As filed with Securities and Exchange Commission on April 24, 2019
As filed with Securities and Exchange Commission on April 22, 2020 |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
FORM 20-F
FORM 20-F |
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, | |
OR | ||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
OR | ||
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report _____________ For the transition period from __________ to __________ | |
Commission file number 001-15264 | ||
(Exact name of Registrant as specified in its charter) | ||
ALUMINUM CORPORATION OF CHINA LIMITED | ||
(Translation of Registrant’s name into English) | ||
People’s Republic of China (Jurisdiction of incorporation or organization) | ||
No. 62 North Xizhimen Street, Haidian District, Beijing People’s Republic of China (100082) (Address of principal executive offices)
Lu Dongliang No. 62 North Xizhimen Street, Haidian District, Beijing People’s Republic of China (100082) (86) 10 8229 8322
| ||
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person) | ||
Securities registered or to be registered pursuant to Section 12(b) of the Act. | ||
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
American Depositary Shares* | ACH | New York Stock Exchange, Inc. | ||
Class H Ordinary Shares** | ||||
* | Evidenced by American Depositary Receipts. Each American Depositary Share represents 25 H Shares. |
** | Not for trading, but only in connection with the listing of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, | |||||
Domestic | 13,078,706,983 | ||||
H Shares, par value RMB1.00 per share | 3,943,965,968 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑✓ No ☐__
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐__ No ☑✓
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑✓ No ☐__
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑✓ No ☐_
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | Non-accelerated filer | Emerging growth company |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐__
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☐__
International Financial Reporting Standards as issued by the International Accounting Standards Board ☑✓
Other ☐__
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ☐__ Item 18 ☐__
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐__ No ☑✓
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐__ No ☐__
2
TABLE OF CONTENTS
i
Certain information contained in this annual report, which does not relate to historical information, may be deemed to constitute forward-looking statements. The words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe” or similar expressions are intended to identify “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected. You should not place undue reliance on any such forward-looking statements, which speak only as of the date made. These forward-looking statements include, without limitation, statements relating to:
● | future general economic conditions; |
● | future conditions in the international and China capital markets; |
● | future conditions in the financial and credit markets; |
● | future prices and demand for our products; |
● | future PRC tariff levels for alumina and primary aluminum; |
● | sales of our products; |
● | the extent and nature of, and potential for, future developments; |
● | production, consumption and demand forecasts of bauxite, coal, alumina and primary aluminum; |
● | expansion, consolidation or other trends in the primary aluminum industry; |
● | the effectiveness of our cost-saving measures; |
● | future expansion, investment and acquisition plans and capital expenditures; |
● | the severity, duration and spread of the COVID-19 outbreak, as well as the direct and indirect impacts of COVID-19 pandemic (as well as the efforts to contain it) on our |
● | competition; |
● | changes in legislation, regulations and policies; |
● | estimates of proven and probable bauxite reserves; |
● | our research and development plans; and |
● | our dividend policy. |
These statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and future developments, as well as other factors we believe are appropriate in particular circumstances. However, whether actual results and developments will meet our expectations and predictions depends on a number of risks and uncertainties, which could cause actual results to differ materially from our expectations. These risks are more fully described in the section headed “Item 3. Key Information - D. Risk Factors.”
ii
Consequently, all of the forward-looking statements made in this annual report are qualified by these cautionary statements. We cannot assure you that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected effect on us or our business or operations.
“Chalco,” “the Company,” “the Group,” “our Company,” “our Group,” “we,” “our” and “us” refer to Aluminum Corporation of China Limited and its subsidiaries and, where appropriate, to its predecessors;
“A Share(s)” and “domestic share(s)” refer to our domestic ordinary share(s), with a par value of RMB1.00 each, which are listed on the Shanghai Stock Exchange;
“ADR(s)” refers to the American Depositary Receipt(s);
“ADS(s)” refers to the American Depositary Share(s);
“alumina-to-silica ratio” refers to the ratio of alumina to silica in bauxite by weight;
“aluminum fabrication” refers to the process of converting primary aluminum or recycled aluminum materials into plates, strips, bars, tubes and other fabricated products;
“Australian dollar” refers to the lawful currency of the Commonwealth of Australia;
“Baotou Aluminum” refers to Baotou Aluminum Company Limited,Co., Ltd., our wholly-owned subsidiary established under the PRC law;
“Baotou Aluminum Group” refers to Baotou Aluminum (Group) Co., Ltd., a subsidiary of Chinalco;
“bauxite” refers to a mineral ore that is principally composed of aluminum;
“Bayer process” refers to a refining process that employs a strong solution of caustic soda at an elevated temperature to extract alumina from ground bauxite;
“Bayer-sintering combined process” and “Bayer-sintering series process” refer to the two methods of refining process developed in China which involve the combined application of the Bayer process and the sintering process to extract alumina from bauxite;
“Board” refers to our board of directors;
“Boffa Project” refers to the project to develop and operate a bauxite mine located in Boffa, Guinea, in accordance with a mining convention entered into by Chalco Hong Kong, Chalco Guinea Company S.A. and the Guinean government on June 8, 2018;
“CBEX” refers to China Beijing Equity Exchange, an approved equity exchange for the transfer of state-owned assets;
“Chinalco Assets” refers to Chinalco Assets Operation and Management Co., Ltd., a wholly-owned subsidiary of Chinalco;
“Chalco Energy” refers to Chalco Energy Co., Ltd., our wholly-owned subsidiary established under the PRC law;
“Chalco Hong Kong” refers to Chalco Hong Kong Limited,Ltd., our wholly-owned subsidiary established under Hong Kong Law;
iii
“Chalco Liupanshui” refers to Chalco Liupanshui Hengtaihe Mining Co., Ltd., 49% of the equity interest of which is owned by us;
“Chalco Logistics” refers to Chalco Logistics Group Co., Ltd., our wholly-owned subsidiary established under the PRC law;
“Chalco Materials” refers to Chalco Materials Co., Ltd., our wholly-owned subsidiary established under the PRC law;
“Chalco Mining” refers to Chalco Mining Co., Ltd., our wholly-owned subsidiary established under the PRC law;
“Chalco Ruimin” refers to Chalco Ruimin Company Limited, our subsidiary until June 2013 when we disposed of 93.30% of its equity interest to Chinalco;
“Chalco Shandong” refers to Chalco Shandong Co., Ltd., our wholly-owned subsidiary established under the PRC law;
“Chalco Shanghai” or “Chinalco Shanghai” refers to Chalco Shanghai Company Limited, our wholly-owned subsidiary established under the PRC law;
“Chalco Southwest Aluminum” refers to Chalco Southwest Aluminum Company Limited, our subsidiary until June 2013 when we disposed of 60% of its equity interest to Chinalco;
“Chalco Southwest Aluminum Cold Rolling” refers to Chalco Southwest Aluminum Cold Rolling Company Limited, our wholly-owned subsidiary until June 2013 when we disposed of its entire equity interest to Chinalco;
“Chalco Trading” refers to China Aluminum International Trading Co., Ltd., our wholly-owned subsidiary established under the PRC law;
“Chalco Trading Group” refers to China Aluminum International Trading Group Co., Ltd., our wholly-owned subsidiary established under the PRC law;
“Chalco Xing County Alumina Project” refers to the Bayer process production system and ancillary facilities at Xing County, Lvliang City of Shanxi Province with production capacity of 800,000 tonnes of metallurgical grade alumina per year;
“China” and the “PRC” refer to the People’s Republic of China, excluding, for purposes of this annual report, Hong Kong Special Administrative Region, Macao Special Administrative Region and Taiwan;
“China Copper” refers to China Copper Co., Ltd., a wholly-owned subsidiary of Chinalco;
“China United Assets Appraisal” refers to China United Assets Appraisal Group Co., Ltd., a PRC qualified valuer;
“Chinalco” and “Chinalco Group” referrefers to our controlling shareholder, Aluminum Corporation of China and its subsidiaries (other than Chalco and its subsidiaries) and, where appropriate, to its predecessors;
“Chinalco Finance” refers to Chinalco Finance Co., Ltd.;
“CSRC” refers to China Securities Regulatory Commission;
“Dongdong Coal” refers to Shaanxi Chengcheng Dongdong Coal Co., Ltd., 45% of the equity interest of which is owned by us;
iv
“Energy-Saving and Emission Reduction Goals” refers to the energy-saving and emission reduction goals set out in China’s 13th Five-Year Plan for National Economic and Social Development laid out in 2016, in accordance with which China expects to, by the end of 2020, reduce its per unit GDP energy consumption by 15% compared with the 2015 level;
iv
“Exchange Act” refers to the U.S. Securities Exchange Act of 1934, as amended;
“Euro” refers to the lawful currency of the Eurozone;
“Fushun Aluminum” refers to Fushun Aluminum Company Limited, our wholly-owned subsidiary established under the PRC law;
“Gansu Hualu” refers to Gansu Hualu Aluminum Company Limited, 51% of the equity interest of which is owned by us;
“Gansu Huayang” refers to Gansu Huayang Mining Development Company Limited, 70% of the equity interest of which is owned by us;
“GNF” refers to Guinea franc, the lawful currency of the Republic of Guinea;
“Guangxi Investment” refers to Guangxi Investment (Group) Co., Ltd., formerly known as Guangxi Development and Investment Co., Ltd., a PRC state-owned enterprise;
“Guizhou Development” refers to Guizhou Provincial Materials Development and Investment Corporation, a PRC state-owned enterprise and one of our promoters and shareholders;
“Guizhou Huajin” refers to Guizhou Huajin Aluminum Co., Ltd., 60% of the equity interest of which is owned by us;
“Guizhou Huaren” refers to Guizhou Huaren New MaterialsMaterial Co., Ltd., 40% of the equity interest of which is owned by us;
“Guizhou Yuneng” refers to Guizhou Yuneng Mining Co., Ltd., 25% of the equity interest of which is owned by us;
“H Share(s)” refers to overseas listed foreign share(s) with a par value of RMB1.00 each, which are listed on the Hong Kong Stock Exchange;
“Henan Aluminum” refers to Chalco Henan Aluminum Company Limited, our subsidiary until June 2013 when we disposed of 90.03% of its equity interest to Chinalco;
“HK$” and “HK dollars” refer to Hong Kong dollars, the lawful currency of the Hong Kong Special Administrative Region of the PRC;
“Hong Kong Stock Exchange” refers to The Stock Exchange of Hong Kong Limited;
“Huaxi Aluminum” refers to Huaxi Aluminum Company Limited, our subsidiary until June 2013 when we disposed of 56.86% of its equity interest to Chinalco;
“Inner Mongolia Huayun” refers to Inner Mongolia Huayun New Materials Co., Ltd., 50% of the equity interest of which is owned by Baotou Aluminum;Aluminum;
“IRS” refers to Internal Revenue Service of the United States federal government;
“Japanese Yen” refers to the lawful currency of Japan;
v
“Jiaozuo Wanfang” refers to Jiaozuo Wanfang Aluminum Manufacturing Co., Ltd.;
v
“Ka” refers to kiloamperes, a unit for measuring the strength of an electric current, with one kiloampere equaling 1,000 amperes;
“kWh” refers to kilowatt-hours, a unit of electrical power, meaning one kilowatt of power for one hour;
“Lanzhou Aluminum” refers to Lanzhou Aluminum Co., Ltd., our wholly-owned subsidiary since January 2019, which was previously our wholly-owned branch, Lanzhou branch;
“Listing Rules” and “Hong Kong Listing Rules” refer to the Rules Governing the Listing of Securities on the Hong Kong Stock Exchange, as amended;
“LME” refers to the London Metal Exchange Limited;
“MIIT” refers to Ministry of Industry and Information Technology of the PRC;
“MOF” refers to Ministry of Finance of the PRC;
“mu” refers to a unit of area commonly used in the PRC. 1 mu equals approximately 666.67 square meters;
“MW” refers to megawatt, a unit of electrical power;
“Nanchu” refers to ENanchu (http:(http://www.enanchu.com/), a nonferrous metal-related portal site in PRC;
“NDRC” refers to China National Development and Reform Commission;
“Ningxia Energy” refers to China Aluminum Ningxia Energy Group Co., Ltd., formerly known as Ningxia Electric Power Group Co., Ltd., before we acquired 70.82% of its equity interest in January 2013;
“Northwest Aluminum” refers to Northwest Aluminum Fabrication Branch, our wholly-owned branch until June 2013 when we disposed of all its assets to a subsidiary of Chinalco;
“NYSE” and“New York Stock Exchange” refer to the New York Stock Exchange Inc.;
“ore-dressing Bayer process” refers to a refining process we developed to increase the alumina-to-silica ratio of bauxite;
“PBOC” refers to People’s Bank of China;
“Qingdao Light Metal” refers to Chalco Qingdao Light Metal Company Limited, our wholly-owned subsidiary until June 2013 when we disposed of its entire equity interest to Chinalco. In December 2017, we acquired 100% of the equity interest in Qingdao Light Metal through Chalco Shandong at a consideration of RMB300.4 million to further our prospective strategic layout on secondary aluminum;
“Qinghai Energy” refers to Qinghai Province Energy Development (Group) Co., Ltd., 21% of the equity interest of which is owned by us;
“refining” refers to the chemical process used to produce alumina from bauxite;
“RMB” and “Renminbi”refer to the lawful currency of the PRC;
“SAT” refers State Administration of Taxation of the PRC;
“SAFE” refers to State Administration of Foreign Exchange of the PRC;
vi
“SASAC” refers to State-owned Assets Supervision and Administration Commission of the State Council of China;
“SEC” refers to the U.S. Securities and Exchange Commission;
vi
“Securities Act” refers to the U.S. Securities Act of 1933, as amended;
“Shandong Huayu” refers to Shandong Huayu Alloy Material Co., Ltd., 55% of the equity interest of which is owned by us;
“Shanxi Jiexiu” refers to Shanxi Jiexiu Xinyugou Coal Industry Co., Ltd., 34% of the equity interest of which is owned by us;
“Shanxi Huasheng” refers to Shanxi Huasheng Aluminum Company Limited, 51% of the equity interest of which is owned by us;
“Shanxi Huaxing” refers to Shanxi Huaxing Aluminum Co., Ltd., a wholly-owned subsidiary established under the PRC law.
“Shanxi New Material” or “Shanxi Huaze” refers to Chalco Shanxi New Material Co., Ltd., formerly known as Shanxi Huaze Aluminum and Power Co., Limited, 85.98% of the equity interest of which is owned by us;
“Shanxi Other Mines” refers to the eight mines to which we entrusted another party to conduct mining activities, including Changjialing mine, (with Shangtan mine consolidated), Guxian mine, (with Jindui mine consolidated), Loufan mine, (with Shicao mine consolidated), Nanpo mine, Xishan mine, Yangjiashan mine, Niucaogou mine, Xiwupu mine and XiwupuJiaokou Xisongzhuang mine in Shanxi Province;
“Shanxi Zhongrun” refers to Shanxi China Huarun Co., Ltd., 40%43.39% of the equity interest of which is owned by us;
“SHFE” refers to the Shanghai Futures Exchange;
“sintering process” refers to a refining process employed to extract alumina from bauxite by mixing ground bauxite with supplemental materials and burning the mixture in a coal-fired kiln;
“smelting” refers to the electrolytic process used to produce molten aluminum from alumina;
“tonne” refers to the metric ton, a unit of weight, that is equivalent to 1,000 kilograms or 2,204.6 pounds;
“US$,” “dollars” and “U.S. dollars” refer to the lawful currency of the United States;
“Xinghua Technology” refers to Chinalco Shanxi Jiaokou Xinghua Technology Ltd., 66% of the equity interest of which is owned by us;
“Yangtze” refers to the Shanghai Changjiang Nonferrous Metals Spot Market;
“Yixin Aluminum” refers to Heqing Yixin Aluminum Co., Ltd., an indirect subsidiary of Chinalco;
“Yunnan Aluminum” refers to Yunnan Aluminum Co., Ltd., an indirect subsidiary of Chinalco;
“Yunnan SASAC” refers to the State-owned Assets Supervision and Administration Commission of Yunnan Provincial People’s Government;
“Zhangze Electric Power” refers to Shanxi Zhangze Electric Power Co., Ltd., which owns 14.02% of equity interest in Shanxi New Material;
vii
“Zhengzhou Institute” refers to Chalco Zhengzhou Research Institute of Non-ferrous Metal Co., Ltd., our wholly-owned subsidiary, which primarily provides research and development services;
“Zhongzhou Aluminum” refers to Chalco Zhongzhou Aluminum Co., Ltd., our wholly-owned subsidiary established under the PRC law;
“Zunyi Alumina” refers to Chalco Zunyi Alumina Co., Ltd.,which was merged intoZunyi Aluminum in June 2018; and
vii
“Zunyi Aluminum” refers to Zunyi Aluminum Co., Ltd., 67.445% of the equity interest of which is owned by us.
Translations of amounts in this annual report from Renminbi to U.S. dollars and vice versa have been made at the rate of RMB6.8755RMB6.9618 to US$1.00, the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board for December 31, 2018.2019. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, the rates stated below, or at all.
Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.
viii
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
A. | Selected Financial Data |
Historical Financial Information
The following table presents our selected financial data. The selected consolidated statements of financial position data as of December 31, 20172018 and 2018,2019, and the selected consolidated statements of comprehensive income (except for earnings per ADS) and consolidated cash flow data for the years ended December 31, 2016, 2017, 2018 and 2018,2019, are derived from our audited consolidated financial statements included elsewhere in this annual report, and should be read in conjunction with those consolidated financial statements. The selected consolidated statements of financial position data as of December 31, 2014, 2015, 2016 and 20162017 and the selected consolidated statements of comprehensive income (except for earnings per ADS) and consolidated cash flow data for the years ended December 31, 20142015 and 20152016 are derived from our consolidated financial statements which are not included in this annual report. Our consolidated financial statements are prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board.
As the business combination under common control incurred in the years ended December 31, 2015, 2016, 2017, 2018 and 2018,2019, the comparative financial data for the years ended December 31, 2014, 2015, 2016, 2017 and 20172018 are revised to reflect the business combination under common control.
For the Year Ended December 31, | ||||||||||||||||||||||||
2014 | 2015 | 2016 | 2017 | 2018 | 2018 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands, except per share and per ADS data) | ||||||||||||||||||||||||
Consolidated Statements of Comprehensive Income Data | ||||||||||||||||||||||||
Revenue | 142,419,555 | 123,922,795 | 144,854,582 | 181,020,428 | 180,240,154 | 26,214,843 | ||||||||||||||||||
Continuing Operations | ||||||||||||||||||||||||
Cost of sales | (141,797,923 | ) | (121,408,135 | ) | (133,700,192 | ) | (166,290,235 | ) | (167,029,416 | ) | (24,293,421 | ) | ||||||||||||
Gross profit | 621,632 | 2,514,660 | 11,154,390 | 14,730,193 | 13,210,738 | 1,921,422 | ||||||||||||||||||
Selling and distribution expenses | (1,772,525 | ) | (1,798,154 | ) | (2,111,787 | ) | (2,372,966 | ) | (2,496,933 | ) | (363,164 | ) | ||||||||||||
General and administrative expenses | (4,874,342 | ) | (2,386,950 | ) | (3,336,095 | ) | (4,549,206 | ) | (3,958,067 | ) | (575,677 | ) | ||||||||||||
Research and development expenses | (293,766 | ) | (168,870 | ) | (168,862 | ) | (498,234 | ) | (626,873 | ) | (91,175 | ) | ||||||||||||
Impairment loss on property, plant and equipment | (5,679,521 | ) | (10,011 | ) | (57,080 | ) | (16,200 | ) | (7,450 | ) | (1,084 | ) | ||||||||||||
Impairment losses on financial assets | — | — | — | — | (107,841 | ) | (15,685 | ) | ||||||||||||||||
Impairment losses on investments in joint ventures | — | — | — | — | (216,953 | ) | (31,555 | ) | ||||||||||||||||
Other income | 832,239 | 1,787,774 | 155,576 | 89,873 | 135,367 | 19,688 | ||||||||||||||||||
Other gains, net | 362,407 | 5,027,661 | 169,143 | 319,382 | 921,904 | 134,085 | ||||||||||||||||||
Operating profit/(losses) from continuing operations | (10,803,876 | ) | 4,966,110 | 5,805,285 | 7,702,842 | 6,853,892 | 996,855 | |||||||||||||||||
Finance costs, net | (5,705,117 | ) | (5,167,030 | ) | (4,204,179 | ) | (4,496,734 | ) | (4,390,264 | ) | (638,538 | ) | ||||||||||||
Operating profit/(loss) from continuing operations less finance costs | (16,508,993 | ) | (200,920 | ) | 1,601,106 | 3,206,108 | 2,463,628 | 358,318 | ||||||||||||||||
Share of profits and losses of joint ventures | 89,510 | 23,238 | (95,508 | ) | 8,151 | (199,452 | ) | (29,009 | ) | |||||||||||||||
Share of profits and losses of associates | 350,575 | 284,531 | 115,091 | (165,249 | ) | 39,335 | 5,721 | |||||||||||||||||
Profit/(loss) before income tax from continuing operations | (16,068,908 | ) | 106,849 | 1,620,689 | 3,049,010 | 2,303,511 | 335,029 | |||||||||||||||||
Income tax (expense)/benefit from continuing operations | (1,076,559 | ) | 226,220 | (403,899 | ) | (643,734 | ) | (822,499 | ) | (119,628 | ) | |||||||||||||
Profit/(loss) for the year from continuing operations | (17,145,467 | ) | 333,069 | 1,216,790 | 2,405,276 | 1,481,012 | 215,401 | |||||||||||||||||
Profit/(loss) per share from continuing operations | (1.21 | ) | 0.01 | 0.02 | 0.09 | 0.04 | 0.01 |
1
For the Year Ended December 31, | ||||||||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | 2019 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands, except share, per share and per ADS data) | ||||||||||||||||||||||||
Consolidated Statements of Comprehensive Income Data | ||||||||||||||||||||||||
Revenue | 123,924,333 | 144,855,997 | 181,022,636 | 180,241,414 | 190,074,161 | 27,302,445 | ||||||||||||||||||
Continuing Operations | ||||||||||||||||||||||||
Cost of sales | (121,408,135 | ) | (133,700,192 | ) | (166,290,269 | ) | (167,029,416 | ) | (177,946,276 | ) | (25,560,383 | ) | ||||||||||||
Gross profit | 2,516,198 | 11,155,805 | 14,732,367 | 13,211,998 | 12,127,885 | 1,742,062 | ||||||||||||||||||
Selling and distribution expenses | (1,798,154 | ) | (2,111,787 | ) | (2,372,966 | ) | (2,496,933 | ) | (1,673,139 | ) | (240,331 | ) | ||||||||||||
General and administrative expenses | (2,388,276 | ) | (3,337,492 | ) | (4,551,237 | ) | (3,959,177 | ) | (3,956,604 | ) | (568,333 | ) | ||||||||||||
Research and development expenses | (168,870 | ) | (168,862 | ) | (498,234 | ) | (626,873 | ) | (940,828 | ) | (135,141 | ) | ||||||||||||
Impairment loss on property, plant and equipment | (10,011 | ) | (57,080 | ) | (16,200 | ) | (46,484 | ) | (259,354 | ) | (37,254 | ) | ||||||||||||
Impairment losses on financial assets | — | — | — | (107,956 | ) | (169,751 | ) | (24,383 | ) | |||||||||||||||
Impairment losses on investments in joint ventures | — | — | — | (216,953 | ) | — | — | |||||||||||||||||
Other income | 1,787,774 | 155,576 | 89,873 | 135,367 | 79,469 | 11,415 | ||||||||||||||||||
Other gains, net | 5,027,661 | 169,200 | 319,402 | 921,904 | 1,247,269 | 179,159 | ||||||||||||||||||
Operating profit from continuing operations | 4,966,322 | 5,805,360 | 7,703,005 | 6,814,893 | 6,454,947 | 927,194 | ||||||||||||||||||
Finance costs, net | (5,167,030 | ) | (4,204,179 | ) | (4,496,732 | ) | (4,390,262 | ) | (4,660,028 | ) | (669,371 | ) | ||||||||||||
Operating (loss)/profit from continuing operations less finance costs | (200,708 | ) | 1,601,181 | 3,206,273 | 2,424,631 | 1,794,919 | 257,823 | |||||||||||||||||
Share of profits and losses of joint ventures | 23,238 | (95,508 | ) | 8,151 | (199,452 | ) | 270,115 | 38,800 | ||||||||||||||||
Share of profits and losses of associates | 284,531 | 115,091 | (165,249 | ) | 39,335 | 48,767 | 7,005 | |||||||||||||||||
Profit before income tax from continuing operations | 107,061 | 1,620,764 | 3,049,175 | 2,264,514 | 2,113,801 | 303,628 | ||||||||||||||||||
Income tax (expense)/benefit from continuing operations | 226,220 | (403,871 | ) | (643,706 | ) | (822,519 | ) | (625,720 | ) | (89,879 | ) | |||||||||||||
Profit for the year from continuing operations | 333,281 | 1,216,893 | 2,405,469 | 1,441,995 | 1,488,081 | 213,749 | ||||||||||||||||||
Profit per share from continuing operations | 0.01 | 0.02 | 0.09 | 0.03 | 0.04 | 0.01 | ||||||||||||||||||
Discontinued operation (loss)/profit for the year from discontinued operation | — | — | — | — | — | — | ||||||||||||||||||
Profit for the year | 333,281 | 1,216,893 | 2,405,469 | 1,441,995 | 1,488,081 | 213,749 | ||||||||||||||||||
Profit attributable to: | ||||||||||||||||||||||||
Owners of the parent | 118,241 | 365,800 | 1,413,221 | 707,460 | 850,999 | 122,238 | ||||||||||||||||||
Non-controlling interests | 215,040 | 851,093 | 992,248 | 734,535 | 637,082 | 91,511 | ||||||||||||||||||
Dividends | — | — | — | — | — | — | ||||||||||||||||||
Basic and diluted earnings per share | 0.01 | 0.02 | 0.09 | 0.03 | 0.04 | 0.01 | ||||||||||||||||||
Number of shares as adjusted | 14,903,798,236 | 14,903,798,236 | 14,903,798,236 | 16,842,713,738 | 17,022,672,951 | 17,022,672,951 | ||||||||||||||||||
Earnings per ADS | 0.20 | 0.61 | 2.19 | 0.92 | 0.94 | 0.14 | ||||||||||||||||||
Dividends (expressed in RMB and US$ per share and per ADS) | ||||||||||||||||||||||||
Final dividends per share | — | — | — | — | — | — | ||||||||||||||||||
Final dividends per ADS | — | — | — | — | — | — | ||||||||||||||||||
Proposed dividends per share | — | — | — | — | — | — | ||||||||||||||||||
Proposed dividends per ADS | — | — | — | — | — | — |
For the Year Ended December 31, | ||||||||||||||||||||||||
2014 | 2015 | 2016 | 2017 | 2018 | 2018 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands, except per share and per ADS data) | ||||||||||||||||||||||||
Discontinued operation (loss)/profit for the year from discontinued operation | — | — | — | — | — | — | ||||||||||||||||||
Profit/(loss) for the year | (17,145,467 | ) | 333,069 | 1,216,790 | 2,405,276 | 1,481,012 | 215,401 | |||||||||||||||||
Profit/(loss) attributable to: | ||||||||||||||||||||||||
Owners of the parent | (16,308,391 | ) | 118,029 | 365,697 | 1,413,028 | 746,477 | 108,567 | |||||||||||||||||
Non-controlling interests | (837,076 | ) | 215,040 | 851,093 | 992,248 | 734,535 | 106,834 | |||||||||||||||||
Dividends | — | — | — | — | — | — | ||||||||||||||||||
Basic and diluted earnings/(loss) per share | (1.21 | ) | 0.01 | 0.02 | 0.09 | 0.04 | 0.01 | |||||||||||||||||
Earnings/(loss) per ADS | (30.15 | ) | 0.20 | 0.61 | 2.37 | 1.25 | 0.02 | |||||||||||||||||
Dividends (expressed in RMB and US$ per share and per ADS) | ||||||||||||||||||||||||
Final dividends per share | — | — | — | — | — | — | ||||||||||||||||||
Final dividends per ADS | — | — | — | — | — | — | ||||||||||||||||||
Proposed dividends per share | — | — | — | — | — | — | ||||||||||||||||||
Proposed dividends per ADS | — | — | — | — | — | — |
As of December 31, | ||||||||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | 2019 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands, except per share and per ADS data) | ||||||||||||||||||||||||
Consolidated Statements of Financial Position Data | ||||||||||||||||||||||||
Total current assets | 64,769,931 | 66,871,453 | 68,651,323 | 58,901,463 | 48,713,752 | 6,997,293 | ||||||||||||||||||
Total non-current assets | 128,285,844 | 124,569,119 | 131,304,053 | 142,063,288 | 154,356,912 | 22,171,983 | ||||||||||||||||||
Total assets | 193,055,775 | 191,440,572 | 199,955,376 | 200,964,751 | 203,070,664 | 29,169,276 | ||||||||||||||||||
Total current liabilities | 82,476,318 | 83,761,221 | 90,436,239 | 74,836,777 | 69,169,728 | 9,935,610 | ||||||||||||||||||
Total non-current liabilities | 58,496,815 | 51,670,923 | 43,737,107 | 58,458,355 | 63,175,876 | 9,074,647 | ||||||||||||||||||
Total liabilities | 140,973,133 | 135,432,144 | 134,173,346 | 133,295,132 | 132,345,604 | 19,010,257 | ||||||||||||||||||
Net assets | 52,082,642 | 56,008,428 | 65,782,030 | 67,669,619 | 70,725,060 | 10,159,019 | ||||||||||||||||||
Long-term interest bearing loans and borrowings (excluding current portion) | 54,065,874 | 47,376,748 | 40,289,703 | 54,207,386 | 59,243,563 | 8,509,805 | ||||||||||||||||||
Capital stock | 14,903,798 | 14,903,798 | 14,903,798 | 14,903,798 | 17,022,673 | 2,445,154 |
As of December 31, | ||||||||||||||||||||||||
2014 | 2015 | 2016 | 2017 | 2018 | 2018 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands, except per share and per ADS data) | ||||||||||||||||||||||||
Consolidated Statements of Financial Position Data | ||||||||||||||||||||||||
Total current assets | 63,952,859 | 64,760,095 | 66,865,293 | 68,644,310 | 58,895,234 | 8,565,957 | ||||||||||||||||||
Total non-current assets | 131,687,008 | 128,177,237 | 124,362,584 | 131,172,489 | 141,980,880 | 20,650,263 | ||||||||||||||||||
Total assets | 195,639,867 | 192,937,332 | 191,227,877 | 199,816,799 | 200,876,114 | 29,216,220 | ||||||||||||||||||
Total current liabilities | 105,163,379 | 82,397,015 | 83,664,323 | 90,337,098 | 74,748,557 | 10,871,727 | ||||||||||||||||||
Total non-current liabilities | 49,013,787 | 58,496,815 | 51,670,923 | 43,737,105 | 58,458,355 | 8,502,415 | ||||||||||||||||||
Total liabilities | 154,177,166 | 140,893,830 | 135,335,246 | 134,074,203 | 133,206,912 | 19,374,142 | ||||||||||||||||||
Net assets | 41,462,701 | 52,043,502 | 55,892,631 | 65,742,596 | 67,669,202 | 9,842,078 | ||||||||||||||||||
Long-term interest bearing loans and borrowings (excluding current portion) | 44,870,211 | 54,065,874 | 47,376,748 | 40,289,703 | 54,207,386 | 7,884,137 | ||||||||||||||||||
Capital stock | 13,524,488 | 14,903,798 | 14,903,798 | 14,903,798 | 14,903,798 | 2,167,668 |
For the Year Ended December 31, | ||||||||||||||||||||||||
2014 | 2015 | 2016 | 2017 | 2018 | 2018 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
OTHER FINANCIAL DATA | ||||||||||||||||||||||||
Net cash flows generated from operating activities | 13,734,366 | 7,339,238 | 11,609,309 | 13,205,572 | 13,018,176 | 1,893,415 | ||||||||||||||||||
Net cash flows (used in)/generated from investing activities | (5,140,277 | ) | 2,392,555 | (2,626,858 | ) | (5,597,489 | ) | (5,528,369 | ) | (804,070 | ) | |||||||||||||
Net cash flows generated from/(used in) financing activities | (3,805,258 | ) | (5,448,013 | ) | (6,105,257 | ) | (3,398,994 | ) | (16,266,476 | ) | (2,365,860 | ) | ||||||||||||
Net increase/(decrease) in cash and cash equivalents | (8,945,535 | ) | 4,283,780 | 2,877,194 | 4,209,089 | (8,776,669 | ) | (1,276,515 | ) |
For the Year Ended December 31, | ||||||||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | 2019 | |||||||||||||||||||
RMB | RMB | RMB | RMB | RMB | US$ | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Other Financial Data | ||||||||||||||||||||||||
Net cash flows generated from operating activities | 7,339,551 | 11,609,110 | 13,207,140 | 13,032,076 | 12,473,489 | 1,791,705 | ||||||||||||||||||
Net cash flows (used in)/generated from investing activities | 2,388,947 | (2,638,951 | ) | (5,598,131 | ) | (5,529,105 | ) | (13,392,301 | ) | (1,923,684 | ) | |||||||||||||
Net cash flows generated from/(used in) financing activities | (5,442,080 | ) | (6,093,612 | ) | (3,387,111 | ) | (16,280,606 | ) | (10,474,035 | ) | (1,504,501 | ) | ||||||||||||
Net increase/(decrease) in cash and cash equivalents | 4,286,418 | 2,876,547 | 4,221,898 | (8,777,635 | ) | (11,392,847 | ) | (1,636,480 | ) |
B. | Capitalization and Indebtedness |
Not applicable.
C. | Reasons for the Offer and Use of Proceeds |
Not applicable.
D. | Risk Factors |
Our business and financial condition and results of operations are subject to various changing business, competitive, economic, political and social conditions in China and worldwide. In addition to the factors discussed elsewhere in this annual report, the following are some of the important factors that could cause our actual results to differ materially from those projected in any forward-looking statements.
3
Our business may be materially and adversely affected by the recent outbreak of COVID-19.
Since the end of 2019, COVID-19, a disease caused by a novel strain of coronavirus, has spread in China and globally, and the World Health Organization declared the COVID-19 outbreak a pandemic in March 2020. The COVID-19 outbreak has led the governments and other authorities around the world, including China, to impose measures intended to control its spread, including quarantines, restrictions on travel and public gatherings, temporary closure of certain businesses and facilities. While still evolving, the COVID-19 pandemic, as well as efforts to contain it, has caused significant economic and financial disruptions around the world, including disruption on manufacturing operations, logistics and global supply chains and significant volatility and disruption of financial markets. Although currently in China, many restrictions have been lifted and the level of business activities are being restored in response to the significant decrease of new reported cases in China, the above mentioned conditions may continue and worsen globally in the near or longer term. The COVID-19 outbreak could materially and adversely affect our business, financial condition and results of operations.
Due to the outbreak and governmental control measures imposed to contain virus spread, we experienced temporary restrains on our operations, such as temporary interruptions on transportation in certain areas in February and some employees’ temporary delay in their returning to work after the Chinese New Year holiday. We have been proactively taking measures to respond to these restrains, including measures to protect the health and safety of our employees, and by far such measures have helped in maintaining our steady production. However, if the virus further spreads worldwide, including in China or other jurisdictions in which we, our suppliers or customers operate or have property or projects, or further control measures are adopted and continue to stay in place in these or other regions, we may face further disruptions on our normal operation, sales, project construction, supply chain and transportation channel, labor shortage and other limitations on our business activities due to restrictions on our employees’ ability to travel, infection of management and employees, suspension or closure of facilities, additional costs arising from precautionary infection control and hygienic measures, and other impacts, which could be material and adverse to our business, financial condition and results of operations.
In addition, the market prices of primary aluminum and alumina have been volatile and significantly decreased since the COVID-19 outbreak. In the first quarter of 2020, the range for the high and low prices for the Australian FOB spot price for alumina and the international cash price for primary aluminum on the LME decreased to a high of US$304 per tonne and a low of US$252 per tonne and a high of US$1,811 per tonne and a low of US$1,489 per tonne, respectively. During the same period, the spot price of alumina in the domestic market reached a high of RMB2,581 per tonne and bottomed out at RMB2,344 per tonne, and the spot price of primary aluminum reached a high of RMB14,700 per tonne and a low of RMB11,310 per tonne on SHFE. See “- Volatility in the prices of alumina, primary aluminum, other non-ferrous metal and other commodities may adversely affect our business, financial condition and results of operations” and “Item 5. Operating and Financial Review and Prospects - A. Operating Results - Factors Affecting Our Results of Operations - Mix and Pricing of Our Products” for information of the historical prices of 2019 and prior years. Such decreases may continue for a prolonged period or further deteriorate, which may, among other things, cause additional provision for our inventories’ value and negatively impact our revenue and profit level. Furthermore, due to the reduction in the downstream business activities resulting from the COVID-19 outbreak, demand for primary aluminum have been generally weakened and may further decline, which may result in reduction of our revenue and profit, increase of our inventory amount and other material and adverse impacts on our financial condition and results of operations. We have been closely monitoring the development of the COVID-19 outbreak and evaluating market changes and impact of the COVID-19 outbreak on our businesses, operations and financial performances, as well as actively responding to the possible impact on us. For example, in response to the price volatility of primary aluminum and alumina, we have been adjusting, or may adjust, the structure of our product portfolio, the amount of inventories and our marketing strategies, and we may utilize futures transactions to hedge against price fluctuations. However, there is no assurance that our efforts would be successful, and given that the COVID-19 outbreak is still evolving around the world, its full impact on us may be difficult to predict at this time.
The global spread of COVID-19 has significantly increased economic and demand uncertainty and has fueled concerns that it may lead to a global recession and a significant slowdown in the economic development in many countries including China. Despite the Chinese government’s efforts in reviving China’s economy, China’s economy has experienced a significant slowdown since the COVID-19 outbreak, and there remains uncertainty on how soon economic activity in China will rebound to the level prior to the COVID-19 pandemic. The global economy may continue to deteriorate in the future and have an adverse impact on China’s economy, which may, among other things, exacerbate turbulence in commodity market, discourage or disrupt investment and production, increase total inventories of primary aluminum or other products in the industry, bring more uncertainty to the consumption of aluminum-made products and the prices of primary aluminum and alumina, and cause other adverse impacts on the industry we are in. An economic downturn including financial market disruption, or a market perception that this situation may occur or develop, may also cause increase of financing costs, or reduce or even diminish available sources of financing for operation or expansion. In addition, significant financial market volatility and uncertainty may adversely affect the market prices of our ordinary shares and ADSs. Credit risks of customers and suppliers and other counterparty risks may also increase. These factors may materially and adversely affect our business, financial condition and results of operations.
4
There is significant uncertainty relating to future developments of the COVID-19 outbreak and its impact on us. At this time, it is not possible to estimate the effects that the COVID-19 outbreak could have on the global and China’s economy, political and social relationships of different countries, financial markets, the industries we are in, our suppliers or customers or our businesses and operations. Our business, financial condition and results of operations could therefore be materially and adversely affected by it. We may also experience negative effects from other future health epidemics or outbreaks beyond our control. These events are impossible to forecast and difficult to mitigate. Any of these events could have a material adverse effect on our results of operations and financial condition.
Our business is vulnerable to downturns in the general economy and industries in which we operate or which we serve. A significant reduction in demand could materially and adversely affect our business, financial condition and results of operations.
Demand for our products depends on the general economy and level of activity and growth in the industries where we operate or serve. Adverse development in economic and market conditions, such as a significant economic downturn or a downturn in the commodity sector or the financial markets, could have a material adverse effect on our business, and financial condition, and results of operations.operations and the price of our ordinary shares or ADSs. Development of the relevant industries is subject to various factors, including but not limited to market fluctuations of prices of commodities, general political or economic conditions, technology development, government regulations and investment plans and fluctuation in domestic and global production capacity, many of which are beyond our control.
We are unable to predict cycles of the global and domestic economies. Concerns over inflation, energy costs, geopolitical issues, trade tensions, the availability and cost of credit, unemployment, consumer confidence, declining asset values, capital market volatility and liquidity issues have created difficult operating conditions for us in the past and may continue to do so in the future. For example, since 2018, there were continuing trade tensions between the U.S. and China, resulting in increased tariffs and escalating tensions between the two countries. On January 15, 2020, the two parties signed the China-U.S. phase-one economic and trade agreement. It is still unclear when future phase negotiations between the two countries will begin and whether there will be further trade agreements following such negotiations. It is also unclear if future disputes will occur or the two countries will be able to negotiate the issues to restore a mutually beneficial economic and trade cooperation. Future actions or escalations by either the U.S. government or the PRC government could have a material adverse effect on the business environment in general, global, Chinese and/or U.S. economic conditions and the stability of global, Chinese and/or U.S. financial markets, which in turn, may adversely affect our business, financial condition and results of operations. Furthermore, the PRC government has, from time to time, adjusted its monetary, fiscal and other policies and measures to manage the rate of growth of the economy or the overheating and overcapacity in certain industries or markets. In addition, the global outbreak of COVID-19 and the efforts to contain it have negatively impacted the global economy and financial markets, potentially causing a global recession. For further details of the impact of outbreak of COVID-19 on the general economy, please refer to “- Our business may be materially and adversely affected by the recent outbreak of COVID-19.” As a result, the global and domestic economic conditions or any particular industry in which we operate or which we serve may grow at a lower-than-expected rate or even experience a downturn. Uncertainty about future economic conditions makes it challenging for us to forecast our results of operations, make business decisions and identify risks that may affect our business. If we are not able to timely and appropriately adapt to changes resulting from the difficult macroeconomic environment, our business, financial condition and results of operations may be materially and adversely affected.
5
Volatility in the prices of alumina, primary aluminum, other non-ferrous metal and other commodities may adversely affect our business, financial condition and results of operations.
The prices of the products we produce and trade, including alumina, primary aluminum, other non-ferrous metal and coal products, have experienced significant fluctuation historically and are expected to continually fluctuate in response to general economic conditions, supply and demand, and the level of inventories, interruption caused by unforeseen international or domestic events such as global inventories,outbreak of COVID-19, uncertainty of or changes in domestic or foreign laws or policies and many other factors, which are beyond our control.
We price our alumina and primary aluminum products by reference to international and domestic market prices, and domestic supply and demand, each of which may fluctuate beyond our control. We may not be able to effectively respond to a sudden fluctuation in alumina or primary aluminum prices. For example, due to the general slowdown of the global economy and overcapacity of global aluminum industry beginning in 2015, the range for the high and low prices for the Australian FOB spot price for alumina and the international cash price for primary aluminum on the LME declined in 2016 to a high of US$350.5 per tonne and a low of US$197.0 per tonne and a high of US$1,778 per tonne and a low of US$1,449 per tonne, respectively. However, due to global economic recovery and adjustment of production capacity in the PRC primary aluminum industry as a result of the supply-side structural reform carried out by the PRC government, the range for the high and low prices for the Australian FOB spot price for alumina and the international cash price for primary aluminum on the LME increased in 2017 to a high of US$484 per tonne and a low of US$272 per tonne and a high of US$2,256 per tonne and a low of US$1,700 per tonne, respectively. Due to supply shortage in the global aluminum and alumina market, the range for the high and low prices for the Australian FOB spot price for alumina and the international cash price for primary aluminum on the LME further increased in 2018 to a high of US$710 per tonne and a low of US$357 per tonne and a high of US$2,603 per tonne and a low of US$1,869 per tonne, respectively. However, due to the uncertainties and the sluggish global economy as the result of, among other things, intensified trade and geopolitical tensions, as well as the increased overseas alumina production, and the weak consumption and the recovered and increased production capacity in the overseas primary aluminum market in 2019, the range for the high and low prices for the Australian FOB spot price for alumina and the international cash price for primary aluminum on the LME decreased in 2019 to a high of US$418 per tonne and a low of US$275 per tonne and a high of US$1,922 per tonne and a low of US$1,696 per tonne, respectively. In 2018,2019, the average external selling prices for our self-produced alumina and primary aluminum were RMB2,923RMB2,735 per tonne and RMB14,364RMB13,861 per tonne respectively in 2018,2019, representing an increasedecreases by 1.7%6.4% and a decrease by 1.8%3.5%, respectively, as compared to the prices in 2017.2018. The prices of the products we produce and trade have further decreased due to the recent global outbreak of COVID-19, please refer to “- Our business may be materially and adversely affected by the recent outbreak of COVID-19” for further details. Furthermore, the prices of alumina and primary aluminum may also decline due to, among other things, decrease in market demand of those products and any slowdown of economic growth in China. Because our prices are affected by a variety of factors, most of which are beyond our control, we may not be able to respond promptly to the fluctuation in alumina or primary aluminum prices in international market or domestic market. There is no assurance that there will not be any further and significant fluctuations in prices of our key products, including alumina and primary aluminum, which may materially and adversely affect our business, financial condition and results of operations. In addition, since our profit margin for trading non-ferrous metal products and coal products is based on price fluctuations in the short term, we need to make the correct prediction of the price fluctuations of these commodities on the markets to maintain our profit margin. If market price fluctuations on the market do not match our prediction, we may incur substantial losses.
In addition, as we generate profit from the differences between the purchase and sales prices of the non-ferrous metal products and the coal products we deal in, significant fluctuations in these prices may cause the value of the outsourced products in transit or in inventory to decline, and if the carrying value of our existing inventories exceeds the market price in the future periods, we may need to make additional provisions for our inventories’ value.value, which may have a material and adverse effect on our profit level and other financial performance. See Note 12 to our audited consolidated financial statements for information about our inventories. As a result, any significant fluctuation in international market prices for these commodities could materially and adversely affect our business, financial condition and results of operations.
6
Our business requires substantial capital expenditures that we may not always be able to obtain at reasonable costs and on acceptable terms.
Our plans to upgrade and expand our production capacity will require substantial capital expenditures. For the years ended December 31, 2017, 2018 and 2019, our total capital expenditures were approximately RMB10.1 billion, RMB9.1 billion and RMB13.0 billion, respectively. We expect our estimated capital expenditures in 2020 to be a total of approximately RMB13.9 billion. See “Item 4. Information on the Company - D. Property, Plants and Equipment - Our Expansion” and “Item 5. Operating and Financial Review and Prospects - B. Liquidity and Capital Resources - Capital Expenditures and Capital Commitments.”Commitments” for details of our expansion and capital expenditures. We may also need additional funding for debt servicing, working capital, other investments, potential acquisitions and joint ventures and other corporate requirements.
We may need to seek external financing, such as bank and other loans as well as bond offerings, to satisfy our capital needs if cash generated from our operations is insufficient to fund our capital expenditures or if our actual capital expenditures and investments exceed our plans. Our ability to obtain external financing at reasonable costs and on acceptable terms is subject to a variety of factors, includingsuch as our credit ratings.ratings, financial market conditions and our past or projected financial performance. Rating agencies may downgrade or withdraw our ratings or place us on “credit watch” based on their assessment of a wide range of factors. For example, records of net losses may result in a deterioration of our credit ratings. Although we were profitable in the recent period includingfrom 2015 2016, 2017 and 2018,through 2019, we recorded a net loss of approximately RMB17.1 billion in 2014 and wehave been recording accumulated losses since 2014. Our accumulated losses were approximately RMB2,216.9 million in 2019. We could incur losses in the future, which may adversely affect our corporate ratings and increase our borrowing costs and limit our access to capital markets. Other factors that may be viewed as negative by the rating agencies may also adversely affect our corporate ratings, such as any significant decrease of market price of our products, any significant increase in our level of debt, any negative development in our ongoing or planned projects and so on. In addition, if financial markets experience significant volatility and disruption, it may result in a decrease in the availability of liquidity and credit for borrowers and increase in interest rate or other financing cost. Failure to obtain sufficient funding at reasonable costs and on acceptable terms for our development plans could delay, reduce the scope of, or eliminate future activities or growth initiatives and adversely affect our business and prospects.
Our previous adjustments of our business segments and historical results may not be indicative of our future prospects.
In the past few years,2013, we have entered into a new business segment, the energy segment, through acquisition of Ningxia Energy andEnergy. In the past few years, we have streamlined our existing business to focus on the productions of alumina and primary aluminum. For instance, since August 2018, the Company has acquired certain carbon assets and equity interests from the affiliated enterprises of Chinalco Assets, through which we are able to consummate our industrial chain as carbon products are one of major raw materials for production of primary aluminum. Inin December 2018, we acquired 50% equity interests in Shanxi Huaxing through the Shanghai United Assets and Equity Exchange at a price of approximately RMB2,665.2 million from Baotou Transportation Investment Group Co., Ltd. Upon completion of the acquisition, Shanxi Huaxing became a wholly-owned subsidiary of the Company. The acquisition is conducted for purposes of enhancing our profitability and is in line with our strategic layout of alumina and aluminum business, as the increase of our shareholding in Shanxi Huaxing, an alumina plant, is expected to enhance the synergy with our primary aluminum production in Shanxi, where we have newly added production capacity of primary aluminum. For further details of these acquisitions,the acquisition, please see “Item 4. Information on the Company - A. History and Development of the Company.”
There is no assurance that we will enter into a new business segment or continue to streamline our existing business as we have done so in the past. Moreover, we cannot assure you that the benefit of entering into a new business segment or streamlining our existing business will be fully realized as expected or at all.
In addition, we have experienced growth in recent years. For example, our revenues for 2016, 2017, 2018 and 20182019 were RMB144,854.6RMB181,022.6 million, RMB181,020.4RMB180,241.4 million and RMB180,240.2RMB190,074.2 million, respectively. However, such performance was driven by a wide range of factors, many of which are out of our control or may not be sustainable or indicative of future growth or performance, such as the prices of coal, electricity and other raw materials. No assurance can be given that our financial conditions or results of operations will be maintained at any level. level, especially due to impact of the outbreak of COVID-19. For further details, please refer to “- Our business may be materially and adversely affected by the recent outbreak of COVID-19.”As a result, our historical results may not be indicative of our future prospects and results of operations.
7
Our failure to successfully manage our business expansion, including our expansion into new areas of business, would have a material adverse effect on our results of operations and prospects.
We have made investments in business expansion in line with our development strategy through organic growth, acquisitions and joint ventures in the past.ventures. In addition, we may, from time to time and when we deem appropriate, expand into new industries which we believe have synergies with our existing operations.
Our expansion has created, and will continue to place, substantial demand on our resources. Managing our growth and integrating the acquired businesses will require us to, among other things:
● | comply with the laws, regulations and policies applicable to the acquired businesses, including obtaining timely approval for the construction or expansion of production and mining facilities as required under the relevant laws of PRC |
● | maintain adequate control on our business expansion to prevent, among other things, project delays or cost overruns; |
● | accumulate expertise and experience in managing the new businesses; |
● | gain market acceptance for new products and services and establish relationships with new customers and suppliers; |
● | achieve sufficient utilization of new production facilities to recover costs; |
● | manage relationships with employees, customers and business partners during the course of our business expansion and integration of new businesses; |
● | attract, train and motivate members of our management and qualified workforce to support successful business expansion; |
● | access debt, equity or other capital resources to fund our business expansion, which may divert financial resources otherwise available for other purposes; |
● | divert significant management attention and resources from our other businesses; and |
● | strengthen our operational, financial and management controls, particularly those of our newly acquired subsidiaries, to maintain the reliability of our reporting processes. |
Any significant difficulty in meeting the foregoing or similar requirements could delay or otherwise constrain our ability to implement our expansion plans, or result in failure to achieve the expected benefits of the combination or acquisition or write-offs of acquired assets or investments, which in turn would limit our ability to increase operational efficiency, reduce marginal manufacturing costs or otherwise strengthen our market position. Failure to obtain the intended economic benefits from the business expansion could adversely affect our business, financial condition, results of operations and prospects. In addition, we may also experience mixed results from our expansion plans in the short term.
Furthermore, there is no assurance that we will be able to identify attractive acquisition targets, obtain favorable deal terms in any acquisition, secure applicable governmental approvals for any proposed investments, accurately estimate the mineral resources and reserves of these acquisition targets or obtain the necessary funding to complete such acquisitions on commercially acceptable terms or at all. Acquisitions may result in the incurrence and inheritance of debts and other liabilities, assumption of potential legal liabilities in respect of the acquired businesses, and incurrence of impairment charges related to goodwill and other intangible assets, any of which could harm our business, financial condition and results of operations. In particular, if any of the acquired businesses fail to perform as we expect, we may be required to recognize a significant impairment charge, which may materially and adversely affect our business, financial condition and results of operations. As a result, there can be no assurance that we will be able to achieve the strategic purpose of any acquisition, the desired level of operational integration or our investment return target.
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Our joint ventures and strategic investmentinvestments may not be successful.
We may from time to time enter into joint ventures or make strategic investmentinvestments to grow our business and operations. For example, since 2010, we have participated in joint ventures and strategic investmentinvestments in coal mining, in line with our development strategy to diversify our product offering and partially offset our future energy costs, as well as supply a portion of the coal we consume in our operations.costs. In addition, we have acted as joint venture partner or strategic investor in certain projects which engage in primary aluminum aluminum alloy and lightaluminum alloy manufacturing to diversify our product offering, strategically position ourselves along the industrial chain and facilitate our enterprise transformation and upgrade. If our joint ventures, strategic investments or other investments experiences fluctuation in performance or incur losses, our business, financial condition and results of operations may be adversely affected. For further details of certain of our joint ventures and strategic investment,investments, please see “Item 4. Information on the Company - A. History and Development of the Company” and “Item 4. Information on the Company - D. Property, Plants and Equipment – Our Expansion.”
We have non-controlling interests in a number of joint ventures. Although we have not been materially constrained by the nature of our ownership interests, no assurance can be given that our joint venture partners will not exercise their power of veto or their controlling influence in any of our joint ventures in a way that will hinder our corporate objectives and reduce any anticipated cost savings or revenue enhancement resulting from these joint ventures. In addition, whether or not we hold majority interests or maintain operational control in such joint ventures, such arrangements necessarily involve special risks and our joint venture partners may:
● | have economic or business interests or goals that are inconsistent with or opposed to ours; |
● | exercise veto rights so as to block actions that we believe to be in our or the joint venture’s best interests; |
● | take action contrary to our policies or objectives with respect to the investments; or |
● | as a result of financial or other difficulties, be unable or unwilling to fulfill their obligations under the joint venture, other agreements, such as contributing capital to expansion or maintenance projects. |
In addition, our joint ventures and subsidiaries which operate coal mines were facing increasing risks in recent years. Due to more stringent regulations on environmental protection, imbalances between supplyincreased market supplies resulting from the increase of the domestic capacity and demand ininflux of imported coal, as well as the coal marketsubstitution effect of thermal power by hydroelectricity and level of inventory,other renewable energy, the coal prices generally declined in the first half of 2016 and reached their lowest point in August 2016. The coal prices then rebounded after August 2016 as a result of the PRC government’s policy of cutting excessive coal production capacity as well as decrease in hydroelectricity and increase in transportation costs. The coal prices in 2017, with seasonal fluctuations, were generally higher than the prices in 2016. In 2018, the coal prices fluctuated at a relatively high price level. However, we cannot assure you the coal price will continue to increase or maintain at the current price level in the future.2019. If coal prices continue to decrease in the future, the business, financial condition and results of operations of these joint ventures which operate coal mines may be adversely affected.
Failure to maintain optimal utilization of our production facilities will adversely affect our gross and operating margins.
During the past few years, we expanded the production capacity by completing our construction, upgrading or remolding of some of our alumina and primary aluminum production facilities. If we are able to maintain satisfactory facility utilization rates and increase our production output, this increase in our production capacity would enable us to reduce our unit costs through economies of scale, as fixed costs will be spread over a higher volume of output units. Conversely, underutilization of our existing and newly acquired or constructed production facilities may increase our marginal production costs and prevent us from realizing the intended economic benefits of our expansion.
Since 2013, we have implemented flexible production arrangements from time to time for certain alumina and primary aluminum production facilities in response to prevailing market conditions and government policies. For example, due to local environmental requirementsas a result of high electricity costs, we have implemented flexible production arrangements for air pollution control in the winter heating season, the output of and the utilization rates ofcertain primary aluminum production facilities at Shandong Huayu in the winter heating season have been reduced.Liancheng branch since November 2018. In addition, we may increase our external purchases of alumina and primary aluminum for trading purposes to capitalize on fluctuating market prices and to enhance resource planning to achieve cost savings in our production. The increase in our external purchases will reduce our utilization of certain production facilities, but may not result in a proportionate decrease in fixed costs such as leases and depreciation of plant, property and equipment.
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If we fail to maintain optimal utilization rates and spread fixed costs over a high volume of output units, our gross and operating margins may be adversely affected.
We may be required to record impairment charges in the future.
If business conditions deteriorate, long lived assets need to be reviewed for possible impairment. Impairment loss needs to be recognized to the extent that the carrying amount exceeds the recoverable amount. In 2016, 2017, 2018 and 2018,2019, we recorded impairment loss of property, plant and equipment of RMB57.1 million, RMB16.2 million, RMB46.5 million and RMB7.5RMB259.4 million, respectively. We also recorded impairment losses of intangible assets of RMB8.1 million and RMB1.4 million in 2017.2017 and 2019, respectively. We cannot guarantee that we will not incur any impairment loss or our impairment loss will not increase in the future due to various reasons including, but are not limited to, strategic decisions made in response to changes in economic and competitive conditions, the impact of the economic environment on our customer base and material adverse changes in our relationship with significant customers. If we record significant impairment charges, our results of operations may be materially and adversely affected.
Our operations consume substantial amounts of electricity, and our profitability may decline if electricity costs rise or if our electricity supplies are interrupted.
Our operations consume substantial amounts of electricity. Although we generally expect to meet the electricity consumption requirements for our alumina refineries and primary aluminum smelters from a combination of internal and external sources, our results of operations may be materially and adversely affected by any significant increase in electricity costs or interruptions in electricity supply.
Cost of electricity is the principal production cost in our primary aluminum operations. Due toAs a result of the increasedecrease in volume ofoutsourced electricity generated byprice resulting from our ownnegotiation with electric power plants and its proportion in the total volumeadjustments of our production capacity of primary aluminum, including halting the primary aluminum production by Shandong Huayu and Shanxi Huasheng, which smelters used to incur relatively high electricity that we consumed,costs, our average electricity cost per kWh (including tax) of our primary aluminum smelters decreased by approximately 2%4% from 20172018 to 2018.2019. However, there is no assurance that we will be able to continuously increasesucceed in electricity price negotiation or further adjust the consumptionproduction capacity of primary aluminum to lower the electricity generated by our own electric power plants,costs, or that any factor beyond our control will not result in any increase in the price of electricity. If we are unable to pass on increases in energy costs to our customers, our operating margin, financial condition and results of operations could be materially and adversely affected.
In addition, interruptions in the supply of electricity can result in costly production shutdowns, increased costs associated with restarting production and the waste of production in progress. A sudden loss of electricity, if prolonged, can cause damage to or the destruction of production equipment and facilities. In such an event, we may need to expend significant capital and resources to repair or replace the affected production equipment to restore our production capacity. In the past, various regions across China experienced shortages and disruptions in electricity supply, especially during peak demand summer season or under severe weather conditions. We cannot assure you that our operations will not suffer from shortages or disruptions in electricity supply, the occurrence of which could have a material adverse impact on our business, financial condition and results of operations.
Our operations consume substantial amounts of coal, and our operations may be adversely affected if we are not able to procure sufficient coal or if coal prices rise significantly.
We rely heavily on coal as our energy and fuel source in our operations. As we increase our alumina refining capacity, our consumption of coal will increase accordingly. If we are not able to obtain the amount of coal needed for our production due to a shortage of coal, constraints on coal transportation or any other reason, we may be forced to reduce our production output or suspend our alumina refining operations, which could materially and adversely affect our financial condition and results of operations. Although we have acquired equity interest in a number of coal mines, we expect to continue to rely substantially on third-party coal suppliers for the supply of coal. Our average purchase price per unit tonne of thermal coal used in our alumina production increaseddecreased by approximately 3%12.4% in 20182019 from the level in 2017.2018. However, there is no assurance that the coal prices will not increase or further fluctuate. If we are unable to pass on increases or otherwise significant fluctuations in coal prices to our customers or offset price increases through productivity improvements, our operating margin, financial condition and results of operations could be adversely affected.
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Our business and industry may be affected by the development of alternative energy sources and climate change.
Our operations consume substantial amounts of coal. Coal combustion generates significant greenhouse gas and other pollutants, and the effects of climate change resulting from global warming and increased pollution levels may provide incentives for governments to promote or invest in “green” energy technologies such as wind, solar, nuclear and biomass power plants, or to reduce their consumption of conventional energy sources such as coal. A number of governments or governmental bodies have introduced or are contemplating legislative and regulatory changes in response to the potential impacts of climate change. These regulatory mechanisms may impact our operations directly or indirectly through our customers or supply chain. We may have to increase our capital expenditures in order to comply with such revised or new legislation or regulations, and may realize changes to our profit or loss arising frommay occur due to increased or decreased demand for our products and indirectly fromdue to changes in costs of goods sold, which may adversely affect our results of operations and financial condition.
In addition, we have invested in coal mining operations. Although revenues attributable to our energy segment accounted for only approximately 3.9%3.7% of our total revenues in 20182019 (after elimination of inter-segment sales), we might still be affected by the growth ofany change on the PRC thermal power industry, which relies on coal as main source of fuel. The PRC thermal power industry may be affected by the development of alternative energy sources, climate change and global environmental factors. In particular, pursuant to China’s 13th Five-Year Plan for Environmental Protection, the PRC government plans to continue to encourage the development of alternative energy sources, such as wind power, solar power, biomass and geothermal energy, from 2016 to 2020. As such, alternative energy industries may rapidly develop and gradually gain mainstream acceptance in the PRC and the rest of the world. If alternative energy technologies continue to develop and prove suitable for wide commercial application in the PRC and overseas, demand for conventional energy sources, such as coal, could be reduced. Such reduction in demand for coal could have a material adverse effect on the coal mining industry and, consequently, negatively affect our business, results of operations and financial condition.
We may not be able to continue competing successfully in the markets in which we operate.
In 2018,2019, we supplied approximately 48% of our total production of alumina to our own smelters and sold substantially all of the remaining self-produced alumina and all of our self-produced alumina and self-produced primary aluminum to our domestic customers. Our alumina (with chemical alumina products included) and primary aluminum production represented approximately 21.2%21.9% and 11.4%10.5%, respectively, of total domestic production in China in 2018.2019. We face competition from both domestic and international alumina and primary aluminum producers. Our principal competitors are major domestic refineries and smelters. These producers compete with our alumina and primary aluminum operations on the basis of product cost, quality and pricing. In addition, we face increasing competition from international alumina and primary aluminum suppliers as a result of the elimination of tariffs on imports of primary aluminum and alumina into China. See “Item 4. Information on the Company - B. Business Overview - Competition” for further details.
Increasing competition in our product markets may reduce our selling prices or sales volumes, which will have a material adverse effect on our financial condition and results of operations. If we are unable to price our products competitively, maintain or increase our current share of China’s alumina and primary aluminum markets or otherwise maintain our competitiveness, our financial condition, results of operations and profitability could be materially and adversely affected.
Our overseas expansion exposes us to political and economic risks, commercial instability and events beyond our control in the countries in which we plan to operate.
We are currently undertaking a couple of overseas projects, includingprojects. For example, we are in the bauxite mining projectsprocess of construction of the Boffa Project in Laos, Indonesia and Guinea. Due to uncertainties involved in the overseas projects, we cannot assure you that our overseas expansion or investments will be successful or that we will not suffer foreign exchange losses in connection with our overseas investment. For example, in April 2019, the Laos government cancelled the exploration rights of the bauxite mines held by Lao Service Mining Co., Ltd., in which we held 60% of the equity interest, as it had not continuously carried out related activities in the past years.
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In addition, operations in the overseas markets also expose us to a number of risks including expropriation and nationalization of our assets in foreign countries, civil unrest, acts of terrorism, war, or other armed conflict; shortages of construction equipment and materials; severe weather conditions; social security, public health and safety, labors and construction safety and similar issues; epidemic diseases and infectious diseases; natural disasters; inflation; currency fluctuations, devaluations and conversion restrictions; confiscatory taxation or other adverse tax policies, governmental activities that limit or disrupt markets, restrict payments or limit the movement of funds, governmental activities that may result in the deprivation of contractual rights; lack of a well-developed legal system that makes it difficult to enforce our contractual rights; uncertainties in laws and policies; and governmental activities that may result in the inability to obtain or retain licenses required for operations.
Our profitability and operations could be adversely affected if we are unable to obtain a steady supply of raw materials at competitive prices.
Historically, the price for bauxite, our most important raw material for alumina production, has been volatile. We obtain bauxite for our operations from our mines and external suppliers. See “Item 4. Information on the Company - B. Business Overview - Raw Materials - Alumina - Supply.” The extents to which we procure bauxite from each of these sources affect the security of our supply or cost of bauxite. The supply of bauxite could be affected by various factors, including geographic conditions of bauxite mines, government policies, market prices and competition, many of which are beyond our control. We rely on overseas suppliers to obtain a portion of bauxite we use for production. Indonesia used to be a major source of our imported bauxite. As a result of the ban imposed by the Indonesia Government on the exportation of unprocessed bauxite and nickel, since January 2014, we have not been able to export the bauxite produced by our bauxite mines in Indonesia for the use of our alumina refineries in China, and our operation of bauxite mining in Indonesia has been suspended since September 2014. See “Item 4. Information on the Company - B. Business Overview - Raw Materials - Alumina – Own Mines” for more details of our bauxite mines in Indonesia. If we exhaust our stockpiles or our procurement of bauxite from external suppliers are interrupted for any reasons, and cannot find an alternative source of bauxite at competitive prices, our financial condition, results of operations and profitability could be adversely affected.
In addition, our results of operations can be affected by increases in the cost of other raw materials and other key inputs such as energy. If we cannot obtain a steady supply of key raw materials at competitive prices, our financial condition and results of operations could be materially and adversely affected.
Any transportation interruption or any material increase in our transportation costs could have a material adverse effect on our business, financial condition and results of operations.
Our operations require the reliable transportation of raw materials and supplies to our refining and smelting sites and finished products to our customers. Our alumina products are mainly transported by rail or trucks and our primary aluminum products are delivered to our customers primarily by rail. There is no assurance that we can always enjoy sufficient transportation capacity or we will not experience transportation interruption in the future. Furthermore, natural disasters, severe weather conditions and outbreak of epidemic diseases and infectious diseases may cause interruption to the transportation system, which could in turn affect the transportation of our products. Please refer to “- Our business may be materially and adversely affected by the recent outbreak of COVID-19” for further details of the impact of outbreak of COVID-19 on the transportation system. In addition, any changes in fuel prices or fuel supply may be unpredictable and beyond our control. There is no assurance that shortage of fuel will not occur in the future. Any surge in fuel prices or shortage of fuel supply may lead to increases in our operation and transportation costs. If we are unable to make timely deliveries due to logistical and transportation disruptions, or transfer the increased costs to our customers, our production, reputation and results of operations may be adversely affected.
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The bauxite reserve data in this annual report are only estimates, which may prove to be inaccurate.
The bauxite reserve data based on which we prepare our production and expenditure plans are only estimates that we have developed internally and may prove to be inaccurate. There are numerous uncertainties inherent in estimating quantities and qualities of reserves, including many factors beyond our control. If these estimates are inaccurate or the indicated tonnages are not recovered, our business, financial condition, and results of operations may be materially and adversely affected.
Our mining operations have limited mine lives and eventual closure of these operations will entail costs and risks regarding ongoing monitoring, rehabilitation and compliance with environmental standards.
Our existing mining operations in the PRC and overseas have limited mine lives and will eventually be depleted. We need to perform certain procedures to remedy and rehabilitate the environmental and social impact that our mining operations have had on local communities and the environment. Remediation, rehabilitation, closure and removal of our facilities will incur various costs and are subject to various risks. The key costs and risks for mine closures include, among others, (i) long-term management of permanent engineered structures and acid rock drainage; (ii) closure in accordance with local or international environmental standards; (iii) orderly retrenchment of employees and third-party contractors; and (iv) orderly transfer of the site, its associated permanent structures and community development infrastructure and programs to new owners. There is no assurance that such closure of mines will be successful and without delays or additional costs, in which case we may be subject to increased costs, penalties or other legal or administrative actions, damages to reputation, or even suspension and cancellation of mining permits, the occurrence of which would cause a material adverse effect on our business, financial condition and results of operations.
Failure to discover new reserves or resources, maintain or enhance existing reserves or resources, develop new mining operations or expand our current mining operations could negatively affect our business, financial condition and results of operations.
Mining exploration is unpredictable in nature. The success of any mining exploration program depends on various factors, many of which are beyond our control. Due to the unpredictable and speculative nature of the mining industry, there is no assurance that any exploration program that we are currently undertaking or may undertake in the future will result in the discovery of valuable reserves or resources. There is no assurance that reported resources can be converted into reserves. Furthermore, actual results upon production may differ from those anticipated at the time of discovery. To access additional reserves in explored areas, we will need to successfully complete development projects, including but not limited to extending existing mines and developing new mines. There are a number of uncertainties inherent in the development and construction of any new mine or an extension of an existing mine, including but not limited to (i) the availability and timing of necessary governmental approvals; (ii) the timing and cost necessary to construct mining and processing facilities; (iii) the availability and cost of labor, utilities, auxiliary materials and other supplies and the accessibility of transportation and other infrastructure; and (iv) the availability of funds to finance construction and production activities. There is no assurance that any future exploration activities or development projects will extend the life of our existing mining operations or result in any new economic mining operations and such failure may have a material adverse effect on our business, financial condition and results of operations.
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Our indebtedness could adversely affect our business, financial condition and results of operations.
We have relied, and expect to continue to rely, on both short-term and long-term borrowings to fund a significant portion of our capital requirements. As of December 31, 2018,2019, we had approximately RMB47.5 billionRMB42,286.7 million in outstanding short-term bonds and short-term bank borrowings (including the current portion of long-term bank and other borrowings) and RMB54.2 billionRMB59,243.6 million in outstanding long and medium-term bonds and long-term bank and other borrowings (excluding the current portion of these borrowings). On March 26, 2020, subject to approval at our 2019 annual general meeting that is expected to be held in 2020, our Board approved to authorize (i) the issuance of debt financing instruments and bonds in the PRC with an aggregate outstanding balance of all bonds not exceeding RMB50 billion (including various issued domestic bonds), and (ii) the issuance of overseas bonds with an aggregate amount of not more than US1 billion (or in other currencies with the equivalent amount), the term of which authorizations will commence on the date of approval at our 2019 annual general meeting and close upon the conclusion of our 2020 annual general meeting. Although we have been managing our debt and assets with the goal of maintaining our debt at an appropriate level, there is no assurance that such efforts would be successful or the level of our debt will be further decreased. Please see Note 1918 and Note 43 to our audited consolidated financial statements for more detailed information about our borrowings.borrowings and recent issuance of bonds and notes in 2020. This level of debt could have significant consequences on our operations, including:
● | making it more difficult for us to fulfill payment and other obligations under our outstanding debt, including repayment of our debt and credit facilities should we be unable to obtain extensions for any such debt or credit facilities before they mature. Please see “Item 5 - Operating and Financial Review and Prospects - B. Liquidity and Capital Resources” for maturities of our outstanding long-term borrowings; |
● | reducing the availability of cash flows to fund working capital, capital expenditures, acquisitions and other general corporate purposes; |
● | exposing us to interest rates fluctuations on our borrowings and the risk of being unable to rollover, extend or refinance our borrowings as necessary; |
● | potentially increasing the cost of additional financing and making it more difficult for us to conduct equity financings in the capital markets or obtain government approvals to seek additional financing; and |
● | putting pressure on our ADS price due to concerns of our ability to repay our debt. |
Our ability to meet our payment and other obligations under our outstanding debt depends on our ability to generate cash flows in the future or to refinance such debt. WeIn 2019, we carried out capital preservation and appreciation businesses by using daily reserve fund for investments such as structural deposits and monetary funds. However, we cannot assure you that such capital preservation and appreciation businesses will be successful or profitable, or our business in general will generate sufficient cash flows from operations, to satisfy our obligations under our outstanding debt and to fund other liquidity needs. If we are not able to generate sufficient cash flows to meet such obligations, we may need to refinance or restructure our debt, reduce or delay capital investments, or seek additional equity or debt financing. The sale of additional equity securities could result in dilution to our ADS holders. A shortage of financing could in turn impose limitations on our ability to plan for, or react effectively to, changing market conditions or to expand through organic and acquisitive growth, thereby reducing our competitiveness. We cannot assure you that future financing will be available in amounts or on terms acceptable to us, if at all.
The instruments governing our senior debt contain a number of significant financial and other covenants that restrict our ability to raise further debt, take certain corporate actions and pay dividends.
We completed the issuance ofissued US$500 million in aggregate principal amountsenior perpetual securities at a rate of 4.25% senior perpetual capital securities (the “Securities”) in NovemberOctober 2016, through Chalco Hong Kong Investment Company Limited (the “Bond Issuer”) with guarantees to the repayment obligations of the Securities provided by Chalco Hong Kong (the “Subsidiary Guarantor”). Please refer to “Item 4. Information on the Company - A. History and Development of the Company - Senior Perpetual Capital Securities Offering” for further details.
The indentures governing the Securities contain a number of significant financial and other covenants. Such covenants restrict, subject to certain exceptions, among other things, our and our subsidiaries’ ability to create, or have outstanding, any security interest upon our or our subsidiaries’ present or future undertaking, assets or revenues to secure any indebtedness which is in the form of bonds, notes, debentures, loan stock or other securities which for the time being are, or are intended to be or capable of being, quoted, listed or dealt in or traded on any stock exchange or over-the-counter or other securities market (“Relevant Indebtedness”) which is issued outside the PRC, our ability to create or have any Relevant Indebtedness which is issued outside the PRC, our ability to create or have outstanding any guarantee or indemnity in respect of any Relevant Indebtedness which is issued outside the PRC and the Bond Issuer’s, Subsidiary Guarantor’s and their respective subsidiaries’ ability to create, or have outstanding, any security interest upon their present or future undertaking, assets or revenues to secure any Relevant Indebtedness or any guarantee or indemnity in respect of any Relevant Indebtedness or to sell or otherwise dispose of capital stock held or controlled by it in any direct or indirect subsidiary of Chalco Hong Kong which is not a Subsidiary Guarantor. These covenants restrict our ability to raise additional funds in the future through issuing Relevant Indebtedness which is issued outside the PRC or creating or having any guarantee or indemnity in respect of any Relevant Indebtedness which is issued outside the PRC and may restrict our ability to engage in some transactions that we expect to be of benefit to us.
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The Securities are guaranteed by Chalco Hong Kong. A breach of any of the covenants in the indenture governing the Securities could result in redemption of the Securities at our discretion or an increase of coupon rate if we do not redeem the Securities upon a breach of such covenants. If we default under the Securities in the future, the holders may enforce their claims against the guarantors to satisfy our obligations to them. In addition, such default may result in a default and acceleration of our senior debt and the holders of our senior debt could gain ownership of the capital stock of certain of our wholly-owned subsidiaries (if such capital stock is pledged for such senior debt) and/or enforce their claims against the assets of the guarantors (if guarantee is provided for such senior debt). Consequently, we could lose control or ownership of certain of our assets and operations of the Subsidiary Guarantor or pledgers.
In addition to the Securities, in October 2015, and October 2018 our Companyand November 2019, we issued RMB2,000 million in aggregate principal amount of 5.50% perpetual medium-term notes (the “2015 Perpetual Medium-term Notes”) and, RMB2,000 million in aggregate principal amount of 5.10% perpetual medium-term notes (the “2018 Perpetual Medium-term Notes”) and RMB1,500 million perpetual medium-term notes with an initial distribution rate at 4.20% (the “2019 Perpetual Medium-term Notes”), respectively, in China. Pursuant to the terms of the 2015 Perpetual Medium-term Notes, the 2018 Perpetual Medium-term Notes and the 20182019 Perpetual Medium-term Notes, while any coupon distribution payments are unpaid or deferred, theour headquarters of the Company cannot declare or pay dividends to shareholders or decrease the share capital, or make material fixed asset investments of the headquarters of the Company.our headquarters. Therefore, our ability to pay dividends in respect of our ordinary shares and the ADSs may be limited under certain circumstances.
In addition, if these perpetual securities are categorized as debt due to changes of accounting standard or other reasons, or if we choose to redeem these perpetual securities, our total equity may be reduced, which may be adverse to our financial condition or the price of our ordinary shares or ADSs.
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The interests of our controlling shareholder who exerts significant influence over us may conflict with ours.
As of December 31, 2018,2019, our largest shareholder, Chinalco, directly owned 33.89%29.67% of our issued share capital and indirectly owned an additional 2.73%2.39% of our issued share capital through its controlled entities. The interests of Chinalco may conflict or even compete with our interests and those of our public shareholders. Chinalco may take actions that are in the interest of its subsidiaries, associates and other related entities to our detriment. For example, Chinalco may seek to influence our decision as to the amount of dividends we declare and distribute. Any increase in our dividend payout would reduce funds otherwise available for reinvestment in our businesses and thus may adversely affect our future prospects and financial condition.
In addition, we enter into transactions with related parties, including Chinalco and a number of its subsidiaries and associates, which provide a range of services to us, including engineering and construction services, social services, land and property leasing as well as the supply of raw and supplemental materials. See “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions” for detailed information. It would be difficult to find an alternative source for some services that we receive from Chinalco. Our cost of operations may increase if Chinalco, its subsidiaries and associates are unable to continue providing such services to us.
In January 2019, Yunnan SASAC gratuitously transferred its 51% equity interest in Yunnan Metallurgical Group Co., Ltd. to China Copper, a wholly-owned subsidiary of Chinalco.Chinalco, with no consideration. As Yunnan Aluminum, Co., Ltd., an affiliated company of Yunnan Metallurgical Group Co., Ltd., competes with us in the business segments of alumina and primary aluminum, Chinalco, as the indirect controlling shareholder of Yunnan Aluminum Co., Ltd. and our direct controlling shareholder, issued a letter of undertakings on non-competition to us, according to which Chinalco undertook to start in 2019 planning the integration of the businesses in which Yunnan Aluminum Co., Ltd. and we compete with each other, and address such business competition within five years. For further details, please see “Item 4. Information on the Company - A. History and Development of the Company.” While we intend to closely monitor Chinalco’s planning and implementation of such business integration and make timely public disclosure about significant progress made, due to the uncertainties involved in such business integration, however, we cannot assure you that business competition between Yunnan Aluminum Co., Ltd. and us would be addressed without undue delays or at all, or the plan of such business integration or the implementation thereof would be viewed by you or other investors as most favorable to us or our shareholders.
We are subject to, and incur costs to comply with, environmental laws and regulations.
As we produce air emissions, discharge waste water, and handle hazardous substances at our bauxite mines, alumina refineries and primary aluminum smelters, we are subject to, and incur costs to comply with, environmental laws and regulations.
Given the magnitude, complexity and continuous amendments to these laws and regulations, compliance therewith may be onerous or may involve substantial financial and other resources to establish efficient compliance and monitoring systems. The liabilities, costs, obligations and requirements associated with these laws and regulations may therefore be substantial and may delay the commencement of, or cause interruptions to, our operations. Non-compliance with the relevant laws and regulations applicable to our operations may even result in substantial penalties or fines, suspension or revocation of our relevant licenses or permits, termination of government contracts or suspension of our operations. For example, in November 2017, our Lanzhou branch was fined by2019, the local environmental protection authorities due to the fact thatimposed administrative penalties on some of our Lanzhou branch did not conduct the application registrationsubsidiaries, including Chalco Mining, Shanxi New Material and Xinhua Technology, for storageemission of residues generatedsulfur dioxide and nitrogen oxides occasionally exceeding regulatory standards from overhaul of electrobath according to relevant requirements.thermal power plants and primary aluminum smelters. We startedhave strengthened the rectification processof issues in December 2017relation to environmental protection and completedlaunched the environmental governance projects in 2019, reforming our system for ultra-low emission. However, as requested through a series of measures, including, among others, relocation of the non-compliantly-stowed overhaul residues to plants in compliance with applicableenvironmental protection standards and requirements construction at our Lanzhou branch of a production line with environmentally-sound treatment of overhaul residues which began operation in March 2018, restoration of the sites previously used to store overhaul residue by Lanzhou branch and improving internal management measures on solid waste treatment by including more stringent requirements. However,may be further enhanced, we cannot assure you that the similar events would not occur in the future, if such incidents were to occur, it could impact our operating results, financial condition and reputation, all of which could adversely affect our profitability and ability to retain existing customers and to attract new customers.
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In addition, the environmental laws and regulations in the PRC and other jurisdictions in which we operate continue to evolve. As a result, we may incur significant additional costs if relevant laws and regulations change or enforcement of existing laws and regulations becomes more rigorous. For instance, to comply with the requirement of desulphurization and denitration in China, we were requested to invest in upgrading or remolding certain production facilities. Due to serious haze hovering in certain areas in China, the PRC government has issued and may continue to issue rules and regulations to restrict production of certain industries in certain areas to alleviate air pollution, pursuant to which we may reduce output of our relevant plants from time to time. Further, our overseas expansion projects are subject to foreign environmental laws and regulations. Failure to comply with environmental laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of monetary penalties, the imposition of remedial requirements and the issuance of orders enjoining future operations, all of which may materially and adversely affect our business operations.
We are subject to administrative policies and orders relating to China’s Energy-Saving and Emission Reduction Goals that could adversely affect our production.
We are subject to administrative energy-saving and emission reduction policies and orders carried out by the central and provincial governments in accordance with China’s Energy-Saving and Emission Reduction Goals. On July 18, 2013, theThe MIIT issued the Standard Conditions for Aluminum Industry on July 18, 2013 and updated it on March 3, 2020, which setsset forth various standards for existing and new projects,enterprises, including but not limited to standards for environmentenvironmental protection, energy consumption, and utilization of resources. Although we have been in compliance with the applicable Standard Conditions for Aluminum Industry since its issuance, we cannot assure you that the relevant government authorities will not issue more stringent standards or rules, which may require us to incur additional costs or expenses to comply with these standards or rules, and our existing production may be delayed for facility upgrading or suspended before full compliance with these standards or rules. The occurrence of any of the foregoing could have an adverse effect on our business, results of operations and financial condition.
We are subject to accidents and natural disasters that may adversely affect our performance.
We may experience accidents and natural disasters in the course of our operations, which may cause significant property damage and personal injuries. Significant accidents and natural disasters may cause interruptions to our operations or result in property or environmental damage, increase in operating expenses or loss of revenues. The occurrence of accidents, natural disasters and the resulting consequences may not be covered adequately, or at all, by the insurance policies we carry. Losses or payments incurred by us as a result of major accidents or natural disasters may have a material adverse effect on our results of operations.
We have not obtained valid titles or land use rights to certain properties or land parcels that we occupy.
We have not obtained valid ownership certificates to certain properties that we occupy. These properties are used primarily for production plants and daily operations management. As of December 31, 2018,2019, the book value of our properties with defective titles is RMB5,639RMB7,315 million, which represents approximately 2.81%3.6% of our total asset value. In addition, we had not obtained land use rights to certain land parcels, which we use primarily for our production plants. As of December 31, 2018,2019, the book value of these land parcels is RMB687RMB74 million, representing approximately 0.34%0.04% of our total asset value. We have applied to the appropriate authorities to obtain the relevant ownership certificates. We cannot give any assurance that ownership dispute will not occur or that third parties will not assert any claims against us for compensation in respect of any use of these properties or land parcels.
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Our business involves inherent risks and occupational hazards, which could damage our reputation, subject us to liability claims and cause substantial costs to us.
Our business involves inherent risks and occupational hazards. Under our mining operations, we engage or may engage in certain inherently risky and hazardous activities, including, among others, operations at height or on dangerous terrains, underground excavation and construction, use of heavy machinery, mining and handling of flammable and explosive materials, and we are therefore subject to risks associated with these activities, including, among others, geological catastrophes, toxic gas and liquid leakages, equipment failures, industrial accidents, fire, explosions and underground water leakages. Although we conduct geological assessments on mining conditions and adapt our mining plans to the mining conditions at each mine, we cannot assure you that adverse mining conditions will not endanger our workforce, increase our production costs, reduce our bauxite or coal output or temporarily suspend our operations. The occurrence of any of the foregoing events or conditions could have a material adverse impact on our business and results of operations. Additionally, we are exposed to operational risks associated with industrial or engineering activities, such as maintenance problems or equipment failures. These risks and hazards may result in personal injury and fatal casualties, damage to or destruction of properties or production facilities, and pollution and other environmental damage. Any of these consequences, to the extent they are significant, could result in business interruption, possible legal liability and damage to our business reputation and corporate image.
Our mines and operating facilities may be damaged by water, gas, fire or cave-ins due to unstable geological structures. Any significant accident, business disruption or safety incident could result in substantial uninsured costs and the diversion of our resources, which could materially and adversely affect our business operations and financial condition.
We may be subject to product liability claims.
Some of the products we sell or manufacture may expose us to product liability claims relating to property damage or personal injury. The successful assertion of product liability claims against us could result in significant damage payments and harm to our reputation, which in turn could have a material adverse effect on our business, financial condition and results of operations.
We are subject to litigation risks.
In the ordinary course of business, claims involving project owners, customers, suppliers and subcontractors may be brought against us and by us in connection with our operations. If we were found to be liable on any of the claims, we would have to incur a charge against earnings to the extent a reserve had not been established for the matter in our accounts, or to the extent the claims were not sufficiently covered by our insurance coverage. Both claims brought against us and by us, if not resolved through negotiations, are often subject to lengthy and expensive litigation or arbitration proceedings, and claims against us may also result in freeze of or restrictions on our bank deposits or other assets during such lengthy legal proceedings. Charges associated with claims brought against us and write-downs associated with claims brought by us could have a material adverse impact on our business, financial condition, results of operations and cash flow. Moreover, legal proceedings resulting in judgments or findings against us may harm our reputation and damage our prospects for future contract or business awards.
We face counterparty risks.
While we generally sell goods and provide services to reputable customers and evaluate the customers’ credit in accordance with our internal risk management criteria, such as their credit history and likelihood of default, we have limited access to information about our customers and we may encounter difficulties in the collection of receivables in certain countries that we have less experience in our dealings. Therefore, we cannot guarantee that all of our customers will fully perform their obligations under their respective contracts with us, and the deterioration of any customers’ credit or payment conditions may result in those customers defaulting on their contractual obligations, which could materially and adversely affect our business, financial condition and results of operations. Please refer to “- Our business may be materially and adversely affected by the recent outbreak of COVID-19” for further details of the impact of outbreak of COVID-19 on our customers. In addition, disputes with governmental entities and other public organizations could potentially lead to contract termination if these remain unresolved or may take a considerably longer period of time to resolve thanthe disputes with counterparties in the private sector, and payments from these entities and organizations may be delayed as a result.
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We may face challenges to our intellectual property rights which could adversely affect our reputation, business and financial position.
We own important intellectual property, including patents and trademarks. Our intellectual property plays an important role in maintaining our competitive position in a number of the markets that we serve. Our competitors may develop technologies that are similar or superior to our proprietary technologies or design around the patents we own or license. Developments or assertions by or against us relating to intellectual property rights, and any inability to protect or enforce these rights, could adversely affect our business and competitive position.
We may be exposed to claims in relation to the unsatisfactory performance of third-party service providers, and disputes with business partners may also adversely affect our business.
We rely on third-party service providers for certain services, including but not limited to mining infrastructure construction, logistics services or warehouse management. Therefore, we are exposed to the risk that our third-party service providers may fail to perform their obligations, which may adversely affect our business operations. In addition, from time to time, we co-operate with business partners to develop our business, including acquiring strategic mining resources or businesses that complement our own business line. Furthermore, we operate certain projects through joint venture arrangements and may enter into further joint ventures in the future along with the expansion of our operations. We may have disputes with these business partners or joint venture partners over various aspects, such as performance of each party’s obligations, scope of each party’s responsibilities, product quality and logistics services. If such disputes cannot be settled in a timely manner, our financial condition and business may be adversely affected.
Failure to hire and retain management executives and other qualified personnel could adversely affect our business and prospects.
The growth of our business operations depends on the continued services of our senior management team. The industry experience, expertise and contributions of our executives and other members of our senior management are essential to our continued success. We will require an increasing number of experienced and competent executives in the future to implement our growth plans. If we were to lose the services of any of our key management members and were unable to recruit and retain personnel with equivalent qualifications at any time, the management and growth of our business could be adversely affected.
Competition for qualified personnel in general is intense in the PRC and other markets where we operate. We cannot guarantee that we will be able to maintain an adequately skilled labor force necessary for us to execute our projects or to perform other corporate activities, nor can we guarantee that staff costs will not increase as a result of a shortage in the supply of skilled personnel. If we fail to attract and retain personnel with suitable managerial, technical or marketing expertise or maintain an adequate labor force on a continuous basis, our business operations could be adversely affected and our future growth and expansions may be inhibited. Please refer to “- Our business may be materially and adversely affected by the recent outbreak of COVID-19” for further details of the impact of outbreak of COVID-19 on our labor force.
We may not be able to detect and prevent fraud or other misconduct committed by our employees, representatives, agents, customers, affiliates or other third parties.
We may be exposed to fraud or other misconduct committed by our employees, representatives, agents, customers, affiliates or other third parties that could subject us to litigation, financial losses and sanctions imposed by governmental authorities, as well as adversely affect our reputation, business, financial condition, results of operations and ADS trading prices. Such misconduct may include, among others:
● | hiding unauthorized or unsuccessful activities, resulting in unknown and unmanaged risks or losses; |
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● | intentionally concealing material facts, or failing to adequately perform necessary due diligence or risk analysis procedures designed to identify potential risks; |
● | improperly using or disclosing confidential information; |
● | engaging in improper activities or activities that might be subject to penalties, fines or sanctions; |
● | misappropriation of funds; |
● | conducting transactions that exceed authorized limits; |
● | engaging in misrepresentation or fraudulent, deceptive or otherwise improper or illegal activities; |
● | engaging in unauthorized or excessive transactions to the detriment of our customers; or |
● | otherwise not complying with applicable laws or our internal policies and procedures. |
Our internal control procedures are designed to monitor our operations and ensure overall compliance. However, such internal control procedures may be unable to identify, detect or prevent all incidents of non-compliance or suspicious transactions in a timely manner, if at all. In addition, we do not have control over the activities conducted on their own by those of our customers, affiliates or other third parties.
There is no assurance that fraud or other misconduct by our employees, representatives, agents, customers, affiliates or other third parties will not occur in the future. If such fraud or other misconduct does occur and to the extent that our employees, representatives, agents, customers, affiliates or other third parties are penalized for any of their non-compliance activities or are otherwise subject to any sanctions laws of foreign jurisdictions, it may cause negative publicity of us as a result, and could have a material adverse effect on our business, financial condition, results of operations and our ADS trading prices.
Cyber attacks and security breaches may threaten the integrity of our intellectual property and other sensitive information and disrupt our business operations, which could adversely affect our reputation, business and financial position.
We face global cybersecurity threats, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. Cyber attacks and security breaches may include, but are not limited to, attempts to access information, computer viruses, denial of service and other electronic security breaches. Cyber attacks and security breaches may cause equipment failures, loss of information and limited access to systems. For manufacturing companies, cyber attacks and security breaches may result in the theft of sensitive data, including valuable technical and marketing information, disruptions to operations and breakdown of industrial control system. The economic costs to us to eliminate or alleviate cyber attacks and security breaches could be significant and may be difficult to estimate or calculate because the loss may differ based on the identity and motive of the programmer or hacker, which are often difficult to identify. Further, the perpetrators of cyber attacks and security breaches are not restricted to specific groups or persons. These attacks may be committed by company employees or external actors operating in any geography, including jurisdictions where law enforcement measures to address such attacks are unavailable or ineffective, and may even be launched by or at the behest of nation states. In addition, new and amended PRC regulatory requirements regarding network security and information protection have been adopted in recent years to further strengthen the regulation in those areas, which may require us to devote significant resources to establishing and maintaining our compliance with such new or amended legislation or regulations.
Although we have not experienced any material cybersecurity incidents in the past, we cannot assure you that we will not experience them in the future. Due to the evolving nature of cybersecurity threats, the scope and impact of any future incident cannot be predicted. While we devote significant resources to security measures to safeguard our systems and mitigate potential risks, such as deploying network protection devices and performing regular security assessment, there is no assurance that such actions will be sufficient to prevent cyber attacks or security breaches that manipulate or improperly use our systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events could negatively impact our reputation and our competitive position and could result in litigation with third parties, regulatory action, loss of business, potential liability and increased remediation costs, any of which could have an adverse effect on our financial condition and results of operations.
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We are subject to risks normally associated with cross-border transactions, and our export products have been and may become subject to anti-dumping or countervailing duty proceedings.
During the past few years, we generated marginal revenue from exports of certain chemical alumina products and also from time to time from exports of certain non-ferrous metals and minerals products to foreign jurisdictions. In 2018,2019, we only engaged in the export of certain chemical alumina products to foreign countries including, among others, South Korea, Japan and countries in Southeast Asia, and revenue generated from such export accounted for approximately 0.5%0.55% of our total revenues in 2018.2019. Such foreign jurisdictions and other countries may take restrictive measures, including, among others, imposition of tariffs, anti-dumping duties and other non-tariff barriers, to protect their own markets. The sales of our product in overseas markets may be adversely affected by increases in or new impositions of anti-dumping duties, countervailing duties, quotas or tariffs imposed on our exports. Further increases in or new imposition of anti-dumping duties, countervailing duties, quotas or tariffs on our sales in these markets could adversely affect the exports to these regions in the future. For example, since October 1, 2018,, the U.S. government has imposed tariffs and other trade barriers on products imported from China, which elicited retaliatory tariff increases by the PRC government on the U.S. products. Since October 1, 2018, the U.S. government had imposed a 10% tariff on various aluminum products imported from China, including chemical alumina products. Starting from May 2019, this tariff rate was increased to 25%. In 2018,2019, we exported 26,000 22,662tonnes of chemical alumina products to the United States, representingwhich decreased by more than 10% compared to 2018 due to the tariff increase. The revenue from our export to the United States represented less than 0.1% of our total revenues in 2018.both 2018 and 2019. Other than exports of chemical alumina products, we did not have any exports to the United States in 2018.2019. There is no assurance that such export volume of chemical alumina products will not further decrease in the future. In addition, such trade frictions and tariffs involved, as well as the sluggish global economy in 2019 and early 2020 in general, may decrease China’s aluminum export to the United States and other countries and reduce global aluminum consumption, which could in turn has a material adverse effect on the demand of our products as well as our business, financial condition and results of operations. On January 15, 2020, the PRC government and the U.S. government entered into the U.S.-China Phase One trade deal agreement. However, ifit is not yet clear what further actions the U.S. government and the PRC government may take. There is no assurance that a broader trade agreement would be successfully negotiated between the U.S. and China, or no additional tariffs or other trade barriers would be imposed. If there is any escalation in trade frictions, we cannot assure you whether such development would not have a material adverse effect on the business environment in general, global economic conditions and the stability of global financial markets. Any of these factors affected by the developments in trade barriers could in turn have a material adverse effect on our business, financial condition and results of operations.
By virtue of our transactions with parties outside the PRC, we will be subject to the risks normally associated with cross-border business transactions and activities. We will also be exposed to the risk of changes in social, legal, political and economic conditions in the foreign jurisdictions. In particular, unexpected changes in regulatory requirements, tariffs and other trade barriers and price or exchange controls could limit our operations and make the repatriation of profits difficult.
Our operations are affected by a number of risks relating to conducting business in the PRC.
As a significant majoritymost of our assets and operations are located in the PRC, we are subject to a number of risks relating to conducting business in the PRC, including the following:
● | The central and local PRC government continues to exercise a substantial degree of control and influence over the aluminum industry in China and shape the structure and development of the industry through the imposition of industry policies governing major project approvals and safety, environmental and quality regulations. If the PRC government changes its current policies or the interpretation of those policies that are currently beneficial to us, we may face pressure on profit margins and significant constraints on our ability to expand our business operations. |
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● | Although the PRC has been one of the world’s fastest growing economies in terms of GDP growth in the past 30 years, the global financial crisis that unfolded in 2008, coupled with the on-going structural |
● | We are subject to reviews and inspections by various governmental authorities and regulatory agencies. These reviews and inspections could cover a broad range of aspects in relation to our business and operations, including financial reporting, tax reporting, internal control and compliance with applicable laws, rules and regulations. We cannot predict the impact of any findings of these reviews and inspections to be carried out by governmental authorities and regulatory agencies in the future, and we cannot assure you that the outcome of any such reviews and inspections would not have a material adverse effect on our business, financial condition, results of operations and prospects. |
● | In 2005, China adopted a managed floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on supply and demand with reference to a basket of currencies. Since then the exchange rate between the U.S. dollar and Renminbi has fluctuated and become increasingly unpredictable following the global financial |
● | There might be uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. The Chinese legal system is a civil law system based on written statutes. Unlike common law systems, it is a system in which decided legal cases may be cited for reference but have limited precedential value. Over the past decades, the PRC government has promulgated a comprehensive system of laws, rules and regulations governing economic matters. |
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You may experience difficulties in effecting service of legal process and enforcing judgments against us and our management.management, and the ability of U.S. authorities to bring actions in the PRC may also be limited.
Substantially allMost of our assets and our subsidiaries are located in the PRC. In addition, most of our directors and officers reside within the PRC, and most of the assets of our directors and officers are located within the PRC. As a result, it may not be possible to effect service of process within the United States or elsewhere outside the PRC upon most of our directors or officers, including with respect to matters arising under applicable laws and regulations. Moreover, the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom or most other Western countries, and Hong Kong has no arrangement for the reciprocal enforcement of judgments with the United States.
As a result, recognition and enforcement in the PRC or Hong Kong of judgments of a court in the United States and any of the other jurisdictions mentioned above in relation to any matter not subject to a binding arbitration provision may be difficult or impossible. Even if you sue successfully in a U.S. court or any of the other jurisdictions mentioned above, you may not be able to collect on such judgment against us or our directors and officers. In addition, the SEC, the U.S. Department of Justice and other U.S. authorities may also have difficulties in bringing and enforcing actions against us or our directors or officers in the PRC. Furthermore, class action lawsuits, which are available in the United States for investors to seek remedies, are generally uncommon in the PRC.
The audit reports included in this annual report are prepared by auditors who are not inspected fully by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.
Auditors of companies that are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firms, must be registered with the USU.S. Public Company Accounting Oversight Board (United States) (the “PCAOB”) and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards. Because we have substantial operations within the PRC and the PCAOB is currently unable to conduct full inspections of the work of our auditors as they relate to those operations without the approval of the Chinese authorities, our auditors’ work related to our operations in China is not currently inspected by the PCAOB.
This lack of PCAOB inspections of audit work performed in China prevents the PCAOB from regularly evaluating audit work of any auditor that was performed in China including that performed by our auditors. As a result, investors may be deprived of the full benefits of PCAOB inspections.
On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. On November 4, 2019, the SEC announced that SEC and PCAOB had dialogue with the “Big Four” accounting firms, which emphasized the need for effective and consistent global firm oversight of member firms, including those operating in China. On February 19, 2020, the SEC and the PCAOB further issued a joint statement on continued dialogue with “Big Four” accounting firms on audit quality in China, highlighting that PCAOB continues to be prevented from inspecting the audit work and practices of PCAOB-registered audit firms in China on a comparable basis to other non-U.S. jurisdictions. However, it remains unclear what further actions the SEC and PCAOB will take to address the problem.
Theinability of the PCAOB to conduct inspections of audit work performed in China makes it more difficult to evaluate the effectiveness of our auditors’ audit procedures as compared to auditors in other jurisdictions that are subject to PCAOB inspections on all of their work. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements. As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national laws, in particular PRC laws, in June 2019, a bipartisan group of lawmakers introduced the Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges Act, or the EQUITABLE Act, in both houses of the U.S. Congress to require the SEC to maintain a list of issuers for which the PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The EQUITABLE Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges (including the New York Stock Exchange) of issuers included on the SEC’s list for three consecutive years. It is unclear if and when this proposed legislation would be enacted. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of our ADSs could be adversely affected.
Proceedings instituted recently by the SEC against five PRC-based accounting firms could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act.
In December 2012, the SEC brought administrative proceedings against five accounting firms in China, alleging that they had refused to produce audit work papers and other documents related to certain other China-based companies under investigation by the SEC for potential accounting fraud. On January 22, 2014, an initial administrative law decision was issued, censuring these accounting firms and suspending four of the five firms from practicing before the SEC for a period of six months. The four firms appealed to the SEC against this decision and, on February 6, 2015, each of the four accounting firms agreed to a censure and to pay a fine to the SEC to settle the dispute and avoid suspension of their ability to practice before the SEC. The firms’ ability to continue to serve all their respective clients is not affected by the settlement. The settlement requires the firms to follow detailed procedures to seek to provide the SEC with access to Chinese firms’ audit documents via the CSRC. If the firms do not follow these procedures, the SEC could impose penalties such as suspensions, or it could restart the administrative proceedings. The settlement did not require the firms to admit to any violation of law and preserves the firms’ legal defenses in the event the administrative proceeding is restarted.
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We were not and are not subject to any SEC investigations, nor are we involved in the proceedings brought by the SEC against the accounting firms. However, the independent registered public accounting firms that issue the audit reports included in our annual reports filed with the SEC is affiliated to one of the four accounting firms above.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.
If our independent registered public accounting firms were denied, temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined to not be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting from the NYSE or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
Item | 4. Information on the Company |
A. | History and Development of the Company |
We were incorporated as a joint stock limited company under the Company Law of the PRC on September 10, 2001 under the corporate name Aluminum Corporation of China Limited. Our principal executive and registered office is located in the People’s Republic of China at No. 62 North Xizhimen Street, Haidian District, Beijing, China 100082, and our telephone number is (86) 10 8229 8322. Our website address iswww.chalco.com.cn. www.chalco.com.cn. The information on our website does not constitute a part of this annual report. Our U.S. public filings are available at the website maintained by the SEC atwww.sec.gov,, which contains reports, proxies and information statements, and other information regarding issuers that file electronically with the SEC.
Pursuant to a reorganization agreement entered into among Chinalco, Guangxi Investment and Guizhou Development in 2001, substantially all of Chinalco’s alumina and primary aluminum production operations, as well as a research institute and other related assets and liabilities, were transferred to us upon our formation. We acquired our bauxite mining operations and associated mining rights from Chinalco in a separate mining rights agreement.
Our A Shares have been listed on the Shanghai Stock Exchange since April 2007. Our H Shares and our ADSs, each representing 25 H Shares, have been listed on the Hong Kong Stock Exchange and New York Stock Exchange, respectively, since December 2001.
We are a vertically integrated aluminum producer with operations in bauxite and coal mining, alumina refining and primary aluminum smelting. We also produce ancillary products and services derived from or related to our aluminum operations. In addition, we are engaged in trading and logistics of alumina, primary aluminum, other non-ferrous metal products, coal products and raw and ancillary materials in bulk domestically and internationally. Since 2013, we have expanded our operations into power generation. See “– B. Business Overview” for more details.
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We have substantially increased the size and scope of our operations through organic growth as well as selective acquisitions and joint ventures. Our key operating assets currently include sevensix subsidiaries mainly engaged in bauxite mining; two integrated alumina and primary aluminum production plant; eight stand-alone alumina refineries; nine stand-alone primary aluminum smelters; threeone stand-alone secondary aluminum producer; four stand-alone carbon production plants; one integrated power generation company with coal mining operations and one institute providing research and development services. All of our principal alumina and primary aluminum production facilities are operated in accordance with ISO14001 standards.
Private Placement of A Shares
On March 8, 2012, our Board resolved to issue up to 1.25 billion A Shares in the PRC. The A Share issue plans previously proposed by our Board on June 30, 2009 and January 30, 2011 and approved by our shareholders at the extraordinary general meeting, A Share class meeting and H Share class meeting held on August 24, 2009 and on April 14, 2011, respectively, ceased. Pursuant to the new issue plan approved by our Board on March 8, 2012, we planned to issue up to 1.25 billion A Shares, with a nominal value of RMB1.00 each, by way of private placement for expected proceeds not exceeding RMB8 billion. We intended to issue the A Shares to no more than ten specific target subscribers within six months of obtaining the approval of the CSRC. The issue price of A Shares to be offered shall be not less than 90% of the average trading price of our A Shares in twenty trading days immediately preceding the pricing determination date. We intended to apply proceeds from this private placement to finance Chalco Xing County Alumina Project, Zhongzhou branch Ore-dressing Bayer Process expansion construction project and to supplement working capital. The issue plan was approved by the SASAC on April 5, 2012 and by our shareholders at the extraordinary general meeting, A Share class meeting and H Share class meeting held on May 4, 2012. On August 24, 2012, our Board resolved to adjust the issue plan by proposing, among others, to increase the number of A Shares to be issued to up to 1.45 billion A Shares. The adjusted issue plan was approved by the SASAC and our shareholders at an extraordinary general meeting, A Share class meeting and the H Share class meeting on October 12, 2012 and by the CSRC on December 7, 2012. On March 14, 2013, we obtained the approval from the CSRC on our proposed private placement of A Shares under such adjusted issue plan, with effective period of six months after the approval date. However, the CSRC temporarily retrieved its approval in July 2013 due to its on-going investigation of the sponsor of our proposed private placement of A Shares. The period of authorization to the Board relating to the adjusted issue plan was extended by our shareholders at the 2013 annual general meeting, A Share class meeting held on June 27, 2014 and H Share class meeting held on June 27, 2014, with an effective period of 12 months after the approval date. On January 4, 2015, we submitted the “Report regarding the resumption of the approval of non-public offering of shares of Aluminum Corporation of China Limited” to the CSRC. On April 24, 2015, we received the Approval in Relation to the Non-public Issuance of Shares by Aluminum Corporation of China Limited issued by the CSRC, pursuant to which we were approved to issue no more than 1,450,000,000 new shares. We completed the non-public issuance of A Shares on June 15, 2015 and issued an additional 1,379,310,344 A Shares pursuant to the specific mandate as approved at the annual general meeting of the Company on June 27, 2014. On June 15, 2015, we completed the non-public issuance of 1,379,310,344 A Shares. Upon completion, the total number of A Shares of the Company was increased from 13,524,487,892 to 14,903,798,236. Please refer to “- Subscription of Equity Interest of Certain Subsidiaries and Subsequent Issuance of Additional A Shares” for further changes of our issuance of A Shares.
Disposal of Aluminum Fabrication Business
We disposed of substantially all of our aluminum fabrication operations to Chinalco pursuant to the approval of shareholders at the 2012 annual general meeting on June 27, 2013.
On May 13, 2013, we submitted the tender notice to CBEX to dispose of the equity interest we held in eight aluminum fabrication enterprises, including Henan Aluminum, Chalco Southwest Aluminum, Chalco Southwest Aluminum Cold Rolling, Huaxi Aluminum, Qingdao Light Metal, Chalco Ruimin, Chalco Sapa Aluminum Products (Chongqing) Co., Ltd. and Guizhou Chalco Aluminum Co., Ltd. (collectively, “Aluminum Fabrication Interests”) through open tender. Chinalco participated in and won the bid for the Aluminum Fabrication Interests on June 7, 2013. We entered into an agreement (the “Aluminum Fabrication Interests Transfer Agreement”) with Chinalco on June 9, 2013 for the disposal of Aluminum Fabrication Interests for a consideration of RMB3,242.2 million. Such consideration was the initial bidding price, which was determined with reference to the appraised value of the Aluminum Fabrication Interests. Pursuant to the Aluminum Fabrication Interests Transfer Agreement, Chinalco agreed to pay the consideration in cash in two installments, namely, 30% of the consideration to be paid within five business days after the effective date of the agreement and 70% of the consideration to be paid by June 30, 2014. Chinalco must pay interest for the second installment for the period starting from the date immediately after the effective date until the payment date at the one-year lending rate set by the PBOC. The disposal was approved at the 2012 annual general meeting held on June 27, 2013 and we completed the disposal on June 27, 2013. Chinalco paid the consideration in full in June 2014.
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As a condition of the disposal of the Aluminum Fabrication Interests, on June 9, 2013, we entered into an agreement with Chinalco to transfer the outstanding entrusted loans we provided to Henan Aluminum and Qingdao Light Metal as of December 31, 2012 to Chinalco for a consideration of RMB1,756.0 million. Such consideration was determined based on negotiations between the parties, with reference to the appraised total value of the loans. Pursuant to the agreement, Chinalco agreed to pay the consideration in cash in five equal installments of RMB351.2 million, with the last installment, together with the relevant interests at the one-year lending rate set by the PBOC, to be paid by June 30, 2017. The transfer was approved at the 2012 annual general meeting held on June 27, 2013 and we completed the transfer on June 27, 2013. The payment was fully settled by Chinalco in accordance with the agreement.
In addition, we entered into an agreement with Northwest Aluminum Fabrication Plant, a subsidiary of Chinalco, on June 6, 2013 to dispose of all the assets of Northwest Aluminum for RMB1,659.6 million. Such consideration was determined based on negotiations between the parties, with reference to the appraised net asset value of Northwest Aluminum. Pursuant to the agreement, Northwest Aluminum Fabrication Plant agreed to pay the consideration in cash in five equal installments of RMB331.9 million, with the last installment, together with the relevant interests at the one-year lending rate set by the PBOC, to be paid by June 30, 2017. The disposal was approved at the 2012 annual general meeting held on June 27, 2013 and we completed the disposal on June 27, 2013. The payment was fully settled by Northwest Aluminum Fabrication Plant in accordance with the agreement.
Disposal of Assets of Alumina Production Line of Guizhou Branch
On June 6, 2013, we entered into an agreement with Guizhou Aluminum Plant, a subsidiary of Chinalco, to dispose of the assets of the alumina production line of our Guizhou branch for a consideration of RMB4,429.0 million. Such consideration was determined based on negotiations between the parties, with reference to the appraised net asset value of such alumina assets of our Guizhou branch. Pursuant to the agreement, Guizhou Aluminum Plant agreed to pay the consideration in cash in five equal installments of RMB885.8 million, with the last installment, together with the relevant interests at the one-year lending rate set by the PBOC, to be paid by June 30, 2017. The disposal was approved at the 2012 annual general meeting held on June 27, 2013 and we completed the disposal on June 27, 2013. The payment was fully settled by Guizhou Aluminum Plant in accordance with the agreement.
We decided to dispose of the assets of the alumina production line of Guizhou branch because the district in which they were located had been changed from an industrial district to a commercial district based on the local urban plan, which will significantly increase Guizhou branch’s environmental compliance costs. We built a new alumina refinery, Guizhou Huajin, in an area relatively close to major bauxite and coal mines in Guizhou Province, which commenced production with an annual capacity of 1.6 million tonnes of alumina in 2015.
Senior Perpetual Capital Securities Offering
In October 2013, we completed the issuance of US$350 million in aggregate principal amount of 6.625% senior perpetual capital securities (the “2013 Senior Perpetual Securities”) through Chalco Hong Kong Investment Company Limited (the “Bond Issuer”), our wholly-owned subsidiary, which was exempted from, and not subject to, registration under the Securities Act. The 2013 Senior Perpetual Securities are guaranteed by Chalco Hong Kong and its certain subsidiaries. The 2013 Senior Perpetual Securities also have the benefit of a keepwell deed dated October 29, 2013 entered into by the Issuer, the Company, Chalco Hong Kong and the trustee and a deed of equity interest purchase undertaking dated on October 29, 2013 entered into by the Company and the trustee, both deeds being executed in favor of the trustee. The 2013 Senior Perpetual Securities were listed on the Hong Kong Stock Exchange on October 30, 2013. The net proceeds from the issue of the 2013 Senior Perpetual Securities after deduction of issuance costs are RMB2,122.6 million and have been on-lent to the Company or any of its subsidiaries for general corporate use. Coupon payments of 6.625% per annum on the 2013 Senior Perpetual Securities are paid semi-annually in arrears from October 29, 2013, and may be deferred at our discretion unless, during the six-month period ending on the day before the relevant scheduled coupon payment date, we have, or the Bond Issuer or Chalco Hong Kong has, declared or paid a discretionary dividend, distribution or other discretionary payment on or in respect of, or have/has at its discretion repurchased, redeemed or otherwise acquired, any securities of lower or equal rank, subject to certain exceptions. The 2013 Senior Perpetual Securities have no fixed maturity and are callable only at our option on or after October 29, 2018, at their principal amounts together with any accrued, unpaid or deferred coupon interest payments. After October 29, 2018, the coupon rate would be reset every five calendar years to a rate of interest expressed as a percentage per annum equal to the sum of (a) the initial spread of 5.312 per cent, (b) the U.S. Treasury Rate, and (c) a margin of 5.00 per cent per annum. While any coupon interest payments are unpaid or deferred, we, Chalco Hong Kong, and the Bond Issuer shall not, subject to certain exceptions, declare or pay any discretionary dividends or make distributions or similar discretionary payments in respect of, or at its discretion repurchase, redeem or otherwise acquire for any consideration any securities of lower or equal rank. We redeemed the 2013 Senior Perpetual Securities in October 2018.
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In April 2014, we completed the issuance of US$400 million in aggregate principal amount of 6.25% senior perpetual capital securities (the “2014 Senior Perpetual Securities”) through the Bond Issuer, which was exempted from, and not subject to, registration under the Securities Act. The 2014 Senior Perpetual Securities are guaranteed by Chalco Hong Kong and its certain subsidiaries. The 2014 Senior Perpetual Securities also have the benefit of a keepwell deed entered into by the Bond Issuer, the Company, Chalco Hong Kong and the trustee and a deed of equity interest purchase undertaking entered into by the Company and the trustee, both deeds being executed in favor of the trustee. The 2014 Senior Perpetual Securities were listed on the Hong Kong Stock Exchange on April 22, 2014. The net proceeds from the issue of the 2014 Senior Perpetual Securities after deduction of issuance costs are RMB2,461.8 million and have been on-lent to the Company or any of its subsidiaries for general corporate use. Coupon payments of 6.25% per annum on the 2014 Senior Perpetual Securities are paid semi-annually on April 29 and October 29 in arrears from April 17, 2014, and may be deferred at our discretion. The first coupon payment date was April 29, 2014. The 2014 Senior Perpetual Securities have no fixed maturity and are callable only at our option on or after April 17, 2017 at their principal amounts together with any accrued, unpaid or deferred coupon interest payments. While any coupon interest payments are unpaid or deferred, we, the subsidiary guarantors and the Bond Issuer cannot declare or pay dividends or make distributions or similar discretionary payments in respect of, or repurchase, redeem or otherwise acquire any securities of lower or equal rank. After April 17, 2017, the coupon rate would be reset to a percentage per annum equal to the sum of (a) the initial spread of 5.423 per cent, (b) the U.S. Treasury Rate, and (c) a margin of 5.00 per cent, per annum. We redeemed the 2014 Senior Perpetual Securities in April 2017.
On October 27, 2015, our Company issued RMB2,000 million perpetual medium-term notes at an initial distribution rate of 5.50% (the “2015 Perpetual Medium-term Notes”). The proceeds from the issuance were RMB2,000 million and were used for repayments of interest-bearing loans and borrowings. Coupon payments of 5.50% per annum on the 2015 Perpetual Medium-term Notes are paid annually in arrears from October 29, 2015 and may be deferred at the discretion of our Company. The 2015 Perpetual Medium-term Notes have no fixed maturity and are callable only at our option on October 29, 2020 or any coupon distribution date after October 29, 2020 at their principal amounts together with any accrued, unpaid or deferred coupon distribution payments. The coupon distribution rate will be reset to a percentage per annum equal to the sum of (a) the initial spread of 2.61 per cent, (b) the China Treasury Rate, and (c) a margin of 300 Bps every five years after October 29, 2020. While any coupon distribution payments are unpaid or deferred, the headquarters of the Company cannot declare or pay dividends to shareholders or decrease the share capital, or make material fixed asset investments of the headquarters of the Company.
On October 31, 2016, the Bond Issuer issued US$500 million senior perpetual securities (the “2016 Senior Perpetual Securities”) at a rate of 4.25%. The 2016 Senior Perpetual Securities are guaranteed by one of our subsidiaries, Chalco Hong Kong. The 2016 Senior Perpetual Securities also have the benefit of a keepwell deed entered into by the Bond Issuer, the Company, Chalco Hong Kong and the trustee. The 2016 Senior Perpetual Securities were listed on the Hong Kong Stock Exchange on November 7, 2016. The net proceeds from the issue of the 2016 Senior Perpetual Securities were approximately RMB3,374 million and were on-lent to the Company or any of its subsidiaries for general corporate use. Coupon payments of 4.25% per annum on the 2016 Senior Perpetual Securities have been made semi-annually on April 29 and October 29 in arrears from November 7, 2016 and may be deferred at our discretion. The first coupon payment date was April 29, 2017. The 2016 Senior Perpetual Securities have no fixed maturity date and are callable only at our option on or after November 7, 2021 at their principal amounts together with any accrued, unpaid or deferred coupon distribution payments. After November 7, 2021, the coupon distribution rate will be reset to a percentage per annum equal to the sum of (a) the initial spread of 2.931 per cent, (b) the U.S. Treasury Rate, and (c) a margin of 5.00 per cent per annum. While any coupon distribution payments are unpaid or deferred, we, the wholly-owned subsidiaries of Chalco Hong Kong as guarantors, and the Bond Issuer cannot declare or pay dividends or make distributions or similar discretionary payments in respect of, or repurchase, redeem or otherwise acquire any securities of lower or equal rank.
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On October 19, 2018, we issued RMB2,000 million perpetual medium-term notes with an initial distribution rate at 5.10% (the “2018 Perpetual Medium-term Notes”). The proceeds from the issuance were RMB2,000 million. The proceeds were used for the repayment of interest-bearing loans and borrowings. Coupon payments of 5.10% per annum on the 2018 Perpetual Medium-term Notes are made annually in arrears from October 19, 2018 and may be deferred at our discretion. The 2018 Perpetual Medium-term Notes have no fixed maturity date and are callable only at our option on October 23, 2021 or any coupon distribution date after October 23, 2021 at their principal amounts together with any accrued, unpaid or deferred coupon distribution payments. The coupon distribution rate will be reset to a percentage per annum equal to the sum of (a) the initial spread of 2.61 per cent, (b) the China Treasury Rate, and (c) a margin of maximum 500 Bps every five years after October 23, 2021. While any coupon distribution payments are unpaid or deferred, we cannot declare or pay dividends to shareholders or decrease the share capital, or make material fixed asset investments.
On November 19, 2019, we issued RMB1,500 million perpetual medium-term notes with an initial distribution rate at 4.20% (the “2019 Perpetual Medium-term Notes”). The proceeds from the issuance were RMB1,499 million. The proceeds were used for the repayment of interest-bearing loans and borrowings. Coupon payments of 4.20% per annum on the 2019 Perpetual Medium-term Notes have been made annually in arrears from November 19, 2019 and may be deferred at our discretion. The 2019 Perpetual Medium-term Notes have no fixed maturity date and are callable only at our option on November 20, 2022 or any coupon distribution date after November 20, 2022 at their principal amounts together with any accrued, unpaid or deferred coupon distribution payments. The coupon distribution rate will be reset to a percentage per annum equal to the sum of (a) the initial spread of 1.31 per cent, (b) the China Treasury Rate, and (c) a margin of maximum 300 Bps every five years after November 20, 2022. While any coupon distribution payments are unpaid or deferred, the Company cannot declare or pay dividends to shareholders or decrease the share capital, or make material fixed asset investments.
Transfer of Equity Interest in Shanxi Huaxing
The Chalco Xing County Alumina Project, which was carried out by Shanxi Huaxing, commenced construction in May 2011 and undertook full operation in 2014. After completion of private placement of A Shares in June 2015, the Board resolved to replace the funds which have been invested by us in advance with the proceeds raised from the private placement of A Shares. In light of our strategic blueprint for the development of Shanxi aluminum recycle industrial park, we planned to introduce strategic investors for joint investment and cooperation to develop a new model of integrated coal, electricity and aluminum operations. In December 2015, the Groupwe entered into an equity transfer agreement with Shenzhen CR Yuanta Asset Management Co., Ltd., a state- ownedstate-owned entity, to transfer 50% equity interests in Shanxi Huaxing, a wholly-owned subsidiary, through the Shanghai United Assets and Equity Exchange at a price of RMB2,351 million (the “2015 Equity Transfer Agreement”). The price was determined based on the appraisal value provided by an independent qualified appraisal company. According to the 2015 Equity Transfer Agreement, 30% of the consideration amounting to RMB705 million has been received by us in December 2015. In December 2016, Shenzhen CR Yuanta Asset Management Co., Ltd. transferred the 50% of equity interest in Shanxi Huaxing to Baotou Transportation Investment Group Co., Ltd. As agreed among Shenzhen CR Yuanta Asset Management Co., Ltd., Baotou Transportation Investment Group Co., Ltd. and the Company, Baotou Transportation Investment Group Co., Ltd., shall assume the payment obligation on the outstanding consideration of RMB1,646,035,160 payable by Shenzhen CR Yuanta Asset Management Co., Ltd. to the Company under the 2015 Equity Transfer Agreement and settle the outstanding consideration in full together with interest accrued thereon from January 1, 2017 to the date of payment before March 31, 2017. The payment was fully settled by Baotou Transportation Investment Group Co., Ltd. in March 2017.
In December 2018, we entered into an equity transfer agreement with Baotou Transportation Investment Group Co., Ltd., pursuant to which we agreed to acquire 50% equity interest in Shanxi Huaxing through the Shanghai United Assets and Equity Exchange at a price of approximately RMB2,665.2 million, which we paid in full in December 2018. Upon completion of the acquisition, Shanxi Huaxing became a wholly-owned subsidiary of the Company. The acquisition is conducted for the purpose of enhancing our profitability and is in line with our strategic layout of alumina and aluminum business, as the increase of our shareholding in Shanxi Huaxing, an alumina plant, is expected to enhance the synergy with our primary aluminum production in Shanxi, where we have newly added production capacity of primary aluminum.
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Transfer of Shares of Jiaozuo Wanfang
On January 22, 2015 and January 23, 2015, we decreased our shareholding in Jiaozuo Wanfang by 4,758,858 shares through the securities exchange system of the Shenzhen Stock Exchange. In March 2015, we transferred 100,000,000 shares of Jiaozuo Wanfang to Geo-Jade Petroleum Corporation by way of agreement after the public solicitation for potential transferees. On June 25, 2015, we further transferred 42,550,900 shares of Jiaozuo Wanfang by way of block trading through the securities exchange system of the Shenzhen Stock Exchange. On December 18, 21 and 22, 2015, we reduced our shareholding in Jiaozuo Wanfang by 16,695,100 shares through the centralized bidding trading system of the Shenzhen Stock Exchange. From December 23 to 25, 2015, we reduced our shareholding in Jiaozuo Wanfang by 13,865,000 shares through the centralized bidding trading system of the Shenzhen Stock Exchange and block trading. As a result, we held 29,582,057 shares of Jiaozuo Wanfang as of December 31, 2015, representing 2.46% of the total share capital of Jiaozuo Wanfang. During the period from July 8, 2016 to September 27, 2016, we reduced our shareholding of Jiaozuo Wanfang by an aggregate of 16,628,098 shares via the Shanghai Stock Exchange centralized bidding trading system, representing approximately 1.39% of the total share capital of Jiaozuo Wanfang. The average price of reduction was approximately RMB8.73 per share. After the reduction, the Company remained holding 12,953,959 shares of Jiaozuo Wanfang, representing approximately 1.09% of its total share capital. During the period from September 29, 2016 to January 26, 2017, we reduced our shareholding of Jiaozuo Wanfang by an aggregate of 12,953,959 shares via the Shanghai Stock Exchange centralized bidding trading system, representing approximately 1.09% of the total share capital of Jiaozuo Wanfang. The average price of reduction was approximately RMB10.19 per share. After such reduction in our shareholding, we no longer hold any shares of Jiaozuo Wanfang.
Disposal of Certain Assets of Guizhou Branch
Guizhou branch entered into a land reserve acquisition cooperation agreement with the People’s Government of the Baiyun District of Guiyang, Guiyang Land Reserve Center, and Guizhou Aluminum Plant on November 13, 2015. As the land of Guizhou Aluminum Plant occupied by the primary aluminum plant of Guizhou branch shall be transferred to the respective land resources and reserve authorities, Guizhou branch sold the relevant assets, including buildings and structures located on the land occupied by the primary aluminum plant of Guizhou branch, to the Guiyang Land Reserve Center for a total consideration of RMB1.95 billion. The consideration was determined based on the asset appraisal conducted by an independent asset appraisal firm.
Disposal of the Environmental Protection Business
On May 30, 2016, the Board approved the transfer of the environmental protection assets in relation to the desulfurization, denitration and dedusting of the coal-fired generating units of five entities, namely Lanzhou branch, Baotou Aluminum, Shandong Huayu, Maliantai Power Station and Liupanshan Power Station of Ningxia Energy, by way of public bidding. On June 29, 2016, the assets transfer agreement in relation to disposal of the above environmental protection assets were entered into between Beijing Aluminum SPC Environment Protection Tech Co., Ltd., which had won the bid for the acquisition of the assets, and us. Pursuant to the asset transfer agreement, the aggregate consideration for the above environmental protection assets disposal was RMB1,754 million which was paid in two installments in June 2016 and December 2016, respectively.
We decided to dispose the environmental protection assets to reduce our capital investments and generate cash flows. We have been complying with the relevant standards of environmental protection through professional services rendered by specialized environmental protection companies.
Development of Gold Leasing Financing
On May 30, 2016, the Board resolved to develop gold leasing business to financing working capital. InSince 2016, 2017 and 2018, we have entered into several agreements with Bank of Communications Co., Ltd., China Everbright Bank and Agriculture Bank of China to finance working capital via gold leasing. As of December 31, 2018,2019, our remaining proceeds from gold leasing amounted to RMB 1.6 billion,approximately RMB7,018.6 million, which has been used to replenish working capital for our production and operation.
Construction Projects
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Establishment of Industry Investment Fund
AsOn May 23, 2017, the Company, Bank of Communications International Trust Co., Ltd. (“BOCOMMTRUST”) and Chinalco Jianxin Investment Fund Management (Beijing) Company Limited (“Chinalco Jianxin”) entered into a partnership agreement in relation to the establishment of Beijing Chalco Bocom Size Industry Investment Fund Management Partnership (Limited Partnership) (the “Industry Fund”). On September 27, 2017, the Company, BOCOMMTRUST, Chinalco Jianxin and Bocommtrust Asset Management Co., Ltd. (“Bocommtrust Asset”) entered into certain agreements with respect to Chinalco Jianxin’s withdrawal from and Bocommtrust Asset’s participation in the Industry Fund. On the same day, the Company, BOCOMMTRUST and Bocommtrust Asset entered into a capital contribution agreement and a new partnership agreement in relation to the Industry Fund. Pursuant to these agreements, the general partner of the dateIndustry Fund changed from Chinalco Jianxin to Bocommtrust Asset while Chinalco Jianxin remained as the manager of this annual report, we have undertaken a number of facility expansion projects in China. See “- D. Property, Plants and Equipment - Our Expansion.”the Industry Fund.
The Industry Fund would provide funding for the construction of our major projects, replenish our working capital and support our structural adjustment, transformation and upgrade. As of December 31, 2019, the Industry Fund made debt investments in certain of our subsidiaries and joint ventures with a total amount of RMB5,000 million, of which we had contributed RMB1,650 million.
Merger and Reorganization of Shanxi Branch and Shanxi Huaze
On August 8, 2017, we entered into a reorganization agreement with Zhangze Electric Power, pursuant to which we contributed certain assets related to alumina production of our Shanxi branch, with an appraised net value of RMB3,425.7 million equaling the appraised net value of the assets and liabilities of Shanxi branch, to Shanxi Huaze. The assets injected into Shanxi Huaze included, among others, inventories, buildings, structures, machinery and equipment. Upon completion of our asset contribution in 2017, our shareholding in Shanxi Huaze increased from 60% to 85.98% and Shanxi Huaze was renamed to Shanxi New Material.
Subscription of Equity Interest of Certain Subsidiaries and Subsequent Issuance of Additional A Shares (“Asset Restructuring”)
On December 4, 2017, we entered into certain investment and debt conversion agreements (the “Initial Agreements”) with Huarong Ruitong Equity Investment Management Co., Ltd. (“Huarong Ruitong”), China Life Insurance Company Limited (“China Life”), Shenzhen Zhaoping Chalco Investment Center LLP (“Zhaoping Investment”), China Pacific Life Insurance Co., Ltd. (“CPIC Life”), China Cinda Asset Management Co., Ltd. (“China Cinda”), BOC Financial Asset Investment Co., Ltd. (“BOC Financial”), ICBC Financial Asset Investment Co., Ltd. (“ICBC Financial”) and ABC Financial Asset Investment Company Limited (“ABC Financial”) (collectively, the “Restructuring Investors”). Pursuant to the Initial Agreements, Huarong Ruitong, China Life, Zhaoping Investment, CPIC Life, BOC Financial, ICBC Financial and ABC Financial have agreed to make cash contributions to our wholly-owned subsidiaries, Chalco Shandong, Zhongzhou Aluminum, Baotou Aluminum and Chalco Mining (collectively, the “Target Subsidiaries”), while the principal of loans owed by Chalco Mining to Huarong Ruitong, Zhaoping Investment, China Cinda and BOC Financial prior to signing of the Initial Agreements would be treated as capital contribution to Chalco Mining and converted into equity interest in Chalco Mining held by Huarong Ruitong, Zhaoping Investment, China Cinda and BOC Financial. The Restructuring Investors have agreed to acquire 30.80%, 36.90%, 25.67% and 81.14% of equity interest of Chalco Shandong, Zhongzhou Aluminum, Baotou Aluminum and Chalco Mining, respectively, with an aggregate capital contribution of approximately RMB12.6 billion. Under the Initial Agreements, we have also agreed to acquire equity interest held by the Restructuring Investors in the Target Subsidiaries with consideration in the form of our A Shares to be issued to the Restructuring Investors. On December 20, 2017, the Initial Agreements and the transactions contemplated thereunder were approved at our 2017 second extraordinary general meeting. In December 2017, the capital contribution to the Target Subsidiaries by the Restructuring Investors was completed in accordance with the terms of the Initial Agreements.
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Subsequently, on January 31, 2018, we entered into equity acquisition agreements (the “Further Agreements”) with the Restructuring Investors. Pursuant to the Further Agreements, we have agreed to acquire all the equity interest held by the Restructuring Investors in the Target Subsidiaries with consideration in the form of A Shares of the Company to be issued to the Restructuring Investors (the “Proposed Issuance”). The number of A Shares in issue pursuant to the Proposed Issuance would equal the appraised value of equity interest held by Restructuring Investors in Target Subsidiaries as of December 31, 2017 determined by China United Assets Appraisal divided by the issue price. The aforementioned appraised value might be subject to further adjustment by competent PRC authorities upon filing of the valuation report by China United Assets Appraisal. The issue price has been set at RMB6.00 per A Share with reference to 90% of the average trading price of our A Shares during the last 60 trading days prior to January 31, 2018 (i.e., the last 60 trading days prior to the suspension of trading of our A Shares) in accordance with rules and regulations of the PRC applicable to transaction of this kind. The appraised value, subject to further adjustment, was RMB12.7 billion and therefore we would issue to the Restructuring Investors approximately 2.1 billion A Shares in aggregate, representing approximately 14.2% of the total issued share capital of the Company as of January 31, 2018 and approximately 12.4% of the enlarged total issued share capital of the Company upon completion of the Proposed Issuance. On July 30, 2018, we entered supplemental equity acquisition agreements with the Restructuring Investors, amending, among others, the final consideration of the proposed acquisition and the number of the consideration shares to be issued from approximately RMB12,703.7 million and approximately 2,117,280,800 to approximately RMB12,713.2 million and 2,118,874,715, respectively. The Proposed Issuance was approved by our shareholders, the SASAC and the CSRC in 2018. In February 2019, all equity interests of Target Subsidiaries held by the Restructuring Investors were transferred to us, which resulted in us holding 100% equity interests of all Target Subsidiaries. On February 25, 2019, we issued an aggregate of 2,118,874,715 A Shares to the Restructuring Investors and our total share capital increased from 14,903,798,236 shares to 17,022,672,951 shares. The shares issued to the Restructuring Investors can be traded on the Shanghai Stock Exchange after expiry on February 26, 2020 of the 12 month lock-up period.
Cash contributions received from the Restructuring Investors have been used by us for the repayment of loans. The Asset Restructuring has helped to reduce the gearing ratios of these subsidiaries and us as a whole.
Boffa Project
On June 8, 2018, Chalco Hong Kong and Chalco Guinea Company S.A., a wholly-owned subsidiary of Chalco Hong Kong, entered into a mining convention (the “Mining Convention”) with the Guinean government, pursuant to which Chalco Hong Kong agreed to provide investment funds while the Guinean government agreed to provide mining licenses and rights to transport mining products for the development and operation of the Boffa Project, a project for the construction and development of a bauxite mine located in Boffa, Guinea.
Based on our previouspreliminary research and preliminary analysis and after taking into account various factors, including but not limited to (i) the bauxite reserve and the minable quantity in the mining area of the Boffa Project; (ii) the advancement and effectiveness of the existing development technologies; (iii) labor cost, transportation expense and other development costs and other factors, the total investment of the Boffa Project is estimated to be approximately US$706 million, subject to adjustment pursuant to the actual needs, which will be mainly allocated in the construction of mines, ports and lightering system and is expected to be funded through capital investment together with shareholders’ loans or bank loans. According to our preliminary design plan, the total investment for the construction of mines is estimated to be approximately RMB3,088 million. As of December 31, 2018,2019, an aggregate of US$64RMB1,872 million of capital expenditure had been incurred for Boffa Project.the construction of mines.
In accordance with the Mining Convention, a mining company (the “Mining Company”) and a port company (the “Port Company”) are established to act as the main operating bodies for mines construction and ports construction, respectively. In accordance with the Mining Convention, we own 85% and 95% equity interests in the Mining Company and the Port Company, respectively, while the Guinean government and its wholly-owned companies collectively own 15% and 5% equity interests in the Mining Company and the Port Company, respectively. Pursuant to the Mining Convention, Chalco Hong Kong shall grant the Guinean government and/or its wholly-owned companies an option to obtain additional equity interests in the Mining Company and grant Societe Guineenne de Patrimoine Minier, a company wholly owned by the Guinean government, an option to obtain additional equity interests in the Port Company (together, the “Options”). If the Options are exercised in full, our equity interests in the Mining Company and Ports Company will reduce to 65% and 90%, respectively. As of December 31, 2019, the Options had not been exercised.
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With a large reserve of resources, we believe the Boffa Project would provide sustainable bauxite resources for our alumina production and its high ore grades would help reduce alkali and energy consumption in our alumina production. In addition, as the mines are close to port, we are able to consolidate inland waterway transportation and maritime transportation, which benefits long-term development of the project and effectively controls investment risks at the early stage.
The Boffa Project commenced construction in September 2018 and planned to be put into operation by the end of March 2020 with an expected annual bauxite output capacity of 12 million tonnes. By the end of 2019, the quarry of mine had been put into operation. The first shipment of bauxite was sent to China in February 2020.
Private PlacementMerger and Reorganization of A SharesZunyi Alumina and Zunyi Aluminum
On March 8, 2012,June 21, 2018, in order to streamline our Board resolvedproduction chains, enhance synergistic effects and control operating costs, we entered into a contribution agreement with other shareholders of Zunyi Aluminum, pursuant to issue upwhich we contributed all assets in Zunyi Alumina to 1.25 billion A SharesZunyi Aluminum. The appraised net value of Zunyi Alumina, equaling the appraised net value of its assets and liabilities, was RMB2,311 million. Upon completion of the merger, our shareholding in Zunyi Aluminum increased from 62.1% to 67.445%.
Controlling Shareholder’s Shareholding Increase in the PRC. The A Share issue plans previously proposed by our Board onCompany
On June 30, 2009 and January 30, 2011 and approved by our shareholders at24, 2018, Chinalco notified us of its plan to increase its shareholding in us via the extraordinary general meeting, A Share class meeting and H Share class meeting held on August 24, 2009 and on April 14, 2011, respectively, ceased. Pursuant to the new issue plan approved by our Board on March 8, 2012, we planned to issue up to 1.25 billion A Shares, with a nominal value of RMB1.00 each, by way of private placement for expected proceeds not exceeding RMB8 billion. We intended to issue the A Shares to no more than ten specific target subscribers within six months of obtaining the approvaltrading system of the CSRC. The issue priceShanghai Stock Exchange in an amount of A Shares to be offered shall be not less than 90%RMB400 million and not more than RMB1 billion in 12 months. Chinalco would, based on its reasonable judgment on our share price as well as the fluctuations of our share prices and the overall trend in the capital market, gradually implement the plan on increase in shareholding to the extent not exceeding 2% of our total share capital. The purpose of such increases in shareholding is to boost confidence of investors, protect the interests of minority shareholders and stabilize the capital market based on Chinalco’s confidence in the future development of the average trading pricecompany and the recognition of our value.
For the period from June 25, 2018 to June 24, 2019, as the result of the aforesaid plan, Chinalco increased its shareholding in us by 160,512,964 A Sharesshares (representing approximately 0.94% of our total issued share capital as of June 24, 2019) in twentythe amount of RMB608 million on a cumulative basis via the trading days immediately precedingsystem of the pricing determination date. We intendedShanghai Stock Exchange. In addition, during the same period of time, Chinalco also, through its subsidiaries, had increased its shareholding in us by 115,276,000 H shares (representing approximately 0.68% of our total issued share capital as of June 24, 2019) in the amount of HK$365 million on a cumulative basis via the trading system of the Hong Kong Stock Exchange.
Acquisition of Carbon Assets and Equity Interests
On August 30, 2018, our Group and the affiliates of Chinalco Assets entered into a series of assets transfer agreements and equity transfer agreements for the acquisition of certain carbon assets and equity interests from the affiliates of Chinalco Assets, including: (i) the assets of the carbon plant under Shandong Aluminum Industry Co., Ltd; (ii) the assets of the carbon plant under Pingguo Aluminum Company Limited; (iii) 49% equity interests of Baotou Sendu Carbon Company Limited; and (iv) 57.69% and 19.96% equity interests of Chibi Great Wall Carbon Products Company Limited from two separate shareholders. Upon completion of the acquisition, we expect this acquisition would help us consummate our industrial chain, ensure our steady production, and improve our competitiveness and anti-risk capabilities, as carbon products are one of major raw materials for production of primary aluminum. As of December 2018, we had paid the total consideration of RMB735.6 million in full and the acquisition had been completed.
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Transfer Between China Copper and Yunnan SASAC
On November 13, 2018, China Copper, a wholly-owned subsidiary of our controlling shareholder, entered into a transfer agreement with Yunnan SASAC, pursuant to apply proceeds from this private placementwhich Yunnan SASAC shall transfer its 51% equity interest in Yunnan Metallurgical Group Co., Ltd. to finance Chalco Xing County Alumina Project, Zhongzhou branch Ore-dressing Bayer Process expansion construction project and to supplement working capital.China Copper with no consideration. The issue plantransfer was approved by the SASAC on April 5, 2012 and by our shareholders at the extraordinary general meeting, A Share class meeting and H Share class meeting held on May 4, 2012. On August 24, 2012, our Board resolved to adjust the issue plan by proposing, among others, to increase the number of A Shares to be issued to up to 1.45 billion A Shares. The adjusted issue plan was approvedDecember 19, 2018, by the SASAC and our shareholders at an extraordinary general meeting, A Share class meeting and the H Share class meetingState Administration for Market Regulation on October 12, 2012December 20, 2018 and by the CSRC on December 7, 2012. On March 14, 2013, we obtained29, 2018. Chinalco completed the approval fromtransfer on January 8, 2019. As Yunnan Aluminum, an affiliated company of Yunnan Metallurgical Group Co., Ltd., competes with us in the CSRCbusiness segments of alumina and primary aluminum, on January 2, 2019, Chinalco, as the indirect controlling shareholder of Yunnan Aluminum and our proposed private placementdirect controlling shareholder, issued a letter of A Shares under such adjusted issue plan, with effective period of six months afterundertakings on non-competition to us in order to address business competition and safeguard the approval date. However, the CSRC temporarily retrieved its approval in July 2013 due to its on-going investigationlegitimate interests of the sponsor ofCompany and our proposed private placement of A Shares. The period of authorizationminority shareholders. According to the Board relatingletter of undertakings, Chinalco undertook to start in 2019 planning the adjusted issue plan was extended by our shareholders at the 2013 annual general meeting, A Share class meeting held on June 27, 2014 and H Share class meeting held on June 27, 2014, with an effective period of 12 months after the approval date. On January 4, 2015, we submitted the “Report regarding the resumptionintegration of the approvalbusinesses in which Yunnan Aluminum and we compete with each other, and address business competition between Yunnan Aluminum and us within five years.
Transfer of non-public offeringPrimary Aluminum Capacity Quota of shares ofShanxi Huasheng
On May 28, 2019, Shanxi Huasheng and Yixin Aluminum Corporation of China Limited” to the CSRC. On April 24, 2015, we received the Approval in Relation to the Non-public Issuance of Shares by Aluminum Corporation of China Limited issued by the CSRC,entered into a transfer agreement, pursuant to which we were approvedShanxi Huasheng agreed to issue no more than 1,450,000,000 new shares. We completedsell to Yixin Aluminum the non-public issuanceprimary aluminum capacity quota of A Shares on June 15, 2015 and issued an additional 1,379,310,344 A Shares pursuant to190,000 tonnes. The total transfer consideration is RMB950 million with the specific mandate as approved attransfer price of RMB5,000 per tonne. With the adjusted number of annual general meeting of the Company on June 27, 2014. On June 15, 2015,capacity quota finally determined by relevant PRC authority, we completed the non-public issuancetransfer of 1,379,310,344 A Shares. Upon completion,the primary aluminum capacity quota of 170,000 tonnes to Yixin Aluminum with the total numbertransfer consideration of A Shares of the Company was increased from 13,524,487,892RMB850 million in June 2019. We expect this transfer would help to 14,903,798,236. Please refer to “- Subscription of Equity Interest of Certain Subsidiariesreverse Shanxi Huasheng’s losses, achieve its transformation and Subsequent Issuance of Additional A Shares” for further changes ofupgrading, and optimize our issuance of A Shares.industrial layout and asset structure.
Senior Perpetual Capital Securities Offering
In October 2013, we completed the issuance of US$350 million in aggregate principal amount of 6.625% senior perpetual capital securities (the “2013 Senior Perpetual Securities”) through Chalco Hong Kong Investment Company Limited (the “Bond Issuer”), our wholly-owned subsidiary, which was exempted from, and not subject to, registration under the Securities Act. The 2013 Senior Perpetual Securities are guaranteed by Chalco Hong Kong and its certain subsidiaries. The 2013 Senior Perpetual Securities also have the benefit of a keepwell deed dated October 29, 2013 entered into by the Issuer, the Company, Chalco Hong Kong and the trustee and a deed of equity interest purchase undertaking dated on October 29, 2013 entered into by the Company and the trustee, both deeds being executed in favor of the trustee. The 2013 Senior Perpetual Securities were listed on the Hong Kong Stock Exchange on October 30, 2013. The net proceeds from the issue of the 2013 Senior Perpetual Securities after deduction of issuance costs are RMB2,122.6 million and have been on-lent to the Company or any of its subsidiaries for general corporate use. Coupon payments of 6.625% per annum on the 2013 Senior Perpetual Securities are paid semi-annually in arrears from October 29, 2013, and may be deferred at our discretion unless, during the six-month period ending on the day before the relevant scheduled coupon payment date, we have, or the Bond Issuer or Chalco Hong Kong has, declared or paid a discretionary dividend, distribution or other discretionary payment on or in respect of, or have/has at its discretion repurchased, redeemed or otherwise acquired, any securities of lower or equal rank, subject to certain exceptions. The 2013 Senior Perpetual Securities have no fixed maturity and are callable only at our option on or after October 29, 2018, at their principal amounts together with any accrued, unpaid or deferred coupon interest payments. After October 29, 2018, the coupon rate would be reset every five calendar years to a rate of interest expressed as a percentage per annum equal to the sum of (a) the initial spread of 5.312 per cent, (b) the U.S. Treasury Rate, and (c) a margin of 5.00 per cent per annum. While any coupon interest payments are unpaid or deferred, we, Chalco Hong Kong, and the Bond Issuer shall not, subject to certain exceptions, declare or pay any discretionary dividends or make distributions or similar discretionary payments in respect of, or at its discretion repurchase, redeem or otherwise acquire for any consideration any securities of lower or equal rank. We redeemed the 2013 Senior Perpetual Securities in October 2018.
In April 2014, we completed the issuance of US$400 million in aggregate principal amount of 6.25% senior perpetual capital securities (the “2014 Senior Perpetual Securities”) through the Bond Issuer, which was exempted from, and not subject to, registration under the Securities Act. The 2014 Senior Perpetual Securities are guaranteed by Chalco Hong Kong and its certain subsidiaries. The 2014 Senior Perpetual Securities also have the benefit of a keepwell deed entered into by the Bond Issuer, the Company, Chalco Hong Kong and the trustee and a deed of equity interest purchase undertaking entered into by the Company and the trustee, both deeds being executed in favor of the trustee. The 2014 Senior Perpetual Securities were listed on the Hong Kong Stock Exchange on April 22, 2014. The net proceeds from the issue of the 2014 Senior Perpetual Securities after deduction of issuance costs are RMB2,461.8 million and have been on-lent to the Company or any of its subsidiaries for general corporate use. Coupon payments of 6.25% per annum on the 2014 Senior Perpetual Securities are paid semi-annually on April 29 and October 29 in arrears from April 17, 2014, and may be deferred at the discretion of the Group. The first coupon payment date was April 29, 2014. The 2014 Senior Perpetual Securities have no fixed maturity and are callable only at our option on or after April 17, 2017 at their principal amounts together with any accrued, unpaid or deferred coupon interest payments. While any coupon interest payments are unpaid or deferred, we, the subsidiary guarantors and the Bond Issuer cannot declare or pay dividends or make distributions or similar discretionary payments in respect of, or repurchase, redeem or otherwise acquire any securities of lower or equal rank. After April 17, 2017, the coupon rate would be reset to a percentage per annum equal to the sum of (a) the initial spread of 5.423 per cent, (b) the U.S. Treasury Rate, and (c) a margin of 5.00 per cent, per annum. We redeemed the 2014 Senior Perpetual Securities in April 2017.
On October 27, 2015, our Company issued RMB2,000 million perpetual medium-term notes at an initial distribution rate of 5.50% (the “2015 Perpetual Medium-term Notes”). The proceeds from the issuance were RMB2,000 million and were used for repayments of interest-bearing loans and borrowings. Coupon payments of 5.50% per annum on the 2015 Perpetual Medium-term Notes are paid annually in arrears from October 29, 2015 and may be deferred at the discretion of our Company. The 2015 Perpetual Medium-term Notes have no fixed maturity and are callable only at the Group’s option on October 29, 2020 or any coupon distribution date after October 29, 2020 at their principal amounts together with any accrued, unpaid or deferred coupon distribution payments. The coupon distribution rate will be reset to a percentage per annum equal to the sum of (a) the initial spread of 2.61 per cent, (b) the China Treasury Rate, and (c) a margin of 300 Bps every five years after October 29, 2020. While any coupon distribution payments are unpaid or deferred, the headquarters of the Company cannot declare or pay dividends to shareholders or decrease the share capital, or make material fixed asset investments of the headquarters of the Company.
On November 7, 2016, the Bond Issuer issued US$500 million senior perpetual securities (the “2016 Senior Perpetual Securities”) at a rate of 4.25%. The 2016 Senior Perpetual Securities are guaranteed by one of our subsidiaries, Chalco Hong Kong. The 2016 Senior Perpetual Securities also have the benefit of a keepwell deed entered into by the Bond Issuer, the Company, Chalco Hong Kong and the trustee. The 2016 Senior Perpetual Securities were listed on the Hong Kong Stock Exchange on November 7, 2016. The net proceeds from the issue of the 2016 Senior Perpetual Securities were on-lent to the Company or any of its subsidiaries for general corporate use. Coupon payments of 4.25% per annum on the 2016 Senior Perpetual Securities have been made semi-annually on April 29 and October 29 in arrears from November 7, 2016 and may be deferred at the discretion of the Group. The first coupon payment date was April 29, 2017. The 2016 Senior Perpetual Securities have no fixed maturity date and are callable only at the Group’s option on or after November 7, 2021 at their principal amounts together with any accrued, unpaid or deferred coupon distribution payments. After November 7, 2021, the coupon distribution rate will be reset to a percentage per annum equal to the sum of (a) the initial spread of 2.931 per cent, (b) the U.S. Treasury Rate, and (c) a margin of 5.00 per cent per annum. While any coupon distribution payments are unpaid or deferred, the Group, the wholly-owned subsidiaries of Chalco Hong Kong as guarantors, and the Bond Issuer cannot declare or pay dividends or make distributions or similar discretionary payments in respect of, or repurchase, redeem or otherwise acquire any securities of lower or equal rank.
On October 19, 2018, we issued RMB2,000 million perpetual medium-term notes with an initial distribution rate at 5.10% (the “2018 Perpetual Medium-term Notes”). The proceeds from the issuance were RMB2,000 million. The proceeds were used for the repayment of interest-bearing loans and borrowings. Coupon payments of 5.10% per annum on the 2018 Perpetual Medium-term Notes are made annually in arrears from October 19, 2018 and may be deferred at our discretion. The 2018 Perpetual Medium-term Notes have no fixed maturity date and are callable only at our option on October 23, 2021 or any coupon distribution date after October 23, 2021 at their principal amounts together with any accrued, unpaid or deferred coupon distribution payments. The coupon distribution rate will be reset to a percentage per annum equal to the sum of (a) the initial spread of 1.90 per cent, (b) the China Treasury Rate, and (c) a margin of 500 Bps after October 23, 2021. While any coupon distribution payments are unpaid or deferred, we cannot declare or pay dividends to shareholders or decrease the share capital, or make material fixed asset investments.
Proposed Issuance of H Shares
On June 26, 2018,25, 2019, our shareholders at the 20172018 annual general meeting passed a special resolution, which will remain valid until the earliest of (i) the conclusion of our next annual general meeting, (ii) the expiration of 12 months following the date of passing the resolution, or (iii) the date on which the authority set out in this resolution is revoked or varied by a special resolution at a general meeting. The resolution authorizes us to issue up to 20% of the total nominal value of H Shares in issue as of the resolution date. Our Board has been authorized to determine the use of the proceeds. The proposed issuance is subject to all the necessary approval by the CSRC and/or other relevant PRC government authorities.
MergerCapital Contribution to China Rare Metals and Reorganization of Shanxi Branch and Shanxi HuazeRare Earths Company Ltd. with Gallium Assets
On August 8, 2017,27, 2019, we entered into a reorganization agreement with Zhangze Electric Power, pursuant to which we contributed certain assets related to alumina production of our Shanxi branch, with an appraised net value of RMB3,425.7 million equaling the appraised net value of the assets and liabilities of Shanxi branch, to Shanxi Huaze. The assets injected into Shanxi Huaze included, among others, inventories, buildings, structures, machinery and equipment. Upon completion of our asset contribution in 2017, our shareholding in Shanxi Huaze increased from 60% to 85.98% and Shanxi Huaze was renamed to Shanxi New Material.
Establishment of Industry Investment Fund
On May 23, 2017, the Company, Bank of Communications International Trust Co., Ltd. (“BOCOMMTRUST”) and Chinalco Jianxin Investment Fund Management (Beijing) Company Limited (“Chinalco Jianxin”) entered into a partnership agreement in relation to the establishment of Beijing Chalco Bocom Size Industry Investment Fund Management Partnership (Limited Partnership) (the “Industry Fund”). On September 27, 2017, the Company, BOCOMMTRUST, Chinalco Jianxin and Bocommtrust Asset Management Co., Ltd. (“Bocommtrust Asset”) entered into certain agreements with respect to Chinalco Jianxin’s withdrawal from and Bocommtrust Asset’s participation in the Industry Fund. On the same day, the Company, BOCOMMTRUST and Bocommtrust Asset entered into a capital contribution agreement with China Rare Metals and Rare Earths Company Ltd., a new partnership agreement in relationsubsidiary of Chinalco, pursuant to the Industry Fund. Pursuant to these agreements, the general partner of the Industry Fund changed from Chinalco Jianxin to Bocommtrust Asset while Chinalco Jianxin remained as the manager of the Industry Fund.
The Industry Fund would provide funding for the construction of our major projects, replenish our working capital and support our structural adjustment, transformation and upgrade.As of December 31, 2018, the Industry Fund made debt investments in certain of our subsidiaries and joint ventures with a total amount of RMB5,000 million, of which we had contributed RMB1,650 million.
Acquisitionagreed to make a capital contribution of Carbon AssetsRMB352,848,100 to China Rare Metals and Equity Interests
OnRare Earths Company Ltd. with our gallium assets, which contribution were made in full in August 30, 2018, our Group and the affiliates of Chinalco Assets entered into a series of assets transfer agreements and equity transfer agreements for the acquisition of certain carbon assets and equity interests from the affiliates of Chinalco Assets, including: (i) the assets of the carbon plant under Shandong Aluminum Industry Co., Ltd; (ii) the assets of the carbon plant under Pingguo Aluminum Company Limited; (iii) 49% equity interests of Baotou Sendu Carbon Company Limited; and (iv) 57.69% and 19.96% equity interests of Chibi Great Wall Carbon Products Company Limited from two separate shareholders.2019. Upon completion of the acquisition,transaction, the shareholding proportion we hold in China Rare Metals and Rare Earths Company Ltd. will be increased from 14.62% to 23.94%, and the registered capital of China Rare Metals and Rare Earths Company Ltd. will be increased from RMB1,360,000,000 to RMB1,526,750,900. We expect this acquisition wouldwill help us consummaterevitalize gallium assets irrelevant to our principal businesses and increase investment returns by leveraging on China Rare Metals and Rare Earths Company Ltd.’s industrial chain, ensure our steady production, and improve our competitiveness and anti-risk capabilities, as carbon products are one of major raw materials for production of primary aluminum. As of December 2018, we had paid the total consideration of RMB735.6 million in full and the closing had been completed.advantages.
Merger and Reorganization of Zunyi Alumina and ZunyiCapital Contribution to Yixin Aluminum
On June 21, 2018, in order to streamline our production chains, enhance synergistic effects and control operating costs,December 10, 2019, we entered into a capital contribution agreement with otherYixin Aluminum and its shareholders, pursuant to which we agreed to make a capital contribution of ZunyiRMB850 million in cash to Yixin Aluminum, which we paid in full in December 2019. Upon completion of the transaction, we will hold 38.90% equity interests of Yixin Aluminum. We expect this capital contribution to facilitate us in participating in the green development layout on the integration of hydropower and aluminum in Yunnan Province and obtaining competitive assets for our principal business.
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Subscription for A Shares of Yunnan Aluminum
On December 19, 2019, we entered into a shares subscription agreement with Yunnan Aluminum, pursuant to which we contributed all assets in Zunyi Aluminaagreed to Zunyi Aluminum. The appraised net value of Zunyi Alumina, equaling the appraised net value of its assets and liabilities, was RMB2,311 million. Upon completion of the merger, our shareholding in Zunyi Aluminum increased from 62.1% to 67.445%.
Gratuitous Transfer Between China Copper and Yunnan SASAC
On November 13, 2018, China Copper, a wholly-owned subsidiary of our controlling shareholder, entered into a gratuitous transfer agreement with Yunnan SASAC, pursuant to which Yunnan SASAC shall gratuitously transfer its 51% equity interest in Yunnan Metallurgical Group Co., Ltd. to China Copper. The gratuitous transfer was approved by the SASAC on December 19, 2018, by the State Administrationsubscribe through non-public offering for Market Regulation on December 20, 2018 and by the CSRC on December 29, 2018. Chinalco completed the gratuitous transfer on January 8, 2019. As Yunnan Aluminum Co., Ltd., an affiliated company of Yunnan Metallurgical Group Co., Ltd., competes with us in the business segments of alumina and primary aluminum, on January 2, 2019, Chinalco, as the indirect controlling shareholder314,050,688 A shares of Yunnan Aluminum Co., Ltd.at a price of RMB4.10 per share with the total subscription amount of RMB1,287,607,820.80. The subscription price of RMB4.10 per A share was determined through bidding and our direct controlling shareholder, issued a letter of undertakingsbased on non-competition to us in order to address business competition and safeguard the legitimate interestsminimum issuance price of the Company and our minority shareholders. According to the letter of undertakings, Chinalco undertook to start in 2019 planning the integration of the businesses in whichnon-public offering by Yunnan Aluminum, Co., Ltd. and we compete with each other, and address business competition between Yunnan Aluminum Co., Ltd. and us within five years.
Subscription of Equity Interest of Certain Subsidiaries and Subsequent Issuance of Additional A Shares (“Asset Restructuring”)
On December 4, 2017, we entered into certain investment and debt conversion agreements (the “Initial Agreements”) with Huarong Ruitong Equity Investment Management Co., Ltd. (“Huarong Ruitong”), China Life Insurance Company Limited (“China Life”), Shenzhen Zhaoping Chalco Investment Center LLP (“Zhaoping Investment”), China Pacific Life Insurance Co., Ltd. (“CPIC Life”), China Cinda Asset Management Co., Ltd. (“China Cinda”), BOC Financial Asset Investment Co., Ltd. (“BOC Financial”), ICBC Financial Asset Investment Co., Ltd. (“ICBC Financial”) and ABC Financial Asset Investment Company Limited (“ABC Financial”) (collectively, the “Restructuring Investors”). Pursuant to the Initial Agreements, Huarong Ruitong, China Life, Zhaoping Investment, CPIC Life, BOC Financial, ICBC Financial and ABC Financial have agreed to make cash contributions to our wholly-owned subsidiaries, Chalco Shandong, Zhongzhou Aluminum, Baotou Aluminum and Chalco Mining (collectively, the “Target Subsidiaries”), while the principal of loans owed by Chalco Mining to Huarong Ruitong, Zhaoping Investment, China Cinda and BOC Financial prior to signing of the Initial Agreements would be treated as capital contribution to Chalco Mining and converted into equity interest in Chalco Mining held by Huarong Ruitong, Zhaoping Investment, China Cinda and BOC Financial. The Restructuring Investors have agreed to acquire 30.80%, 36.90%, 25.67% and 81.14% of equity interest of Chalco Shandong, Zhongzhou Aluminum, Baotou Aluminum and Chalco Mining, respectively, with an aggregate capital contribution of approximately RMB12.6 billion. Under the Initial Agreements, we have also agreed to acquire equity interest held by the Restructuring Investors in the Target Subsidiaries with consideration in the form of our A Shares to be issued to the Restructuring Investors. On December 20, 2017, the Initial Agreements and the transactions contemplated thereunder were approved at our 2017 second extraordinary general meeting. In December 2017, the capital contribution to the Target Subsidiaries by the Restructuring Investors was completed in accordance with the terms of the Initial Agreements.
Subsequently, on January 31, 2018, we entered into equity acquisition agreements (the “Further Agreements”) with the Restructuring Investors. Pursuant to the Further Agreements, we have agreed to acquire all the equity interest held by the Restructuring Investors in the Target Subsidiaries with consideration in the form of A Shares of the Company to be issued to the Restructuring Investors (the “Proposed Issuance”). The number of A Shares in issue pursuant to the Proposed Issuance would equal the appraised value of equity interest held by Restructuring Investors in Target Subsidiaries as of December 31, 2017 determined by China United Assets Appraisal divided by the issue price. The aforementioned appraised value may be subject to further adjustment by competent PRC authorities upon filing of the valuation report by China United Assets Appraisal. The issue price has been set at RMB6.00 per A Share with reference towhich represented 90% of the average trading price of our A Shares during the last 60 trading days prior to January 31, 2018 (i.e.,shares in the last 6020 trading days prior to the suspension of trading of our A Shares) in accordance with rules and regulationsfirst day of the PRC applicable to transactionissuance period, namely December 13, 2019. We paid the consideration in full and 314,050,688 A shares of this kind. The appraised value, subject to further adjustment, was RMB12.7 billion and therefore we would issue to the Restructuring Investors approximately 2.1 billion A SharesYunnan Aluminum were registered under our name in aggregate,December 2019, representing approximately 14.2%10.04% of the total issued share capital of the Company as of January 31, 2018 and approximately 12.4% of the enlarged total issued share capital of the Company upon completion of the Proposed Issuance. On July 30, 2018, we entered supplemental equity acquisition agreements with the Restructuring Investors, amending, among others, the final consideration of the proposed acquisition and the number of the consideration shares to be issued from approximately RMB12,703.7 million and approximately 2,117,280,800 to approximately RMB12,713.2 million and 2,118,874,715, respectively. The Proposed Issuance was approved by our shareholders, the SASAC and the CSRC in 2018. In February 2019, all equity interests of Target Subsidiaries held by the Restructuring Investors were transferred to us, which resulted in us holding 100% equity interests of all Target Subsidiaries. On February 25, 2019, we issued an aggregate of 2,118,874,715 A SharesYunnan Aluminum. Pursuant to the Restructuring Investors. The Restructuring Investorsshares subscription agreement, we shall not transfer the subscribed A shares issued thereto within twelve36 months from the completion datelisting date. We expect our subscription for A shares of the issuance of the sharesYunnan Aluminum will help resolve business competitions between Yunnan Aluminum and the shares may be listedus and traded on the Shanghai Stock Exchange upon expiry of the lock-up period.
Cash contributions received from the Restructuring Investors have been used by us for the repayment of loans. The Asset Restructuring has helped to reduce the gearing ratios of these subsidiariesis in line with our development strategies and the Groupin our interests as a whole.
Construction Projects
As of the date of this annual report, we have undertaken a number of facility expansion projects in China. See “- D. Property, Plants and Equipment - Our Expansion.”
B. | Business Overview |
Our Principal Products
We are a leading enterprise in the non-ferrous metal industry in China. In terms of comprehensive scale, we ranked among the top enterprises in the global aluminum industry. We have benefited from the strong growthdevelopment of the PRC aluminum market, one of the world’s fastest growing majorlargest aluminum markets.market. We refine bauxite into alumina, which is then smelted into primary aluminum. In addition to alumina and primary aluminum, we also produce and sell a relatively small amount of chemical alumina products (alumina hydrate and alumina-based industrial chemical products), and carbon products (carbon anodes and cathodes) and gallium.. We are also engaged in the trading and logistics of alumina, primary aluminum, other non-ferrous metal products, coal products and raw and ancillary materials in bulk both manufactured by us andor sourced from external suppliers domestically and abroad. In addition, we are engaged in coal mining and power generation. The remainder of our revenues was derived from research and development activities and other products and services. Accordingly, we organize and manage our operations in five business segments: alumina segment, primary aluminum segment, trading segment, energy segment and corporate and other operating segment. After elimination of inter-segment sales, revenues attributable to our alumina segment, primary aluminum segment, trading segment, energy segment, and corporate and other operating segment accounted for approximately 8.2%7.5%, 22.9%19.7%, 64.7%68.9%, 3.9%3.7% and 0.3%0.2%, respectively, of our total revenues in 2018.2019.
Our alumina segment includes the mining and purchasing of bauxite and other raw materials, and production and sale of alumina as well as chemical alumina and metal gallium.alumina. Alumina accounted for approximately 88.88%88.1% of our total production volume for this segment in 2018.2019. Chemical alumina products are used in the production of chemical, pharmaceutical, ceramic and construction materials. In the process of refining bauxite into alumina, we alsoused to produce gallium as a by-product. Galliumby-product, which is a rare, high value metal with applications in the electronics and telecommunication industries. In August 2019, we made a capital contribution with all of our gallium assets to China Rare Metals and Rare Earths Company Ltd. and are currently not engaged in any gallium production. See “- A. History and Development of the Company - Capital Contribution to China Rare Metals and Rare Earths Company Ltd. with Gallium Assets” for details.
Our primary aluminum segment includes the procurement of alumina, other raw materials, supplemental materials and electrical power, the production and sale of primary aluminum and aluminum-related products, such as carbon products, aluminum alloy products and other aluminum products. Our principal primary aluminum products are ingots, molten aluminum and aluminum alloys, which accounted for approximately 29%, 39%38% and 32%33%, respectively, of our total production volume of primary aluminum in 2018.2019. Our standard 20 kilogram remelt ingots are used for general aluminum fabrication in the construction, electricity, electronics, transportation, packaging, machinery and durable goods industries. We internally produce substantially all the carbon products used at our smelters and sell our remaining carbon products to external customers.
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Our trading segment is mainly engaged in the trading of alumina, primary aluminum, aluminum fabrication products, other non-ferrous metal products, and crude fuels such as coal products, as well as supplemental materials and logistics and transport services to our internal manufacturing plants and external customers. We established our trading business under Chalco Trading as a separate segment in July 2010 as a result of our operational structural adjustment. Since 2014, we have established China Aluminum InternationalChalco Materials, Chalco Logistics and Chalco Trading Group Co. Ltd., Chalco Materials Co. Ltd. and China Aluminum Logistics Group Corporation Co., Ltd. to continuously promote and deepen development of our trading business, jointly constituting our trading segment. Established in 2018, Chalco Trading Group has undertaken the businesses that used to be operated by Chalco Trading.
Our energy segment includes the research and development, production and operation of energy products, including coal mining and conventional coal-fire power generation as well as renewable energy generation such as wind power and solar power. We are also engaged in new energy equipment production. We established our energy segment in January 2013 as a result of our acquisition of Ningxia Energy in line with our development strategy to partially offset our future energy costs and secure a portion of the coal we consume in our operations.costs. In 2018,2019, we supplied the majority of the electricity we generated for our own production use, supplied a portion of the coal output to our own electric power plant and sold the remaining portion to external customers. Ningxia Energy supplied the electricity it generated mainly to the state grid in China.
Our corporate and other operating segment mainly includes corporate and other aluminum-related research, development, and our other activities of the Group.activities.
Our Production Capacity
As of December 31, 2018,2019, our annual alumina production capacity and primary aluminum production capacity was approximately 18.86 million tonnes and 4.784.59 million tonnes, respectively. The following table sets forth the production capacity of each of our principal plants by business segment as of the indicated date:
As of December 31, 2019 | ||||||||
Plant | Alumina | Primary Aluminum | ||||||
(in thousand tonnes)(1) | ||||||||
Guangxi branch | 2,210 | — | ||||||
Zhongzhou Aluminum | 3,050 | — | ||||||
Qinghai branch | — | 420 | ||||||
Guizhou branch | — | — | ||||||
Chalco Mining | 2,410 | — | ||||||
Chalco Shandong | 2,270 | — | ||||||
Shanxi New Material | 2,600 | 424 | ||||||
Chongqing branch | 800 | — | ||||||
Lanzhou Aluminum | — | 450 | ||||||
Shanxi Huasheng | — | — | ||||||
Zunyi Aluminum | 1,000 | 375 | ||||||
Shandong Huayu | — | 200 | ||||||
Baotou Aluminum(2) | — | 1,340 | ||||||
Zhengzhou Institute | 20 | — | ||||||
Liancheng branch | — | 550 | ||||||
Guizhou Huajin | 1,600 | — | ||||||
Xinghua Technology | 900 | — | ||||||
Shanxi Huaxing | 2,000 | — | ||||||
Guizhou Huaren | — | 400 | ||||||
Shanxi Zhongrun | — | 432 | ||||||
Total | 18,860 | 4,591 |
As of December 31, 2018 | ||||||||
Plant | Alumina | Primary Aluminum | ||||||
(in thousand tonnes)(1) | ||||||||
Guangxi branch | 2,210 | — | ||||||
Zhongzhou Aluminum | 3,050 | — | ||||||
Qinghai branch | — | 420 | ||||||
Guizhou branch | — | 0 | ||||||
Chalco Mining | 2,410 | — | ||||||
Chalco Shandong | 2,270 | — | ||||||
Shanxi New Material | 2,600 | 424 | ||||||
Chongqing branch | 800 | — | ||||||
Lanzhou Aluminum | — | 450 | ||||||
Shanxi Huasheng | — | 190 | ||||||
Zunyi Aluminum | 1,000 | 375 | ||||||
Shandong Huayu | — | 200 | ||||||
Baotou Aluminum(2) | — | 1,340 | ||||||
Zhengzhou Institute | 20 | — | ||||||
Liancheng branch | — | 550 | ||||||
Guizhou Huajin | 1,600 | — | ||||||
Xinghua Technology | 900 | — | ||||||
Shanxi Huaxing | 2,000 | — | ||||||
Guizhou Huaren | — | 400 | ||||||
Shanxi Zhongrun | — | 432 | ||||||
Total | 18,860 | 4,781 |
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(1) | Production capacity is calculated based on designed capacity, which accounts for various assumptions including downtime for ordinary maintenance and repairs, the ore grade of bauxite feedstock and subsequent capacity modifications. |
(2) | Including the primary aluminum production capacity of Inner Mongolia Huayun, a subsidiary of Baotou Aluminum. |
In 2018,2019, we produced approximately 13.5113.80 million tonnes of alumina (excluding chemical alumina products), 3.80 million tonnes of chemical alumina products and 4.173.79 million tonnes of primary aluminum. Our production of alumina (with chemical alumina products included) and primary aluminum represented approximately 21.2%21.9% and 11.4%10.5%, respectively, of the total output of alumina (with chemical alumina products included) and primary aluminum in China in 2018.2019.
The following table sets forth a breakdown of our production volume by product segment for the periods indicated:
Year Ended December 31, | ||||||||||||
Production Volume by Product | 2016 | 2017 | 2018 | |||||||||
(in thousand tonnes, except Gallium) | ||||||||||||
Alumina segment | ||||||||||||
Alumina | 12,027 | 12,810 | 13,510 | |||||||||
Chemical alumina products | 2,479 | 2,853 | 3,240 | |||||||||
Gallium (in tonnes) | 71 | 72 | 136 | |||||||||
Primary aluminum segment | ||||||||||||
Primary aluminum(1) | 2,953 | 3,607 | 4,166 | |||||||||
Carbon | 1,680 | 1,962 | 2,010 |
Year Ended December 31, | ||||||||||||
Production Volume by Product | 2017 | 2018 | 2019 | |||||||||
(in thousand tonnes, except Gallium) | ||||||||||||
Alumina segment | ||||||||||||
Alumina | 12,810 | 13,510 | 13,803 | |||||||||
Chemical alumina products | 2,853 | 3,240 | 3,802 | |||||||||
Gallium (in tonnes) | 72 | 136 | 98 | |||||||||
Primary aluminum segment | ||||||||||||
Primary aluminum(1) | 3,607 | 4,166 | 3,788 | |||||||||
Carbon | 1,962 | 2,010 | 1,472 |
(1) | Including ingots, molten aluminum and aluminum alloys. |
Production Process
Alumina
Alumina is refined from bauxite, an aluminum-bearing ore, through a chemical refining process. The refining process applied is determined by the mineral composition of the bauxite used in production. Our refineries may employ the Bayer process, the Bayer-sintering series process, the Bayer-sintering combined process or the ore-dressing Bayer process. Most of the bauxite reserves in China contain diasporic bauxite, which contains high alumina content but relatively high silica content, resulting in bauxite reserves with low alumina-to-silica ratio. The Bayer process cannot efficiently refine diasporic bauxite that has not undergone processing to increase its alumina-to-silica ratio. The Bayer-sintering process and the Bayer-sintering combined process are suitable for refining low alumina-to-silica ratio bauxite. We have developed and improved these processes to increase our refining yield. When we refine alumina using the Bayer process, we produce gallium as a by-product, which undergoes further processing before sale. In addition, we also produce some chemical alumina products (alumina hydrate and alumina-based industrial chemical products).
Primary Aluminum
We smelt alumina into primary aluminum through electrolytic reduction. The electrolytic process takes place in a reduction cell, or pot, a steel shell lined with carbon cathodes and refractory materials. Powerful electric currents are passed through the pot to produce molten aluminum. The molten aluminum is transferred to holding furnaces and then poured directly into molds to produce foundry ingots, or further refined to form fabricating ingots, which may be used directly in the aluminum fabrication process. The primary aluminum we produce is in the form of ingots, molten aluminum and aluminum alloys.
All of our primary aluminum smelters use pre-bake anode reduction pot-lines. In the pre-bake reduction process, the anodes are pre-formed in a separate facility where pollutants can be contained. The cells themselves are enclosed with removable panels so that the waste gas produced during the process can be extracted using large exhaust fans. Our waste gas is treated and purified to reduce dust and fluoride emissions to acceptable levels set by state environmental protection agencies.
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Production Facilities
Alumina
We currently operate ten alumina refineries and one research institute with a total designed annual production capacity of approximately 18.86 million tonnes as of December 31, 2018.2019. Two of our refineries are integrated with primary aluminum smelters. In 2018,2019, we produced approximately 13.5113.80 million tonnes of alumina, approximately 3.243.80 million tonnes of chemical alumina products and approximately 13698 tonnes of gallium. The overall utilization rate for our refineries was 91%84% as of December 31, 2018.2019.
In 2018,2019, we supplied approximately 6.066.57 million tonnes, or 45%48%, of our total production of alumina to our own smelters and sold substantially all of the remaining alumina to other domestic customers. All of the chemical alumina products that we produced in 20182019 were sold by alumina refineries directly to external customers or internally to Chalco Trading Group for subsequent external trading.
The following table sets forth the annual production capacity, output of alumina and chemical alumina products, utilization rate and production process applied in each of our alumina refineries and our Zhengzhou Institute:
As of December 31, 2018 | For the Year Ended December 31, 2018 | As of December 31, 2019 | For the Year Ended December 31, 2019 | |||||||||||||||||||||||||||||||||
Annual | Utilization | Alumina Production Output | Chemical Alumina Products Output | Production Process | Annual | Utilization | Alumina | Chemical | Production Process | |||||||||||||||||||||||||||
(in thousand tonnes, except percentages) | (in thousand tonnes, except percentages) | |||||||||||||||||||||||||||||||||||
Shanxi New Material | 2,600 | 100 | % | 2,129 | 73 | Bayer-sintering | 2,600 | 100 | % | 1,771 | 95 | Bayer-sintering | ||||||||||||||||||||||||
Chalco Mining | 2,410 | 81 | % | 1,748 | 95 | Bayer-sintering | 2,410 | 87 | % | 1,235 | 99 | Bayer-sintering | ||||||||||||||||||||||||
Chalco Shandong | 2,270 | 100 | % | 1,715 | 2,105 | Sintering and Bayer | 2,270 | 100 | % | 1,568 | 2,528 | Sintering and Bayer | ||||||||||||||||||||||||
Zhongzhou Aluminum | 3,050 | 84 | % | 1,913 | 637 | Sintering and Bayer | 3,050 | 100 | % | 2,133 | 778 | Sintering and Bayer | ||||||||||||||||||||||||
Guangxi branch | 2,210 | 100 | % | 2,486 | 97 | Bayer | 2,210 | 100 | % | 2,460 | 128 | Bayer | ||||||||||||||||||||||||
Zunyi Aluminum | 1,000 | 100 | % | 1,110 | 3 | Bayer | 1,000 | 100 | % | 1,102 | 16 | Bayer | ||||||||||||||||||||||||
Chongqing branch | 800 | — | — | — | Bayer-sintering | 800 | — | — | — | Bayer-sintering | ||||||||||||||||||||||||||
Zhengzhou Institute(3) | 20 | — | — | 43 | Bayer | 20 | — | — | 71 | Bayer | ||||||||||||||||||||||||||
Guizhou Huajin | 1,600 | 100 | % | 1,514 | — | Bayer | 1,600 | 100 | % | 1,613 | — | Bayer | ||||||||||||||||||||||||
Xinghua Technology | 900 | 100 | % | 778 | 189 | Bayer | 900 | 61 | % | 665 | 88 | Bayer | ||||||||||||||||||||||||
Shanxi Huaxing | 2,000 | 100 | % | 117 | (4) | — | Bayer | 2,000 | 50 | % | 1,256 | — | Bayer | |||||||||||||||||||||||
Total | 18,860 | 91 | % | 13,510 | 3,243 | 18,860 | 84 | % | 13,803 | 3,802 |
(1) | Production capacity is calculated based on designed capacity, which accounts for various assumptions including downtime for ordinary maintenance and repairs, the ore grade of bauxite feedstock and subsequent capacity modifications. |
(2) | Capacity utilization rate is calculated by dividing our utilized production capacity as of the date indicated by our total designed annual production capacity. |
(3) | The chemical alumina products produced at our Zhengzhou Institute are sold commercially and such sales are included in our total revenues. |
Primary Aluminum
We operate eleven primary aluminum smelters in China. Our smelters had an aggregate annual production capacity of approximately 4.59 million tonnes as of December 31, 2019.
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In 2019, we produced approximately 3.79 million tonnes of primary aluminum and the average utilization rate for our smelters was 80% as of December 31, 2019. The following table sets forth the annual production capacity, aluminum output, utilization rate and smelting equipment used in each of our aluminum smelters:
As of December 31, 2019 | For the Year Ended December 31, 2019 | |||||||||||||
Plant | Annual | Utilization | Aluminum | Smelting Equipment | ||||||||||
(in thousand tonnes, except percentages) | ||||||||||||||
Baotou Aluminum(4) | 1,340 | 100 | % | 1,315 | 200Ka, 240Ka, 400Ka and 500Ka pre-bake | |||||||||
Guizhou branch(5) | — | — | — | Secondary aluminum processing | ||||||||||
Lanzhou Aluminum | 450 | 99 | % | 409 | 200Ka and 350Ka pre-bake | |||||||||
Qinghai branch | 420 | 99 | % | 408 | 180Ka and 210Ka pre-bake | |||||||||
Shandong Huayu(6) | 200 | — | 8 | 240Ka pre-bake | ||||||||||
Shanxi Huasheng(7) | — | — | 61 | 300Ka pre-bake | ||||||||||
Shanxi New Material | 424 | 81 | % | 366 | 300Ka pre-bake | |||||||||
Zunyi Aluminum | 375 | 100 | % | 405 | 200Ka and 400Ka pre-bake | |||||||||
Liancheng branch | 550 | 28 | % | 155 | 200Ka and 500Ka pre-bake | |||||||||
Guizhou Huaren | 400 | 100 | % | 480 | 500Ka | |||||||||
Shanxi Zhongrun | 432 | 50 | % | 181 | 500Ka | |||||||||
Total | 4,591 | 80 | % | 3,788 |
(1) | Production capacity takes into account designed capacity, downtime for ordinary maintenance and repairs and subsequent capacity modifications. |
(2) | Capacity utilization rate is calculated by dividing our utilized production capacity as of the date indicated by our total designed annual production capacity. |
(3) |
Primary Aluminum
We operate eleven primary aluminum smelters in China. Our smelters had an aggregate annual production capacity of approximately 4.78 million tonnes as of December 31, 2018.
In 2018, we produced approximately 4.17 million tonnes of primary aluminum and the average utilization rate for our smelters was 82% as of December 31, 2018. The following table sets forth the annual production capacity, aluminum output, utilization rate and smelting equipment used in each of our aluminum smelters:
As of December 31, 2018 | For the Year Ended December 31, 2018 | |||||||||||||
Plant(1) | Annual | Utilization | Aluminum | Smelting Equipment | ||||||||||
(in thousand tonnes, except percentages) | ||||||||||||||
Baotou Aluminum(5) | 1,340 | 100 | % | 1,234 | 200Ka, 240Ka, 400Ka and 500Ka pre-bake | |||||||||
Guizhou branch | — | — | 36 | 230Ka pre-bake and secondary aluminum processing | ||||||||||
Lanzhou Aluminum | 450 | 99 | % | 399 | 200Ka and 350Ka pre-bake | |||||||||
Qinghai branch | 420 | 99 | % | 404 | 180Ka and 210Ka pre-bake | |||||||||
Shandong Huayu | 200 | 45 | % | 197 | 240Ka pre-bake | |||||||||
Shanxi Huasheng | 190 | 100 | % | 225 | 300Ka pre-bake | |||||||||
Shanxi New Material | 424 | 99 | % | 431 | 300Ka pre-bake | |||||||||
Zunyi Aluminum | 375 | 100 | % | 403 | 200Ka and 400Ka pre-bake | |||||||||
Liancheng branch | 550 | 28 | % | 438 | 200Ka and 500Ka pre-bake | |||||||||
Guizhou Huaren | 400 | 94 | % | 345 | 500Ka |
As of December 31, 2018 | For the Year Ended December 31, 2018 | |||||||||||||
Plant(1) | Annual | Utilization | Aluminum | Smelting Equipment | ||||||||||
(in thousand tonnes, except percentages) | ||||||||||||||
Shanxi Zhongrun | 432 | 25 | % | 53 | 500Ka | |||||||||
Total | 4,781 | 82 | % | 4,166 |
Includes ingots, molten aluminum and aluminum alloys. |
Including the primary aluminum production facilities at Inner Mongolia Huayun, a subsidiary of Baotou Aluminum. |
(5) | As of December 31, 2019, the primary aluminum production facilities in our Guizhou branch had been disposed of by us. Our Guizhou branch did not have annual primary aluminum production capacity as of December 31, 2019. We did not produce any primary aluminum at our Guizhou branch in 2019. |
(6) | As of December 31, 2019, Shandong Huayu had halted its primary aluminum production. See “- Principal Facilities – Shandong Huayu” for details. |
(7) | As of December 31, 2019, Shanxi Huasheng had terminated its primary aluminum production and transferred its primary aluminum capacity quota to Yixin Aluminum. See “- A. History and Development of the Company - Transfer of Primary Aluminum Capacity Quota of Shanxi Huasheng” for details. |
Raw Materials
Alumina
Bauxite is the principal raw material in alumina production. Most of the bauxite in China is monohydrate, consisting mainly of Aluminosilicate compounds. Bauxite deposits have been discovered across a broad area of central China and are especially abundant in the southern and northern parts of central China. The largest bauxite deposit in China lies in the Shanxi Province.
Rock Formation and Mineralization.Except for our Guangxi Pingguo mine which is an accumulation deposit due to original erosion, the bauxite deposits of our mines in China usually have similar stratigraphic sequences. Primary bauxite deposit, as a type of sedimentary boehmite (Al2O3.H2O) the Carboniferous or Permian age, is contained in clay rock, limestone or coal seams. A zonary red shale is usually located at the bottom of the bauxite and the red seam distributes over the irregular “karst-type” erosion face on the top of Ordovician limestone. Aluminum deposits in northern China are usually covered with a very thick Quaternary weathering.
The thickness and quality of deposits vary with our mine locations. Quality is usually consistent in smooth sections but changes sharply in karst “billabong” terrain. The level of hardness of minerals also varies. A sequence that includes a seam of hard bauxite of fine quality in the middle and soft bauxite of inferior quality on the bottom and top seams is common in deposits.
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Generally, deposits are horizontal or with an obliquity of 0 to 8 degrees, but there are also steep deposits at an angle of 75 degrees, such as in our Guizhou No. 2 mine. Most of the original mineralization is not influenced by folds and faults, and some fractures of a low obliquity and folds emerge in certain deposits, which is evident in the Guizhou No. 2mine area. In most of the Guizhou mine area, where the underground mining method must be used due to the obliquity of its bauxite body reaching 70 degrees with the influence of folds and several meters of dislocation arising from partial faults.
Economic Significance. Our bauxite deposits in China are divided into three groups. They are primarily distinguished by drill hole spacing and the composition of the deposit, which can encompass rock formations such as intercalated clays, bauxite, footwall iron clay or Ordovician limestone. Bauxite deposit groups vary in the thickness and mineral quality of its reserves.
We use the Chinese bauxite deposit estimation method, which is calculated using cut-off grades and thickness to outline continuous areas within the limits defined by samples of marginal grade. We utilize actual limiting sample points that are joined to create a polygonal outline, and grades are then calculated using a length weighted arithmetic average. We believe that the Chinese bauxite deposit estimation method of test boring, inspection pit, trial trench, density, tonnage analysis and calculation applied to the geological work of bauxite in China is an appropriate method to analyze these types of deposits.
Supply.To support the growth of our alumina production, we continuously seek opportunities to streamline and optimize our bauxite procurement. Except for Chalco Shandong, all of our refineries are located in the four provinces where over 90% of China’s potentially mineable bauxite has been found. We generally source our bauxite from mines close to our refineries to control transportation costs. Historically, we have procured our bauxite supply principally from three sources:
● | our own bauxite mining operations; |
● | jointly-operated mines; and |
● | other suppliers, which principally include small independent mines in China and |
On average, our refineries consumed approximately 2.292.4 tonnes of bauxite to produce one tonne of alumina in 2018.2019. Our mines supplied approximately 15.5014.79 million tonnes of bauxite to our refineries in 2018.2019. We purchase bauxite from a number of suppliers and do not depend on any supplier for our bauxite requirements. In 2018,2019, bauxite secured from other suppliers accounted for approximately 56.4%62.4% of our total bauxite supply, primarily because our demand for bauxite exceeded the production of our mines.
The following table sets forth the volumes and percentages of bauxite supplied by our mines and other suppliers for the periods indicated:
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2017 | 2018 | 2017 | 2018 | 2019 | |||||||||||||||||||||||||||||||||||||||||||
Bauxite Supply | Percentage of Bauxite Supply | Bauxite Supply | Percentage of Bauxite Supply | Bauxite Supply | Percentage of Bauxite Supply | Bauxite | Percentage | Bauxite | Percentage | Bauxite | Percentage | |||||||||||||||||||||||||||||||||||||
% | % | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||
(in thousand tonnes, except percentages) | (in thousand tonnes, except percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
Own mines | 13,603.5 | 46.9 | 14,679.6 | 47.0 | 15,498.0 | 43.6 | 14,679.6 | 47.0 | 15,498.0 | 43.6 | 14,791.2 | 37.6 | ||||||||||||||||||||||||||||||||||||
Other suppliers | 15,384.3 | 53.1 | 16,566.5 | 53.0 | 20,043.6 | 56.4 | 16,566.5 | 53.0 | 20,043.6 | 56.4 | 24,499.9 | 62.4 | ||||||||||||||||||||||||||||||||||||
Total | 28,987.8 | 100.0 | 31,246.1 | 100.0 | 35,541.6 | 100.0 | 31,246.1 | 100.0 | 35,541.6 | 100.0 | 39,291.1 | 100.0 |
Own Mines. As of December 31, 2018,2019, we owned and operated 1918 mines in China that had approximately 235253 million tonnes of aggregate bauxite reserves and we continue to explore new bauxite reserves to replenish our reserves. We also own ahad exploration rights to the bauxite minemines in Laos through Lao Service Mining Co., Ltd., in which we held 60% of the equity interest. In April 2019, the Laos government cancelled the exploration rights held by Lao Service Mining Co., Ltd. as it had not continuously carried out related activities in the past years. We also hold the requisite mining permit for all the three bauxite mines in West Kalimantan, Indonesia through our 96.28% owned subsidiary, PT Nusapati Prima. Our bauxite deposits in Indonesia are lateritic gibbsite and were formed by weathering and leaching of aluminum-rich silicate rock in tropical climates. We have suspended our bauxite mining in Indonesia since September 2014 due to restraints on export of bauxite imposed by the Indonesian government. InSince 2017, and 2018, the Indonesian government has issued, and amended from time to time, relevant rules pursuant to which export of bauxite may be allowed upon satisfaction of certain requirements. We have been actively exploring the possibility of meeting these requirements. In addition, we own a bauxite mine in Guinea, and have the mining permit, through Chalco Guinea Company S.A., in which we indirectly held 85% of the equity interest.
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For the years ended December 31, 2016, 2017, 2018 and 2018,2019, we extracted approximately 14.5 million tonnes, 17.0 million tonnes, 17.3 million tonnes and 17.314.4 million tonnes, respectively, of bauxite from our domestic mines. The decrease in the volume of bauxite extracted from our mines in 2019 was primarily because the time of effective production by certain of our mines was reduced in response to the higher standards and requirements of environmental protection in certain areas as well as we were in the process of application for the administrative approvals for mining in new mining areas while some of our existing mining areas had become depleted. Our reported bauxite reserves for our mines in China do not exceed the quantities that we estimate could be extracted economically if future prices were at similar levels to average historical prices for bauxite or aluminum for the years ended December 31, 2016, 2017, 2018 and 2018,2019, or the three year historical contracted prices for such commodities. However, we do not use the three year historical bauxite or aluminum price to determine bauxite reserves, nor did we utilize any currency conversion factors or pricing related mechanisms. Instead, the primary criteria are the specifications required by our aluminum refineries, as well as certain modifying factors that are dependent on reserve quality.
The following table sets forth information for our mines as of December 31, 2018:
2019:
Mine | Location | Nature of ownership | Mining method | Permit Renewal(1) | Present Condition/ Current of Exploration | Bauxite Production (in thousand tonnes) |
Pingguo mine | Guangxi Zhuang Autonomous Region, China | 100% owned and operated by Chalco | Open pit | Fully developed and operational | ||
Guizhou mine(2) | Guizhou Province, China | 100% owned and operated by Chalco | Open pit/underground | March 2019(3) - December 2038 | Partly developed and operational | |
Zunyi mine | Guizhou Province, China | 100% owned and operated by Chalco | Open pit/underground | February 2020 – | Partly developed and operational | |
Xiaoyi mine | Shanxi Province, China | 100% owned and operated by Chalco | Open pit | |||
Shanxi Other Mines | Shanxi Province, China | 100% owned and operated by Chalco | Open pit/underground | September 2017(3) - July 2035 | ||
Mianchi mine | Henan Province, China | 100% owned and operated by Chalco | Open pit/underground | Partly developed and operational | ||
Luoyang mine | Henan Province, China | 100% owned and operated by Chalco | Open pit/underground | Partly developed and operational | ||
Xiaoguan mine | Henan Province, China | 100% owned and operated by Chalco | Open pit/underground | Fully developed and operational | ||
Gongyi mine | Henan Province, China | 100% owned and operated by Chalco | Open pit/underground | June | Fully developed and operational | |
Dengfeng mine | Henan Province, China | 100% owned and operated by Chalco | Open pit/underground | Partly developed and operational | ||
Xinmi mine | Henan Province, China | 100% owned and operated by Chalco | Open pit/underground | |||
Sanmenxia mine | Henan Province, China | 100% owned and operated by Chalco | Underground | Fully developed and operational | ||
Xuchang mine | Henan Province, China | 100% owned and operated by Chalco | Open pit/underground | Partly developed and operational | ||
Jiaozuo mine | Henan Province, China | 100% owned and operated by Chalco | Open pit/underground | September 2018(3) - October 2024 | Partly developed and operational | |
Pingdingshan mine | Henan Province, China | 100% owned and operated by Chalco | Open pit/underground | Partly developed and operational | ||
Yangquan mine | Shanxi Province, China | 100% owned and operated by Chalco | Open pit | September 2031 - May 2036 |
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Mine | Location | Nature of ownership | Mining method | Permit Renewal(1) | Present Condition/ Current Stage of Exploration | Bauxite Production (in thousand tonnes) |
Nanchuan mine | Chongqing Municipality, China | 100% owned and operated by Chalco | Underground | In preparation for restarting operation | — | |
Huaxing mine | Shanxi Province, China | 100% owned and operated by Chalco | Underground | August 2020 | Fully developed and operational | |
PT ALUSENTOSA | West Kalimantan, Indonesia | Owned and operated by PT Nusapati Prima, a 96.28% subsidiary of Chalco | Open pit | December 2027 | Suspended production | — |
PT KALMIN | West Kalimantan, Indonesia | Owned and operated by PT Nusapati Prima, a 96.28% subsidiary of Chalco | Open pit | December 2027 | Suspended production | — |
PT VISITAMA | West Kalimantan, Indonesia | Owned and operated by PT Nusapati Prima, a 96.28% subsidiary of Chalco | Open pit | November 2038 | Pending production commencement | — |
Boffa bauxite mine | Boffa, Guinea | Owned and operated by Chalco Guinea Company S.A., an 85% subsidiary of Chalco | Open pit | July 2033 | Under construction | — |
(1) | All conditions to retain our properties or leases have been fulfilled as of December 31, |
(2) | Including both Guizhou No. 1 mine and Guizhou No. 2 mine. |
(3) | We are in the process of renewing these permits. |
We are required to obtain mining rights permits to conduct mining activities. Under PRC laws and regulations, a mining enterprise must prepare and submit exploration reports for a mine to the local government to obtain a mining rights permit for a mine. A mining right owner is also permitted to lease the mining right through a lease arrangement. The mining rights permit is subject to renewal on a regular basis.
Furthermore, the mining right owner is required to obtain land use rights on the land in order to operate the mines. We lease the land use rights relating to our mines in China from Chinalco pursuant to a land use rights lease agreement that became effective upon our formation. Chinalco’s land use rights relating to over 90% of our mining properties in China are for 50-year terms beginning on July 1, 2001. The remaining land use rights relating to other mines in China are for shorter terms, some as short as one year. All of our land use rights lease agreements end on the expiry date of the mining rights or the end of the working life of the mine, whichever is earlier. Both the land use rights and land use rights lease agreements are renewable.
For our mines in Indonesia Laos and Guinea, neither proven nor probable reserves have been established in accordance with United States Securities and Exchange Commission Industry Guide 7 as of the date of this annual report.report (“Industry Guide 7”). The following table sets forth certain estimated details of the reserves for our mines in China as of December 31, 2018:2019:
Mine | Reserves(1)(2) | Al2O3 | S1O2 | Ratio of | Reserves (1)(2) | Al2O3 | S1O2 | Ratio of |
Pingguo mine | 48.01 | 53.47 | 4.76 | 11.23 | 80.08 | 52.96 | 4.94 | 10.72 |
Guizhou No. 1 mine | 1.23 | 65.47 | 10.02 | 6.53 | ||||
Guizhou No. 2 mine | 39.74 | 65.16 | 8.80 | 7.40 | ||||
Guizhou mine(4) | 41.68 | 64.15 | 9.06 | 7.08 | ||||
Zunyi mine | 8.20 | 60.13 | 11.06 | 5.44 | 10.36 | 59.17 | 10.59 | 5.59 |
Xiaoyi mine | 11.65 | 65.77 | 11.92 | 5.52 | 10.29 | 65.74 | 12.08 | 5.44 |
Shanxi Other Mines | 10.61 | 65.16 | 12.74 | 5.12 | 17.73 | 63.15 | 13.20 | 4.78 |
Mianchi mine | 2.88 | 63.24 | 12.33 | 5.13 | 2.60 | 63.52 | 12.01 | 5.29 |
Luoyang mine | 2.99 | 61.27 | 10.14 | 6.04 | 2.53 | 61.25 | 10.17 | 6.02 |
Xiaoguan mine | 19.95 | 63.70 | 14.94 | 4.26 | 17.83 | 64.26 | 13.45 | 4.78 |
Gongyi mine | 2.30 | 64.89 | 13.02 | 4.98 | 2.31 | 64.91 | 12.94 | 5.02 |
Dengfeng mine | 1.24 | 61.85 | 13.23 | 4.67 | 1.25 | 61.84 | 13.22 | 4.68 |
Xinmi mine | 2.59 | 65.38 | 12.02 | 5.44 | 1.08 | 65.51 | 12.77 | 5.13 |
Sanmenxia mine | 42.98 | 63.34 | 12.73 | 4.98 | 42.10 | 63.01 | 12.97 | 4.86 |
Xuchang mine | 1.09 | 62.94 | 9.08 | 6.93 | 1.11 | 62.88 | 9.07 | 6.94 |
Jiaozuo mine | 1.27 | 58.76 | 14.95 | 3.93 | ||||
Pingdingshan mine | 1.76 | 62.08 | 12.13 | 5.12 | ||||
Yangquan mine | 2.63 | 58.82 | 13.37 | 4.40 | ||||
Nanchuan mine | 29.09 | 60.60 | 13.84 | 4.38 | ||||
Huaxing Mine | 4.74 | 63.27 | 9.62 | 6.58 | ||||
Total (average) reserves | 234.95 | 61.34 | 10.54 | 5.82 | ||||
By reserve type | ||||||||
Proven reserve | 70.35 | 61.92 | 10.93 | 5.67 | ||||
Probable reserve | 164.60 | 61.09 | 10.38 | 5.88 | ||||
Total (average) reserves | 234.95 | 61.34 | 10.54 | 5.82 |
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Mine | Reserves (1)(2) | Al2O3 | S1O2 | Ratio of |
Jiaozuo mine | 0.24 | 61.50 | 12.51 | 4.92 |
Pingdingshan mine | 2.92 | 63.06 | 13.19 | 4.78 |
Yangquan mine | 1.01 | 58.35 | 13.95 | 4.18 |
Nanchuan mine | 14.19 | 58.53 | 15.50 | 3.77 |
Huaxing Mine | 3.53 | 62.12 | 8.87 | 7.00 |
Total (average) reserves | 252.83 | 59.79 | 9.74 | 6.14 |
By reserve type | ||||
Proven reserve | 77.04 | 60.67 | 10.29 | 5.90 |
Probable reserve | 175.78 | 59.41 | 9.49 | 6.26 |
Total (average) reserves | 252.83 | 59.79 | 9.74 | 6.14 |
(1) | Our reserves take into consideration mining dilution and loss factors, which generally vary from 5% to 10% and are based on the planned mining method and selected drill data for each site. |
(2) | Our metallurgical recovery factors are calculated in accordance with the relevant PRC mining standards and vary from mine to mine. |
(3) | Refers to the ratio of average grade of Al2O3 to the average grade of SiO2 of the reserves. |
(4) | Including both Guizhou No. 1 mine and Guizhou No. 2 mine. |
We have been in compliance with the National Mining Safety Law and related rules and regulations in China. We closely supervise and routinely inspect mining conditions with continual implementation of safety measures and procedures at our own bauxite mines and safety training for our mining personnel. In 2018,2019, we extracted approximately 17.314.4 million tonnes of bauxite from our domestic mines and did not experience any mining operation related accidents that involved serious work injuries or death.
Other Suppliers.In addition to our mines, we also source bauxite from other suppliers. The majority of other domestic suppliers are small independent mines. Small independent mines are not affiliated with us and generally have annual bauxite production capacities not exceeding 200,000 tonnes. These mines have been an important source of bauxite for our operations. We purchase bauxite directly from small independent mines or through local distributors that procure bauxite from these mines. In addition, we also secure a portion of bauxite overseas. Bauxite secured from other suppliers accounted for 56.4%62.4% of our total bauxite supply in 2018.2019.
Bauxite Procurement. The corporate management department at our headquarters is responsible for the oversight and coordination of our supply of bauxite in general. The marketing and procurement department is responsible for management and coordination of procurement of imported bauxite. To determine how our bauxite requirement will be allocated among our principal sources each year, we first estimate our total bauxite needs for the year. Based on market conditions, production costs and other factors, we determine the amount of bauxite that we wish to source from our mines, and the remaining requirements from other suppliers.
Alumina-to-Silica Ratio.The production method for alumina refining is determined by the mineral composition of the bauxite, in particular, its alumina-to-silica ratio. Most of the bauxite reserves in China are diasporic with low alumina-to-silica ratios. Based on our current technology and economic considerations, an efficient application of the Bayer process requires bauxite with an alumina-to-silica ratio of 5:1 or higher, while the Bayer-sintering process can refine bauxite with an alumina-to-silica ratio as low as 4:1. In 2018,2019, the average alumina-to-silica ratio of the proven and probable reserves of our mines ranges from approximately 3.93:3.77:1 to 11.23:10.72:1.
Prices.There is neither governmental regulation on bauxite prices nor an official trading market for bauxite in China. We negotiate bauxite prices with our suppliers based on ore quality, mining costs, market conditions, transportation costs and various governmental taxes or levies, including a resource tax imposed by local governments. Our total bauxite cost is currently influenced by the following factors:
● | the cost of our mining operations; |
● | the market conditions relating to purchases from small independent mines; and |
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● | the market conditions relating to purchases from overseas. |
The average purchase price of bauxite per tonne from our other suppliers in 2016, 2017, 2018 and 20182019 was approximately RMB328, RMB369, RMB413 and RMB413RMB430 respectively. The average cost of bauxite per tonne from our mines in 2016, 2017, 2018 and 20182019 was approximately RMB219.0, RMB226.2RMB226, RMB246 and RMB245.5,RMB242, respectively.
We purchase a substantial amount of bauxite to satisfy our alumina production needs. Additionally, to fully utilize the bauxite from our mines, we refine all bauxite that meets the minimum technical requirements for our production of alumina. We also purchase higher grade ore from other suppliers and blend the ore of various grades to meet the technical requirements for our alumina production. This practice allows for flexibility and the inclusion of lower grade bauxite to optimize the use of bauxite deposits available to us. We do not use our historical average purchase prices or any other historical index to estimate our bauxite reserves.
The following table sets forth our capital expenditures for our bauxite mines for the periods indicated:
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
2016 | 2017 | 2018 | 2017 | 2018 | 2019 | |||||||||||||||||||
(RMB in thousands) | (RMB in thousands) | |||||||||||||||||||||||
Capital Expenditures | ||||||||||||||||||||||||
Infrastructure construction | 478,024.6 | 405,920.0 | 368,357.4 | 405,920.0 | 368,357.4 | 1,314,802.9 | (1) | |||||||||||||||||
Facility upgrade | 35,222.9 | 24,016.9 | 74,632.7 | 24,016.9 | 74,632.7 | 6,079.8 | ||||||||||||||||||
Total | 513,247.5 | 429,936.9 | 442,990.1 | 429,936.9 | 442,990.1 | 1,320,882.7 |
(1) | The significant increase in capital expenditures on infrastructure construction in 2019 was primarily attributable to the construction of the Boffa Project. See “– A. History and Development of the Company – Boffa Project” for more details. |
Primary Aluminum
An average of approximately 1.9121.91 tonnes of alumina and 13,40813,350 kWh of electricity was required to produce one tonne of primary aluminum ingots in 2018.2019.
Alumina and electricity, the two principal components of costs in the smelting process, accounted for approximately 43% and 33%34%, respectively, of our unit primary aluminum production costs in 2018.2019. Apart from alumina and electricity, we also require carbon anodes, carbon cathodes, fluoride salt and cryolite for our smelting operations.
Alumina is the main raw material used in the production of primary aluminum. Our primary aluminum plants that do not have integrated alumina refining operations onsite obtain alumina internally from our alumina refineries located elsewhere or externally on the market.
Supplemental Materials, Electricity and Fuel
The marketing and procurement department at our headquarters coordinates and manages our supply chain for all our major raw materials in conjunction with the procurement center at each production facility, which manages the logistics and inventory of raw materials locally. We are able to purchase diesel, the main fuel used by our mining and manufacturing equipment, from the public markets, and we source our water from local rivers, lakes or underground sources.
Alumina
Electricity, coal, alkali (caustic soda or soda ash) and natural gas are the principal materials and energy used in our alumina production. Electricity is one of the principal cost components in our refining process. We generate electricity at a number of alumina refineries and purchase our remaining electric power requirements from regional power grids at government-mandated rates or directly from power generation enterprises. Most of our power supply agreements have a term of one year and are renewed by mutual agreement. Power prices in China can vary, sometimes substantially, from one region to another, based on demand and power production costs in the region. Power costs for our various alumina refineries vary accordingly.
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Large quantities of coal are used as a reducing agent and fuel to produce steam and gas in the alumina refining process. As of December 31, 2018,2019, we held minority interests in a number of coal mining enterprises, including Shanxi Jiexiu, Qinghai Energy, Xuehugou Coal Industry Co., Ltd., Huasheng Wanjie Coal Co., Ltd., Dongdong Coal, Chalco Liupanshui, Huozhou Coal Group Xingshengyuan Coal Co., Ltd., and Guizhou Yuneng. We hold 70% of the equity interest in Gansu Huayang, which holds miningexploration rights for coal depositscertain portion of Luochuan mine in the Luochuan mining area, Gansu Province. We have also acquired 70.82% of the equity interest in the Ningxia Energy, which holds mining rights for coal deposits in Ningxia Autonomous Region.
Guizhou Yuneng, an associate company in which we hold 25% of the equity interest, has been under development, and in September 2018, portiondevelopment. In 2019, one of the coal mines wereunder its construction was put into production.production, and another coal mine under its construction is expected to be put into operation in May 2020. The productionoperation of Huozhou Coal Group Xingshengyuan Coal Co., Ltd. and onehas been suspended for technological upgrade. Chalco Liupanshui filed bankruptcy in 2019 as a result of the mines ownedsupply-side structural reform carried out by Chalco Liupanshui is currently suspended due to production technology renovation.the PRC government in the coal industry and the bankruptcy has been accepted by the court. The rest of the coal mining enterprises in which we directly or indirectly have minority equity interests are currently in the extraction or trial production stage. See “- D. Property, Plants and Equipment” for details of coal mines that we operate. By investing in coal mining enterprises and acquiring mining rights for coal deposits, we plan to partially offset our future energy costs, and secure a portion of the coal we consume in our operations.costs.
Alkali is used as a supplemental material in alumina refining. The Bayer-sintering process and the Bayer-sintering combined process require soda ash while caustic soda is used in the Bayer process. Our alumina refineries use natural gas and coal gas as fuel to refine alumina. There is no governmental regulation of the prices of coal, alkali or fuel. We purchase these raw materials from external suppliers under negotiated supply contracts, which we believe are competitively priced. We have not experienced difficulty in obtaining these materials in sufficient quantity and at acceptable prices.
Primary Aluminum
Electricity, carbon anodes and cathodes are the principal materials and energy used in our smelting process. Smelting primary aluminum requires a substantial and continuous supply of electricity. The availability and price of electricity are key factors in our primary aluminum production. See “Item 5. Operating and Financial Review and Prospects - A. Operating Results - Overview - Factors Affecting Our Results of Operations - Manufacturing Costs.”
We generate electricity at four of our smelters to supply a portion of the electricity consumed by these smelters. We purchase our remaining electric power requirements directly from power generation enterprises. As of December 31, 2018, ten2019, nine of our smelters had direct purchase arrangement with power generation enterprises. Direct purchase transactions are normally organized by the local government and the direct purchase agreements are entered into annually. Because power prices in China vary from one region to another, power costs for our various smelters could vary substantially. The average electricity cost (including tax) of our smelters was approximately RMB0.34/RMB0.32/kWh in 2018,2019, which decreased by 2%4% compared to 2017,2018, primarily due to the increasedecrease in volume ofoutsourced electricity generated byprice resulting from our ownnegotiation with electric power plants and its proportion in the total volumeadjustments of our production capacity of primary aluminum, including halting the primary aluminum production by Shandong Huayu and Shanxi Huasheng, which smelters used to incur relatively high electricity that we consumed.costs.
Carbon anodes and cathodes are key raw materials in the smelting process. We are generally able to manufacture carbon anodes necessary for the operations of our smelters. In addition, our Qinghai branch possesses production capacity of carbon cathodes and is able to manufacture carbon cathodes products.
Sales and Marketing
We coordinate substantially all of our sales and marketing activities for our self-produced alumina products and some of our sales and marketing activities for our self-produced primary aluminum products through Chalco Trading.Trading Group. Our subsidiaries and branches sell some of our self-produced primary aluminum products directly to external customers. Our alumina refineries sell our self-produced chemical alumina products directly to external customers or indirectly through Chalco Trading Group for subsequent external trading. For all of our self-produced products that are sold either through Chalco Trading Group for subsequent external sale or directly to external customers, our subsidiaries and branches play an important role in providing after-sale services and strengthening our presence in the marketplace. Since late 2009, we also have been engaged substantially in the trading of non-ferrous metal products including alumina, primary aluminum, copper, zinc and lead as well as coal products that we source from third-party suppliers through Chalco Trading Group, or previously Chalco Trading.
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Alumina
We sell our self-produced alumina to external customers primarily through Chalco Trading Group, giving priority to customers with whom we have long-standing relationships and who have established a strong credit history, after reserving sufficient alumina for our forecasted primary aluminum production. In 2018,2019, we supplied approximately 6.066.57 million tonnes of alumina produced at our alumina refineries to our smelters, which represented approximately 45%48% of our total alumina production, and sold the remainder to our customers. In addition, we also procure and sell outsourced alumina under long-term agreements or on the spot market through Chalco Trading.Trading Group. We sold approximately 1.032.26 million tonnes of outsourced alumina in 2018.2019.
The sales prices of alumina that our alumina refineries sell internally to Chalco Trading Group are determined based on our budgeted sale prices, spot market prices and the prices of primary aluminum on SHFE. Chalco Trading Group coordinates the external negotiation and execution of sales contracts of our alumina products. Chalco Trading Group sells our self-produced alumina and alumina sourced from third-party suppliers to customers throughout China. Most of our major customers in the past three years have been domestic smelters. We primarily sourced alumina from third-party suppliers on the spot market, and we are normally required to pay the full price of the outsourced alumina before each delivery.
Chalco Trading Group sells our self-produced alumina and outsourced alumina under spot sales agreements and long-term sales agreements with terms ranging from one year to three years. Our long-term sales agreement for alumina normally sets forth the quantity of alumina to be sold by us in each month and each year, the price determination mechanism, payment method, place of delivery and delivery method. Places of delivery under our sales agreements are arranged to be where we could efficiently manage the transportation of alumina and help reduce logistics cost. Our customers are normally required to pay for their procurement before each delivery. As a result, the spot price of alumina and fluctuations of primary aluminum prices on the SHFE affect the alumina prices at which we sell.
Chalco Trading Group sets the price for the external sales of alumina products after taking into account the following factors:
● | international and domestic supply-demand situation; |
● | CIF Chinese ports prices for alumina imports into China and other relevant import expenses; |
● | international and domestic alumina transportation costs; |
● | effects of the PRC government’s policies on raw materials required by our alumina refineries; and |
● | our short-term and mid-term projections for alumina prices. |
Primary Aluminum
We sell all of our self-produced and outsourced primary aluminum to domestic customers. We expect China to remain our key market for primary aluminum for the foreseeable future. Customers of our primary aluminum products principally consist of aluminum fabricators and distributors that resell our primary aluminum products to aluminum fabricators or other purchasers.
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To improve the efficiency of our distribution, we divide our China market into the following regions: southern China (including Guangdong and Fujian Provinces); eastern China (including Jiangsu and Zhejiang Provinces and Shanghai Municipality); southwestern China (including Sichuan Province and Chongqing Municipality); the Beijing-Tianjin-Tanggu area; and central China. In general, we satisfy each purchase order with products from our nearest smelter to minimize transportation costs.
Our primary aluminum smelting subsidiaries and branches sell a portion of our primary aluminum output directly to external customers. Each of our smelters is normally responsible for the sale of products to the customers from neighboring markets, negotiating the pricing and delivery terms based on market conditions.
Our primary aluminum smelting subsidiaries and branches also sell a portion of our primary aluminum output internally to Chalco Trading Group at prices based on the spot prices of primary aluminum on Yangtze or Nanchu. We establish pricing guidelines for Chalco Trading Group to conduct external domestic sales of our self-produced primary aluminum products, taking into account four main factors: the primary aluminum spot prices and futures price on the SHFE; spot prices in the regions of eastern China and southern China; our production costs and expected profit margins; and supply and demand. Chalco Trading Group then coordinates the external sales of primary aluminum. Chalco Trading Group sells our self-produced primary aluminum products to external customers through the following three channels:
● | Contract sales. Most of our primary aluminum sales are made pursuant to contracts entered into directly with our long-standing customers. The terms for our sales contracts for primary aluminum are typically one year. We price our primary aluminum products based on the SHFE prices and spot market prices for primary aluminum. |
● | Sales on the SHFE. As part of our effort to manage market risk, we sell a portion of our primary aluminum products on the SHFE through futures contracts with terms ranging from one month to twelve months to hedge against declines in primary aluminum prices. |
● | Sales on the spot market. We also sell our primary aluminum products on the spot market at prices with reference to various factors, such as market spot prices and transportation costs. |
In addition, we also procure and sell outsourced primary aluminum on the spot market or through short-term futures and options transactions. We determine our sales prices of the outsourced primary aluminum through negotiations with our customers, taking into consideration factors including our procurement prices and the prevailing market conditions. We sold approximately 1.741.03 million tonnes of outsourced primary aluminum in 2018.2019.
Chemical alumina products and Gallium
Chemical alumina products and gallium are derived from our alumina production. We adjust our production of these products based on market demand. Our alumina refineries sell our chemical alumina products directly to external customers or indirectly to external customers through Chalco Trading Group for subsequent external trading.
We sell most of our chemical alumina products in China. Prices for our chemical alumina products are determined through negotiations with our customers, taking into consideration the market conditions.
In addition, in the process of refining bauxite into alumina, we used to produce gallium as a by-product. We adjusted our production of gallium based on market demand and sold all of gallium in China. Prices for our chemical alumina products and gallium arewere determined through negotiations with our customers, taking into consideration the market conditions. Our total sales of gallium in 2016, 2017, 2018 and 20182019 amounted to approximately RMB108 million, RMB74 million, and RMB147 million and RMB97 million, respectively. In August 2019, we made a capital contribution with all of our gallium assets to China Rare Metals and Rare Earths Company Ltd. and are not engaged in gallium production currently. See “- A. History and Development of the Company - Capital Contribution to China Rare Metals and Rare Earths Company Ltd. with Gallium Assets” for details.
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Coal
Ningxia Energy sells a portion of its self-produced coal directly to external customers through short-term contracts at prices determined through negotiations with our customers, taking into consideration factors including our procurement prices and prevailing market conditions. Ningxia Energy consumes the rest of its self-produced coal at its own electric power plant.
In addition, we also procure and sell outsourced coal under long-term agreements or on the spot market through Chalco Trading.Trading Group. We sold approximately 5.256.60 million tonnes of outsourced coal in 2018.2019.
Trading of Outsourced Non-ferrous Metal Products and Other Materials
Since late 2009, we have been actively engaged in the trading of alumina and primary aluminum sourced from third-party suppliers. Please see “- Alumina” and “- Primary Aluminum” for more details. Through Chalco Trading Group, we also sell other non-ferrous metal products such as copper, zinc and lead as well as coal products that we procure from our third-party suppliers to external customers on the spot market or under long-term sales agreements. Please see “- Coal.” In 2018,2019, we sold approximately 0.441.42 million tonnes of outsourced copper, zinc and lead. In addition, we also sell outsourced raw and ancillary materials such as iron ore, charred coal and cathode copper in bulk to customers such as steel manufacturers and copper processing companies on the spot market.
Chalco Trading Group has a team with trading expertise to conduct research on the markets of non-ferrous metal products and other materials. From time to time, we may enter into futures and options transactions to hedge against price fluctuations in the non-ferrous metal product market.
Delivery
We rely on rail shipping and trucks for the delivery of products within China.
Our alumina is transported by rail or trucks, and transportation costs are generally borne by our customers and excluded from our sales prices. For long-distance deliveries, we maintain spur lines connecting our plants to the national railway routes.
Most of our primary aluminum products are transported by rail, and our coal products are transported both by trucks and by rail.
Rail shipping on the PRC national railway system is subject to government mandated pricing.
Principal Facilities
Our principal facilities include 22 principal production plants and our Zhengzhou Institute. Set forth below is a description of our principal production plants.
Guangxi Branch
Our Guangxi branch commenced operations in 1994 and is located in Guangxi Zhuang Autonomous Region in southwestern China, an area rich in bauxite reserves. Our Guangxi branch obtains bauxite delivered via highway from our Pingguo mine, one of our wholly-owned mines, located less than 17 kilometers from our Guangxi branch.
Our Pingguo mine contains large, easily exploitable bauxite reserves with high alumina-to-silica ratios. Our Guangxi branch is our only principal refinery that exclusively uses the Bayer process. With technology and production equipment imported from Europe, the Guangxi refinery features a high level of automation and energy efficiency. Since its inception, we have continually increased the designed production capacity at this branch by overcoming production bottlenecks and investing in capacity expansions. Guangxi branch had an annual alumina production capacity of approximately 2,210,000 tonnes as of December 31, 2018.2019. In 2018,2019, our Guangxi branch produced approximately 2,486,1802,459,840 tonnes of alumina, along with approximately 96,520128,030 tonnes of chemical alumina products.
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Guizhou Branch
Our Guizhou branch commenced its smelting operations in 1966 and was subsequently expanded to include alumina refining operations in 1978. Our Guizhou branch usesused 160Ka and 230Ka pre-bake reduction pot-lines in its primary aluminum production. The smelter in our Guizhou branch has undergone technological innovations and overhauls since its inception. Since November 2017, we have been engaged in the gradual closing down of the 160Ka pre-bake reduction pot-lines and, subsequently, the closing down of the 230Ka pre-bake reduction pot-lines. As of January 2018, the production in Guizhou branch had been fully shut down. In 2018, our2019, we disposed of the primary aluminum production facilities in Guizhou branch. Guizhou branch produced approximately 35,830 tonnes ofdid not have any annual primary aluminum products.production capacity as of December 31, 2019 and did not produce any primary aluminum in 2019. It was mainly engaged in bauxite mining in 2019.
Chalco Mining
Chalco Mining was incorporated as one of our subsidiaries in the PRC in 2007 and is currently our wholly owned subsidiary. To optimize the allocation of our resources and further consolidate our operations, we transferred all of the assets and liabilities of our Henan branch to Chalco Mining in August 2017. Henan branch commenced its alumina refining operation in 1966 and primary aluminum smelting operation in 1967 (the latter of which was ceased in 2013) in Henan Province, a province rich in bauxite reserves. It was the first refinery in China to develop the Bayer-sintering combined process. Bauxite is delivered to Chalco Mining via railway and highway from our following mines: Xiaoguan mine, Gongyi mine and Dengfeng mine located in Zhengzhou, Luoyang mine in Luoyang, Mianchi mine in Mianchi, Xuchang mine in Zhengzhou, Sanmenxia mine in Sanmenxia and Jiaozuo mine in Jiaozuo. The alumina production line that we put into operation at Chalco Mining uses the ore-dressing Bayer process, which we developed to refine low alumina-to-silica ratio bauxite. Chalco Mining’s production facilities have been substantially upgraded with equipment imported from Germany and Denmark. The refinery has also benefited from its access to high alumina-to-silica ratio bauxite from certain of our mines and through purchases on the market. Chalco Mining had an annual alumina production capacity of approximately 2,410,000 tonnes as of December 31, 2018.2019. In 2018,2019, Chalco Mining produced approximately 1,747,8601,235,390 tonnes of alumina and 95,30098,850 tonnes of chemical alumina products.
Chalco Shandong
Chalco Shandong was incorporated as one of our subsidiaries in the PRC in 2015 and is currently our wholly owned subsidiary. The predecessor of Chalco Shandong was our Shandong branch, which commenced operations in 1954. Chalco Shandong has the capacity to produce alumina and chemical alumina products. Bauxite is delivered to Chalco Shandong via railway and highway from the Yangquan mine in Yangquan, Shanxi Province. Its alumina refinery was China’s first production facility for alumina. It produces its alumina through the Bayer-sintering process and the Bayer process. In 2018, throughThrough technology renovation, Chalco Shandong has the capacity to produce high-quality alumina products used for the production of refined aluminum and high-purity aluminum. Chalco Shandong purchases some bauxite from overseas and the rest from small third-party mines in Henan and Shanxi Provinces. Chalco Shandong had an annual alumina production capacity of approximately 2,270,000 tonnes as of December 31, 2018.2019. It produced approximately 1,714,7001,567,980 tonnes of alumina in 2018.2019.
In addition, Chalco Shandong produces substantial amount of chemical alumina products. In 2018,2019, it produced approximately 2,105,4802,528,170 tonnes of chemical alumina products. It is the largest and most technologically advanced production facility for chemical alumina products in China with the ability to produce a wide variety of chemical alumina products.
Chalco Shandong had engaged in primary aluminum production before we suspended the operations of its primary aluminum production facilities in June 2013. In 2017, the disposal of Chalco Shandong’s primary aluminum production facilities was completed. Chalco Shandong did not have any annual primary aluminum production capacity as of December 31, 20182019 and did not produce any primary aluminum in 2018.2019.
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Qinghai Branch
Located in Qinghai Province, our Qinghai branch is a stand-alone primary aluminum production facility. This branch commenced operations in1987 and is one of the most technologically advanced primary aluminum smelters in China. It operates 180Ka and 210Ka automated pre-bake anode reduction pot-lines that were developed domestically.In addition, our Qinghai branch also possesses production capacity of carbon cathodes and is able to manufacture carbon cathodes products.Our Qinghai branch benefits from relatively low electricity costs in Qinghai Province due to the hydroelectric power stations in the region. The Qinghai branch sources alumina from Shanxi New Material, Chalco Shandong, Chalco Mining and Zhongzhou Aluminum and incurs higher transportation costs for both raw materials and its primary aluminum products than our other branches.
Our Qinghai branch had an annual primary aluminum production capacity of approximately 420,000 tonnes as of December 31, 2018.2019. It produced approximately 403,890408,400 tonnes of primary aluminum in 2018.2019.
Guizhou Huaren
Established in May 2017 and located in Qingzhen, Guizhou Province, Guizhou Huaren is a stand-alone primary aluminum production facility and commenced full operation in September 2018. Guizhou Huaren had an annual primary aluminum production capacity of approximately 400,000 tonnes as of December 31, 2018.2019. It produced approximately 344,600479,500 tonnes of primary aluminum products in 2018.2019.
Shanxi Zhongrun
Established in November 2015 and located in Lvliang, Shanxi Province, Shanxi Zhongrun specializes in producing primary aluminum products. The first batch of electrolytic cells of Shangxi Zhongrun was put into operations in May 2018. Shanxi Zhongrun had an annual primary aluminum production capacity of approximately 432,000 tonnes as of December 31, 2018.2019. It produced approximately 53,470181,200 tonnes of primary aluminum products in 2018.2019.
Zhongzhou Aluminum
Located in Henan Province, Zhongzhou Aluminum is a stand-alone alumina plant, located near abundant bauxite, coal and water supplies. Zhongzhou Aluminum was incorporated as one of our subsidiaries in the PRC in 2015 and is currently our wholly owned subsidiary. The predecessor of Zhongzhou Aluminum was our Zhongzhou branch. Zhongzhou Aluminum commenced operations in 1993 and is equipped with imported and self-developed technology and has undergone various improvements and upgrades, in particular to its Bayer-sintering process and Bayer process. Zhongzhou Aluminum obtains bauxite supplies partly from extractions of our mines, and partly from external suppliers in Henan and Shanxi Provinces and overseas.
Zhongzhou Aluminum had an annual alumina production capacity of approximately 3,050,000 tonnes as of December 31, 2018.2019. Zhongzhou Aluminum produced approximately 1,913,2402,132,760 tonnes of alumina and approximately 637,200777,920 tonnes of chemical alumina products in 2018.2019.
Chongqing Branch
Our Chongqing branch is located in Chongqing. Chongqing branch completed the construction of alumina production facilities in 2010 and its annual alumina production capacity was approximately 800,000 tonnes as of December 31, 2018. Chongqing branch did not produce any alumina or chemical alumina products in 2018.2019. We have suspended production in Chongqing branch since July 2014 due to the relatively significant decrease in the price of alumina as compared with the price of alumina during the construction period, large negative variation of mineral resources and the high costs of natural gas and other energy at the time of suspension. In 2018, we utilizedentered into agreements with a third party to lease the alumina assetsproduction facilities of Chongqing branch through public external leasing.and to cooperate on mine operations, respectively. In 2019, we received RMB115 million for leasing alumina production facilities and RMB3.4 million for cooperation on mine operations, respectively.
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Guizhou Huajin
Established in July 2014 and located in Qingzhen, Guizhou Province, Guizhou Huajin specializes in producing alumina products. Guizhou Huajin had an annual alumina production capacity of approximately 1,600,000 tonnes as of December 31, 2018.2019. Guizhou Huajin produced approximately 1,514,3701,612,880 tonnes of alumina products in 2018.2019.
Shanxi Huaxing
Located in Shanxi Province, Shanxi Huaxing is a stand-alone alumina plant which commenced trial production in October 2013. Shanxi Huaxing obtains bauxite supplies from our own mines delivered primarily via highway and is located near abundant coal and water supplies.
In December 2015, we transferred out 50% of our equity interests in Shanxi Huaxing, a then wholly-owned subsidiary of our Company, through the Shanghai United Assets and Equity Exchange. In December 2018, we acquired the 50% equity interests in Shanxi Huaxing through the Shanghai United Assets and Equity Exchange from Baotou Transportation Investment Group Co., Ltd. Upon completion of the acquisition, Shanxi Huaxing became aour wholly-owned subsidiary of the Group.subsidiary. Please see “- A. History and Development of the Company - Transfer of Equity Interest in Shanxi Huaxing” for more details about the transfer of equity interest.
Shanxi Huaxing had an annual alumina production capacity of approximately 2,000,000 tonnes as of December 31, 2018. 116,5702019. Shanxi Huaxing produced approximately 1,256,340 tonnes of alumina produced by Shanxi Huaxingproducts in 2018 was recorded as our production volume, being the output of alumina of Shanxi Huaxing in December 2018, as Shanxi Huaxing became our wholly-owned subsidiary in December 2018.2019.
Lanzhou Aluminum
Located in Lanzhou city in Gansu Province, Lanzhou Aluminum is a stand-alone primary aluminum plant. In April 2007, we acquired a primary aluminum plant in Lanzhou, which was divided in to two parts in July 2007: our Lanzhou branch and Northwest Aluminum. In January 2019, we turned the Lanzhou branch into our wholly-owned subsidiary, Lanzhou Aluminum, in order to promote its business vitality. Lanzhou Aluminum owns a primary aluminum smelting plant with a designed annual primary aluminum production capacity of approximately 450,000 tonnes as of December 31, 2018.2019. It produced approximately 398,790408,500 tonnes of primary aluminum in 2018.2019.
Shanxi New Material
Shanxi New Material is situated in Shanxi Province. In March 2003, we established the joint venture company, Shanxi Huaze, with Zhangze Electric Power to commence the construction of a primary aluminum production facility. In 2017, we contributed certain assets related to alumina production of our Shanxi branch to Shanxi Huaze. Upon completion of our asset contribution, our shareholding in Shanxi Huaze increased from 60% to 85.98% and Shanxi Huaze was renamed to Shanxi New Material. Shanxi New Material had an annual alumina production capacity of approximately 2,600,000 tonnes as of December 31, 20182019 and produced approximately 2,129,1301,771,020 tonnes of alumina and 73,05094,620 tonnes of chemical alumina products in 2018.2019. Its designed annual production capacity of primary aluminum was approximately 424,000 tonnes as of December 31, 20182019 and it produced approximately 431,360365,800 tonnes of primary aluminum in 2018.2019. Please see “- A. History and Development of the Company - Merger and Reorganization of Shanxi Branch and Shanxi Huaze” for more details about the reorganization.
Shanxi Huasheng
Shanxi Huasheng is situated in Shanxi Province. In December 2005, we entered into a joint venture agreement with Shanxi Guan Lv Company Limited to establish a joint venture company, Shanxi Huasheng. Shanxi Huasheng commenced operations in March 2006 and had a designed annual production capacity for primary aluminum of approximately 190,000 tonnes as of December 31, 2018.2006. We currently hold 51% equity interest in Shanxi Huasheng. In 2018,2019, Shanxi Huasheng produced approximately 225,39060,900 tonnes of primary aluminum. In June 2019, Shanxi Huasheng transferred its primary aluminum capacity quota to Yixin Aluminum and no longer had any annual primary aluminum production capacity as of December 31, 2019. See “- A. History and Development of the Company - Transfer of Primary Aluminum Capacity Quota of Shanxi Huasheng” for details.
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Zunyi Aluminum
Zunyi Aluminum is situated in Guizhou Province. In 2018, we merged Zunyi Alumina into Zunyi Aluminum. Upon the completion of the merger, our shareholding in Zunyi Aluminum increased from 62.1% to 67.445%. After the merger, Zunyi Aluminum had an annual alumina production capacity of approximately 1,000,000 tonnes as of December 31, 20182019 and the aggregate production of Zunyi Aluminum was approximately 1,110,0001,102,340 tonnes of alumina and 3,17016,150 tonnes of chemical alumina products in 2018.2019. Its post-merger designed annual production capacity of primary aluminum was approximately 375,000 tonnes as of December 31, 20182019 and it produced approximately 402,940404,500 tonnes of primary aluminum in 2018.2019. Please see “- A. History and Development of the Company - Merger and Reorganization of Zunyi Alumina and Zunyi Aluminum” for more details about the merger.
Fushun Aluminum
Fushun Aluminum is situated in Liaoning Province, and iswas a stand-alone primary aluminum plant. In March 2006, we entered into a share transfer agreement with Liaoning Fushun Aluminum Plant to acquire 100% of the equity interests in Fushun Aluminum for a consideration of RMB500 million. Fushun Aluminum’s primary business was the production of primary aluminum and carbon products. We stopped production of primary aluminum in Fushun Aluminum in October 2015 due to the relatively significant decrease in the price of primary aluminum and high costs of electricity at the time of suspension.that time. In 2018, we disposed of the primary aluminum production facilities in Fushun Aluminum. Fushun Aluminum did not have any annual primary aluminum production capacity as of December 31, 20182019 and did not produce any primary aluminum in 2018.2019.
Fushun Aluminum had an annual anode carbon production capacity of approximately 180,000530,000 tonnes as of December 31, 20182019 and it produced approximately 117,387169,029 tonnes of baked carbon anodes in 2018.2019.
Shandong Huayu
Shandong Huayu is situated in Shandong Province and is a stand-alone primary aluminum plant. We currently hold 55% equity interest in Shandong Huayu. Shandong Huayu had an annual primary aluminum production capacity of approximately 200,000 tonnes as of December 31, 2018. Shandong Huayu also has supporting facilities and coal-fired generators. In 2018, Shandong Huayu produced approximately 197,280 tonnes of primary aluminum.2019. Since November 2018, we have gradually suspended production of aluminum at Shandong Huayu due to market environment and production restriction for environmental protection. In 2019, we halted its primary aluminum production and before that Shandong Huayu produced approximately 8,500 tonnes of primary aluminum in 2019. Shandong Huayu also has supporting facilities and coal-fired generators. We are considering the plan of transformation, upgrading and development of Shandong Huayu.
Gansu Hualu
Gansu Hualu is situated in Gansu Province, and is a stand-alone primary aluminum plant. In August 2006, we entered into a share transfer agreement with Baiyin Nonferrous Metal (Group) Co., Ltd. (“Baiyin Nonferrous”) and Baiyin Ibis Aluminum Co., Ltd. (“Baiyin Ibis”). Baiyin Nonferrous contributed 127,000 tonnes of primary aluminum smelting and supporting facilities owned by Baiyin Ibis as capital contribution and holds a 49% equity interest in Gansu Hualu. We hold a 51% equity interest in Gansu Hualu. Since November 2015, the production of primary aluminum has been suspended. In 2018,2019, most of the primary aluminum production facilities in Gansu Hualu has been disposed orand the rest is expected to be disposed in the processfirst half of disposal.2020. Gansu Hualu had no annual primary aluminum production capacity as of December 31, 20182019 and did not produce any primary aluminum in 2018.2019.
In addition, Gansu Hualu also possesses production capacity of carbon products. Its designed annual production capacity of anode carbon products was approximately 150,000 tonnes as of December 31, 20182019 and it produced approximately 113,59527,318 tonnes of calcined petroleum cokeanode carbon products in 2018.2019.
Baotou Aluminum
Baotou Aluminum is located in the Inner Mongolia Autonomous Region, and is a stand-alone primary aluminum plant. On December 28, 2007, through A Shares issuance and exchange for Baotou Aluminum shares, we acquired 100% of the equity interest of Baotou Aluminum. Baotou Aluminum is currently our wholly owned subsidiary.In April 2015, Baotou Aluminum and Baotou Transportation Investment Group Co., Ltd. established Inner Mongolia Huayun.Inner Mongolia Huayuncommenced operations in 2017. Togetherwith the primary aluminum production facilities at Inner Mongolia Huayun, Baotou Aluminum had a consolidated annual primary aluminum production capacity of approximately 1,340,000 tonnes as of December 31, 20182019 and a consolidated output of approximately 1,234,2401,315,300 tonnes of primary aluminum in 2018.2019.
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Liancheng Branch
Liancheng branch is located in Gansu Province. In late May 2008, we acquired 100% of the equity interest in Liancheng Longxing Aluminum Company Limited from Chinalco on the China Beijing Equity Exchange and subsequently turned it into our Liancheng branch which specializes in producing primary aluminum. To better transform its management mechanisms, energize its business vitality and improve its market competitiveness,We have implemented flexible production arrangement for certain primary aluminum production facilities in SeptemberLiancheng branch since November 2018 we decided to convert it into our wholly-owned subsidiary. We are in the processas a result of completing such conversion.high electricity costs. Liancheng branch had an annual primary aluminum production capacity of approximately 550,000 tonnes as of December 31, 2018.2019. It produced approximately 438,230155,200 tonnes of primary aluminum in 2018.2019.
Ningxia Energy
Ningxia Energy is an integrated power generation company with coal mines located in Ningxia Autonomous Region. Its principal business includes conventional coal-fire power generation and renewable energy generation. Ningxia Energy was established in June 2003. In January 2013, we acquired an aggregate of 70.82% of the equity interest in Ningxia Energy. Ningxia Energy had a total installed capacity of 4,249.13 MW as of December 31, 2018.2019. It also operates coal mines located in the Ningxia Autonomous Region. Please see “- D. Property, Plants and Equipment - Mines - Coal Mines.” Its principal business includes conventional coal-fire power generation and renewable energy generation. In 2018,2019, Ningxia Energy produced approximately 10.8 million tonnes of coal and approximately 15.915.8 billion kWh of electricity.
Zhengzhou Institute
The Zhengzhou Institute, located in Zhengzhou, Henan Province, was incorporated as our subsidiaries in 2015. Its predecessor was established in August 1965 and has served as the center for our research and development efforts. The Zhengzhou Institute specializes in the research and development of technologies for primary aluminum smelting, alumina refining and the development of new products of chemical alumina. Zhengzhou Institute is the only professional research institute in China dedicated to light metalsthe research and development of aluminum smelting technologies and has played a key role in bringing about technological innovations in China’s aluminum industry. The Zhengzhou Institute was approved by the Ministry of Science and Technology of the PRC in 2003 to establish the National Research Center of Aluminum Refinery Technologies and Engineering. As of December 31, 2018,2019, the Zhengzhou Institute had a limited production capacity for chemical alumina products, which it uses in connection with its research and development efforts.
Xinghua Technology
We acquired a 66% equity interest in Xinghua Technology in December 2016. Located at Shanxi Province, Xinghua Technology is an alumina plant with an annual alumina production capacity of approximately 900,000 tonnes as of December 31, 2018.2019. It produced approximately 778,300664,750 tonnes of alumina and approximately 189,43088,000 tonnes of chemical alumina in 2018.2019.
Competition
Competition from Domestic Competitors
Alumina
WeIn 2019, we supplied approximately 48% of our total production of alumina to our own smelters and sold substantially all of ourthe remaining self-produced alumina to our domestic customers in 2018.customers. Our competitors mainly include other domestic and international alumina producers that conduct sales in China. In 2018,2019, our alumina production (with chemical alumina products included) represented approximately 21.2%21.9% of total domestic production in China.
The Group is
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We are a leading enterprise in non-ferrous metal industry in China. As of December 31, 2018,2019, 18 alumina producers in China (including Chalco) each had annual production capacity of 500,000 tonnes or above, which collectively represented approximately 97.59%92.65% of the total alumina production capacity in China. As of the same date, among these 18 alumina producers, 1614 alumina producers (including Chalco) each had annual production capacity of one million tonnes or above, which collectively represented approximately 95.84%89.45% of the total alumina production capacity in China. In order to improve the efficiency and competitiveness of the Chinese alumina industry as well as to protect the environment, MIIT published “Standardthe Standard Conditions for Aluminum Industry” (the “Standard Conditions”)Industry in July 2013 and issued a new version in March 2020, which established a high entry barrierprovides stringent standards for new alumina producers in China and imposed stringent requirement forthe existing alumina companies.
enterprises. Although we face competition from other domestic and international refineries, we have several advantages over such competitors, including:
● | we have access to a substantial and stable supply of bauxite; |
● | we are experienced in alumina production and our production technologies are specifically adapted to the particular chemical composition of bauxite found in China; |
● | we have strong capabilities in technology research and hold certain proprietary technologies and patents; and |
● | we have a substantial workforce that has extensive experience in production and management. |
Primary Aluminum
We derived all of our primary aluminum revenues from domestic sales in 2018.2019. Our competitors include other domestic and international primary aluminum producers that conduct sales in China. In 2018,2019, our primary aluminum production represented approximately 11.4%10.5% of total domestic production in China.
We are a leading enterprise in non-ferrous metal industry in China. As of December 31, 2018, 202019, 18 primary aluminum producers in China (including Chalco) each had annual production capacity of 500,000 tonnes or above, which collectively represented approximately 88.57%84.95% of the total primary aluminum production capacity in China. As of the same date, among these 2018 primary aluminum producers, 1112 primary aluminum producers (including Chalco) each had annual production capacity of one million tonnes or above, which collectively represented approximately 72.73%73.25% of the total primary aluminum production capacity in China. The PRC government encourages consolidation in the Chinese primary aluminum industry to create larger, more efficient producers that are better positioned to implement measures to reduce emissions. Moreover, according to the current Standard Conditions for Aluminum Industry and other administrative regulations, new primary aluminum projects for expanding production capacitysmelting enterprises must be approved byensure the relevant administrative departmentsavailability of resources, energy and must have stable supply of alumina.water resources, and are encouraged to merge with hydropower, coal power and other power enterprises through reorganization. In addition, pursuant to relevant PRC regulations, the construction of new primary aluminum projects and the reconstruction or expansion of existing primary aluminum projects would be approved only if such projects would introduce new primary aluminum production capacity in an amount equal to or smaller than the amount of existing production capacity to be replaced.
Although we face competition from other domestic and international smelters, we have several advantages over such competitors, including:
● | Scale of production. With eleven primary aluminum smelters, we can achieve significant economies of scale. In addition, our scale of production enables us to achieve high production volumes to fill large customer orders and maintain a large customer base. Through our national distribution network, we are able to make timely deliveries to customers from our local warehouses. |
● | Technology. We believe we have a more sophisticated technological innovation system and |
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● | Vertical integration. As a leading integrated alumina and primary aluminum producer in China, we are able to supply alumina internally to our primary aluminum plants. As a result, we save on transportation, warehousing and related costs. In addition, because we operate our own alumina refineries, we are able to assure a stable supply of alumina for our primary aluminum smelting operations. |
● | Quality. We have maintained and will continue to improve on the high quality standards for our primary aluminum which has satisfied national and industrial standards and customers’ need. |
The primary aluminum produced by most of our smelters satisfies the quality standards of the LME.
Competition from International Competitors
The tariff rate for alumina and primary aluminum imports was eliminated on January 1, 2008 and August 1, 2007, respectively. In 2018,2019, China had net exportimport of approximately 0.951.37 million tonnes of alumina (with chemical alumina products included), compared to a net importexport of 2.810.95 million tonnes in 2017,2018, primarily due to supply shortagethe recovery of production of a major player in international marketthe overseas alumina market. China had a net export of approximately 811 tonnes of primary aluminum in 2018. China had2019, compared to a net import of approximately 69,600 tonnes of primary aluminum in 2018, which represented a 31.7% decrease from 2017. The decrease in net import of primary aluminum in 2018 was primarily due to slowed growth of aluminum consumption in China.2018.
We expect to continue to face competition from international suppliers of alumina and primary aluminum which are large international companies. Some competitors may also consider establishing joint venture companies with local producers in China to gain access to the resources in China and to lower transportation costs. However, we expect we will continue to benefit from certain PRC governmental policies that promote large domestic aluminum enterprises.
Research and Development
Our research and development efforts over the years have facilitated the expansion of our production capacity and reduced our unit costs. We have successfully commercialized our previous research and development results in various technologies. In 2018,2019, we completed 3582 technological projects, including nine69 research and development projects undertaken independently by our branches or subsidiaries, 21ten special key science and technology projects and fivethree science and technology application projects. In addition, we filed a total of 122248 patent applications in 2018.2019.
As of December 31, 2018,2019, we owned 1,2671,300 patents, which were primarily related to technologies and processes, equipment and new products. Once registered,granted, a patent in China for an invention is valid for 20 years and for a utility model or a design 10 years from the date of the patent application. As of December 31, 2018,2019, we owned 25 trademarks, each of which had a term of 10 years.
We do not regard any single patent, license, or trademark to be material to our sales and operations as a whole. We are not involved in any material intellectual property disputes.
Environmental Protection
Our operations are subject to PRC national and local environmental laws and regulations, including laws and regulations governing waste discharge, waste generation, treatment and disposal of hazardous materials, land reclamation, pollutant emissions and environmental issues associated with mining.
The pollutants discharged from our alumina refining process include red mud, waste water and gas emissions and particulates. Our primary aluminum production process generates fluorides, pitch fume and particulates. It is illegal to release these pollutants untreated. The discharge of these pollutants after treatment must comply with national and local discharge limits.
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Each of our alumina refineries, primary aluminum smelters and other production plants has its own waste treatment facilities onsite or has developed other methods to dispose of industrial waste in compliance with applicable environmental laws and regulations. We were granted ISO14001 accreditations issued by China Quality Certification Center and the International Certification Network in 2004. In 2018,2019, we passed the annual review and these accreditations were renewed.
We have increased our energy-efficiency by implementing new production techniques and technologies, upgrading our production facilities, optimizing our production process and enhancing our logistics and operations management. We have incorporated clean technology and processes into our operations with a view to promoting the concept of “zero emission”discharge” plants. In 2018,2019, the emissiondischarge of all industrial waste water in the course of our alumina and primary aluminum production met the standards under relevant regulations.
In addition, we have focused on sustainable development of mine sites and achieved significant progress in mine reclamation. We reclaimed 12,000 mu of land throughout the year of 2019 and had reclaimed an aggregate amount of 78,500 mu of land as of December 31, 2019, representing a cumulative reclamation rate of over 86%.
Our total expenditures for maintaining compliance with environmental laws and regulations were RMB657.5 million, RMB691.9 million, and RMB777.6 million and RMB914.4 million for 2016, 2017, 2018 and 2018,2019, respectively. In 2018,2019, we did not have any major environmental pollution incidents.
Insurance
We maintain insurance coverage for our fixed assets such as plant, machinery, equipment, office facilities and transportation vehicles against accidents or natural disasters such as typhoons, hurricanes, floods, landslides and lightning strikes. However, there are certain types of losses, such as losses from war, acts of terrorism and nuclear radiation, for which we cannot obtain insurance at a reasonable cost or at all.
We are covered under the work-related injury insurance required by the relevant local government labor departments, and we have procured additional business accidental insurance for our employees. More extensive insurance is either unavailable in China or would impose a cost on our operations that would reduce our competitiveness.
Our insurance premiums were RMB35.8 million, RMB44.1 million, and RMB49.6 million and RMB42.9 million in 2016, 2017, 2018 and 2018,2019, respectively.
Seasonality
Our business in general is not subject to seasonality. Separately, our bauxite output in Boffa bauxite mine may be subject to seasonal fluctuations due to the rainy season in Guinea.
Cyber Security
With respect to our internal internet policies on cyber-security, we have established an information safety management system and issued internal regulations on cyber-security, internal hardware and data safety systems and we are gradually implementing measures relating to the office environment information safety management, information system access control, protection from any malicious software, and internal review and audit of information safety risks, in order to prevent loss of information due to cyber-security incidents, network outages or hardware incidents. In 2018,2019, we did not experience any material cyber-security incidents or related losses.
Regulatory Overview
Producers of alumina and primary aluminum are subject to national industrial policies and relevant laws and regulations in areas of environmental protection, import and export, land use, foreign investment regulation and taxation. We are also subject to regulations relating to activities such as mining.
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We are principally subject to governmental supervision and regulation by four agencies of the PRC government:
● | the NDRC, which sets and implements the major policies concerning China’s economic and social development, approves investments exceeding certain amounts, coordinates and improves the reform of the economic system; |
● | the Ministry of Natural Resources of China, which has the authority to grant land use rights and mining right permits; |
● | the MIIT, which formulates industrial policies and investment guidelines for all industries including the aluminum industry; and |
● | the CSRC, the securities regulatory commission of China. |
The following is a brief summary of the principal laws, regulations, policies and administrative directives to which we are subject.
Requirements for Capital Investments
Anycapital markets financing activities by an enterprise or company incorporated in the PRC such as those to finance capital projects, are subject to approval by the CSRC and/or other relevant authorities in China, regardless of whether the funds are raised in China or on the international capital markets. An issuer incorporated in the PRC must obtain prior approval from the CSRC for issuance of equity securities or equity-linked securities. Offering of corporate bonds in the PRC is also subject to supervision of the CSRC. Offering of bonds by a PRC-incorporated company outside the PRC shall be filed with NDRC. For all overseas financing activities by an enterprise or company incorporated in the PRC, the issuer must register with and obtain prior approval from the administrative authorities of foreign exchange. Foreign investmentinvestment in the exploring and mining of alumina and primary aluminum is permitted by the PRC government.
Standard Conditions for Aluminum Industry
The Standard Conditions for Aluminum Industry was issued by MIIT in July 18, 2013 and a new version was issued on March 3, 2020 to replace the 2013 version. The new Standard Conditions for Aluminum Industry only applies to existing bauxite mining, alumina and primary aluminum enterprises and indicates that such standards do not constitute administrative approval or mandatory requirement. It provides that bauxite mining, alumina and primary aluminum projectsproduction must comply with the state and local industry policies and overall plans on the mining resources and development of aluminum industry, land use, urban planningas well as laws, regulations and designation of functional zones.policies related to the environmental protection, energy conservation, mining and production safety. According to the new Standard Conditions for Aluminum Industry, aluminum smelting enterprises must be appropriately distributed acrossensure the relevant regions according to certain conditions including availability of resources, energy and environment. Pursuantwater resources, and are encouraged to merge with hydropower, coal power and other power enterprises through reorganization. It further encourages that alumina enterprises use intelligent systems and equipment in its operation to achieve energy-conserving and environment-protective purpose. The new Standard Conditions for Aluminum Industry further set out guidelines and standards for enterprises in aluminum industry regarding product quality, facilities, energy consumption, resources consumption, environmental protection, production safety and occupational deceases prevention.
Under the Standard Conditions aluminum smelting enterprises locatedfor Aluminum Industry, the MIIT shall, in regions lacking competitive production elements should be gradually moved to more competitive region,accordance with the applicable regulatory standards, review the applicants and disclose the amountnames of newly increased production capacity shall be strictly controlled to prevent excessive capacity caused by over-investing. The Standard Conditions further sets standards for production scale and major external conditions for newly established bauxite mining, alumina, electrolytic aluminum and recycled aluminum projects.applicants that meet the regulatory conditions. The MIIT promulgated on April 4, 2014, January 4, 2015 and February 14, 2016, respectively, the first, the second and the third lists of enterprises that meet the Standard Conditions for the aluminum industry.Aluminum Industry. Most of our production branches and subsidiaries have met the Standard Conditions for Aluminum Industry of 2013 version and are included on these lists. According to the current Standard Conditions for Aluminum Industry, enterprises that would like to be named in the list under this new Standard Conditions for Aluminum Industry need to resubmit application for the MIIT’s review.
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Pricing
The PRC government does not impose any limitations with respect to the pricing of alumina, primary aluminum and related products. Thus, alumina and primary aluminum producers are free to set prices for their products. All the raw materials, supplemental materials and other supplies that we purchase are based on market prices. Freight transportation on the national railway system is subject to government mandated pricing.
Electricity Supply and Price
The State Electricity Regulatory Commission of China is responsible for the supervision and administration of the power industry in China. The NDRC and local governments regulate electricity pricing.
The Electric Power Law of China and related rules and regulations govern construction, generation, supply and consumption of electric power. Currently, China’s state-owned power companies, through their respective local subsidiaries, operate all the regional power grids in China from which we obtain a part of our electricity requirements. In October 2007, PRC government issued “Notice on Further Solutions of the Difference in Electricity Rates,” according to which the preferential electricity prices originally enjoyed by Chinese primary aluminum enterprises have been gradually abolished. In December 2007, PRC government issued “Notice of Eliminating Preferential Electricity Rate for High Energy Consuming Enterprises and Related Matters,” which further eliminated the preferential electricity price arrangement enjoyed by Chinese primary aluminum enterprises. In December 2013, the NDRC and MIIT issued the “Circular on the Policies for Tiered Pricing of Electricity Used by Electrolytic Aluminum Enterprises” (the “Electricity Tiered Pricing Circular”), which became effective on January 1, 2014, to impose tiers of electricity prices on primary aluminum smelters. Specifically, if the alternating current consumed by any smelter is more than 13,700 kWh per tonne of molten aluminum but less than 13,800 kWh per tonne of molten aluminum, such smelter must pay additional RMB0.02 per kWh for the electricity used. If the alternating current consumed by any smelter is more than 13,800 kWh per tonne of molten aluminum, such smelter must pay additional RMB0.08 for per kWh for the electricity used.
In March 2015, new policies and reforms relating to electricity generation, retail, usage, and other related sectors were introduced. Under “Several Opinions of the CPC Central Committee and the State Council on Further Deepening the Reform of the Electric Power System,” a series of reforms relating to electricity pricing, distribution and retail segments, electricity trading, distributed generation, and other aspects has been put forward. In November 2015, NDRC and the National Energy Administration of the PRC jointly issued further supplemental measures, including “Implementation Opinions on Promoting Transmission-Distribution Price Reform,” “Implementation Opinions on Promoting Power Market Construction,” “Implementation Opinions on Establishing Power Trading Institutions and Their Normative Operation,” “Implementation Opinions on Orderly Releasing Plans of Power Generation and Power Utilization,” “Implementation Opinions on Promoting Power-Sales Side Reform,” and “Guidance Opinions on Reinforcing and Regulating Supervision and Management of Coal-Fired Self-Generation Power Plants,” which set out further requirements and implementation steps in relation to the reform of electric power system. Towards the end of 2016, NDRC promulgated “Measures of Electricity Pricing for Transmission-Distribution Grid at the Provincial Level,” which established a regulatory framework of electricity transmission and distribution pricing.
Regulations Concerning Imports and Exports of Alumina and Primary Aluminum
Import taxes on alumina and primary aluminum have been eliminated. The export tariff on certain primary aluminum products has been 15% since August 1, 2007.
Environmental Protection Laws and Regulations
The Ministry of Ecology and Environment of China is responsible for supervision and administration of environmental protection in China. It formulates national environmental quality and discharge standards and monitors China’s environmental system. Bureau of Ecology and Environment at the municipal level or above are responsible for environmental protection within their respective jurisdictions.
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Environmental regulations require each enterprise to file an environmental impact report with the relevant Bureau of Ecology and Environment for approval before undertaking the construction of a new production facility or any major expansion or renovation of an existing production facility. New facilities built pursuant to this approval are not permitted to operate until the relevant environmental bureau has performed an inspection and concluded that the facilities are in compliance with environmental standards.
The Environmental Protection Law requires any facility that produces pollutants or other hazards to incorporate environmental protection measures in its operations and establish an environmental protection responsibility system. Such system includes adoption of effective measures to control and properly dispose of waste gases, waste water, waste residue, dust or other waste materials. Any entity that discharges pollution must register with the relevant environmental protection authority. In 2016, Circular of the General Office of the State Council on the Implementing Plan for the Permit System for Controlling the Discharge of Pollutants was issued, pursuant to which enterprises that discharge pollutants need to obtain permits from relevant environment authority.
Penalties for breaches of the Environmental Protection Law include warning, payment of damages and imposition of fines. Any entity undertaking a construction project that fails to install pollution prevention and control facilities in compliance with environmental standards for a construction project may be ordered to suspend production or operations or to cease operations and may be fined. Criminal liability may be imposed for a material violation of environmental laws and regulations that causes any significant loss of property or personal injuries or death.
On December 25, 2016, the PRC government promulgated the Environmental Protection Tax Law, which became effective from January 1, 2018 and was amended on October 26, 2018. The Environmental Protection Tax Law imposes environmental protection tax to enterprises, entities, producers or operators which discharge taxable pollutants into air, water or lands. Taxable pollutants include air pollutants, water pollutants, solid wastes and noises. The environmental protection tax is collected by tax authority and levied in accordance with a table attached to the Environmental Protection Tax Law. However, enterprises, entities, producers or operators that directly emitemission of taxable pollutants into the centralized sewage and domestic waste treatment facilities, or storestorage or disposedisposal of solid wastes in facilities or places that meet the national or local environmental protection standard, areby enterprises, entities, producers or operators, is not deemed as direct emission of pollutants into the environment and is exempted from the Environment Protection Tax.environmental protection tax for such pollutants.
Mineral Resources Laws and Regulations
All mineral resources in China are owned by the state under the current Mineral Resources Law. Exploration, exploitation and mining operations must comply with the relevant provisions of the Mineral Resources Law and are under the supervision of the Ministry of Natural Resources. Exploration and exploitation of mineral resources are also subject to examination and approval by the Ministry of Natural Resources or relevant local authorities. Upon approval, the relevant administrative authorities, which are responsible for supervision and inspection of mining exploitation in their jurisdiction, will issue an exploration permit or mining permit. The holders of mining rights are required to file with the relevant administrative authorities annually.
The PRC government permits mine operators of collectively owned mines to exploit mineral resources in designated areas and individuals to mine scattered mineral resources. Such mine operators and individuals are subject to government regulation. Mining activities by individuals are restricted. Individuals are not permitted to exploit mineral reserves allocated for exploitation by a mining enterprise or company, or specified minerals prescribed by the state for protective mining. Indiscriminate mining that damages mineral resources is prohibited.
If mining activities result in damage to arable land, grassland or afforested area, the mining operator must take measures to return the land to an arable state within the prescribed time frame. Any entity or individual which fails to fulfil its remediation obligations may be fined and denied application for land use rights for new land by the relevant land and natural resources authorities.
It is unlawful for an entity or individual to conduct mining operations in areas designated for other legal mining operators. A mining operator whose exploitation causes harm to others in terms of production or in terms of living standards is liable for compensation and is required to take necessary remedial measures. When a mine is closed, a mine closure report and information concerning the mining facilities, hidden dangers, remediation and environmental protection must be submitted for examination and approval in accordance with the relevant PRC law and regulations.
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Mineral products that have been illegally extracted and the related income derived from such activities may be confiscated and may result in fines, revocation of the mining permit and, in serious circumstances, criminal liability.
Energy Conservation Law
The amended Energy Conservation Law came into effect onOctober 26, 2018. It sets out the general principles for reducing energy waste and improving efficiency of energy consumption. It urges the adjustment of industry structure and replacement of high energy consumption projects with new energy or renewable energy resources. It provides that an energy conservation assessment and review system shall apply to newly investment projects and where a project does not meet the mandatory energy conservation standards, the project cannot be constructed. If a project that does not meet the mandatory energy conservation standards has been completed, it cannot be put into use.
In March 2014, the MIIT issued a regulation, the “Opinion on Implementing Supervision of Industrial Energy Conservation,” which lists the primary aluminum smelting as one of the high energy consumption operations that will be strictly monitored. In December 2014, the MIIT issued the Guidance for National Industrial Efficiency, which sets forth industrial efficiency standards for producers of major products in industries that involve high energy consumption, which included primary aluminum and alumina products.
Regulations Concerning Electrolytic Aluminum Industry
In June 2016, the General Office of the State Council promulgated “Guiding Opinions on Creating a Favorable Market Environment and Promoting the Non-Ferrous Metals Industry to Adjust Structure, Advance Transformation and Increase Efficiency,” under which the construction of new electrolytic aluminum projects and the reconstruction or expansion of existing electrolytic aluminum projects would be approved only if such construction, reconstruction or expansion would introduce new electrolytic aluminum production capacity in an amount equal to or smaller than the amount of existing electrolytic aluminum production capacity to be replaced by such construction, reconstruction or expansion.
In April 2017, NDRC, MIIT, the Ministry of Land and Resources (now known as Ministry of Natural Resources) and the Ministry of Environmental Protection (now known as Ministry of Ecology and Environment) jointly issued the “Notice Regarding the Plan on Special Action for Clean-up and Rectification of Projects in Violation of Laws and Regulations in the Electrolytic Aluminum Industry,” which sets forth a comprehensive plan to inspect electrolytic aluminum projects and rectify violations of applicable laws or regulations revealed in the inspection.
On January 1, 2018, MITT issued the “Notice Regarding Electrolytic Aluminum Enterprises to Realize Capacity Replacement by Acquisition, Merger and Restructure”,Restructure,” which requires electrolytic aluminum enterprises to achieve capacity replacement by acquisition, merger or capacity transferring and exchange of capacity quotas with its group companies.
Tax Laws and Regulation
In March 2007, the PRC government promulgated the Enterprise Income Tax Law which became effective from January 1, 2008. The Enterprise Income Tax Law imposes a single income tax rate of 25% on both domestic and foreign invested enterprises. Pursuant to the Enterprise Income Tax Law, important high- and new-tech enterprises that are necessary to be supported by the state are subject to a reduced enterprise income tax rate of 15%. Certain branches and subsidiaries of us were granted tax concessions including preferential tax rates of 15%. On December 6, 2007, PRC government promulgated the Enterprise Income Tax Law Implementation Rules which also became effective on January 1, 2008.
In March 2016,the MOF and the SAT jointly promulgated “Circular on Comprehensively Promoting the Pilot Program of the Collection of Value-added Tax in Lieu of Business Tax,” pursuant to which we are allowed to deduct input tax from output tax according to the amount set forth in the special value-added tax invoices obtained from our purchases of services, intangible assets or real estate. On April 4, 2018, the MOF and the SAT issued the Circular on Adjusting Value-added Tax Rates, which became effective on May 1, 2018. Pursuant to this circular, for sale or import of goods, the previous applicable value-added tax rate 17% and 11% were adjusted to 16% and 10% respectively.
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On March 20, 2019, the MOF, the SAT and the General Administration of Customs jointly issued the Announcement on Policies for Deepening Reform of Value-added Tax, which became effective on April 1, 2019. Pursuant to this announcement, for sales or import of goods by a general taxpayer that were previously subject to value added tax at the rate of 16%, the applicable tax rate has been adjusted to 13%, and for those previously subject to value added tax at the rate of 10%, the applicable tax rate has been adjusted to 9%.
C. Organizational Structure
Set out below is a chart illustrating our corporate structure as of March 31, 2019:2020:
Below sets forth further information of our principal subsidiaries as ofDecember 31, 2018:2019:
Company | Percentage of ownership interest | Principal activities | ||
Baotou Aluminum Co.,Ltd. | 100.00% | Manufacture and distribution of primary aluminum, aluminum alloy and related fabricated products and carbon products |
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Chalco Hong Kong Ltd.(1) | 100.00% | Overseas investments and alumina import and export activities | ||
China Aluminum International Trading Co., Ltd. | 100.00% | Trading, import and export activities | ||
Chalco Mining Co., Ltd. | 100.00% | Manufacture, acquisition and distribution of bauxite mines, limestone ore, manufacturing and distribution of alumina | ||
Chinalco Shanxi Jiaokou Xinghua Technology Ltd.(2) | 66.00% | Manufacture and distribution of | ||
Chalco Shanghai Company Limited | 100.00% | Trading and engineering project management | ||
Chalco Shanxi New Material Co., Ltd. | 85.98% | Manufacture and distribution of alumina, primary aluminum and anode carbon products and electricity generation and supply | ||
Zunyi Aluminum Co., Ltd. |
| 67.445% | Manufacture and distribution of primary aluminum and alumina | |
Chalco Energy Co., Ltd. | 100.00% | Thermoelectric supply and investment management |
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Company | Percentage of ownership interest | Principal activities | ||
China Aluminum Ningxia Energy Group Co., Ltd. | 70.82% | Thermal power, wind power and solar power generation, coal mining, and power related equipment manufacturing | ||
Guizhou Huajin Aluminum Co., Ltd. | 60.00% | Manufacture and distribution of alumina | ||
Chalco Zhengzhou Research Institute of Non-ferrous Metal Co., Ltd. | 100.00% | Research and development services | ||
Chalco Shandong Co., Ltd. | 100.00% | Manufacture and distribution of alumina | ||
Chalco Zhongzhou Aluminum Co., Ltd. | 100.00% | Manufacture and distribution of alumina | ||
100.00% | Logistic transportation | |||
Shanxi HuaxingAluminum Co., Ltd.(3) | 100.00% | Manufacture and distribution of alumina | ||
Shanxi China Huarun Co., Ltd. | 43.39% | Manufacture and distribution of primary aluminum | ||
Guizhou Huaren New Material Co., Ltd. | 40.00% | Manufacture and distribution of primary aluminum | ||
China Aluminum International Trading Group Co., Ltd. | 100.00% | Trading, importing and | ||
Chalco Materials Co., Ltd. | 100.00% | Procurement of materials including raw materials and fuels |
(1) | Chalco Hong Kong Ltd. is incorporated in Hong Kong. All other principal subsidiaries are incorporated in the PRC. |
(2) | We directly hold 33% shares and indirectly hold 33% shares, through Chalco Shandong Co., Ltd. |
(3) | We directly hold 60% shares and indirectly hold 40% shares, through Chalco Hong Kong Ltd. |
D. Property, Plants and Equipment
Mines
Bauxite Mines
The following map sets forth details of the area surrounding our largest bauxite mine in China, the Pingguo mine:
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The Guangxi Pingguo plant, located in the Guangxi Zhuang Autonomous Region, commenced operations in 1994. The surrounding infrastructure includes roadways and waterways.
Modernization and Physical Condition, Equipment, Infrastructure and Other Facilities
We have modern facilities at our mines in China, which were designed by professional PRC mine design institutes and adhere to international standards. Our mines are either open pit or underground. Our mines generally have mining offices and transportation facilities that have access to local roads and highways. In addition, we utilize advanced heavy equipment such as bulldozers and scrapers.
Source of Power and Water
All of our mining facilities in China are connected to the local or regional electric power grids. In addition, our mining facilities are connected to reliable water sources, all of which were sufficient for the requirements of each individual mine.
Our mines in Indonesia have access to local roads. Prior to suspension of productions, the two mines that used to be put into operation were powered by diesel fuel and are equipped with washing machines.
Coal Mines
We acquired 70% of the equity interest in Gansu Huayang in March 2011, which holds exploration rights for a portion of Luochuan mine.mine in Gansu Province. We renewed the exploration permitin March 2019, which will expire in October 2020. We are in the process of applying for the exploration permit for the rest of Luochuan mine. Luochuan mine is an underground mine. We have completed the exploration but have not commenced development of Luochuan mine. As of the date of this annual report, neither proven nor probable reserves have been established in accordance with United States Securities and Exchange Commission Industry Guide 7 (“Industry Guide 7”).7.
We acquired the mining rights for Laodonghe mine, in January 2013 through Chalco Guizhou Mining Co., Ltd. We hold 80.0% of the equity interest of Laodonghe mine.mine in Guizhou Province. The mining permit expiredexpired in December 2018. We havehad completed the exploration but have not commenced development of Laodonghe mine.mine and have been actively coordinating follow-up matters with relevant parties. Laodonghe mine is an underground mine. As of the date of this annual report, neither proven nor probable reserves have been established in accordance with Industry Guide 7.
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We completed the acquisition of 70.82% of the equity interest in Ningxia Energy in January 2013, which holds mining rights or exploration rights for certain coal deposits in Ningxia Autonomous Region. The coal mines owned and operated by Ningxia Energy include Wangwa mine, Wangwa No.2 mine, Yindonggou mine and Yinxingyijing mine, all of which are underground thermal coal mines. The operations at these coal mines are powered by electricity from local power grids and are accessible by public roads. As of the date of this annual report, neither proven nor probable reserves have been established in accordance with Industry Guide 7.
Wangwa mine, Wangwa No. 2 mine and Yindonggou mine are currently in extraction stage. We primarily use comprehensive mechanized longwall mining method to extract coal from Wangwa mine, Wangwa No. 2 mine and Yindonggou mine and we use advanced coal mining equipment including hydraulic roof supports and shearers. In addition, Ningxia Energy holds 50% of interest in Yinxingyijing mine while the other joint owner in Yinxingyijing mine does not participate in its operation. Yinxingyijing mine is currently in trial production.has been put into operation since January 2019. The exploration permit of Yinxingyijing mine expired in August 2018 and wehas been cancelled since then. We obtained the mining permit in February 2018, which will expire in February 2048.
The following table sets forth detailed information on Wangwa mine, Wangwa No. 2 mine and Yindonggou mine:
Wangwa mine | Wangwa No. 2 mine | Yindonggou mine | |
Nature of Ownership | Owned and operated by Ningxia Energy, a 70.82% subsidiary of Chalco | Owned and operated by Ningxia Energy, a 70.82% subsidiary of Chalco | Owned and operated by Ningxia Energy, a 70.82% subsidiary of Chalco |
Commencement of construction | 1984(1) | 2007 | 2010 |
Commencement of extraction | 1990(1) | 2010 | 2016 |
Permit renewal | November 2046 | June 2032 | July 2036 |
Mining recovery rate(%)(2) | 78 | 81 | 76 |
Depth of mine(meters underground) | 400 | 400 | 478 |
Average thickness of main coal seam(meters) | 6-11 | 8-10 | 2-8 |
Calorific value(Kcal/kg) | 4,900-5,100 | 4,800-5,000 | 4,600-4,900 |
Sulphur content(%) | 1.1 | 1.2 | 1.12 |
Average ash content(%) | 14.2 | 15.3 | 12.2 |
(1) | The capacity expansion and technology upgrade of Wangwa mine is currently |
(2) | The mining recovery rate is the rate of the amount of coal recovered from a determined amount of reserves, which is calculated by dividing the actual volume of coal recovered in a year by the volume of reserves mined and consumed in the same year. |
For the year ended December 31, 2018,2019, Ningxia Energy incurred capital expenditures of approximately RMB1.2RMB1.6 billion on infrastructure construction.
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Land
Chinalco leases to us 414411 pieces or parcels of land, located in eight provinces, covering an aggregate area of approximately 53.5652.89 million square meters for any purpose related to our operations and businesses. Currently, all leases for our properties are valid and have not expired. The leased land mainly consists of:
● |
● | 12 pieces of land with an area of approximately 1.30 million square meters. Chinalco has paid the land premiums and obtained land use rights certificates. |
The land is leased for the following terms:
● | allocated land: 50 years commencing from July 1, 2001 (except for land use rights of mines operated by us, whose leased terms shall end on the expiration date of the mining rights or at the end of the actual mine life, whichever is earlier); |
● | granted land: until expiration of the relevant land use right permits; and |
● | for both allocated or granted land: normal commercial terms that stipulate, among other conditions, the terms of use, monthly or annual rental amounts payable in Renminbi and a six-month notification provision for termination of any lease agreement. |
Buildings
Our principal executive offices, which we lease from Chinalco, are located at No. 62 North Xizhimen Street, Haidian District, Beijing, People’s Republic of China, 100082.
Pursuant to the reorganization in connection with our initial public offering in 2001, Chinalco transferred to us, among other operating assets, ownership of the buildings and properties for the operation of our core businesses. Chinalco retained its remaining buildings and properties for its operations. The buildings transferred to us comprise 4,631 buildings with an aggregate gross area of approximately 4.2 million square meters. These buildings may be sold or transferred only with the consent of Chinalco and in accordance with applicable land transfer procedures. Chinalco has undertaken to provide its consent and the necessary assistance to affect land grant procedures to ensure that our buildings can be legally transferred or sold.
We and Chinalco also lease to each other a number of other buildings and properties for ancillary uses, which comprise mainly buildings for offices, dormitory, canteen and storage purposes. As of the date of this annual report, we leased 129133 buildings to Chinalco, with an aggregate gross area of approximately 549,407134,186 square meters, while Chinalco leased 92119 buildings to us, with an aggregate gross area of approximately 163,437179,849 square meters. In June 2018, we and China Aluminum Investment and Development Co., Ltd., a wholly-owned subsidiary of Chinalco, renewed a tenancy agreement pursuant to which we would lease from Chinalco the office premises at certain floors of No. 62 North Xizhimen Street, Haidian District, Beijing, PRC, with an aggregate gross floor area of 22,303 square meters. This agreement will expire on December 31, 2021.
Our Expansion
Our expansion projects in 20182019 primarily include:
● | The Boffa Project: |
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● | The 2,000,000-tonne alumina project of Guangxi Huasheng New Material Co., Ltd.: We expect to invest a total amount of approximately RMB5,805 million in this project. By the end of |
● | The 432,000-tonne light alloy project of Shanxi Zhongrun: We expect to invest a total amount of approximately |
● | Ningxia Energy’s 200-MW wind power project in Alxa Left Banner, Inner Mongolia: We expect to invest a total amount of approximately RMB1,446 million in this project. By the end of 2019, an aggregate of RMB1,253 million of capital expenditure had been incurred. The project had been connected to the grid for power generation at the end of 2019. |
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and selected historical financial data, in each case together with the accompanying notes included elsewhere in this annual report. This section contains certain “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of our future performance or results and our actual results could materially differ from those disclosed in the forward-looking statements. In evaluating our business, you should carefully consider the information provided in “Item 3. Key Information - D. Risk Factors.”
As the business combination under common control incurred in the years ended December 31, 2015, 2016, 2017, 2018 and 2018,2019, the comparative financial data for the years ended December 31, 2014, 2015, 2016, 2017 and 20172018 are revised to reflect the business combination under common control. Unless otherwise indicated in this section, our financial data for the years ended December 31, 20162017 and 20172018 are presented based on those revised amounts. Please see Note 38 to our audited consolidated financial statements.
A. Operating Results
Overview
We are a leading enterprise in the non-ferrous metal industry in China. We are engaged principally in alumina refining, primary aluminum smelting, and trading of non-ferrous metal products, coal products and other products. In addition, we are engaged in coal mining and power generation. The remainder of our revenues was derived from research and development activities and other products and services. We organize and manage our operations according to the following key segments:
● | Our alumina segment, which consists of the mining and purchasing of bauxite and other raw materials, and production and sale of alumina as well as chemical |
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● | Our primary aluminum segment, which consists of the procurement of alumina, other raw materials, supplemental materials and electrical power, the production and sale of primary aluminum and aluminum-related products, such as carbon products, aluminum alloy products and other aluminum products. Our principal primary aluminum products are ingots, molten aluminum and aluminum alloys, which accounted for approximately 29%, |
● | Our trading segment, which mainly consists of the trading of alumina, primary aluminum, aluminum fabrication products, other non-ferrous metal products, and crude fuels such as coal products, as well as supplemental materials and logistics and transport services to our internal manufacturing plants and external customers. We established our trading business under Chalco Trading as a separate segment in July 2010 as a result of our operational structural adjustment. Since 2014, we have established |
● | Our energy segment, which consists of the research and development, production and operation of energy products, including coal mining and conventional coal-fire power generation as well as renewable energy generation such as wind power and solar power. We are also engaged in new energy equipment production. We established our energy segment in January 2013 as a result of our acquisition of Ningxia Energy in line with our development strategy to partially offset our future energy |
● | Our corporate and other operating segment, which consists of corporate and other aluminum-related research, development, and our other |
We used to be engaged in aluminum fabrication operations, where we processed primary aluminum for the production and sales of various aluminum fabrication products. As approved at our 2012 annual general meeting held on June 27, 2013, we disposed of substantially all of our aluminum fabrication operations to Chinalco. As a result, we ceased tooperate aluminum fabrication business as a separate segment in June 2013.
Critical Accounting Policies
We prepare our consolidated financial statements in accordance with IFRS as issued by the International Accounting Standards Board, which requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the accounting policies. The areas in our financial reporting involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements, are disclosed in Note 3 to our consolidated financial statements. We have established procedures and processes to facilitate the making of such judgments in the preparation of our consolidated financial statements. Management has used the best information available but actual performance may differ from our management’s estimates and future changes in key variables could change future reported amounts in our consolidated financial statements.
Property, Plant and Equipment - recoverable amount
Property, plant and equipment, other than construction in progress (“CIP”), are stated at cost less accumulated depreciation and any impairment losses. When an item of property, plant and equipment is classified as held for sale or when it is part of a disposal group classified as held for sale, it is not depreciated and is accounted for in accordance with IFRS 5. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.
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Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to profit or loss in the period in which it is incurred. In situations where the recognition criteria are satisfied, the expenditure for a major inspection is capitalized in the carrying amount of the asset as a replacement. Where significant parts of property, plant and equipment are required to be replaced at intervals, we recognize such parts as individual assets with specific useful lives and depreciate them accordingly.
We calculate depreciation on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows:
Buildings | 8-45 years |
Machinery | 3-30 years |
Transportation facilities | 6-10 years |
Office and other equipment | 3-10 years |
Where parts of an item of property, plant and equipment have different useful lives, the cost of that item is allocated on a reasonable basis among the parts and each part is depreciated separately. We reviewed and adjusted the assets’ depreciation method, residual values and useful lives, if appropriate, at the end of each reporting period.
An item of property, plant and equipment including any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognized in profit or loss in the year the asset is derecognized is the difference between the net sales proceeds and the carrying amount of the relevant asset.
CIP represents buildings under construction, and plant and equipment pending for installation, and is stated at cost lessany impairment losses. Cost comprises construction expenditures, other expenditures necessary for the purpose of preparing the CIP for its intended use and those borrowing costs incurred before the assets are ready for their intended use that is eligible for capitalization. CIP is transferred to property, plant and equipment when the CIP is ready for its intended use.
IntangibleProperty, plant and equipment and intangible assets - goodwill– recoverable amount (excluding goodwill)
GoodwillIn accordance with our accounting policy, each asset or cash-generating unit is initiallyevaluated in every reporting period to determine whether there are any indications of impairment. If any such indication exists, an estimate of the net recoverable amount is performed and an impairment loss is recognized to the extent that the carrying amount exceeds the recoverable amount. The recoverable amount of an asset or cash-generating unit of assets is measured at cost, being the excesshigher of the aggregate of the consideration transferred, the amount recognized for non-controlling interests and any fair value less costs of our previously held equity interestsdisposal and value in use.
A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the acquiree overasset in its highest and best use or by selling it to another market participant that would use the identifiable net assets acquiredasset in its highest and liabilities assumed. Ifbest use.
Value in use is generally determined as the sum of this consideration and other items is lower than the fairpresent value of the netestimated future cash flows of those expected to arise from the continued use of the asset in its present form and its eventual disposal. Present values are determined using a risk-adjusted pre-tax discount rate appropriate to the risks inherent in the asset. Future cash flow estimates are based on significant estimates and judgments involved in the projections of the future prices of aluminum and alumina, expected production and sales volumes, production costs, operating expenses, and discount rates applied to these forecasted future cash flows. These estimates and judgments may be affected by unexpected changes in the future market or economic conditions; hence, there is a possibility that changes in circumstances will alter these projections, which may impact on the recoverable amounts of the assets. In such circumstances, some or all of the carrying value of the assets acquired,may be impaired and the difference is, after reassessment, recognized inimpairment would be charged against profit or loss as a gain on bargain purchase.loss.
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For the purposes of impairment testing,
Goodwill - recoverable amount
In accordance with our accounting policy, goodwill acquired in a business combination is allocated to each of the cash-generatingour cash generating units or groups of cash-generating units, that is expected to benefit from the synergies of the combination. Each unit or group of units to which the goodwill is allocated(“CGU”) as it represents the lowest level within the entityCompany at which the goodwill is monitored for internal management purposes. Goodwillpurposes and is monitored at the operating segment level.
Goodwilltested for impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. Impairment is determinedcircumstance indicated that the carrying amount may be impaired, by assessingcomparing the recoverable amount of the cash-generating unit to whichCGU and the goodwill relates. Wherecarrying amount of the CGU. The recoverable amount is the higher of value in use and the fair value less costs of disposal. The recoverable amount of the cash-generating unit is less thanunderlying CGUs involved estimates and judgments, including future prices of aluminum and alumina, expected production and sales volumes, production costs, operating expenses, terminal growth rates used to estimate future cash flows and discount rates applied to these forecasted future cash flows of the carrying amount, an impairment loss is recognized. An impairment loss recognized for goodwill is not reversedunderlying CGUs. These estimates and judgments may be affected by unexpected changes in a subsequent period. Any impairment is recognized immediately as an expense and is not subsequently reversed.future market or economic conditions.
Intangible assets - mining rights and mineral exploration rights
Our mineral exploration rights and mining rights relate to coal, bauxite and other mines.
(i) | Recognition |
MineralExcept for mineral exploration rights and mining rights acquired in a business combination, mineral exploration rights and mining rights are initially recorded at the cost which includes the acquisition consideration, qualifying exploration and other direct costs. The mineral exploration rights are stated at cost less any impairment, and the mining rights are stated at cost less any amortization and impairment.
(ii) | Reclassification |
Mineral exploration rights are converted to mining rights when technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Mineral exploration rightsdemonstrable, and are subject to amortization when commercial production has commenced.
We assess the stage of each mine under construction to determine when a mine moves into the production stage. The criteria used to assess the start date are determined based on the unique nature of each mine construction project. We consider various relevant criteria, such as completion of a reasonable period of testing of the mine and equipment, ability to produce in saleable form (within specifications) and ability to sustain ongoing production to assess when a mine is substantially complete and ready for its intended use.
(iii) | Amortization |
Amortization of bauxite and other mining rights (except for coal mining rights) is provided on a straight-line basis according to the shorter of the expiration date of the mining certificate and the mineable period of natural resources. Estimated mineable periods of the majority of the mining rights range from 3 to 30 years.
Coal mining rights are amortized on a unit-of-production basis over the economically recoverable reserves evaluated based on the reserves estimated in accordance with the standards in the Solid Mineral Resource/Reserve Classification of the PRC (GB/T17766-1999) of the mine concerned.
(iv) | Impairment |
An impairment review is performed when there are indicators that the carrying amount of the mineral exploration rights and mining rights may exceed their recoverable amounts. To the extent that this occurs, the excess is fully provided as an impairment loss.
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Non-current assets and disposal groups held for sale
Leases
Non-current(1) Applicable from January 1, 2019
Weassess at contract inception whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
(i) | As a lessee |
We apply a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. We recognize lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
(a) | Right-of-use assets |
Right-of-use assets are recognized at the commencement date of the lease (that is the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and disposal groupsany impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-us assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payment made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease terms and the estimated useful lives of the assets as follows:
Buildings | 2–20 years |
Machinery | 2–10 years |
Land use rights | 10–50 years |
If ownership of the leased asset transfers to us by the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset.
(b) | Lease liabilities |
Lease liabilities are recognized at the commencement date of the lease at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by us and payments of penalties for termination of a lease, if the lease term reflects us exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognized as an expense in the period in which the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, we use our incremental borrowing rate at the lease commencement date because the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in lease payments (e.g., a change to future lease payments resulting from a change in an index or rate) or a change in assessment of an option to purchase the underlying asset.
Our lease liabilities are included in interest-bearing bank and other borrowings.
(c) | Short-term leases and leases of low-value assets |
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We apply the short-term lease recognition exemption to our short-term leases of machinery and equipment (that is those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). We also apply the recognition exemption for leases of low-value assets to leases of office equipment that are considered to be of low value (i.e. below RMB30,000).
Lease payments on short-term leases and leases of low-value assets are recognized as an expense on a straight-line basis over the lease term.
(ii) | As a lessor |
When we actas a lessor, it classifies at lease inception (or when there is a lease modification) each of our leases as either an operating lease or a finance lease.
Leases in which we do not transfer substantially all the risks and rewards incidental to ownership of an asset are classified as heldoperating leases. When a contract contains lease and non-lease components, we allocate the consideration in the contract to each component on a relative stand-alone selling price basis. Rental income is accounted for sale if theiron a straight-line basis over the lease terms and is included in revenue in profit or loss due to its operating nature. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amounts will be recovered principally throughamount of the leased asset and recognized over the lease term on the same basis as rental income. Contingent rents are recognized as revenue in the period in which they are earned.
Leases that transfer substantially all the risks and rewards incidental to ownership of an underlying assets to the lessee, are accounted for as finance leases. At the commencement date, the cost of the leased asset is capitalized at the present value of the minimum lease payments and related payments (including the initial direct costs), and presented as a sales transaction rather than through continuing use. For thisreceivable at an amount equal to be the case,net investment in the asset or disposal group must be available for immediate sale in its present condition subject only to terms that are usual and customary for the salelease. The finance costs of such leases are charged to profit or loss so as to provide a constant periodic rate of charge over the lease terms.
(2) | Applicable before January 1, 2019 |
Leases that transfer substantially all the rewards and risks of ownership of assets or disposal groups and its sale must be highly probable. All assets and liabilitiesto us, other than legal title, are accounted for as finance leases. At the inception of a subsidiary classified as a disposal group are reclassified as held for sale regardlessfinance lease, the cost of whether the Group retains a non-controlling interest in its former subsidiary after the sale.
Non-current assets and disposal groups (other than financial assets) classified as held for sale are measuredleased asset is capitalized at the lowerpresent value of their carrying amountsthe minimum lease payments and fair values less costsrecorded together with the obligation, excluding the interest element, to sell. Property,reflect the purchase and financing. Assets held under capitalized finance leases, including prepaid land lease payments under finance leases, are included in property, plant and equipment, and intangible assets classifieddepreciated over the shorter of the lease terms and the estimated useful lives of the assets. The finance costs of such leases are charged to profit or loss so as held for sale are not depreciated or amortized.to provide a constant periodic rate of charge over the lease terms.
Assets acquired through hire purchase contracts of a financing nature are accounted for as finance leases, but are depreciated over their estimated useful lives.
Leases where substantially all the rewards and risks of ownership of assets remain with the lessor are accounted for as operating leases. Where we are the lessor, assets leased by us under operating leases are included in non-current assets, and rentals receivable under the operating leases are credited to profit or loss on the straight-line basis over the lease terms. Where we are the lessee, rentals payable under operating leases net of any incentives received from the lessor are charged to profit or loss on the straight-line basis over the lease terms.
Prepaid land lease payments under operating leases are initially stated at cost and subsequently recognized on the straight-line basis over the lease terms.
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Provision for expected credit losses on trade receivables
We use a provision matrix to calculate expected credit losses for trade receivables. The provision rates are based on days past due for groupings of various customer segments that have similar loss patterns (i.e., by product type, customer type, and coverage by letters of credit and other forms of credit insurance).
The provision matrix is initially based on our historical observed default rates. We will calibrate the matrix to adjust the historical credit loss experience with forward-looking information. For instance, if forecast economic conditions (i.e. gross domestic products) are expected to deteriorate over the next year which can lead to an increased number of defaults in the manufacturing sector, the historical default rates are adjusted. At each reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analyzed.
The assessment of the correlation among historical observed default rates, forecast economic conditions and expected credit losses is a significant estimate. The amount of expected credit losses is sensitive to changes in circumstances and forecast economic conditions. Our historical credit loss experience and forecast of economic conditions may also not be representative of the customer’s actual default in the future. The information about the expected credit losses on our trade receivables is disclosed in Note 1413 to our consolidated financial statements.
Estimated impairment of inventories
In accordance with our accounting policy, our management tests whether inventories suffered any impairment based on estimates of the net realizable amount of the inventories. For different types of inventories, it requires the estimation on selling prices, costs of conversion, selling expenses and the related tax expense to calculate theirthe net recoverablerealizable amount of inventories. For inventories held for executed sales contracts, our management estimates the net recoverablerealizable amount based on the contracted price; for other inventories, our management estimates the realizable future price based on the actual prices during the period from the end of the reporting period to the date that these financial statements were approved for issuance by our Board, taking into account the nature and balance of inventories and future estimated price trends.price. For raw materials and work-in-progress, our management has established a model in estimating the netrecoverable amount at which the inventories can be realized in the normal course of business after considering our manufacturing cycles, production capacity and forecasts, estimated future conversion costs and selling prices. The management also takes into account the price or cost fluctuations and other related matters occurring after the end of the reporting period which reflect conditions that existed at the end of the reporting period.
It is reasonably possible that if there is a significant change in circumstances, including our business and the external environment, outcomes within the next financial year would be significantly affected.
Coal reserve estimates and units-of-production depreciationamortization for coal mining rights
External qualified valuation professionals evaluate “economically recoverable reserves” based on reserves estimated by external qualified exploration engineers in accordance with the PRC standards.The estimates of our coal reserves are inherently imprecise and represent only the approximate amounts of the coal reserves because of the subjective judgments involved in developing such information. Economically recoverable reserve estimates are evaluated on a regular basis and have taken into account recent production and technical information about each mine.
Income Tax
We estimate our income tax provision and deferred income taxation in accordance with the prevailing tax rules and regulations, taking into account any special approvals obtained from the relevant tax authorities and any preferential tax treatment to which we are entitled in each location or jurisdiction in which we operate. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. We recognize liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred income tax provisions in the period in which such determination is made.
Deferred tax assets are recognized for unused tax losses anddeductible temporary differences, such as the provision for impairment of receivables, inventories and property, plant and equipment and accruals of expenses not yet deductible for tax purposes, to the extent that it is probable that taxable profits will be available against which the losses deductible temporary difference can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon forecast of future taxable profits which was complex and judgmental and was based on significant assumptions, including future tax rates, the possible utilization of loss carry forwards and future taxable profits that are affected by unexpected changes in the tax law framework and future market or economic conditions. The carrying value of our deferred tax assets as of December 31, 2019 was RMB1,522.2 million, compared with approximately RMB1,542.7 million as of December 31, 2018, after taking into consideration the offsetting of the balances within the same tax jurisdiction. The amount of unrecognized tax losses as of December 31, 2019, was RMB6,210.3 million, compared with approximately RMB11,387.5 million as of December 31, 2018.
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An entity shall recognize a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, except to the extent that both of the following conditions are satisfied: (a) the parent, investor or joint venturer is able to control the timing of the reversal of the temporary difference; and (b) it is probable that the temporary difference will not reverse in the foreseeable future.
We believe that we have recorded adequate current tax provision and deferred taxes based on the prevailing tax rules and regulations and our current best estimates and assumptions. In the event that future tax rules and regulations or related circumstances change, adjustments to current and deferred taxation may be necessary which would impact our results or financial position.
Revenue recognition
(i) | Revenue from contracts with customers |
We adopted IFRS 15 from January 1, 2018 using the modified retrospective method of adoption. We applied IFRS 15 to contracts that are initiated after the effective date and contracts that had remaining obligations as of the effective date. In respect of the prior periods, we retained prior period’s figures as reported under the previous standards, recognizing the cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as at January 1, 2018. We concluded that the transitional adjustment to be made on January 1, 2018 to accumulated losses upon initial adoption of IFRS 15 is nil. It is because we recognize revenue upon the transfer of significant risks and rewards, which coincides with the fulfilment of performance obligations. Additionally, our contracts with customers generally has only one performance obligation.
Revenue from contracts with customers is recognized when control of goods or services is transferred to the customers at an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.
When the consideration in a contract includes a variable amount, the amount of consideration is estimated to which we will be entitled in exchange for transferring the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognized will not occur when the associated uncertainty with the variable consideration is subsequently resolved.
When the contract contains a financing component which provides the customer with a significant benefit of financing the transfer of goods or services to the customer for more than one year, revenue is measured at the present value of the amount receivable, discounted using the discount rate that would be reflected in a separate financing transaction between us and the customer at contract inception. When the contract contains a financing component which provides us a significant financial benefit for more than one year, revenue recognized under the contract includes the interest expense accreted on the contract liability under the effective interest method. For a contract where the period between the payment by the customer and the transfer of the promised goods or services is one year or less, the transaction price is not adjusted for the effects of a significant financing component, using the practical expedient in IFRS 15.
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● | Sale of industrial products |
Revenue from the sale of industrial products (including sales of scrap and other materials) is recognized at the point in time when control of the asset is transferred to the customer, generally on delivery of the industrial products.
● | Rendering of services |
Revenue from services is recognized over time, using an input method to measure progress towards complete satisfaction of the service, because the customer simultaneously receives and consumes the benefits provided by us. Revenue is recognized on a straight-line basis because the entity’s inputs are expended evenly throughout the performance period.
(ii) | Revenue from other sources |
● | Rental income |
Rental income is recognized on a time proportion basis over the lease terms. Variable lease payments that do not depend on an index or a rate are recognized as income in the accounting period in which they are incurred.
● | Other income |
Interest income is recognized on an accrual basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset.
Dividend income is recognized when the shareholders’ right to receive payment has been established, it is probable that the economic benefits associated with the dividend will flow to us and the amount of the dividend can be measured reliably.
New IFRS Pronouncements
For a detailed discussion of new accounting pronouncements, please see Note 2 to our audited consolidated financial statements.
Factors Affecting Our Results of Operations
We believe that the following factors which impact our various revenue and expense items (as described below) have had, and will continue to have, a significant effect on the development of our business, financial position and results of operation.
Economic Condition of China and the World
As the major aluminum product market is globalized, the demand for and prices of our products are highly correlated with the general economic condition of China and the world and the performance of the major aluminum and related product markets. In recent years, China’s economy continued to experience growth despite the negative effects of the global financial crisis beginning in the second half of 2008 and economic recession in 2009, as well as general market volatility and changing macroeconomic conditions. However, the growth of China’s economy has shown signs of slowing down since 2014, with GDP growth of 6.9% from 2014 to 2015, 6.7% from 2015 to 2016, 6.9% from 2016 to 2017, 6.6% from 2017 to 2018 and 6.1% from 2018 to 2019, as compared to 7.5% from 2013 to 2014. In addition, the outbreak and global spread of the COVID-19 in 2020 may adversely affect global and China’s economy and financial market in general. Please refer to “Item 3. Key Information - D. Risk Factors - Our business may be materially and adversely affected by the recent outbreak of COVID-19” for further details of the impact of the outbreak of COVID-19.
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The global output of alumina (with chemical alumina products included) in 2019 increased by approximately 5.4% from 2018 to approximately 131.41 million tonnes. The global alumina consumption (with chemical alumina products included) in 2019 increased approximately by 1.1% from 2018 to approximately 129.85 million tonnes. In 2019, the domestic output of alumina (with chemical alumina products included) decreased approximately by 0.4% from 2018 to approximately 71.55 million tonnes and the domestic consumption for alumina (with chemical alumina products included) increased by approximately 0.4% from 2018 to approximately 72.98 million tonnes.
The global output of primary aluminum in 2019decreased approximately by 0.6% from 2018 to approximately 63.78 million tonnes. The global consumption of primary aluminum in 2019 decreased approximately 0.8% from 2018 to approximately 65.15 million tonnes. In 2019, the domestic output of primary aluminum decreased approximately by 1.8% from 2018 to approximately 35.93 million tonnes and the domestic consumption of primary aluminum decreased approximately by 1.2% from 2018 to approximately 36.55 million tonnes.
Mix and Pricing of Our Products
We are engaged principally in alumina refining, primary aluminum smelting and sales of these products and trading of non-ferrous metal products and other products. In addition, we are engaged in coal mining and power generation. We coordinate substantially all of our sales and marketing activities for our self-produced alumina products and some of our sales and marketing activities for our self-produced primary aluminum products through Chalco Trading Group, taking into account the spot market prices and SHFE prices. In 2019, revenues generated from alumina, primary aluminum, trading and energy segments (after elimination of inter-segment sales) accounted for7.5%, 19.7%, 68.9% and 3.7%, respectively, of our consolidated total revenues after elimination of inter-segment sales. We apply different policies to price different products. For information on our pricing of different products, please see the section headed “Item 4. Information of the Company - B. Business Overview - Sales and Marketing.”
The sales prices of alumina that our alumina refineries sell internally to Chalco Trading Group are determined based on our budgeted sale prices, spot market prices and the prices of primary aluminum on SHFE. Chalco Trading Group coordinates the external negotiation and execution of sales contracts of our alumina products. The alumina prices in both domestic and international market decreased in 2019 when compared to that of 2018. The decline in sales price in international market was attributable to the uncertainties and the sluggish global economy as the result of, among other things, intensified trade and geopolitical tensions in 2019, as well as the increase in alumina production overseas. The alumina sales price in domestic market declined because of the stagnant alumina demand, the increase in domestic alumina production capacity and the recovered import volume of alumina. In 2019, the spot price of alumina in the international market reached a high of approximately US$418 per tonne and bottomed out at approximately US$275 per tonne. The average spot price of alumina in the international market was approximately US$333 per tonne, representing a decrease of 29.6% from 2018. The spot price of alumina in the domestic market reached a high of RMB3,131 per tonne and bottomed out at RMB2,408 per tonne. The average spot price of alumina in the domestic market was approximately RMB2,696 per tonne, representing a decrease of 9.9% from 2018. Our average selling price of alumina decreased by 5.9% from RMB2,918 per tonne in 2018 to RMB2,747 per tonne in 2019.
Like most primary aluminum producers in China, we price our primary aluminum products by reference to the primary aluminum spot prices and futures price on the SHFE. In 2019, three month aluminum futures prices reached a high of US$1,951 per tonne and a low of US$1,705 per tonne on LME; and a high of RMB14,585 per tonne and a low of RMB13,225 per tonne on SHFE. The average three-month aluminum futures prices at SHFE decreased by 3.5% from RMB14,375 per tonne in 2018 to RMB13,877 per tonne in 2019. Our average selling price of primary aluminum decreased by 3.1% from RMB14,313 per tonne in 2018 to RMB13,869 per tonne in 2019. In 2019, the primary aluminum prices in global market generally declined due to the slowdown of global economic growth, the escalation of trade tensions between the U.S. and China and the weak market demand, as well as the increase in overseas aluminum production volume and production capacity in 2019. The primary aluminum prices in domestic market also declined in general in 2019 due to the decrease in consumption of primary aluminum, but such decline was partially offset as a result of the relatively strong Chinese economy, implementation of tax reduction policy and decrease in primary aluminum output due to severe weather and industrial accidents in the second half of 2019.
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Price Volatility of Non-ferrous Metal and Coal Products
Since late 2009, as a result of the implementation of our operational structural adjustment, we have been engaged substantially in the trading of outsourced non-ferrous metal products to increase our profit. In 2012, we began to engage in the trading of significant amounts of outsourced coal products to diversify our product portfolio. Although the profit margin of sales of outsourced products is typically lower than that of our self-produced products, we generated substantial revenues and profit from the trading of outsourced products during the past few years due to our significant trading volumes. Our revenue generated from external sales of products purchased from external sources in 2019 was approximately RMB106,542.9 million, representing approximately 81.4% of total revenue from external sales in our trading segment. From time to time, we may enter into futures and option transactions in addition to the simple buy-low-sell-high trading model to hedge against price fluctuations in the non-ferrous metal and coal products market. However, short-term price volatility of these products remains a key factor affecting our operation results, as we need to make the correct prediction concerning the price trends of these products on the markets to ensure substantial revenues through large trading volume. If the market price trend does not match our prediction, we may be forced to sell trading products at low prices or to purchase trading products at high prices, which may adversely affect gross margins and profitability.
Manufacturing Costs
Our cost of revenues consists primarily of the costs of raw materials, overhead cost and electric power cost. Our principal raw material is bauxite. For the years ended December 31, 2017, 2018 and 2019, bauxite supplied by our mines accounted for 47%, 44% and 38%, respectively, of our total bauxite used in the production of alumina. The unit cost of bauxite produced by us is generally lower than the unit cost of bauxite procured from external suppliers. In 2019, as a result of the decrease in costs of soda ash and fuel, our average cost of alumina per tonne decreased by approximately 1.1% from that in 2018.
Primary aluminum is one of our major aluminum products and is produced by smelting operations. Smelting operations require a substantial and continuous supply of electricity. Electricity cost is the most significant component of our primary aluminum production cost and accounted for approximately 34% of our unit production cost for primary aluminum in 2019. The availability and price of electricity are key considerations in our primary aluminum operations. Interruptions of electricity supply can result in lengthy production shutdowns, increased costs associated with restarting production and waste of production in progress, and prolonged interruptions can cause damage to, or the destruction of, production equipment and facilities. Our average annual electricity price per kWh (including tax) decreased by 2% from 2017 to 2018 and further decreased by 4% from 2018 to 2019.
Given our high proportion of fixed costs, we must generate sufficient sales to absorb our fixed costs to maintain or increase our operating margins. Our acquisitions and production expansion in recent years have significantly increased our costs that are relatively fixed in nature, such as leases and depreciation of property, plant and equipment and employee benefit expenses. If we are able to maintain satisfactory facility utilization rates and productivity, our production capacity expansion will enable us to reduce our unit costs through economies of scale and recover associated increased costs through higher output. In 2019, we continued to focus on lowering production costs and increasing production efficiency through reducing raw material consumption by improving technology and internal management.
Availability and Costs of Financing
We require a significant amount of capital to fund our operations. For example, we need substantial amounts of funds for expanding our operations, purchasing and maintaining equipment and procuring commodities. We have in the past funded our capital expenditures primarily with bank loans and the issuance of medium-term notes and bonds and long-term bonds. The availability of financing is subject to various factors, including our credit history and the prevailing credit policy adopted by the PRC government. Over the years, we have maintained good relationships with the commercial banks in China, which enables us to access bank financing at relatively low costs.Any change of lending policies adopted by the PRC government in the future may, among other things, affect our ability to obtain financing and may in turn adversely affect our operating results.
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Due to the increase of interest on lease liabilities as a result of the adoption of new accounting standards, although the expense of other interest decreased in 2019, our finance costsremained stable from 2018 to 2019. If we are unable to secure sufficient external funding when required, we may not be able to fund our working capital requirements and necessary capital expenditures, which could adversely affect our business, financial performance and prospects.
In addition, our borrowing costs and access to debt financing depend significantly on our credit ratings. These ratings, including long-term corporate credit ratings and financing bond credit ratings, are assigned by rating agencies, which may lower or withdraw their ratings. Any change in our credit ratings or average interest rate could have negative implications, which may increase our finance costs and affect our financial results.
Regulatory Environment
The central and local governments in the PRC continues to exercise a substantial degree of control and influence over the aluminum and other non-ferrous metal products industry in China and shape the structure and development of the industry through the imposition of industry policies governing major project approvals and safety, environmental and quality regulations. If the PRC government changes its current policies or the interpretation of those policies that are currently beneficial to us, we may face pressure on profit margins and significant constraints on our ability to expand our business operations.
Selected Statement of Operation Items
Revenue
Our revenue is primarily generated from sales of alumina, primary aluminum, other non-ferrous metal products and coal products. In addition, we are engaged in coal mining and power generation. The remainder of our revenues was derived from research and development activities and other products and services.We established our trading and energy businesses as new business segments in 2010 and 2013, respectively.
Cost of Sales
Our cost of sales consists primarily of the purchase of inventories in relation to trading activities, cost of raw materials, consumables and electric power used in manufacturing, the fixed cost of and employee benefit expenses. For the years ended December 31, 2017, 2018 and 2019, our cost of sales was RMB166,290.3 million, RMB167,029.4 million and RMB177,946.3 million, respectively, and accounted for 91.9%, 92.7% and 93.6%, respectively, of the total consolidated revenues for those periods.
Operating Expenses
Selling and Distribution Expenses.Our selling and distribution expenses consist primarily of transportation and loading expenses, packaging expense and, to a lesser extent, port expenses and employee benefit expenses for employees in selling and distribution department. Selling and distribution expenses accounted for 31.9%, 33.5% and 23.9% of our total operating expenses for the years ended December 31, 2017, 2018 and 2019, respectively.
General and Administrative Expenses.Our general and administrative expenses consist primarily of early retirement benefit expenses, employee benefit expenses for directors and officers and employees in administrative department and, to a lesser extent, taxes other than income tax expenses, depreciation of non-production property, plant and equipment, provision for impairment of receivables, termination benefit expenses, operating lease rental expenses, travelling and entertainment, legal and other professional fees, amortization of right-of-use assets, utilities and office supplies, insurance expense, pollutants discharge fees, repairs and maintenance expenses, auditors’ remuneration, amortization of intangible assets, and others. General and administrative expenses accounted for 61.2%, 53.1% and 56.5% of our total operating expenses for the years ended December 31, 2017, 2018 and 2019, respectively. Employee benefit expenses, including salaries and bonus, housing fund, staff welfare and other expenses, employment expense in relation to early retirement schemes, termination benefit and retirement benefit cost-defined contribution schemes, comprise a significant component of our general and administrative expenses, accounting for 51.6%, 40.1% and 46.3% of our total general and administrative expenses for the years ended December 31, 2017, 2018 and 2019, respectively.
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Research and Development Expenses.Our research and development expenses accounted for 6.7%, 8.4% and 13.4% of our total operating expenses for the years ended December 31, 2017, 2018 and 2019, respectively.
Impairment loss on property, plant and equipment.Our impairment loss on property, plant and equipment accounted for 0.2%, 0.6% and 3.7% of our total operating expenses for the years ended December 31, 2017, 2018 and 2019, respectively. The significant increase in impairment loss on property, plant and equipment in 2019 was primarily resulting from the impairment loss on the plant and production facilities of Shanxi Huasheng for its termination of production.
Impairment losses on financial assets.Our impairment losses on financial assets accounted for 2.4% of our total operating expenses for the year ended December 31, 2019.
Impairment losses on investments in joint ventures.We did not incur any impairment losses on investments in joint ventures for the year ended December 31, 2019.
Other Income
Our other income consists primarily of tax returns and grants on industrial development support from the government. For the year ended December 31, 2019, our other income was RMB79.5 million, and accounted for 0.04% of the total consolidated revenues.
Other Gains, net
Our other net gains consisted primarily of gains on disposal of subsidiaries, gains on disposal of property, plant and equipment, gains on share of associates’ net assets, gains on disposal of joint venture or associates and gains on disposal of business. For the year ended December 31, 2019, our other net gains were RMB1,247.2 million, and accounted for 0.7% of the total consolidated revenues.
Finance Income
Our finance income consists primarily of interest income. For the year ended December 31, 2019, our finance income was RMB261.2 million, and accounted for 0.1% of the total consolidated revenues.
Finance Costs
Our financing costs consist primarily of interest expense on our borrowings. Interest rates on loans related to capital expenditures and working capital set by banks generally follow guidelines issued by the PBOC. The PBOC regulates the interest rates for commercial loans charged by state-owned banks from time to time as part of the PRC government’s efforts to regulate the PRC economy. In 2019, we incurred interest expense (net of capitalized interest) of RMB4,375.8 million on our borrowings.
Share of Profits and Losses of Joint Ventures
Our share of profits and losses of joint ventures is the profit attributable to us from our joint ventures, based on our equity interests in such joint ventures. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.
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Share of Profits and Losses of Associates
Our share of profits and losses of associates is the profit attributable to us from our associates, based on our equity interests in such associates. An associate is an entity over which we have significant influence but not control.
Consolidated Results of Operations
The following table sets forth certain income and expense items as a percentage of our revenues from our consolidated statements of comprehensive income for the periods indicated:
Year Ended December 31, | |||||||||||||||||||||
2017 | 2018 | 2019 | |||||||||||||||||||
RMB | (%) | RMB | (%) | RMB | US$ | (%) | |||||||||||||||
(in millions, except percentage) | |||||||||||||||||||||
Revenue | 181,022.6 | 100.0 | 180,241.4 | 100.0 | 190,074.2 | 27,302.4 | 100.0 | ||||||||||||||
Cost of Sales | (166,290.3 | ) | (91.9 | ) | (167,029.4 | ) | (92.7 | ) | (177,946.3 | ) | (25,560.4 | ) | (93.6 | ) | |||||||
Gross Profit | 14,732.3 | 8.1 | 13,212.0 | 7.3 | 12,127.9 | 1,742.0 | 6.4 | ||||||||||||||
Selling and distribution expenses | (2,373.0 | ) | (1.3 | ) | (2,496.9 | ) | (1.4 | ) | (1,673.1 | ) | (240.3 | ) | (0.9 | ) | |||||||
General and administrative expenses | (4,551.2 | ) | (2.5 | ) | (3,959.2 | ) | (2.2 | ) | (3,956.6 | ) | (568.3 | ) | (2.1 | ) | |||||||
Research and development expenses | (498.2 | ) | (0.3 | ) | (626.9 | ) | (0.3 | ) | (940.8 | ) | (135.1 | ) | (0.5 | ) | |||||||
Impairment loss on property, plant and equipment | (16.2 | ) | <0.1 | (46.5 | ) | <0.1 | (259.4 | ) | (37.3 | ) | (0.1 | ) | |||||||||
Impairment losses on financial assets | — | — | (108.0 | ) | (0.1 | ) | (169.8 | ) | (24.4 | ) | <0.1 | ||||||||||
Impairment losses on investments in joint ventures | — | — | (217.0 | ) | (0.1 | ) | — | — | — | ||||||||||||
Other income | 89.9 | <0.1 | 135.5 | <0.1 | 79.5 | 11.4 | <0.1 | ||||||||||||||
Other gains, net | 319.4 | 0.2 | 921.9 | 0.5 | 1,247.2 | 179.2 | 0.7 | ||||||||||||||
Operating profit | 7,703.0 | 4.2 | 6,814.9 | 3.8 | 6,454.9 | 927.2 | 3.4 | ||||||||||||||
Finance Income | 706.7 | 0.4 | 492.2 | 0.3 | 261.2 | 37.5 | 0.1 | ||||||||||||||
Finance cost | (5,203.4 | ) | (2.9 | ) | (4,882.5 | ) | (2.7 | ) | (4,921.2 | ) | (706.9 | ) | (2.6 | ) | |||||||
Share of profits and losses of joint ventures | 8.1 | <0.1 | (199.5 | ) | (0.1 | ) | 270.1 | 38.8 | 0.1 | ||||||||||||
Share of profits and losses of associates | (165.2 | ) | <0.1 | 39.4 | <0.1 | 48.8 | 7.0 | <0.1 | |||||||||||||
Profit before income tax | 3,049.2 | 1.7 | 2,264.5 | 1.3 | 2,113.8 | 303.6 | 1.1 | ||||||||||||||
Income tax benefit/(expense) | (643.7 | ) | (0.4 | ) | (822.5 | ) | (0.5 | ) | (625.7 | ) | (89.9 | ) | (0.3 | ) | |||||||
Profit for the year | 2,405.5 | 1.3 | 1,442.0 | 0.8 | 1,488.1 | 213.7 | 0.8 |
No customer individually accounted for more than 10% of our total revenue for the year ended December 31, 2019. Sales to Chinalco and its subsidiaries, joint ventures, associates and other related parties accounted for approximately 8.2%, 11.2% and 13.0% of consolidated revenues for the years ended December 31, 2017, 2018 and 2019, respectively. For information on related party transactions, see “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions” and Note 35 to our audited consolidated financial statements.
Year Ended December 31, 2019 Compared with Year Ended December 31, 2018
Revenue
Our revenueincreased by 5.5% from RMB 180,241.4 million for the year ended December 31, 2018, to RMB 190,074.2 million for the year ended December 31, 2019, primarily due to the increase in revenue generated from the sales of products sourced from external suppliers. Please see “- Discussion of Segment Operations - Year Ended December 31, 2019 Compared with Year Ended December 31, 2018 – Trading Segment” for discussion regarding sales of outsourced products in 2019 as compared to 2018.
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Cost of Sales
Our cost of salesincreased by 6.5% from RMB167,029.4 million for the year ended December 31, 2018, to RMB177,946.3 million for the year ended December 31, 2019, primarily due to the increase in the procurement costs from products sourced from external suppliers. Please see “- Discussion of Segment Operations - Year Ended December 31, 2019 Compared with Year Ended December 31, 2018 – Trading Segment” for detailed discussion regarding procurement of outsourced products in 2019 as compared to 2018.
Selling and Distribution Expenses
Our selling and distribution expensesdecreased by 33.0% from RMB2,496.9 million for the year ended December 31, 2018, to RMB1,673.1 million for the year ended December 31, 2019, primarily due to the decrease in transportation expenses of products.
General and Administrative Expenses
Our general and administrative expensesremained stable from RMB3,959.2 million for the year ended December 31, 2018, to RMB3,956.6 million for the year ended December 31, 2019.
Research and Development Expenses
Our research and development expensesincreased by 50.1% from RMB626.9 million in the year ended December 31, 2018 to RMB940.8 million for the year ended December 31, 2019, primarily due to the increase in investment in research and development of bauxite utilization improvement and high-quality alumina.
Other Income
Other income decreased by 41.3% from RMB135.5 million in the year ended December 31, 2018 to RMB79.5 million for the year ended December 31, 2019, primarily due to the decreases in the government grants recorded under other income.
Other Gains, Net
Our net other gains increased by 35.3% from RMB921.9 million for the year ended December 31, 2018 to RMB1,247.2 million for the year ended December 31, 2019, primarily due to the increase in gains from our investment in certain associates and the increase in gains on disposal of certain subsidiaries, associates and business, partially offset by the decrease in gains on re-measured equity value because we converted certain entities from joint ventures and associates to our subsidiaries in 2018 while we did not have such conversion in 2019. Please see “- Year Ended December 31, 2018 Compared with Year Ended December 31, 2017 – Other Gains, Net” for details of such conversion in 2018.
Finance Income
Our finance incomedecreased by 46.9% from RMB492.2 million for the year ended December 31, 2018 to RMB261.2 million for the year ended December 31, 2019, primarily due to the decrease in interest income resulting from the decrease in cash and cash equivalent held by us.
Finance Costs
Due to the increase of interest on lease liabilities as a result of the adoption of new accounting standards, although the expense of other interest decreased in 2019, our finance costs remained stable from RMB4,882.5 million for the year ended December 31, 2018 to RMB4,921.2 million for the year ended December 31, 2019.
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Share of Profits and Losses of Joint Ventures
We had a profit of RMB270.1 million in our share of profits and losses of joint venture for the year ended December 31, 2019, whereas we incurred a loss of RMB199.5 million in our share of profits and losses of joint venture for the year ended December 31, 2018. This was primarily attributable to the increase in profitability of some of our joint ventures.
Share of Profits and Losses of Associates
Our profit in our share of profits and losses of associates increased by 24.0% from RMB39.4 million for the year ended December 31, 2018 to RMB48.8 million for the year ended December 31, 2019. This was primarily attributable to improved operations of some of our associates that experienced losses in 2018.
Income TaxOperating Expenses
We estimateSelling and Distribution Expenses.Our selling and distribution expenses consist primarily of transportation and loading expenses, packaging expense and, to a lesser extent, port expenses and employee benefit expenses for employees in selling and distribution department. Selling and distribution expenses accounted for 31.9%, 33.5% and 23.9% of our total operating expenses for the years ended December 31, 2017, 2018 and 2019, respectively.
General and Administrative Expenses.Our general and administrative expenses consist primarily of early retirement benefit expenses, employee benefit expenses for directors and officers and employees in administrative department and, to a lesser extent, taxes other than income tax provisionexpenses, depreciation of non-production property, plant and deferred income taxation in accordance with the prevailing tax rules and regulations, taking into account any special approvals obtained from the relevant tax authorities and any preferential tax treatment to which we are entitled in each location or jurisdiction in which we operate. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. We recognize liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred income tax provisions in the period in which such determination is made.
Deferred tax assets are recognized for unused tax losses and deductible temporary differences, such as theequipment, provision for impairment of receivables, inventoriestermination benefit expenses, operating lease rental expenses, travelling and entertainment, legal and other professional fees, amortization of right-of-use assets, utilities and office supplies, insurance expense, pollutants discharge fees, repairs and maintenance expenses, auditors’ remuneration, amortization of intangible assets, and others. General and administrative expenses accounted for 61.2%, 53.1% and 56.5% of our total operating expenses for the years ended December 31, 2017, 2018 and 2019, respectively. Employee benefit expenses, including salaries and bonus, housing fund, staff welfare and other expenses, employment expense in relation to early retirement schemes, termination benefit and retirement benefit cost-defined contribution schemes, comprise a significant component of our general and administrative expenses, accounting for 51.6%, 40.1% and 46.3% of our total general and administrative expenses for the years ended December 31, 2017, 2018 and 2019, respectively.
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Research and Development Expenses.Our research and development expenses accounted for 6.7%, 8.4% and 13.4% of our total operating expenses for the years ended December 31, 2017, 2018 and 2019, respectively.
Impairment loss on property, plant and equipment.Our impairment loss on property, plant and equipment accounted for 0.2%, 0.6% and accruals of expenses not yet deductible for tax purposes, to the extent that it is probable that taxable profits will be available against which the losses deductible temporary difference can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies. The carrying value3.7% of our deferred tax assets as of December 31, 2018 was RMB1,542.6 million, compared with approximately RMB1,606.2 million as oftotal operating expenses for the years ended December 31, 2017, without taking into consideration2018 and 2019, respectively. The significant increase in impairment loss on property, plant and equipment in 2019 was primarily resulting from the offsettingimpairment loss on the plant and production facilities of Shanxi Huasheng for its termination of production.
Impairment losses on financial assets.Our impairment losses on financial assets accounted for 2.4% of our total operating expenses for the balances within the same tax jurisdiction. The amount of unrecognized tax losses as ofyear ended December 31, 2018, was RMB11,387.5 million, compared with approximately RMB18,213.6 million as of December 31, 2017.2019.
An entity shall recognize a deferred tax liability for all taxable temporary differences associated withImpairment losses on investments in subsidiaries, associates and joint ventures, except to the extent that both of the following conditions are satisfied: (a) the parent, investor or joint venturer is able to control the timing of the reversal of the temporary difference; and (b) it is probable that the temporary difference willventures.We did not reverse in the foreseeable future.
We believe that we have recorded adequate current tax provision and deferred taxes basedincur any impairment losses on the prevailing tax rules and regulations and our current best estimates and assumptions. In the event that future tax rules and regulations or related circumstances change, adjustments to current and deferred taxation may be necessary which would impact our results or financial position.
Revenue recognition
Revenue from contracts with customers is recognized when control of goods or services is transferred to the customers at an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services.
We recognize revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to us and specific criteria have been met for each of our activities (see descriptions below).
Investmentsinvestments in joint ventures and associates – recoverable amountfor the year ended December 31, 2019.
In accordance withOther Income
Our other income consists primarily of tax returns and grants on industrial development support from the government. For the year ended December 31, 2019, our accounting policy, each investment in aother income was RMB79.5 million, and accounted for 0.04% of the total consolidated revenues.
Other Gains, net
Our other net gains consisted primarily of gains on disposal of subsidiaries, gains on disposal of property, plant and equipment, gains on share of associates’ net assets, gains on disposal of joint venture or associates and gains on disposal of business. For the year ended December 31, 2019, our other net gains were RMB1,247.2 million, and accounted for 0.7% of the total consolidated revenues.
Finance Income
Our finance income consists primarily of interest income. For the year ended December 31, 2019, our finance income was RMB261.2 million, and accounted for 0.1% of the total consolidated revenues.
Finance Costs
Our financing costs consist primarily of interest expense on our borrowings. Interest rates on loans related to capital expenditures and working capital set by banks generally follow guidelines issued by the PBOC. The PBOC regulates the interest rates for commercial loans charged by state-owned banks from time to time as part of the PRC government’s efforts to regulate the PRC economy. In 2019, we incurred interest expense (net of capitalized interest) of RMB4,375.8 million on our borrowings.
Share of Profits and Losses of Joint Ventures
Our share of profits and losses of joint ventures is the profit attributable to us from our joint ventures, based on our equity interests in such joint ventures. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.
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Share of Profits and Losses of Associates
Our share of profits and losses of associates is the profit attributable to us from our associates, based on our equity interests in such associates. An associate is evaluated in every reporting period to determine whether there are any indicators of impairment. If any such indicator exists, an estimate of the recoverable amount is performed and an impairment loss is recognized to the extent that the carrying amount exceeds the recoverable amount. The recoverable amount of the investment in a joint venture and an associate is measured at the higher of fair value less costs of disposal and value in use.entity over which we have significant influence but not control.
A fair value measurementConsolidated Results of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.Operations
Value in use is also generally determinedThe following table sets forth certain income and expense items as a percentage of our revenues from our consolidated statements of comprehensive income for the present valueperiods indicated:
Year Ended December 31, | |||||||||||||||||||||
2017 | 2018 | 2019 | |||||||||||||||||||
RMB | (%) | RMB | (%) | RMB | US$ | (%) | |||||||||||||||
(in millions, except percentage) | |||||||||||||||||||||
Revenue | 181,022.6 | 100.0 | 180,241.4 | 100.0 | 190,074.2 | 27,302.4 | 100.0 | ||||||||||||||
Cost of Sales | (166,290.3 | ) | (91.9 | ) | (167,029.4 | ) | (92.7 | ) | (177,946.3 | ) | (25,560.4 | ) | (93.6 | ) | |||||||
Gross Profit | 14,732.3 | 8.1 | 13,212.0 | 7.3 | 12,127.9 | 1,742.0 | 6.4 | ||||||||||||||
Selling and distribution expenses | (2,373.0 | ) | (1.3 | ) | (2,496.9 | ) | (1.4 | ) | (1,673.1 | ) | (240.3 | ) | (0.9 | ) | |||||||
General and administrative expenses | (4,551.2 | ) | (2.5 | ) | (3,959.2 | ) | (2.2 | ) | (3,956.6 | ) | (568.3 | ) | (2.1 | ) | |||||||
Research and development expenses | (498.2 | ) | (0.3 | ) | (626.9 | ) | (0.3 | ) | (940.8 | ) | (135.1 | ) | (0.5 | ) | |||||||
Impairment loss on property, plant and equipment | (16.2 | ) | <0.1 | (46.5 | ) | <0.1 | (259.4 | ) | (37.3 | ) | (0.1 | ) | |||||||||
Impairment losses on financial assets | — | — | (108.0 | ) | (0.1 | ) | (169.8 | ) | (24.4 | ) | <0.1 | ||||||||||
Impairment losses on investments in joint ventures | — | — | (217.0 | ) | (0.1 | ) | — | — | — | ||||||||||||
Other income | 89.9 | <0.1 | 135.5 | <0.1 | 79.5 | 11.4 | <0.1 | ||||||||||||||
Other gains, net | 319.4 | 0.2 | 921.9 | 0.5 | 1,247.2 | 179.2 | 0.7 | ||||||||||||||
Operating profit | 7,703.0 | 4.2 | 6,814.9 | 3.8 | 6,454.9 | 927.2 | 3.4 | ||||||||||||||
Finance Income | 706.7 | 0.4 | 492.2 | 0.3 | 261.2 | 37.5 | 0.1 | ||||||||||||||
Finance cost | (5,203.4 | ) | (2.9 | ) | (4,882.5 | ) | (2.7 | ) | (4,921.2 | ) | (706.9 | ) | (2.6 | ) | |||||||
Share of profits and losses of joint ventures | 8.1 | <0.1 | (199.5 | ) | (0.1 | ) | 270.1 | 38.8 | 0.1 | ||||||||||||
Share of profits and losses of associates | (165.2 | ) | <0.1 | 39.4 | <0.1 | 48.8 | 7.0 | <0.1 | |||||||||||||
Profit before income tax | 3,049.2 | 1.7 | 2,264.5 | 1.3 | 2,113.8 | 303.6 | 1.1 | ||||||||||||||
Income tax benefit/(expense) | (643.7 | ) | (0.4 | ) | (822.5 | ) | (0.5 | ) | (625.7 | ) | (89.9 | ) | (0.3 | ) | |||||||
Profit for the year | 2,405.5 | 1.3 | 1,442.0 | 0.8 | 1,488.1 | 213.7 | 0.8 |
No customer individually accounted for more than 10% of our total revenue for the estimated future cash flows of those expectedyear ended December 31, 2019. Sales to arise from the continued use of the asset in its present formChinalco and its eventual disposal. Present values are determined using a risk-adjusted pre-tax discount rate appropriate tosubsidiaries, joint ventures, associates and other related parties accounted for approximately 8.2%, 11.2% and 13.0% of consolidated revenues for the risks inherent in the asset. Future cash flow estimates are basedyears ended December 31, 2017, 2018 and 2019, respectively. For information on expected productionrelated party transactions, see “Item 7. Major Shareholders and sales volumes, selling prices (considering currentRelated Party Transactions - B. Related Party Transactions” and historical prices, price trends and related factors) and operating costs. This policy requires management to make these estimates and assumptions which are subject to risk and uncertainty; hence there is a possibility that changes in circumstances will alter these projections, which may impact on the recoverable amounts of the investments. In such circumstances, some or all of the carrying value of the investments may be impaired and the impairment would be charged against profit or loss.
New IFRS Pronouncements
For a detailed discussion of new accounting pronouncements, please see Note 235 to our audited consolidated financial statements.
Factors Affecting Our Results of Operations
We believe that the following factors which impact our various revenue and expense items (as described below) have had, and will continue to have, a significant effect on the development of our business, financial position and results of operation.
Economic Condition of China and the World
As the major aluminum product market is globalized, the demand for and prices of our products are highly correlated with the general economic condition of China and the world and the performance of the major aluminum and related product markets. In recent years, China’s economy continued to experience growth despite the negative effects of the global financial crisis beginning in the second half of 2008 and economic recession in 2009, as well as general market volatility and changing macroeconomic conditions. However, the growth of China’s economy has shown signs of slowing down since 2014, with GDP growth of 6.9% from 2014 to 2015, 6.7% from 2015 to 2016, 6.9% from 2016 to 2017 and 6.6% from 2017 to 2018, as compared to 7.5% from 2013 to 2014.
The global output of alumina (with chemical alumina products included) in 2018 decreased by approximately 4.5% from 2017 to approximately 124.69 million tonnes. The global alumina consumption (with chemical alumina products included) in 2018 decreased approximately by 1.5% from 2017 to approximately 128.40 million tonnes. In 2018, the domestic output of alumina (with chemical alumina products included) increased approximately by 1.9% from 2017 to approximately 71.61 million tonnes and the domestic consumption for alumina (with chemical alumina products included) increased by approximately 0.3% from 2017 to approximately 72.70 million tonnes.
The global output of primary aluminum in 2018 increased approximately by 1.5% from 2017 to approximately 64.21 million tonnes. The global consumption of primary aluminum in 2018 increased approximately 3.3% from 2017 to approximately 65.70 million tonnes. In 2018, the domestic output of primary aluminum decreased approximately by 0.5% from 2017 to approximately 36.48 million tonnes and the domestic consumption of primary aluminum increased approximately by 4.9% from 2017 to approximately 37.13 million tonnes.
Mix and Pricing of Our Products
We are engaged principally in alumina refining, primary aluminum smelting and sales of these products and trading of non-ferrous metal products and other products. In addition, we are engaged in coal mining and power generation. We sell most of our self-produced products through Chalco Trading, taking into account the spot market prices and SHFE prices. In 2018, revenues generated from alumina, primary aluminum, trading and energy segments (after elimination of inter-segment sales) accounted for 8.2%, 22.9%, 64.7% and 3.9%, respectively, of our consolidated total revenues after elimination of inter-segment sales. We apply different policies to price different products. For information on our pricing of different products, please see the section headed “Item 4. Information of the Company - B. Business Overview - Sales and Marketing.”
The sales prices of alumina that our alumina refineries sell internally to Chalco Trading are determined based on our budgeted sale prices, spot market prices and the prices of primary aluminum on SHFE. Chalco Trading coordinates the external negotiation and execution of sales contracts of our alumina products. The alumina prices in both domestic and international market increased in 2018 when compared to that of 2017. The increase in sales price in international market was attributable to the supply shortage in global alumina market, as a result of decreases in production of, and sanctions and labor strikes faced by, certain main players in the overseas market in 2018. China’s export volume of alumina also increased in 2018 due to such supply shortage in international market. In addition, the tightened environmental protection regulatory inspection restrained the supply of bauxite in certain areas, which further contributed to the increase in sales price in domestic market. Accordingly, in 2018, the sales price of alumina in the domestic market fluctuated at a relatively high price level. In 2018, the spot price of alumina in the international market reached a high of approximately US$710 per tonne and bottomed out at approximately US$357 per tonne. The average spot price of alumina in the international market was approximately US$473 per tonne, representing an increase of 33.6% from 2017. The spot price of alumina in the domestic market reached a high of RMB3,291 per tonne and bottomed out at RMB2,691 per tonne. The average spot price of alumina in the domestic market was approximately RMB2,992 per tonne, representing an increase of 2.9% from 2017. Our average selling price of alumina increased by 2.6% from RMB2,845 per tonne in 2017 to RMB2,918 per tonne in 2018.
Like most primary aluminum producers in China, we price our primary aluminum products by reference to the primary aluminum spot prices and futures price on the SHFE. In 2018, three month aluminum futures prices reached a high of US$2,718 per tonne and a low of US$1,830 per tonne on LME; and a high of RMB15,650 per tonne and a low of RMB13,505 per tonne on SHFE. The average three-month aluminum futures prices at SHFE decreased by 2.4% from RMB14,731 per tonne in 2017 to RMB14,375 per tonne in 2018. Our average selling price of primary aluminum decreased by 1.7% from RMB14,567 per tonne in 2017 to RMB 14,313 per tonne in 2018. In 2018, the primary aluminum prices in global market experienced significant fluctuations, as the prices first increased due to supply shortage in the global aluminum industry and sanctions faced by a main player in the overseas market, but then followed by a price decrease partially due to mitigation of impacts of factors that previously drove up the prices, as well as the impact of the China-U.S. trade tension. Meanwhile, the primary aluminum prices in domestic market generally declined in 2018 due to the slowdown in growth of demand for primary aluminum, in spite of the impact of the decrease in aluminum production.
Price Volatility of Non-ferrous Metal and Coal Products
Since late 2009, as a result of the implementation of our operational structural adjustment, we have been engaged substantially in the trading of outsourced non-ferrous metal products to increase our profit. In 2012, we began to engage in the trading of significant amounts of outsourced coal products to diversify our product portfolio. Although the profit margin of sales of outsourced products is typically lower than that of our self-produced products, we generated substantial revenues and profit from the trading of outsourced products during the past few years due to our significant trading volumes. Our revenue generated from external sales of products purchased from external sources in 2018 was approximately RMB82,192.6 million, representing approximately 70.5% of total revenue from external sales in our trading segment. From time to time, we may enter into futures and option transactions in addition to the simple buy-low-sell-high trading model to hedge against price fluctuations in the non-ferrous metal and coal products market. However, short-term price volatility of these products remains a key factor affecting our operation results, as we need to make the correct prediction concerning the price trends of these products on the markets to ensure substantial revenues through large trading volume. If the market price trend does not match our prediction, we may be forced to sell trading products at low prices or to purchase trading products at high prices, which may adversely affect gross margins and profitability.
Manufacturing Costs
Our cost of revenues consists primarily of the costs of raw materials, overhead cost and electric power cost. Our principal raw material is bauxite. For the years endedYear Ended December 31, 2016, 2017 and2019 Compared with Year Ended December 31, 2018 bauxite supplied by our mines accounted for 47%, 47% and 44%, respectively, of our total bauxite used in the production of alumina. The unit cost of bauxite produced by us is generally lower than the unit cost of bauxite procured from external suppliers. In 2018, as a result of the increase in the costs of purchasing bauxite and caustic soda, our average cost of alumina per tonne increased by approximately 9.5% from that in 2017.
Primary aluminum is one of our major aluminum products and is produced by smelting operations. Smelting operations require a substantial and continuous supply of electricity. Electricity cost is the most significant component of our primary aluminum production cost and accounted for approximately 33% of our unit production cost for primary aluminum in 2018. The availability and price of electricity are key considerations in our primary aluminum operations. Interruptions of electricity supply can result in lengthy production shutdowns, increased costs associated with restarting production and waste of production in progress, and prolonged interruptions can cause damage to, or the destruction of, production equipment and facilities. Our average annual electricity price per kWh increased by 21% from 2016 to 2017 and decreased by 2% from 2017 to 2018.
Given our high proportion of fixed costs, we must generate sufficient sales to absorb our fixed costs to maintain or increase our operating margins. Our acquisitions and production expansion in recent years have significantly increased our costs that are relatively fixed in nature, such as leases and depreciation of property, plant and equipment and employee benefit expenses. If we are able to maintain satisfactory facility utilization rates and productivity, our production capacity expansion will enable us to reduce our unit costs through economies of scale and recover associated increased costs through higher output. In 2018, we continued to focus on lowering production costs and increasing production efficiency through reducing raw material consumption by improving technology and internal management.
Availability and Costs of Financing
We require a significant amount of capital to fund our operations. For example, we need substantial amounts of funds for expanding our operations, purchasing and maintaining equipment and procuring commodities. We have in the past funded our capital expenditures primarily with bank loans and the issuance of medium-term notes and bonds and long-term bonds. The availability of financing is subject to various factors, including our credit history and the prevailing credit policy adopted by the PRC government. Over the years, we have maintained good relationships with the commercial banks in China, which enables us to access bank financing at relatively low costs. Any change of lending policies adopted by the PRC government in the future may, among other things, affect our ability to obtain financing and may in turn adversely affect our operating results.
Our finance costsdecreased by 6.2% from 2017 to 2018, primarily due to the decrease in interest-bearing loans and borrowings during the year. If we are unable to secure sufficient external funding when required, we may not be able to fund our working capital requirements and necessary capital expenditures, which could adversely affect our business, financial performance and prospects.
In addition, our borrowing costs and access to debt financing depend significantly on our credit ratings. These ratings, including long-term corporate credit ratings and financing bond credit ratings, are assigned by rating agencies, which may lower or withdraw their ratings. Any change in our credit ratings or average interest rate could have negative implications, which may increase our finance costs and affect our financial results.
Regulatory Environment
The central and local governments in the PRC continues to exercise a substantial degree of control and influence over the aluminum and other non-ferrous metal products industry in China and shape the structure and development of the industry through the imposition of industry policies governing major project approvals and safety, environmental and quality regulations. If the PRC government changes its current policies or the interpretation of those policies that are currently beneficial to us, we may face pressure on profit margins and significant constraints on our ability to expand our business operations.
Selected Statement of Operation Items
Revenue
Our revenue isincreased by 5.5% from RMB 180,241.4 million for the year ended December 31, 2018, to RMB 190,074.2 million for the year ended December 31, 2019, primarily due to the increase in revenue generated from the sales of alumina, primary aluminum, other non-ferrous metal products and coal products. In addition, we are engagedsourced from external suppliers. Please see “- Discussion of Segment Operations - Year Ended December 31, 2019 Compared with Year Ended December 31, 2018 – Trading Segment” for discussion regarding sales of outsourced products in coal mining and power generation. The remainder of our revenues was derived from research and development activities and other products and services. We established our trading and energy businesses2019 as new business segments in 2010 and 2013, respectively.compared to 2018.
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Cost of Sales
Our cost of sales consists primarily ofincreased by 6.5% from RMB167,029.4 million for the purchase of inventories in relation to trading activities, cost of raw materials, consumables and electric power used in manufacturing, the fixed cost of and employee benefit expenses. For the yearsyear ended December 31, 2016, 2017 and 2018, our costto RMB177,946.3 million for the year ended December 31, 2019, primarily due to the increase in the procurement costs from products sourced from external suppliers. Please see “- Discussion of sales was RMB133,700.2 million, RMB166,290.2 million and RMB167,029.4 million, respectively, and accountedSegment Operations - Year Ended December 31, 2019 Compared with Year Ended December 31, 2018 – Trading Segment” for 92.3%, 91.9% and 92.7%, respectively,detailed discussion regarding procurement of the total consolidated revenues for those periods.outsourced products in 2019 as compared to 2018.
Selling and Distribution Expenses
Our selling and distribution expensesdecreased by 33.0% from RMB2,496.9 million for the year ended December 31, 2018, to RMB1,673.1 million for the year ended December 31, 2019, primarily due to the decrease in transportation expenses of products.
General and Administrative Expenses
Our general and administrative expensesremained stable from RMB3,959.2 million for the year ended December 31, 2018, to RMB3,956.6 million for the year ended December 31, 2019.
Research and Development Expenses
Our research and development expensesincreased by 50.1% from RMB626.9 million in the year ended December 31, 2018 to RMB940.8 million for the year ended December 31, 2019, primarily due to the increase in investment in research and development of bauxite utilization improvement and high-quality alumina.
Other Income
Other income decreased by 41.3% from RMB135.5 million in the year ended December 31, 2018 to RMB79.5 million for the year ended December 31, 2019, primarily due to the decreases in the government grants recorded under other income.
Other Gains, Net
Our net other gains increased by 35.3% from RMB921.9 million for the year ended December 31, 2018 to RMB1,247.2 million for the year ended December 31, 2019, primarily due to the increase in gains from our investment in certain associates and the increase in gains on disposal of certain subsidiaries, associates and business, partially offset by the decrease in gains on re-measured equity value because we converted certain entities from joint ventures and associates to our subsidiaries in 2018 while we did not have such conversion in 2019. Please see “- Year Ended December 31, 2018 Compared with Year Ended December 31, 2017 – Other Gains, Net” for details of such conversion in 2018.
Finance Income
Our finance incomedecreased by 46.9% from RMB492.2 million for the year ended December 31, 2018 to RMB261.2 million for the year ended December 31, 2019, primarily due to the decrease in interest income resulting from the decrease in cash and cash equivalent held by us.
Finance Costs
Due to the increase of interest on lease liabilities as a result of the adoption of new accounting standards, although the expense of other interest decreased in 2019, our finance costs remained stable from RMB4,882.5 million for the year ended December 31, 2018 to RMB4,921.2 million for the year ended December 31, 2019.
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Share of Profits and Losses of Joint Ventures
We had a profit of RMB270.1 million in our share of profits and losses of joint venture for the year ended December 31, 2019, whereas we incurred a loss of RMB199.5 million in our share of profits and losses of joint venture for the year ended December 31, 2018. This was primarily attributable to the increase in profitability of some of our joint ventures.
Share of Profits and Losses of Associates
Our profit in our share of profits and losses of associates increased by 24.0% from RMB39.4 million for the year ended December 31, 2018 to RMB48.8 million for the year ended December 31, 2019. This was primarily attributable to improved operations of some of our associates that experienced losses in 2018.
Operating Expenses
Selling and Distribution Expenses.Our selling and distribution expenses consist primarily of transportation and loading expenses, packaging expense and, to a lesser extent, port expenses and employee benefit expenses for employees in selling and distribution department, warehouse and other storage fees, depreciation of non-production property, plant and equipment, sales commissions and other handling fees, marketing and advertising expenses, among others.department. Selling and distribution expenses accounted for 37.2%31.9%, 31.9%33.5% and 33.7%23.9% of our total operating expenses for the years ended December 31, 2016, 2017, 2018 and 2018,2019, respectively.
General and Administrative Expenses.Our general and administrative expenses consist primarily of early retirement benefit expenses, employee benefit expenses for directors and officers and employees in administrative department and, to a lesser extent, taxes other than income tax expenses, impairment of intangible assets, depreciation of non-production property, plant and equipment, provision for impairment of receivables, termination benefit expenses, operating lease rental expenses, travelling and entertainment, legal and other professional fees, amortization of land use rights and leasehold land,right-of-use assets, utilities and office supplies, insurance expense, pollutants discharge fees, repairs and maintenance expenses, auditors’ remuneration, amortization of intangible assets, and others. General and administrative expenses accounted for 58.8%61.2%, 61.2%53.1% and 53.4%56.5% of our total operating expenses for the years ended December 31, 2016, 2017, 2018 and 2018,2019, respectively. Employee benefit expenses, including salaries and bonus, housing fund, staff welfare and other expenses, employment expense in relation to early retirement schemes, termination benefit and retirement benefit cost-defined contribution schemes, comprise a significant component of our general and administrative expenses, accounting for 51.0%51.6%, 51.3%40.1% and 40.1%46.3% of our total general and administrative expenses for the years ended December 31, 2016, 2017, 2018 and 2018,2019, respectively.
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Research and Development Expenses.Our research and development expenses accounted for 3.0%6.7%, 6.7%8.4% and 8.5%13.4% of our total operating expenses for the years ended December 31, 2016, 2017, 2018 and 2018,2019, respectively.
Impairment loss on property, plant and equipment.Our impairment loss on property, plant and equipment accounted for 1.0%0.2%, 0.2%0.6% and 0.1%3.7% of our total operating expenses for the years ended December 31, 2016, 2017, 2018 and 2018,2019, respectively. The significant increase in impairment loss on property, plant and equipment in 2019 was primarily resulting from the impairment loss on the plant and production facilities of Shanxi Huasheng for its termination of production.
Impairment losses on financial assets.Our impairment losses on financial assets accounted for 1.5%2.4% of our total operating expenses for the year ended December 31, 2018.2019.
Impairment losses on investments in joint ventures.OurWe did not incur any impairment losses on investments in joint ventures accounted for 2.9% of our total operating expenses for the year ended December 31, 2018.2019.
Other Income
Our other income consists primarily of research subsidies,tax returns and grants on energy saving, environment protection projects and industrial development support from the government. For the year ended December 31, 2018,2019, our other income was RMB135.4RMB79.5 million, and accounted for 0.1%0.04% of the total consolidated revenues.
Other Gains, net
Our other net gains consisted primarily of gains on deemed disposal and disposal of subsidiaries, gains on disposal of property, plant and equipment, gains on share of associates’ net assets, gains on disposal of joint venture or associates and gains on previously held equity interest remeasured at acquisition-date fair value, partially offset by losses and unrealized losses on future, forward and option contracts.disposal of business. For the year ended December 31, 2018,2019, our other net gains were RMB921.9RMB1,247.2 million, and accounted for 0.5%0.7% of the total consolidated revenues.
Finance Income
Our finance income consists primarily of interest income. For the year ended December 31, 2018,2019, our finance income was RMB492.2RMB261.2 million, and accounted for 0.3%0.1% of the total consolidated revenues.
Finance Costs
Our financing costs consist primarily of interest expense on our borrowings, which we have incurred mainly to fund our capital expenditures.borrowings. Interest rates on loans related to capital expenditures and working capital set by banks generally follow guidelines issued by the PBOC. The PBOC regulates the interest rates for commercial loans charged by state-owned banks from time to time as part of the PRC government’s efforts to regulate the PRC economy. In 2018,2019, we incurred interest expense (net of capitalized interest) of RMB4,685.1RMB4,375.8 million on our borrowings.
Share of Profits and Losses of Joint Ventures
Our share of profits and losses of joint ventures is the profit attributable to us from our joint ventures, based on our equity interests in such joint ventures. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.
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Share of Profits and Losses of Associates
Our share of profits and losses of associates is the profit attributable to us from our associates, based on our equity interests in such associates. An associate is an entity over which we have significant influence but not control.
Consolidated Results of Operations
The following table sets forth certain income and expense items as a percentage of our revenues from our consolidated statements of comprehensive income for the periods indicated:
Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||
2016 | 2017 | 2018 | 2017 | 2018 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
RMB | (%) | RMB | (%) | RMB | US$ | (%) | RMB | (%) | RMB | (%) | RMB | US$ | (%) | ||||||||||||||||||||||||||||||||||||
(in millions, except percentage) | (in millions, except percentage) | ||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | 144,854.6 | 100.0 | 181,020.4 | 100.0 | 180,240.2 | 26,214.8 | 100.0 | 181,022.6 | 100.0 | 180,241.4 | 100.0 | 190,074.2 | 27,302.4 | 100.0 | |||||||||||||||||||||||||||||||||||
Cost of Sales | (133,700.2 | ) | (92.3 | ) | (166,290.2 | ) | (91.9 | ) | (167,029.4 | ) | (24,293.4 | ) | (92.7 | ) | (166,290.3 | ) | (91.9 | ) | (167,029.4 | ) | (92.7 | ) | (177,946.3 | ) | (25,560.4 | ) | (93.6 | ) | |||||||||||||||||||||
Gross Profit | 11,154.4 | 7.7 | 14,730.2 | 8.1 | 13,210.8 | 1,921.4 | 7.3 | 14,732.3 | 8.1 | 13,212.0 | 7.3 | 12,127.9 | 1,742.0 | 6.4 | |||||||||||||||||||||||||||||||||||
Selling and distribution expenses | (2,111.8 | ) | (1.5 | ) | (2,373.0 | ) | (1.3 | ) | (2,496.9 | ) | (363.2 | ) | (1.4 | ) | (2,373.0 | ) | (1.3 | ) | (2,496.9 | ) | (1.4 | ) | (1,673.1 | ) | (240.3 | ) | (0.9 | ) | |||||||||||||||||||||
General and administrative expenses | (3,336.1 | ) | (2.3 | ) | (4,549.2 | ) | (2.5 | ) | (3,958.1 | ) | (575.7 | ) | (2.2 | ) | (4,551.2 | ) | (2.5 | ) | (3,959.2 | ) | (2.2 | ) | (3,956.6 | ) | (568.3 | ) | (2.1 | ) | |||||||||||||||||||||
Research and development expenses | (168.9 | ) | (0.1 | ) | (498.2 | ) | (0.3 | ) | (626.9 | ) | (91.2 | ) | (0.3 | ) | (498.2 | ) | (0.3 | ) | (626.9 | ) | (0.3 | ) | (940.8 | ) | (135.1 | ) | (0.5 | ) | |||||||||||||||||||||
Impairment loss on property, plant and equipment | (57.1 | ) | <0.1 | (16.2 | ) | <0.1 | (7.5 | ) | (1.1 | ) | <0.1 | (16.2 | ) | <0.1 | (46.5 | ) | <0.1 | (259.4 | ) | (37.3 | ) | (0.1 | ) | ||||||||||||||||||||||||||
Impairment losses on financial assets | — | — | — | — | (107.8 | ) | (15.7 | ) | (0.1 | ) | — | — | (108.0 | ) | (0.1 | ) | (169.8 | ) | (24.4 | ) | <0.1 | ||||||||||||||||||||||||||||
Impairment losses on investments in joint ventures | — | — | — | — | (217.0 | ) | (31.6 | ) | (0.1 | ) | — | — | (217.0 | ) | (0.1 | ) | — | — | — | ||||||||||||||||||||||||||||||
Other income | 155.6 | 0.1 | 89.9 | <0.1 | 135.4 | 19.7 | 0.1 | 89.9 | <0.1 | 135.5 | <0.1 | 79.5 | 11.4 | <0.1 | |||||||||||||||||||||||||||||||||||
Other gains, net | 169.2 | 0.1 | 319.3 | 0.2 | 921.9 | 134.1 | 0.5 | 319.4 | 0.2 | 921.9 | 0.5 | 1,247.2 | 179.2 | 0.7 | |||||||||||||||||||||||||||||||||||
Operating profit | 5,805.3 | 4.0 | 7,702.8 | 4.3 | 6,853.9 | 996.9 | 3.8 | 7,703.0 | 4.2 | 6,814.9 | 3.8 | 6,454.9 | 927.2 | 3.4 | |||||||||||||||||||||||||||||||||||
Finance Income | 815.7 | 0.6 | 706.7 | 0.4 | 492.2 | 71.6 | 0.3 | 706.7 | 0.4 | 492.2 | 0.3 | 261.2 | 37.5 | 0.1 | |||||||||||||||||||||||||||||||||||
Finance cost | (5,019.9 | ) | (3.5 | ) | (5,203.4 | ) | (2.9 | ) | (4,882.5 | ) | (710.1 | ) | (2.7 | ) | (5,203.4 | ) | (2.9 | ) | (4,882.5 | ) | (2.7 | ) | (4,921.2 | ) | (706.9 | ) | (2.6 | ) | |||||||||||||||||||||
Share of profits and losses of joint ventures | (95.5 | ) | (0.1 | ) | 8.2 | <0.1 | (199.5 | ) | (29.0 | ) | (0.1 | ) | 8.1 | <0.1 | (199.5 | ) | (0.1 | ) | 270.1 | 38.8 | 0.1 | ||||||||||||||||||||||||||||
Share of profits and losses of associates | 115.1 | 0.1 | (165.2 | ) | (0.1 | ) | 39.3 | 5.7 | <0.1 | (165.2 | ) | <0.1 | 39.4 | <0.1 | 48.8 | 7.0 | <0.1 | ||||||||||||||||||||||||||||||||
Profit before income tax | 1,620.7 | 1.1 | 3,049.0 | 1.7 | 2,303.5 | 335.0 | 1.3 | 3,049.2 | 1.7 | 2,264.5 | 1.3 | 2,113.8 | 303.6 | 1.1 | |||||||||||||||||||||||||||||||||||
Income tax benefit/(expense) | (403.9 | ) | (0.3 | ) | (643.7 | ) | (0.4 | ) | (822.5 | ) | (119.6 | ) | (0.5 | ) | (643.7 | ) | (0.4 | ) | (822.5 | ) | (0.5 | ) | (625.7 | ) | (89.9 | ) | (0.3 | ) | |||||||||||||||||||||
Profit for the year | 1,216.8 | 0.8 | 2,405.3 | 1.3 | 1,481.0 | 215.4 | 0.8 | 2,405.5 | 1.3 | 1,442.0 | 0.8 | 1,488.1 | 213.7 | 0.8 |
No customer individually accounted for more than 10% of our total revenue for the year ended December 31, 2018.2019. Sales to Chinalco and its subsidiaries, joint ventures, associates and other related parties accounted for approximately 9.0%8.2%, 8.2% 11.2% and 11.2%13.0% of consolidated revenues for the years ended December 31, 2016, 2017, 2018 and 2018,2019, respectively. For information on related party transactions, see “Item 7 -7. Major Shareholders and Related Party Transactions - B. Related Party Transactions” and Note 35 to our audited consolidated financial statements.
Year Ended December 31, 2019 Compared with Year Ended December 31, 2018
Revenue
Our revenueincreased by 5.5% from RMB 180,241.4 million for the year ended December 31, 2018, to RMB 190,074.2 million for the year ended December 31, 2019, primarily due to the increase in revenue generated from the sales of products sourced from external suppliers. Please see “- Discussion of Segment Operations - Year Ended December 31, 2019 Compared with Year Ended December 31, 2018 – Trading Segment” for discussion regarding sales of outsourced products in 2019 as compared to 2018.
78
Cost of Sales
Our cost of salesincreased by 6.5% from RMB167,029.4 million for the year ended December 31, 2018, to RMB177,946.3 million for the year ended December 31, 2019, primarily due to the increase in the procurement costs from products sourced from external suppliers. Please see “- Discussion of Segment Operations - Year Ended December 31, 2019 Compared with Year Ended December 31, 2018 – Trading Segment” for detailed discussion regarding procurement of outsourced products in 2019 as compared to 2018.
Selling and Distribution Expenses
Our selling and distribution expensesdecreased by 33.0% from RMB2,496.9 million for the year ended December 31, 2018, to RMB1,673.1 million for the year ended December 31, 2019, primarily due to the decrease in transportation expenses of products.
General and Administrative Expenses
Our general and administrative expensesremained stable from RMB3,959.2 million for the year ended December 31, 2018, to RMB3,956.6 million for the year ended December 31, 2019.
Research and Development Expenses
Our research and development expensesincreased by 50.1% from RMB626.9 million in the year ended December 31, 2018 to RMB940.8 million for the year ended December 31, 2019, primarily due to the increase in investment in research and development of bauxite utilization improvement and high-quality alumina.
Other Income
Other income decreased by 41.3% from RMB135.5 million in the year ended December 31, 2018 to RMB79.5 million for the year ended December 31, 2019, primarily due to the decreases in the government grants recorded under other income.
Other Gains, Net
Our net other gains increased by 35.3% from RMB921.9 million for the year ended December 31, 2018 to RMB1,247.2 million for the year ended December 31, 2019, primarily due to the increase in gains from our investment in certain associates and the increase in gains on disposal of certain subsidiaries, associates and business, partially offset by the decrease in gains on re-measured equity value because we converted certain entities from joint ventures and associates to our subsidiaries in 2018 while we did not have such conversion in 2019. Please see “- Year Ended December 31, 2018 Compared with Year Ended December 31, 2017 – Other Gains, Net” for details of such conversion in 2018.
Finance Income
Our finance incomedecreased by 46.9% from RMB492.2 million for the year ended December 31, 2018 to RMB261.2 million for the year ended December 31, 2019, primarily due to the decrease in interest income resulting from the decrease in cash and cash equivalent held by us.
Finance Costs
Due to the increase of interest on lease liabilities as a result of the adoption of new accounting standards, although the expense of other interest decreased in 2019, our finance costs remained stable from RMB4,882.5 million for the year ended December 31, 2018 to RMB4,921.2 million for the year ended December 31, 2019.
79
Share of Profits and Losses of Joint Ventures
We had a profit of RMB270.1 million in our share of profits and losses of joint venture for the year ended December 31, 2019, whereas we incurred a loss of RMB199.5 million in our share of profits and losses of joint venture for the year ended December 31, 2018. This was primarily attributable to the increase in profitability of some of our joint ventures.
Share of Profits and Losses of Associates
Our profit in our share of profits and losses of associates increased by 24.0% from RMB39.4 million for the year ended December 31, 2018 to RMB48.8 million for the year ended December 31, 2019. This was primarily attributable to improved operations of some of our associates that experienced losses in 2018.
Income Tax
Our income tax expense decreased by 23.9% from RMB822.5 million for the year ended December 31, 2018 to RMB625.7 million for the year ended December 31, 2019. This was mainly because we had deferred tax expenses in 2018 but deferred tax benefits in 2019.
Results of Operations
As a result of the foregoing, our net profit increased by 3.2% from RMB1,442.0 million for the year ended December 31, 2018 to RMB1,488.1 million for the year ended December 31, 2019.
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Revenue
Our revenue remained stable from RMB181,020.4RMB181,022.6 million for the year ended December 31, 2017, to RMB180,240.2RMB180,241.4 million for the year ended December 31, 2018,, mainly because the increases in the revenue generated from external sales of our primary aluminum segment and energy segment were offset by the decrease in the revenue generated from external sales of our trading segment. Please see “- Discussion of Segment Operations - Year Ended December 31, 2018 Compared with Year Ended December 31, 2017” for discussion regarding segment revenues in 2018 as compared to 2017.
Cost of Sales
Our cost of sales remained stable from RMB166,290.2RMB166,290.3 million for the year ended December 31, 2017, to RMB167,029.4 million for the year ended December 31, 2018, mainly because the increases in the cost of sales incurred from external sales of our primary aluminum segment and energy segment were offset by the decrease in the cost of sales incurred from external sales of our trading segment. Please see “- Discussion of Segment Operations - Year Ended December 31, 2018 Compared with Year Ended December 31, 2017” for discussion regarding segment cost and expenses in 2018 as compared to 2017.
Selling and Distribution Expenses
Our selling and distribution expenses increased by 5.2% from RMB2,373.0 million for the year ended December 31, 2017, to RMB2,496.9 million for the year ended December 31, 2018, primarily due to the increase of freight charges arising from increased sales.
General and Administrative Expenses
Our general and administrative expensesdecreased by 13.0% from RMB4,549.2RMB4,551.2 million for the year ended December 31, 2017, to RMB3,958.1millionRMB3,959.2 million for the year ended December 31, 2018, primarily attributable to the non-recurring provisions for early retirement benefits for certain employees made in 2017.
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Research and Development Expenses
Our research and development expensesincreased by 25.8% from RMB498.2 million in the year ended December 31, 2017 to RMB626.9 million for the year ended December 31, 2018, primarily due to increase in the research and development investment in high-quality alumina, premium aluminum alloy and upgrading of production technology.
Other Income
Other income increased by 50.6% from RMB89.9 million in the year ended December 31, 2017 to RMB135.4RMB135.5 million for the year ended December 31, 2018, primarily due to the increases in the government grants recorded under other income.
Other Gains, Net
Our net other gains increased significantly from RMB319.4 million for the year ended December 31, 2017 to RMB921.9 million for the year ended December 31, 2018, primarily due to the increase in our equity value in certain entities that were converted from joint ventures and associates to our subsidiaries during the year and were therefore re-measured in connection with such conversion.
Finance Income
Our finance income decreased by 30.4%30.3% from RMB706.7 million for the year ended December 31, 2017 to RMB492.2 million for the year ended December 31, 2018, primarily due to decreases in the interest received from unpaid disposal proceeds and interest income from our related party loans.
Finance Costs
Our finance costsdecreased by 6.2% from RMB5,203.4 million for the year ended December 31, 2017 to RMB4,882.5 million for the year ended December 31, 2018, primarily due to decrease in interest-bearing loans and borrowings during the year.
Share of Profits and Losses of Joint Ventures
We incurred a loss of RMB199.5 million in our share of profits and losses of joint venture for the year ended December 31, 2018, whereas we had a profit of RMB8.2RMB8.1 million in our share of profits and losses of joint venture for the year ended December 31, 2017. This was primarily attributable to the decrease in profitability of our major joint ventures.
Share of Profits and Losses of Associates
We had a profit of RMB39.3RMB39.4 million in our share of profits and losses of associates for the year ended December 31, 2018, whereas we incurred a loss of RMB165.2 million in our share of profits and losses of associates for the year ended December 31, 2017. This was primarily attributable to improved operations of our associates which experienced losses in 2017.
Income Tax
Ourincome tax expense increased by 27.8% from RMB643.7 million for the year ended December 31, 2017 to RMB822.5 million for the year ended December 31, 2018. This was mainly because we had deferred tax benefits in 2017 but deferred tax expenses in 2018.
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Results of Operations
OurOur net profit decreased by 38.4%40.1% from RMB2,405.3RMB2,405.5 million for the year ended December 31, 2017 to RMB1,481.0RMB1,442.0 million for the year ended December 31, 2018. This was primarily due to decrease of our gross profit, which mainly resulted from the decrease in sales price of primary aluminum and the increase in prices of raw materials.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
Revenue
Our revenue increased by 25.0% from RMB144,854.6 million for the year ended December 31, 2016, to RMB181,020.4 million for the year ended December 31, 2017, primarily due to the increase in prices and trading volume of various products. Specifically, influenced by the improvement in the supply and demand of the global aluminum market and China’s environmental policies, the prices and sales volume of alumina, primary aluminum, coal and other products we produced increased in 2017. The sales, purchase prices and purchase quantities of alumina, primary aluminum, copper, lead and zinc in the trading segment also increased.
Cost of Sales
Our cost of sales increased by 24.4% from RMB133,700.2 million for the year ended December 31, 2016, to RMB166,290.2 million for the year ended December 31, 2017, primarily due to the increase in the prices of raw materials and energy consumed as well as the increase in trading volume of products.
Selling and Distribution Expenses
Our selling and distribution expenses amounted to RMB2,373.0 million for the year ended December 31, 2017, representing an increase from RMB2,111.8 million for the year ended December 31, 2016, primarily due to the increase of trading volume of products.
General and Administrative Expenses
Our general and administrative expenses increased by 36.4% from RMB3,336.1 million for the year ended December 31, 2016, to RMB4,549.2 million for the year ended December 31, 2017, primarily attributable to the provision for the early retirement benefits for certain employees and the increase in tax expenses.
Research and Development Expenses
Our research and development expenses significantly increased from RMB168.9 million in the year ended December 31, 2016 to RMB498.2 million for the year ended December 31, 2017, primarily due to an increase in the research and development investment in advanced technologies relating to aluminum alloy and alumina.
Other Income
Other income decreased from RMB155.6 million in the year ended December 31, 2016 to RMB89.9 million for the year ended December 31, 2017, primarily due to a decrease in government grants recorded under other income.
Other Gains, Net
Our net other gains increased from RMB169.2 million for the year ended December 31, 2016 to RMB319.3 million for the year ended December 31, 2017, primarily due to gains on deemed disposal and disposal of subsidiaries.
Finance Income
Our finance income decreased from RMB815.7 million for the year ended December 31, 2016 to RMB706.7 million for the year ended December 31, 2017, primarily due to a decrease in the interest received from unpaid disposal proceeds.
Finance Costs
Our finance costs increased by 3.7% from RMB5,019.9 million for the year ended December 31, 2016 to RMB5,203.4 million for the year ended December 31, 2017, primarily due to the increase in exchange loss.
Share of Profits and Losses of Joint Ventures
We had a profit of RMB8.2 million in our share of profits and losses of joint venture for the year ended December 31, 2017, whereas we incurred a loss of RMB95.5 million in our share of profits and losses of joint venture for the year ended December 31, 2016. This was primarily attributable to the improved results of operation of our joint ventures.
Share of Profits and Losses of Associates
We had a profit of RMB115.1 million in our share of profits and losses of associates for the year ended December 31, 2016, whereas we incurred a loss of RMB165.2 million in our share of profits and losses of associates for the year ended December 31, 2017. This was primarily attributable to the decrease in the profits of our associates.
Income Tax
Our income tax expense increased from RMB403.9 million for the year ended December 31, 2016 to RMB643.7 million for the year ended December 31, 2017. This was mainly attributable to more income taxes recognized as a result of increase in profit for the year 2017.
Results of Operations
As a result of the foregoing, our net profit increased from RMB1,216.8 million for the year ended December 31, 2016 to RMB2,405.3 million for the year ended December 31, 2017.
Discussion of Segment Operations
We account for our operations on a segmental basis; that is, separately preparing the accounting for our alumina, primary aluminum, trading, energy and corporate and other operating segments. Unless otherwise indicated, also included in these segments are other revenues derived from activities such as supplying electricity, gas, heat and water to our affiliates, selling scrap and other materials and providing services including transportation and research and development to third parties. For additional information relating to our business segments and segment presentation, see Note 4 to our consolidated financial statements.
The following table sets forth a breakdown of our revenues by segment and the contribution of external sales and inter-segment sales for the periods indicated:
Year Ended December 31, | ||||||||||||||||||||||||
2016 | 2017 | 2018 | 2018 | 2018 | 2018 | |||||||||||||||||||
RMB | RMB | RMB | US$ | % | % | |||||||||||||||||||
(in millions, except percentage) | ||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Alumina: | ||||||||||||||||||||||||
External sales | 9,518.8 | 14,565.4 | 14,758.4 | 2,146.5 | 6.0 | 8.2 | ||||||||||||||||||
Inter-segment sales | 20,508.5 | 24,431.9 | 29,392.5 | 4,275.0 | 11.9 | |||||||||||||||||||
Total | 30,027.3 | 38,997.3 | 44,150.9 | 6,421.5 | 17.9 | |||||||||||||||||||
Primary aluminum: | ||||||||||||||||||||||||
External sales | 30,108.0 | 36,551.9 | 41,344.3 | 6,013.3 | 16.7 | 22.9 | ||||||||||||||||||
Inter-segment sales | 4,981.9 | 10,693.7 | 12,457.9 | 1,811.9 | 5.0 | |||||||||||||||||||
Total | 35,089.9 | 47,245.6 | 53,802.2 | 7,825.2 | 21.7 | |||||||||||||||||||
Trading | ||||||||||||||||||||||||
External sales | 100,439.5 | 123,695.6 | 116,646.3 | 16,965.5 | 47.0 | 64.7 | ||||||||||||||||||
Inter-segment sales | 13,906.4 | 23,159.1 | 25,370.3 | 3,690.0 | 10.2 | |||||||||||||||||||
Total | 114,345.9 | 146,854.7 | 142,016.6 | 20,655.5 | 57.2 | |||||||||||||||||||
Energy | ||||||||||||||||||||||||
External sales | 4,382.3 | 5,733.7 | 7,037.0 | 1,023.5 | 2.8 | 3.9 | ||||||||||||||||||
Inter-segment sales | 137.5 | 517.3 | 198.3 | 28.8 | 0.1 | |||||||||||||||||||
Total | 4,519.8 | 6,251.0 | 7,235.3 | 1,052.3 | 2.9 | |||||||||||||||||||
Corporate and others | ||||||||||||||||||||||||
External sales | 406.0 | 473.8 | 454.2 | 66.0 | 0.2 | 0.3 | ||||||||||||||||||
Inter-segment sales | 98.3 | 171.5 | 213.0 | 31.0 | 0.1 | |||||||||||||||||||
Total | 504.3 | 645.3 | 667.2 | 97.0 | 0.3 | |||||||||||||||||||
Total Revenues before inter-segment eliminations | 184,487.2 | 239,993.9 | 247,872.2 | 36,051.5 | 100 | |||||||||||||||||||
Eliminations of inter-segment sales | (39,632.6 | ) | (58,973.5 | ) | (67,632.0 | ) | (9,836.7 | ) | (27.3 | ) | ||||||||||||||
Consolidated total revenues | 144,854.6 | 181,020.4 | 180,240.2 | 26,214.8 | 72.7 | 100.0 |
Year Ended December 31, | ||||||||||||||||||||||||
2017 | 2018 | 2019 | 2019 | 2019 | 2019 | |||||||||||||||||||
RMB | RMB | RMB | US$ | % | % | |||||||||||||||||||
(in millions, except percentage) | ||||||||||||||||||||||||
Revenue | ||||||||||||||||||||||||
Alumina: | ||||||||||||||||||||||||
External sales | 14,565.3 | 14,758.4 | 14,326.6 | 2,057.7 | 5.6 | 7.5 | ||||||||||||||||||
Inter-segment sales | 24,431.9 | 29,392.5 | 29,573.4 | 4,248.0 | 11.4 | |||||||||||||||||||
Total | 38,997.2 | 44,150.9 | 43,900.0 | 6,305.7 | 17.0 | |||||||||||||||||||
Primary aluminum: | ||||||||||||||||||||||||
External sales | 36,552.0 | 41,344.3 | 37,394.6 | 5,371.4 | 14.4 | 19.7 | ||||||||||||||||||
Inter-segment sales | 10,693.7 | 12,457.9 | 11,694.4 | 1,679.8 | 4.5 | |||||||||||||||||||
Total | 47,245.7 | 53,802.2 | 49,089.0 | 7,051.2 | 18.9 | |||||||||||||||||||
Trading | ||||||||||||||||||||||||
External sales | 123,697.8 | 116,647.5 | 130,917.3 | 18,805.1 | 50.4 | 68.9 | ||||||||||||||||||
Inter-segment sales | 23,159.1 | 25,370.3 | 27,769.0 | 3,988.8 | 10.7 | |||||||||||||||||||
Total | 146,856.9 | 142,017.8 | 158,686.3 | 22,793.9 | 61.1 | |||||||||||||||||||
Energy | ||||||||||||||||||||||||
External sales | 5,733.7 | 7,037.0 | 7,109.8 | 1,021.3 | 2.7 | 3.7 | ||||||||||||||||||
Inter-segment sales | 517.3 | 198.3 | 236.1 | 33.9 | 0.1 | |||||||||||||||||||
Total | 6,251.0 | 7,235.3 | 7,345.9 | 1,055.2 | 2.8 | |||||||||||||||||||
Corporate and others | ||||||||||||||||||||||||
External sales | 473.8 | 454.2 | 325.9 | 46.8 | 0.1 | 0.2 | ||||||||||||||||||
Inter-segment sales | 171.5 | 213.0 | 167.1 | 24.0 | 0.1 | |||||||||||||||||||
Total | 645.3 | 667.2 | 493.0 | 70.8 | 0.2 | |||||||||||||||||||
Total Revenues before inter-segment eliminations | 239,996.1 | 247,873.4 | 259,514.2 | 37,276.8 | 100.0 | |||||||||||||||||||
Eliminations of inter-segment sales | (58,973.5 | ) | (67,632.0 | ) | (69,440.0 | ) | (9,974.4 | ) | (26.8 | ) | ||||||||||||||
Consolidated total revenues | 181,022.6 | 180,241.4 | 190,074.2 | 27,302.4 | 73.2 | 100.0 |
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The following table sets forth segment results before income tax by segment for the periods indicated:
Year Ended December 31, | ||||||||||||||||
2016 | 2017 | 2018 | 2018 | |||||||||||||
RMB | RMB | RMB | US$ | |||||||||||||
(in millions) | ||||||||||||||||
Alumina: | ||||||||||||||||
Revenues | 30,027.3 | 38,997.3 | 44,150.9 | 6,421.5 | ||||||||||||
Cost and expenses(1) | (29,116.9 | ) | (35,706.4 | ) | (40,654.5 | ) | (5,913.0 | ) | ||||||||
Segment results(2) | 910.4 | 3,290.9 | 3,496.4 | 508.5 | ||||||||||||
Primary aluminum: | ||||||||||||||||
Revenues | 35,089.9 | 47,245.6 | 53,802.2 | 7,825.2 | ||||||||||||
Cost and expenses(1) | (32,906.1 | ) | (46,419.0 | ) | (54,731.5 | ) | (7,960.4 | ) | ||||||||
Segment results(2) | 2,183.8 | 826.6 | (929.3 | ) | (135.2 | ) | ||||||||||
Trading: | ||||||||||||||||
Revenues | 114,345.9 | 146,854.7 | 142,016.6 | 20,655.5 | ||||||||||||
Cost and expenses(1) | (113,541.7 | ) | (146,121.0 | ) | (141,237.1 | ) | (20,542.1 | ) | ||||||||
Segment results(2) | 804.2 | 733.7 | 779.5 | 113.4 | ||||||||||||
Energy: | ||||||||||||||||
Revenues | 4,519.8 | 6,251.0 | 7,235.3 | 1,052.3 | ||||||||||||
Cost and expenses(1) | (4,486.4 | ) | (6,422.3 | ) | (7,209.3 | ) | (1,048.5 | ) | ||||||||
Segment results(2) | 33.4 | (171.3 | ) | 26.0 | 3.8 | |||||||||||
Corporate and others | ||||||||||||||||
Revenues | 504.3 | 645.3 | 667.2 | 97.0 | ||||||||||||
Cost and expenses(1) | (2,497.5 | ) | (2,373.9 | ) | (1,934.3 | ) | (281.3 | ) | ||||||||
Segment results(2) | (1,993.2 | ) | (1,728.6 | ) | (1,267.1 | ) | (184.3 | ) | ||||||||
Elimination(3) | (318.0 | ) | 97.6 | 198.1 | 28.8 | |||||||||||
Total (loss)/profit before income tax | 1,620.7 | 3,049.0 | 2,303.5 | 335.0 |
Year Ended December 31, | ||||||||||||||||
2017 | 2018 | 2019 | 2019 | |||||||||||||
RMB | RMB | RMB | US$ | |||||||||||||
(in millions) | ||||||||||||||||
Alumina: | ||||||||||||||||
Revenues | 38,997.2 | 44,150.9 | 43,900.0 | 6,305.7 | ||||||||||||
Cost and expenses(1) | (35,706.3 | ) | (40,654.5 | ) | (43,055.2 | ) | (6,184.4 | ) | ||||||||
Segment results(2) | 3,290.9 | 3,496.4 | 844.8 | 121.3 | ||||||||||||
Primary aluminum: | ||||||||||||||||
Revenues | 47,245.7 | 53,802.2 | 49,089.0 | 7,051.2 | ||||||||||||
Cost and expenses(1) | (46,419.1 | ) | (54,731.5 | ) | (48,401.8 | ) | (6,952.5 | ) | ||||||||
Segment results(2) | 826.6 | (929.3 | ) | 687.2 | 98.7 | |||||||||||
Trading: | ||||||||||||||||
Revenues | 146,856.9 | 142,017.8 | 158,686.3 | 22,793.9 | ||||||||||||
Cost and expenses(1) | (146,123.0 | ) | (141,277.3 | ) | (157,733.5 | ) | (22,657.0 | ) | ||||||||
Segment results(2) | 733.9 | 740.5 | 952.8 | 136.9 | ||||||||||||
Energy: | ||||||||||||||||
Revenues | 6,251.0 | 7,235.3 | 7,345.9 | 1,055.2 | ||||||||||||
Cost and expenses(1) | (6,422.3 | ) | (7,209.3 | ) | (6,942.4 | ) | (997.2 | ) | ||||||||
Segment results(2) | (171.3 | ) | 26.0 | 403.5 | 58.0 | |||||||||||
Corporate and others | ||||||||||||||||
Revenues | 645.3 | 667.2 | 493.0 | 70.8 | ||||||||||||
Cost and expenses(1) | (2,373.9 | ) | (1,934.3 | ) | (1,480.7 | ) | (212.7 | ) | ||||||||
Segment results(2) | (1,728.6 | ) | (1,267.1 | ) | (987.7 | ) | (141.9 | ) | ||||||||
Elimination(3) | 97.7 | 198.0 | 213.2 | 30.6 | ||||||||||||
Total profit before income tax | 3,049.2 | 2,264.5 | 2,113.8 | 303.6 |
(1) | Consist of cost of sales, operating expenses, other income, other gains, finance income, finance costs and others attributable to each segment. |
(2) | Segment results refer to |
(3) | Elimination refers to the aggregate inter-segment eliminations of segment results of each segment. |
Year Ended December 31, 20182019 Compared with Year Ended December 31, 20172018
Alumina Segment
Revenues.Total revenue generated by the alumina segment slightly decreased from RMB44,150.9 million for the year ended December 31, 2018, to RMB43,900.0 million for the year ended December 31, 2019, primarily due to the decrease in the sales prices of the external sales of alumina.
Revenue from external sales of the alumina segment decreased by 2.9% from RMB14,758.4 million for the year ended December 31, 2018, to RMB14,326.6 million for the year ended December 31, 2019, primarily due to the decrease in the sales prices of the external sales of alumina.
Revenue from inter-segment sales of the alumina segment remained stable from RMB29,392.5 million for the year ended December 31, 2018, to RMB29,573.4 million for the year ended December 31, 2019.
Cost and expenses. The total cost and expenses for our alumina segment increased by 5.9% from RMB40,654.5 million for the year ended December 31, 2018, to RMB43,055.2 million for the year ended December 31, 2019, primarily due to the increase in costs of bauxite as we procured more bauxite from external suppliers in 2019 and the losses from disposal of production facilities in Guizhou branch.
Segment results.The segment profit for our alumina segment decreased by 75.8% from RMB3,496.4 million for the year ended December 31, 2018 to RMB844.8 million for the year ended December 31, 2019, primarily due tothe increases in cost and expenses resulting fromthe increase in costs of bauxite as we procured more bauxite from external suppliers in 2019 and the losses from disposal of production facilities in Guizhou branch.
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Primary Aluminum Segment
Revenues.Total revenue generated by the primary aluminum segment decreased by 8.8% from RMB53,802.2 million for the year ended December 31, 2018, to RMB49,089.0 million for the year ended December 31, 2019, primarily due to the decrease in output of primary aluminum as a result of production suspension of Shandong Huayu and production termination of Shanxi Huasheng.
Revenue from external sales of the primary aluminum segment decreased by 9.6% from RMB41,344.3 million for the year ended December 31, 2018, to RMB37,394.6 million for the year ended December 31, 2019, primarily due to the decrease in trading volume for external sales of primary aluminum as a result of production suspension of Shandong Huayu and production termination of Shanxi Huasheng.
Revenue from inter-segment sales of primary aluminum segment decreased by 6.1% from RMB12,457.9 million for the year ended December 31, 2018, to RMB11,694.4 million for the year ended December 31, 2019, primarily due to the decrease in trading volume for internal sales of primary aluminum as a result of production suspension of Shandong Huayu and production termination of Shanxi Huasheng.
Cost and expenses.The total cost and expenses for our primary aluminum segment decreased by 11.6% from RMB54,731.5 million for the year ended December 31, 2018, to RMB48,401.8 million for the year ended December 31, 2019, primarily due to the production suspension of Shandong Huayu and production termination of Shanxi Huasheng.
Segment results.We had a segment profit of RMB687.2 million for the year ended December 31, 2019, whereas we incurred a segment loss of RMB929.3 million for the year ended December 31, 2018. This was mainly due to the decreases inprices ofcarbon anodesand alumina used under the primary aluminum segment in 2019 by 11.5% and 4.5%, respectively, in comparison with 2018.
Trading Segment
Revenues.Total revenue generated by the trading segment increased by 11.7% from RMB142,017.8 million for the year ended December 31, 2018 to RMB158,686.3 million for the year ended December 31, 2019, primarily due to the increases in trading volumes for external sales of outsourced primary aluminum, alumina and charred coal in 2019 by 159.2%, 119.8% and 40.0%, respectively, in comparison with 2018, partially offset by the decrease in trading volume of other non-ferrous metal products, such as copper and zinc.
Revenue from external sales of the trading segment increased by 12.2% from RMB116,647.5 million for the year ended December 31, 2018 to RMB130,917.3 million for the year ended December 31, 2019, primarily due to the increases in trading volumes for external sales of outsourced primary aluminum, alumina and charred coal in 2019 by 159.2%, 119.8% and 40.0%, respectively, in comparison with 2018, partially offset by the decrease in trading volume of other non-ferrous metal products, such as copper and zinc.
Revenue from internal sales of the trading segment increased by 9.5% from RMB25,370.3 million for the year ended December 31, 2018 to RMB27,769.0 million for the year ended December 31, 2019, primarily due to the increase in internal sales of bauxite as we imported more bauxite from suppliers overseas in 2019.
Cost and expenses.The total cost and expenses for our trading segment increased by 11.6% from RMB141,277.3 million for the year ended December 31, 2018 to RMB157,733.5 million for the year ended December 31, 2019, primarily due to the increases in trading volumes for external sales of outsourced primary aluminum, alumina and charred coal in 2019 by 159.2%, 119.8% and 40.0%, respectively, in comparison with 2018, partially offset by the decrease in trading volume of other non-ferrous metal products, such as copper and zinc.
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Segment results. Our segment profit increased by 28.7% from RMB740.5 million for the year ended December 31, 2018 to RMB952.8 million for the year ended December 31, 2019. This was mainly due to the increase in trading volume of charred coal, which is of a relatively high gross profit margin.
Energy Segment
Revenues.Total revenue generated by the energy segment increased by 1.5% from RMB7,235.3 million for the year ended December 31, 2018 to RMB7,345.9 million for the year ended December 31, 2019, remaining relatively stable.
Revenue from external sales of the energy segment increased by 1.0% from RMB7,037.0 million for the year ended December 31, 2018 to RMB7,109.8 million for the year ended December 31, 2019, remaining relatively stable.
Revenue from internal sales of the energy segment increased by 19.1% from RMB198.3 million for the year ended December 31, 2018 to RMB236.1 million for the year ended December 31, 2019, primarily due to increased sales of bauxite from a subsidiary in the energy segment to a company in the alumina segment.
Cost and expenses.The total cost and expenses for our energy segment decreased by 3.7% from RMB7,209.3 million for the year ended December 31, 2018 to RMB6,942.4 million for the year ended December 31, 2019, primarily due to the increases of share of profits of joint ventures and gains on disposal of associates, partially offset by the increase in the costs of coal.
Segment results.Our segment profit increased significantly from RMB26.0 million for the year ended December 31, 2018 to RMB403.5 million for the year ended December 31, 2019. This was mainly because the increases of share of profits of joint ventures and gains on disposal of associates, partially offset by the increase in the costs of coal.
Corporate and Other Operating Segment
Revenues. Revenue from the corporate and other operating segment decreased by 26.1% from RMB667.2 million for the year ended December 31, 2018 to RMB493.0 million for the year ended December 31, 2019, primarily due to decrease in maintenance service provided to primary aluminum enterprises resulting from the production suspension of Shandong Huayu and the production termination of Shanxi Huasheng.
Segment results. Our segment loss decreased by 22.1% from RMB1,267.1 million for the year ended December 31, 2018 to RMB987.7 million for the year ended December 31, 2019. This was mainly because the increase in gains from our investment in Yunnan Aluminum and Yixin Aluminum.
Year Ended December 31, 2018 Compared with Year Ended December 31, 2017
Alumina Segment
Revenues.Total revenue generated by the alumina segment increased by 13.2% from RMB38,997.3RMB38,997.2 million for the year ended December 31, 2017, to RMB44,150.9 million for the year ended December 31, 2018, primarily due to increases in the sales price and trading volume of alumina in 2018 by 2.6% and 5.0%, respectively, in comparison with 2017.
Revenue from external sales of the alumina segment increased by 1.3% from RMB14,565.4RMB14,565.3 million for the year ended December 31, 2017, to RMB14,758.4 million for the year ended December 31, 2018, primarily due to increase in the sales prices of the external sales of alumina.
Revenue from inter-segment sales of the alumina segmentincreased by 20.3% from RMB24,431.9 million for the year ended December 31, 2017, to RMB29,392.5 million for the year ended December 31, 2018, primarily due to an increasing demand of alumina by our primary aluminum smelters resulting from the increase in target production volume of our primary aluminum segment in 2018.
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Cost and expenses.The total cost and expenses for our alumina segment increased by 13.9% from RMB35,706.4RMB35,706.3 million for the year ended December 31, 2017, to RMB40,654.5 million for the year ended December 31, 2018, primarily due to the increase in trading volume of alumina.
Segment results.As a result of the foregoing, the segment profit for our alumina segment increased by 6.2% from RMB3,290.9 million for the year ended December 31, 2017 to RMB3,496.4 million for the year ended December 31, 2018.
Primary Aluminum Segment
Revenues.Total revenue generated by the primary aluminum segment increased by 13.9% from RMB47,245.6RMB47,245.7 million for the year ended December 31, 2017, to RMB53,802.2 million for the year ended December 31, 2018, primarily due to the increase in the trading volume of primary aluminum, partially offset by the decrease in the sales price of primary aluminum. In comparison with 2017, the trading volume and sales price of primary aluminum increased by 15.5% and decreased by 1.7%, respectively, in 2018.
Revenue from external sales of the primary aluminum segment increased by 13.1% from RMB36,551.9RMB36,552.0 million for the year ended December 31, 2017, to RMB41,344.3 million for the year ended December 31, 2018, primarily due to the increase in the trading volume for external sales of primary aluminum.
Revenue from inter-segment sales of primary aluminum segment increased by 16.5% from RMB10,693.7 million for the year ended December 31, 2017, to RMB12,457.9 million for the year ended December 31, 2018, primarily due to the increase in the trading volume for inter-segment sales of primary aluminum.
Cost and expenses.The total cost and expenses for our primary aluminum segment increased by 17.9% from RMB46,419.0RMB46,419.1 million for the year ended December 31, 2017, to RMB54,731.5 million for the year ended December 31, 2018, primarily due to the increase in the trading volume of primary aluminum. In addition, the increases in the purchase prices of alumina and anode also contributed to the increases in cost and expenses. In comparison with 2017, the purchase prices of alumina and anode increased by 3.5% and 11.5%, respectively, in 2018.
Segment results.We had a segment profit of RMB826.6 million for the year ended December 31, 2017, whereas we incurred a segment loss of RMB929.3 million for the year ended December 31, 2018. This was mainly attributable to the increases in purchase prices of alumina and anode and the decrease in the sales price of primary aluminum.
Trading Segment
Revenues.Total revenue generated by the trading segment decreased by 3.3% from RMB146,854.7RMB146,856.9 million for the year ended December 31, 2017 to RMB142,016.6RMB142,017.8 million for the year ended December 31, 2018, primarily due to the decrease in the revenue generated from the external sales of our trading segment.
Revenue from external sales of the trading segment decreased by 5.7% from RMB123,695.6RMB123,697.8 million for the year ended December 31, 2017 to RMB116,646.3RMB116,647.5 million for the year ended December 31, 2018, mainly due to conversion of certain trading segment subsidiaries making external sales or their businesses into joint ventures.
Revenue from internal sales of the trading segment increased by 9.5% from RMB23,159.1 million for the year ended December 31, 2017 to RMB25,370.3 million for the year ended December 31, 2018, primarily due to the increase in the inter-segment trading volume of alumina and primary aluminum as a result of the increase in target production volume of our primary aluminum segment.
Cost and expenses.The total cost and expenses for our trading segment decreased by 3.3% from RMB146,121.0RMB146,123.0 million for the year ended December 31, 2017 to RMB141,237.1RMB141,277.3 million for the year ended December 31, 2018, mainly due to the conversion of certain trading segment subsidiaries or their businesses into joint ventures.
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Segment results.As a result of the foregoing, the segment profit for our trading segment decreased by 6.2%remained stable from RMB733.7RMB733.9 million for the year ended December 31, 2017 to RMB779.5RMB740.5 million for the year ended December 31, 2018.
Energy Segment
Revenues.Total revenue generated by the energy segment increased by 15.7% from RMB6,251.0 million for the year ended December 31, 2017 to RMB7,235.3 million for the year ended December 31, 2018, primarily due to the increases in revenues of coal and electricity by 9.22% and 40.45%, respectively, in comparison with 2017.
Revenue from external sales of the energy segment increased by 22.7% from RMB5,733.7 million for the year ended December 31, 2017 to RMB7,037.0 million for the year ended December 31, 2018, primarily due to the increase in trading volume of electricity resulting from the acquisition of an electricity plant by Ningxia Energy in September 2017.
Revenue from internal sales of the energy segment decreased by 61.7% from RMB517.3 million for the year ended December 31, 2017 to RMB198.3 million for the year ended December 31, 2018, primarily due to a reduction of inter-company services provided by our energy segment subsidiaries and a decrease in the inter-segment trading volume of coals.
Cost and expenses.The total cost and expenses for our energy segment increased by 12.3% from RMB6,422.3 million for the year ended December 31, 2017 to RMB7,209.3 million for the year ended December 31, 2018, primarily due to the increase in trading volume of electricity.
Segment results.We recorded a segment loss of RMB171.3 million for the year ended December 31, 2017, whereas we had a segment profit of RMB26.0 million for the year ended December 31, 2018. This was mainly attributable to the increase in revenue generated from external sales of the energy segment following acquisition of a new electricity plant in September 2017.
Corporate and Other Operating Segment
Revenues. Revenue from the corporate and other operating segment remained stable from RMB645.3 million for the year ended December 31, 2017 to RMB667.2 million for the year ended December 31, 2018.
Segment results. The segment loss for our corporate and other operate segment decreased from RMB1,728.6 million for the year ended December 31, 2017 to RMB1,267.1 million for the year ended December 31, 2018, primarily due to gains resulted from the increase in our equity value in certain entities that were converted from joint ventures and associates to our subsidiaries during the year and were therefore re-measured in connection with such conversion.
Year Ended December 31, 2017 Compared with Year Ended December 31, 2016
B. |
|
Historically, our primary sources of funding have been cash generated from operating activities, prepayments and deposits from customers, bank and other loans and proceeds from equity or notes and bonds offerings. Our primary uses of funds have been working capital for production, capital expenditures and repayments of short-term, medium-term and long-term borrowings.
As of December 31, 2019, our current assets amounted to RMB48,713.8 million, representing a decrease of 17.3% from RMB58,901.5 million as of December 31, 2018. This is mainly because we enhanced the efficiency and utilization of the working capital, resulting in the decrease in cash and cash equivalents. As of December 31, 2019, our restricted cash and time deposits and cash and cash equivalents balance amounted to RMB9,065.0 million, representing a decrease of 57.4% from RMB21,296.1 million as of December 31, 2018. As of December 31, 2019, our trade and notes receivable amounted to RMB7,393.1 million, representing a decrease of 8.8% from RMB8,104.0 million as of December 31, 2018.
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As of December 31, 2019, our current liabilities amounted to RMB69,169.7 million, representing a decrease of 7.6% from RMB74,836.8 million as of December 31, 2018. This is mainly due to the decrease in short-term loans and borrowings resulting from the optimization of the maturity profile of our interest bearing liabilities.
As of December 31, 2019, our net current liabilities amounted to RMB20,456.0 million, representing an increase of 28.4% from RMB15,935.3 million as of December 31, 2018. As of December 31, 2019, our current ratio (current assets/current liabilities) was 0.70, compared with 0.79 as of December 31, 2018. Our quick ratio ((current assets - inventories - prepayments)/current liabilities) was 0.41 as of December 31, 2019, compared with 0.49 as of December 31, 2018.
We have considered our available sources of funds as follows:
● | Our expected net cash inflows from operating activities in 2020; |
● | As of December 31, |
As of December 31, 2018, our current liabilities amounted to RMB74,748.6 million, representing a decrease of 17.3% from RMB90,337.1 million as of December 31, 2017, primarily due to the decrease in short-term interest-bearing liabilities resulting from optimizing debt structure.
As of December 31, 2018, our net current liabilities amounted to RMB15,853.4 million, representing a decrease of 26.9% from RMB21,692.8 million as of December 31, 2017. As of December 31, 2018, our current ratio (current assets/current liabilities) was 0.79, compared with 0.76 as of December 31, 2017. Our quick ratio ((current assets - inventories - prepayments)/current liabilities) was 0.49 as of December 31, 2018, compared with 0.52 as of December 31, 2017.
We have considered our
● | Other available sources of
We believe that we have adequate resources to continue in operational existence for the foreseeable future not less than 12 months from December 31, 2019. The Board therefore continues to adopt the going concern basis in preparing these financial statements.
Cash Flows and Working Capital The following table sets forth a condensed summary of our statement of cash flows for the periods indicated:
Net Cash Flows Generated from Operating Activities For the year ended December 31, 2019, we had cash inflows before changes in working capital but after adjustment for non-cash items and non-operating cash items of RMB14,250.1 million and net cash generated from operating activities of RMB12,473.5 million. The adjustment primarily consisted of non-cash and non-operating activities items such as depreciation of property, plant and equipment of RMB7,094.7 million, finance cost of RMB4,921.2 million and depreciation of right-of-use assets of RMB1,075.8 million, outflows of RMB1,228.0 million for changes in working capital and outflows of income tax of RMB548.6 million. The outflows from changes in working capital consisted primarily of (i) a decrease in trade and notes payables of RMB1,385.1 million and (ii) an increase in trade and notes receivables of RMB1,050.9 million, and partially offset by (i) a decrease in inventories of RMB929.0 million and (ii) a decrease in restricted cash of RMB859.5 million. 88 For the year ended December 31, 2018, we had cash inflows before changes in working capital but after adjustment for non-cash items and non-operating cash items of RMB14,231.1 million and net cash generated from operating activities of RMB13,032.1 million. The adjustment primarily consisted of non-cash and non-operating activities items such as depreciation of property, plant and equipment of RMB7,499.3 million and finance cost of RMB4,882.5 million, and outflows of RMB251.3 million for changes in working capital and outflows of income tax of RMB947.7 million. The outflows from changes in working capital consisted primarily of (i) an increase in trade and notes receivables of RMB2,473.0 million and (ii) a decrease in other payables and accrued liabilities of RMB945.3 million, and partially offset by (i) a decrease in inventories of RMB1,194.5 million and (ii) a decrease in other current assets of RMB916.7 million. For the year ended December 31, 2017, we had cash inflows before changes in working capital but after adjustment for non-cash items and non-operating cash items of RMB14,711.8 million and net cash generated from operating activities of RMB13,207.1 million. The adjustment primarily consisted of non-cash and non-operating activities items such as depreciation of property, plant and equipment of RMB6,554.8 million and finance cost of RMB5,203.4 million, outflows of RMB555.2 million for changes in working capital and outflows of income tax of RMB949.4 million. The outflows from changes in working capital consisted primarily of (i) an increase in inventories of RMB2,662.5 million and (ii) an increase in trade and notes receivables of RMB1,963.2 million, and partially offset by (i) an increase in other payables and accrued liabilities of RMB1,672.7 million, (ii) an increase in trade and notes payables of RMB1,601.0 million and (iii) a decrease in other current assets of RMB1,275.5
Net Cash Flows Used in Investing Activities
The net cash flows used in investing activities
Net Cash Flows Used in Financing Activities
The net cash flows used in financing activities The net cash flows used in financing activities increased significantly from RMB3,387.1 million for the year ended December 31, 2017 to RMB16,280.6 million for the year ended December 31, 2018, mainly because we received capital injection from non-controlling shareholders in 2017 resulting from the Asset Restructuring and the net cash outflow from the proceeds and repayments of our major debts increased in 2018 as compared to 2017. Our net cash used in financing activities for the year ended December 31, 2018, consisted primarily of repayments of short-term and long-term loans of
Loans and Borrowings
During the past years, we engaged in debt financing to fund our operations and business expansion. As of December 31,
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Bank and Other Loans
The weighted average annual interest rate of short-term bank and other loans for the year end December 31,
The weighted average annual interest rate of long-term bank and other loans for the years ended December 31,
As of December 31, 90
As of December 31,
Notes and Bonds
The following table sets forth the face value, maturity, effective interest rate and outstanding amount of our outstanding long-term bonds and medium-term notes as of December 31,
The following table sets forth face value, maturity, effective interest rate and outstanding amount of our outstanding short-term bonds as of December 31,
Senior Perpetual Capital Securities
Please refer to “Item 4. Information on the Company - A. History and Development of the Company - Senior Perpetual Capital Securities Offering” for further details.
Restriction on Cash Dividends
Our PRC subsidiaries are required to set aside a certain amount of their retained profits each year, if any, to fund certain statutory reserves and these reserves may not be distributed as cash dividends. In addition, when our subsidiaries incur debts on their own behalf, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. Our directors are of the view that we will continue to be able to meet our borrowing payment obligations as they fall due from cash generated from our operating activities.
Capital Expenditures and Capital Commitments
The following table sets forth our capital expenditures for the years ended
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In Our total capital expenditure increased by 42.7% from 2018 to 2019, primarily due to our increased expenditures on project construction and expansion. We expect our estimated capital expenditures in As of December 31, As of December 31,
We expect to use primarily operating cash flow in meeting such commitments with the shortfall to be satisfied by proceeds of bank loans, short-term and long-term bonds and medium-term notes.
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1,
There are no off-balance sheet arrangements material to investors that have or are reasonably likely to have a current or future effect on our financial condition, our changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
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The following table summarizes our contractual obligations and commercial commitments for the periods indicated as of December 31,
See “Forward-Looking Statements” at the beginning of this annual report.
Directors
The We follow our home country practice in relation to the composition of our Board in reliance on the exemption provided under Section 303A.00 of the NYSE Corporate Governance Rules available to foreign private issuers. Our home country practice does not require a majority of directors of a listed company to be independent directors. As such, the majority of our directors are not independent within the meaning of NYSE Corporate Governance Rules.
The table and discussion below set forth information concerning our directors who served on our Board during the year ended December 31,
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Executive Directors
Lu Dongliang,aged
He Zhihui, aged 57, is currently an executive director and the president of the Company. Mr. He graduated from Huazhong Institute of Technology with a master’s degree in engineering and is a senior engineer with outstanding performance. Mr. He served as an engineer and a deputy director of the power control office, the head of the electric automation institution and the dean of the electric automation branch of Guiyang Aluminum Magnesium Design & Research Institute, the deputy dean and dean of Guiyang Aluminum Magnesium Design & Research Institute, the deputy general manager and general manager of China Aluminum International Engineering Co., Ltd., the chairman of China Nonferrous Metals Processing Technology Co., Ltd. and the secretary of the Communist Party Committee, chairman, executive director, president and chairman of the labor union of China Aluminum International Engineering Corporation Limited. Currently, Mr. He also serves as an assistant to the general manager of Chinalco. 94 Jiang Yinggang, aged
Zhu Runzhou, aged
Non-Executive Directors
Ao Hong, aged
Wang Jun, aged
Independent Non-Executive Directors
Chen Lijie, aged
95 Hu Shihai, aged
Lie-A-Cheong Tai Chong, David, aged
Supervisors
Our supervisors are elected to represent our employees and shareholders and serve a term of three years or until the election of their respective successors, whichever is earlier. Our supervisors currently comprise Mr. Ye Guohua, Mr.
The table and discussion below set forth certain information concerning our supervisors who served on our supervisory committee during the year ended December 31,
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Ye Guohua, aged
Shan Shulan, aged
Ou Xiaowu, aged 55, is currently a supervisor of the Company. Mr. Ou graduated from Xiamen University with a bachelor’s degree in economics majoring in planning and statistics and is a senior auditor. Mr. Ou has extensive experience in auditing and financial management. He successively served as the deputy director and the director of the second division of the audit department and the director of the first division of the audit department in China Nonferrous Metals Industry Corporation, the deputy head of the finance department and the deputy head of the audit department of China Copper Lead & Zinc Group Corporation, the deputy general manager of our Guizhou branch, the deputy director and the director of the finance department (audit department) and the chief financial officer of the copper department of Chinalco and also served as a director and the chief financial officer of China Copper and the general manager of the finance department and audit department of the Company. Mr. Ou currently also acts as the deputy chief auditor and the director of the audit department of Chinalco, a supervisor of China Copper, a supervisor of China Aluminum International Engineering Corporation Limited, a supervisor of Chinalco High-end Manufacturing Co., Ltd., the chairman of the supervisory committee of Qinghai Yellow River Hydropower Renewable Aluminum Co., Ltd. and a supervisor of Chalco Energy. Guan Xiaoguang, aged 49, is currently a supervisor of the Company. Mr. Guan holds a master’s degree in business administration from Peking University. He is a senior economist with rich experience in human resources management and political work. Mr. Guan has successively served as a cadre of the personnel division and deputy secretary of the Youth League Committee of the North China University of Technology, deputy secretary of the Youth League Committee of the attached agencies directly under the China Nonferrous Metals Industry Corporation, deputy director and director of the Investment Management Office of the China Nonferrous Metals Industry Association, head of business and deputy director of the office of the expert advisory committee of Chinalco, manager of the talent development and training division of the human resources department of the Company, head and deputy director of the talent development and training division of the human resources department (veteran cadre work department) of Chinalco, deputy secretary of the Party committee, chairman of the labor union and supervisor of Shandong Aluminum Co., Ltd. and deputy general manager of the president’s office (the office of the Party committee (discipline inspection commission)) of the Company. Mr. Guan currently also serves as the general manager of the president’s office (the office of the Party committee (discipline inspection commission)) of the Company. 97 Yue Xuguang, aged 56, is currently a supervisor of the Company. Mr. Yue graduated from Kunming Institute of Technology with a bachelor degree in engineering majoring in mineral census and exploration. He is a senior economist. He has rich experience in human resources management. Mr. Yue has successively served as the deputy head of the coordination division of the labor insurance bureau and the head of the labor management division of the personnel and education department of China Nonferrous Metals Industry Corporation, the deputy head of the general division of the personnel office of State Bureau of Nonferrous Metal Industry (enjoying the head-level treatment), the deputy head of the personnel department of Chinalco, the head of the labor division of the personnel department of Chinalco, the manager of the remuneration management division of the human resources department of the Company, the head of the general division of the general office of Chinalco, the manager of the general division of the capital operating department of the Company, the deputy general manager of the human resources department of the Company, the deputy head (departmental head level) of the human resources department (veteran cadre work department) of Chinalco, the secretary of the party committee and deputy general manager of Chinalco Asset Operation and Management Co., Ltd. Mr. Yue currently also serves as the general manager of the human resources department of the Company. Senior Management
The table and discussion below set forth certain information concerning other members of senior management during the year ended December 31,
Wu Maosen, aged 98
Wang Jun, aged
B. Compensation
Executive Compensation
Executive directors are entitled to a director’s fee, performance bonuses and welfare benefits provided under the relevant PRC laws and regulations. Non-executive directors are entitled only to a director’s fees. In Details of the emoluments paid to our directors and supervisors during the year ended December 31,
99
Senior Management Incentive System
In order to better provide incentives for our senior management and improve our shareholders’ value, we adopted a special compensation system for our senior management designed to align our senior management’s financial interests with our operating performance. Under this system, the senior management’s compensation consists of the following components:
C. Board Practices
Board of Directors
All of our directors and supervisors serve a term of three years or until such later date as their successors are elected or appointed. Directors and supervisors may serve consecutive terms. Each of our directors and supervisors has entered into a service contract with us, none of which can be terminated by us within one year without payment of compensation (other than statutory compensation). There were no arrangements providing for benefits upon termination of directors, supervisors or other senior management personnel.
100
Audit Committee
As at the date of this annual report, our audit committee consists of three independent non-executive directors, namely, Ms. Chen Lijie, Mr. Hu Shihai and Mr. Lie-A-Cheong Tai Chong, David. Mr. Lie-A-Cheong Tai Chong, David is the chairman of the audit committee.
The primary duties of our audit committee as set out in the committee charter include proposing to engage or replace the auditor, supervising our internal audit and its implementation, being responsible for the communication between the internal audit and external audit, auditing our financial information and its disclosure, reviewing the Company’s financial control, internal control and risk management systems, studying on our other relevant professional matters, and putting forward suggestions for the decisions of the Board for reference.
Remuneration Committee
As at the date of this annual report, our remuneration committee consists of one non-executive director, namely Mr. Ao Hong, and two independent non-executive directors, namely Mr. Hu Shihai and Mr. Lie-A-Cheong Tai Chong, David. Mr. Hu Shihai is the chairman of the remuneration committee. We follow our home country practice in relation to the composition of our remuneration committee in reliance on the exemption provided under NYSE Corporate Governance Rule 303A.00 available to foreign private issuers. Our home country practice does not require us to establish a remuneration committee which must be composed entirely of independent directors.
Nomination Committee
As at the date of this annual report, our nomination committee consists of The primary duties of our nomination committee as set out in the committee charter include: studying the selection standards and procedures for directors, senior management and members of special committees under the Board and providing suggestions to the Board; reviewing the qualification of candidates for directors, senior management and members of special committees under the Board and providing advice on inspection and appointment; assessing the independence of independent non-executive directors; and other functions and authorities delegated by the Board.
We follow our home country practice in relation to the composition of our nomination committee in reliance on the exemption provided under NYSE Corporate Governance Rule 303A.00 available to foreign private issuers. Our home country practice does not require us to establish a nomination committee which must be composed entirely of independent directors.
101 Development and Planning Committee
As at the date of this annual report, our development and planning committee consists of Occupational Health and Safety and Environmental Committee
As at the date of this annual report, our occupational health and safety and environmental committee consists of two executive directors, namely Mr. Lu Dongliang and Mr. Jiang Yinggang, and one non-executive director, namely Mr. Wang Jun, with Mr. Jiang Yinggang as the chairman. This committee considers our annual planning on health, environmental protection and safety, supervises our implementation of the planning on health, environmental protection and safety initiatives, makes inquiries into serious incidents and inspects and supervises the handling of such incidents and makes recommendations to the Board on major decisions on health, environmental protection and safety.
Supervisory Committee
As at the date of this annual report,our supervisory committee consists of Mr. Ye Guohua is the chairman of our supervisory committee. During D. Employees
As of December 31,
102
We have workers’ unions at the plant level that protect employees’ rights and welfare benefits, organize educational programs, encourage employee participation in management decisions and mediate disputes between individual employees and us. All employees are union members. We have not experienced any strikes or other labor disturbances that have interfered with our operations and we believe that we maintain good relationships with our employees.
103 The remuneration package of our employees includes salary, bonuses, subsidies, allowances and benefits. In accordance with applicable PRC regulations, we participate in pension contribution plans organized by provincial and municipal governments, under which each of our plants is required to contribute an amount equal to a specified percentage of its employees’ salaries, bonuses and various allowances. E. Share Ownership
As of the date of this annual report, the following directors, supervisors or senior management own an interest in shares of our Company:
Item 7. Major Shareholders and Related Party Transactions A. Major Shareholders We are a joint stock limited company organized under the laws of the PRC. Our parent company, Chinalco, a state-owned enterprise, beneficially owns 32.06% of our outstanding ordinary Shares directly and indirectly through its controlled entities as of March 31,
104
We are not aware of any arrangement that may on a subsequent date result in a change of control of Chalco. We have completed the Asset Restructuring through capital contributions by several investors to our subsidiaries and subsequent issuance of additional A Shares to these investors to purchase their entire stake in these subsidiaries. On February 25, 2019, we issued to the investors approximately 2.1 billion A Shares in aggregate, representing approximately 12.45% of the enlarged total issued share capital of the Company. See “Item 4. Information on the Company - A. History and Development of the Company - Subscription of Equity Interest of Certain Subsidiaries and Subsequent Issuance of Additional A Shares” for detailed information of the Asset Restructuring. For the period from June 25, 2018 to June 24, 2019, Chinalco increased its shareholding in the Company by 160,512,964 A shares and 115,276,000 H shares on a cumulative basis, representing approximately 0.94% and 0.68% of our total issued share capital as of June 24, 2019, respectively. See “Item 4. Information on the Company - A. History and Development of the Company - Controlling Shareholder’s Shareholding Increase in the Company” for detailed information of the shareholding increase.
As of March 31,
As an owner of at least 30% of our issued and outstanding shares, the parent company is deemed a controlling shareholder and therefore may not exercise its voting rights with respect to various matters related to our shares in a manner prejudicial to the interests of our other shareholders. See “Item 10. Additional Information - B. Memorandum and Articles of Association.” In accordance with our Articles of Association, each share of our capital stock has one vote and the shares of the same class have the same rights. Other than the foregoing restrictions, the voting rights of our major holders of domestic and H Shares are identical to those of any other holders of the same class of shares. Holders of domestic shares and H Shares are deemed to be shareholders of different classes for some matters, which may affect their respective interests. Other than the foregoing, holders of H Shares and domestic shares are entitled to the same voting rights.
105
Connected Transactions under Hong Kong Listing Rules
Under the Listing Rules, transactions between connected persons and us, or connected transactions, generally must be reported to the Hong Kong Stock Exchange, announced to the public and/or approved by shareholders unless the foregoing requirements are waived by the Hong Kong Stock Exchange or exempted under the Listing Rules. Each year our independent non-executive directors must review our non-exempt continuing transactions and confirm that these transactions have been entered into:
Although the definition of connected transactions is not synonymous with the definition of related party transactions, the concepts are sufficiently similar that the description of our connected transactions would satisfy disclosure requirements under U.S. securities laws.
The following table sets forth the details of our
106
We provide Chinalco with products including, among other things, aluminum and alumina products, supporting services and ancillary production services.
107
108
109
110
___________________
All transactions with related parties are conducted at prices and terms mutually agreed by the parties involved, which are determined as follows:
111
During the years ended December 31,
We provide the following additional information on
112
113
114
Guarantees
We provided guarantees to our related parties to guarantee their loans during the period from January 1,
Our related parties also provided guarantees to us to guarantee our loans during the period from January 1, Loans
We provided several entrusted loans to our related parties mainly for the purpose of supplementing working capital during the period from January 1, Our related party also provided several loans to us mainly for the purpose of supplementing working capital during the period from January 1, 115
Not applicable.
We have appended our consolidated financial statements filed as part of this annual report on Form 20-F.
Legal Proceedings
We are not currently a party to any pending legal proceedings which are expected to have a significant effect on our financial position or results of operations, nor are we aware of any proceedings that are pending or threatened which may have a significant effect on our financial position or results of operations. We may from time to time become a party to various legal or administrative proceedings arising in the ordinary course of our business. Dividend Policy
Under the Company Law of the PRC and our Articles of Association, all of our shareholders have equal rights to dividends and distributions. The holders of the H Shares share proportionately on a per share basis in all dividends and other distributions declared by our Board. Any final dividend for a fiscal year is subject to shareholders’ approval. Cash dividends, if made, are declared in Renminbi with respect to H Shares on a per share basis and paid in HK dollars. The Bank of New York Mellon, as depositary, converts the HK dollar dividend payments and distributes them to holders of ADSs in U.S. dollars, less expenses of conversion. We believe that our dividend policy strikes a balance between two important goals of providing our shareholders with a competitive return on investment and assuring sufficient reinvestment of profits to enable us to achieve our strategic objectives. The declaration of dividends is subject to the discretion of our Board, which takes into account the following factors:
Under our current profit distribution policy as set forth in our Articles of Association, the basic principles of such policy include (i) giving adequate consideration to return to investors and making dividend to shareholders in an applicable percentage of the distributable profits, (ii) maintaining the continuity and stability of our dividend policy, while taking into consideration of our interests in the long term and the overall interests of all shareholders, as well as our sustainable development; and (iii) giving priority to dividend in cash. More specifically, under such policy, we may make dividends in cash, in shares or in a combination of both cash and shares. Subject to conditions, we may make interim profit distributions. Save in exceptional circumstances, 116 Pursuant to PRC laws and regulations, dividends may only be distributed after allowance has been made for: (1) recovery of losses, if any and (2) allocations to the statutory surplus reserve. The allocations to the statutory surplus reserve is 10% of our net profit determined in accordance with PRC Generally Accepted Accounting Principles, unless the accumulated statutory surplus reserve exceeds 50% of our registered share capital, in which case the surplus reserve is discretional. See “Item 10. Additional Information - E. Taxation” for a discussion of the tax consequences of receipt of dividends. B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements which is included in this annual report.
Our A Shares are traded under the stock code “601600” in the Shanghai Stock Exchange, as our principal host market, while our H Shares are traded under the stock code “02600” in the Hong Kong Stock Exchange as the principal market for our H Shares. The ADSs have been issued by
In connection with the proposed Asset Restructuring, the trading of A Shares of the Company on the Shanghai Stock Exchange was suspended from September 12, 2017 to February 25, 2018. For more information regarding the Asset Restructuring, see “Item 4. Information on the Company - A. History and Development of the Company - Subscription of Equity Interest of Certain Subsidiaries and Subsequent Issuance of Additional A Shares.”
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following is a summary of certain provisions of our Articles of Association, as amended. Such summary does not purport to be complete. For further information, you and your advisors should refer to the text of our Articles of Association, as amended, and to the texts of applicable laws and regulations. A copy of our Articles of Association is filed as an exhibit to this annual report.
Our objects and purposes
Our Articles of Association as amended from time to time are filed with the Hong Kong Companies Registrar. Our business purpose and business scope can be found in Article 13 and Article 14, respectively, of our Articles of Association.
Directors’ power to vote on matters in which he or she has an interest
Under Article 174, a director shall not vote in any resolution of the board of directors for approving any contract, transaction or arrangement in which such director or any of his associates (as defined in the applicable rules governing the listing of securities amended from time to time) is materially interested, and shall not be counted into the quorum of the meeting either. Unless the interested director has disclosed his or her interest to the board of directors in accordance with the Article 174 and the contract, transaction or arrangement has been approved by the board of directors at a meeting in which the interested director is not counted in the quorum and has refrained from voting, a contract, transaction or arrangement in which such director is materially interested is voidable at the instance of our Company except as against a bona fide party thereto acting without notice of the breach of duty by such director. Accordingto Article 86(2), matters concerning the remuneration of directors shall be decided by the shareholders’ general meeting. 117
Borrowing powers
Subject to compliance with applicable laws and regulations of the PRC, we have the power to raise and borrow money which power includes (without limitation) the issuance of debentures and the charging or mortgaging of part or whole of our business or properties and other rights permitted. The Articles of Association do not contain any specific provision in respect of the manner in which borrowing powers may be exercised by the directors nor do they contain any specific provision in respect of the manner in which such powers may be varied, other than (a) provisions which give the directors the power to formulate proposals for the issuance of debentures by us; (b) Article 87(2), which provides that the issuance of bonds must be approved by the shareholders in a general meeting by way of a special resolution; and (c) Article 112(4), which provides that the directors have the power to formulate our annual final financial budgets and final
Age limit for retirement
There is no provision pertaining to the retirement of directors pursuant to an age limit requirement in our Articles of Association.
Directors’ qualifying shares
Under Article 107, the directors are not required to hold any qualifying shares.
Dividend rights
Article 55(1) provides that holders of our ordinary shares have the right to receive dividends and distribution of profits in other forms, in proportion to the number of shares held. Under Article 49, when we convene a shareholders’ general Article 207 provides that under the premise of obeying the laws of the PRC, we have the right to forfeit the unclaimed dividends, subject to the expiry of the applicable relevant limitation period. Voting rights
Article 55(2) provides that holders of our ordinary shares have the right to lawfully request, convene, chair, attend in person or appoint a proxy to attend and vote at A special resolution of the shareholders’ general meeting will be required for important matters specified in Article 87, such as the increase or reduction of the registered capital and issuance of any class of shares, amendments to our Articles of Association, and our division, merger, dissolution and liquidation, and a special resolution must be adopted by shareholders in attendance (including proxies) at the meeting with supermajority votes as set forth in Article 80. For other matters to be approved in a shareholders’ general meeting, an ordinary resolution as set forth in Article 80 will need to be adopted. Rights to share profits
Article 61(7) provides that a plan for profit distribution and a plan for making up for losses formulated by the Board in accordance with Article 112(6) must be approved by way of the shareholders’ general meeting.
Rights to share surplus in the event of liquidation
Article 55(6) provides that the holders of ordinary shares have the right to participate in the distribution of our surplus assets in proportion to the number of shares held in the event of the termination or liquidation of us. Article 228 sets forth the order of priority of payments out of our properties in the event of liquidation. Enforceability of Shareholders’ Rights Our Articles of Association provide that, with certain limited exceptions, where disputes and claims which concern our affairs and are based on rights or obligations provided for in our Articles of Association, the Company Law of the PRC or other relevant laws arise between holders of H Shares and us, holders of A Shares, or our director, supervisor, general manager or other senior management staff, such disputes and claims must be submitted to arbitration. Chapter 23 of our Articles of Association sets forth further details of the dispute resolution procedure. 118
Redemption provisions; sinking fund provisions and liability to further capital calls Article 30 provides that we may repurchase issued shares in Under Articles 32 and 33, share repurchases by agreements outside a stock exchange are generally subject to our shareholders’ approval. Under Article 33, share repurchases under the circumstances described in item (1), (2) and (3) above shall be resolved at the shareholders’ general meeting, while share repurchases under the circumstances described in item (5) and (6) above shall be subject to approval by more than two-thirds of directors present at the meeting of the Board. No securities issued by us are redeemable, entitled to a sinking fund or subject to liability for further capital calls.
Actions necessary to change the rights of holders of our shares or holders of a class of shares
Under Article 87(5), revision of any rights of class shareholders, e.g., rights to dividends, share profits or surplus in the event of liquidation or voting rights, requires a special resolution of the shareholders’ general meeting.
The rights attached to any class of shares may be varied or abrogated only with the sanction of a special resolution passed at the shareholders’ general meeting and by holders of shares of the affected class passed at a separate general meeting of the class convened in accordance with Articles
Resolutions of a class meeting shall be passed by
The proceedings of class meetings shall be conducted as near as possible to those of shareholders’ general meetings. The provisions in the Articles of Association relating to the proceedings of shareholders’ general meetings shall apply to class meetings.
The special procedures for approval by a class of shareholders do not apply where we issue, upon approval by special resolution of shareholders in general meeting, either separately or concurrently once every 12 months, domestic shares and H Shares not more than 20% of
Provisions discriminating against any existing or prospective shareholder as a result of owning a substantial number of shares
Chinalco, as our controlling shareholder (which is defined under Article 59), shall not exercise its voting rights in a manner prejudicial to the interest of all or some part of the shareholders when making decisions:
119
Conditions governing the manner in which annual general meetings and extraordinary general meetings of shareholders are convoked
Shareholders’ general meetings can be held as annual general meetings or extraordinary general meetings. Annual general meetings are held once a year within six months after the end of the preceding fiscal year.
The Board is required to convene an extraordinary general meeting within two months of the occurrence of any of the following circumstances:
We shall, within 45 days (inclusive of date of meeting) before the date of meeting, send written notices of the shareholders’ general meeting and inform all registered shareholders of the matters to be considered at the meeting and the date and venue of the meeting. Those shareholders who intend to attend the meeting shall send the written reply to The meeting may be held if the number of voting shares represented by the shareholders intending to attend the meeting meets the threshold prescribed under Article 66. Otherwise, we shall, within five days, inform the shareholders once again of the matters to be considered at, and the date and place of, the meeting in the form of a public announcement, after which we may hold the meeting. A meeting and the resolutions adopted thereat shall not be invalidated due to the accidental omission to give notice of the meeting to, or the non-receipt of notice of the meeting by, a person entitled to receive notice. Motions put forward at the general meeting shall be specific and shall relate to the matters to be considered at a shareholders’ general meeting. Motions raised at a general meeting shall:
Limitations on the rights to own securities
Under Article 19, the shares issued to domestic investors and denominated in Renminbi are Domestic-Invested Shares whereas the shares issued to overseas investors and denominated in foreign currency are Foreign-Invested Shares. sold directly to investors resident within the PRC. Provisions having an effect of delaying, deferring or preventing a change in control
Under Article 116, decisions in respect of market development, merger and acquisition, and investment in a new field, where the consideration to be paid or the assets to be acquired exceed 10% of our total assets, the Board is required to engage relevant professional consultants to provide professional opinions, which shall serve as the key reference for the decision of the Board concerning such investment, merger or acquisition.
120 Under Article 87(3), division, merger, dissolution and liquidation of us and material acquisitions and disposals by us must be approved by a special resolution at a shareholders’ general meeting.
There are no provisions under the Articles of Association pertaining to the ownership threshold above which shareholder ownership must be disclosed.
Conditions governing changes in registered capital
Under Article 112(7), any proposal for the increase or decrease of our registered capital must be formulated by the Board. Article 87(1) further provides that any increase or reduction in share capital requires adoption of a special resolution at a shareholders’ general meeting. In addition, according to Article 97, alternation of the number of shares of a class or of a different class having voting rights, distribution rights or other privileges equal or superior to such class is regarded as alternation or abolishment of rights of such class, and must satisfy the requirements for shareholders’ meetings of the affected class. See “—Actions necessary to change the rights of holders of our shares or holders of a class of shares.” Certain Differences Between PRC Company Law and Delaware Corporate Law
We are a PRC joint stock company, which is a corporate entity organized under the Company Law of the PRC.ThePRC company lawdiffers from laws applicable to United States corporations and their shareholders. A description of securities registered under Section 12 of the Exchange Actis filed as Exhibit 2.4 to this annual report on Form 20-F and includes a summary of certainsignificant differences between the provisions of thePRC company lawapplicable to us and the comparable provisions of the laws applicable to companies incorporated in the United States and their shareholders (for this purpose we refer to Delaware corporate law). Such summary does not purport to be complete and is subject to and qualified in its entirety by reference to our Articles of Association, as amended, and to the relevant laws and regulations. C. Material Contracts
For the two years immediately preceding the date of this annual report, we have not entered into any additional material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company - A. History and Development of the Company” and “Item 7. Major Shareholders and Related Party Transactions - B. Related Party Transactions.”
D. Exchange Controls
The existing foreign exchange regulations have significantly reduced government foreign exchange controls for transactions under the current account, including trade and service-related foreign exchange transactions and payment of dividends. We may undertake current account foreign exchange transactions without prior approval from the SAFE by producing commercial documents evidencing such transactions, provided that they are processed through Chinese banks licensed to engage in foreign exchange transactions. The PRC government has stated publicly that it intends to make the Renminbi freely convertible in the future. However, we cannot predict whether the PRC government will continue its existing foreign exchange policy and when the PRC government will allow free conversion of Renminbi to foreign currency.
Foreign exchange transactions under the capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the SAFE. These limitations could affect our ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.
Since 1994, the conversion of Renminbi into HK and U.S. dollars has been based on rates set by the PBOC, which are set daily based on the previous day’s PRC interbank foreign exchange market rate and current exchange rates on the world financial markets. From 1994 to July 20, 2005, the official exchange rate for the conversion of Renminbi to U.S. dollars was generally stable. On July 21, 2005, the PRC government introduced a managed floating exchange rate system to allow the value of the Renminbi to fluctuate within a regulated band based on market supply and demand and by reference to a basket of currencies. Since then, the PRC government has made, and may in the future make, further adjustments to the exchange rate system. In April 2012, the PRC government took a milestone step in turning the Renminbi into a global currency by doubling the size of its trading band against the U.S. dollar, pushing through a crucial reform that further liberalizes its financial markets. The PBOC allows the Renminbi to rise or fall 1% from a mid-point every day, effective April 16, 2012, compared with its previous 0.5% limit. The PBOC further allows the Renminbi to rise or fall 2% from a mid-point every day, effective March 17, 2014.
121 E. Taxation
PRC Taxation
The following summary of the material PRC and United States federal income tax provisions relating to the ownership and disposition of H Shares or ADSs held by the investor as capital assets is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change, and does not constitute legal or tax advice. This summary does not deal with all possible tax consequences relating to an investment in our ordinary shares, such as the tax consequences under state, local and other tax laws.
Dividends Paid to Individual Investors
Any shares registered in the name of our depositary bank will be deemed as being held by non-resident enterprise shareholders and the dividends attributable to the corresponding ADSs will be subject to the withholding of the PRC corporate income tax. We are therefore required to withhold 10% corporate income tax when we make dividend distributions to the investors of our ADSs. Investors of our ADSs will not be subject to further PRC individual income tax or PRC corporate income tax. The 10% dividend withholding tax rate is not subject to any reduction under the 1984 Agreement between the United States and the People’s Republic of China for the Avoidance of Double Taxation, or the PRC Treaty. Capital Gains
With respect to foreign enterprises which are established under the laws of non-PRC jurisdictions and have no establishment or residence in China or whose capital gains from China do not relate to their establishment or residence in China (“non-resident foreign enterprises”), according to the Enterprise Income Tax Law and its implementation rules, which became effective on January 1, 2008, capital gains realized by non-resident foreign enterprises are ordinarily subject to capital gains tax at the rate of 10%, unless exempted or reduced pursuant to an applicable double-taxation treaty or other exemptions. The capital gains realized by resident enterprises, including enterprises established under the laws of non-PRC jurisdictions but whose “de facto management body” is located in the PRC, upon the sales of overseas-listed shares are subject to the PRC enterprise income tax.
With respect to foreign individual investors, the Provisions for Implementation of Individual Income Tax Law of China, as amended, stipulated that individual income tax on gains realized on the sale of equity shares shall be regulated in separate rules to be drafted by the State Council of China. However, as of the date of this annual report, there are no such rules enacted by the State Council yet. On March 30, 1998, the MOF and the SAT jointly issued the “Circular of Taxation Regarding the Continued Exemption of Individual Income Taxes Levied on Income Obtained from the Transfer of Shares,” which provided that income derived from the transfer of shares issued by listed companies shall not be taxed as income for the purposes of levying individual income taxes after July 1, 1997.
For PRC mainland investors, on October 31, 2014, the SAT issued “Circular on Tax Policies Relating to the Pilot Program of Shanghai-Hong Kong Stock Connect,” which provided that any capital gain from transferring stocks listed on the Hong Kong Stock Exchange by a PRC mainland investor would not be subject to tax during the period from November 17, 2014 to November 16, 2017. For mainland enterprises, such capital gains would be included in its income and subject to income tax. On November 1, 2017, the MOF, the SAT and the CSRC jointly issued “Circular on Extending Individual Income Tax Policies Relating to the Shanghai-Hong Kong Stock Connect,” which provided that income generated from price differences through investment in stocks listed on the Hong Kong Stock Exchange by PRC mainland individual investors via the Shanghai-Hong Kong Stock Connect would be exempt from individual income tax from November 17, 2017 to December 4, 2019. On December 4, 2019, the MOF, the SAT and the CSRC jointly issued the “Circular on Extending Individual Income Tax Policies Relating to the Shanghai-Hong Kong Stock Connect, Shenzhen-Hong Kong Stock Connect and Mainland-Hong Kong Mutual Recognition of Funds,” which further exempts the individual income tax on income generated from transfer through investment in stocks listed on the Hong Kong Stock Exchange by PRC mainland individual investors via the Shanghai-Hong Kong Stock Connect or Shenzhen-Hong Kong Stock Connect and investment in Mainland-Hong Kong mutually recognized Funds from December 5, 2019 to December 31, 2022. 122
Tax Treaties
China currently has such treaties with more than one hundred countries and regions, including the following countries:
Under most treaties, the rate of withholding tax imposed by China’s taxation authorities remains 10%. The double taxation treaty between China and the United States provides that 10% withholding tax rate will be applied to the gross amount of dividends repatriated to an eligible U.S. holder. Under the treaty, an eligible U.S. holder is a person who, by reason of domicile, residence, place of head office, place of incorporation or any other criterion of similar nature is subject to taxation in the United States, as applicable under the treaty’s “treaty shopping provisions.”
Additional China Tax Considerations
Pursuant to the prevailing stamp duty regulations, a stamp duty is not imposed by China on the transfer of shares, such as the H Shares or ADSs, of Chinese publicly traded companies that take place outside of China.
United States Federal Income Taxation Each potential investor is strongly urged to consult its own tax advisor to determine the particular U.S. federal, state, local, treaty and foreign tax consequences of acquiring, owning or disposing of the H Shares or ADSs. The following summary describes the principal U.S. federal income tax consequences of purchasing, owning and disposing of the H Shares or ADSs. This summary only applies to U.S. holders, as defined below, who hold the H Shares or ADSs as capital assets within the meaning of Section 1221 of the Internal Revenue Code of 1986 as amended (the “Code”). This discussion does not address all of the tax consequences relating to the purchase, ownership and disposition of the H Shares or ADSs, and does not take into account U.S. holders that may be subject to special rules, including:
123
Moreover, this description does not address U.S. federal estate, gift or alternative minimum taxes, the U.S. federal unearned income Medicare contribution tax, or any foreign state or local tax consequences of the acquisition, ownership and disposition of the H Shares or ADSs. Each U.S. holder should consult its tax advisor with respect to the U.S. federal, state, local and foreign tax consequences of acquiring, owning and disposing of H Shares or ADSs.
This discussion is based on the Code, its legislative history, final, temporary and proposed U.S. Treasury regulations promulgated thereunder, published rulings and court decisions as in effect on the date hereof, as well as on the agreement between the United States and the People’s Republic of China for the avoidance of double taxation (the “Treaty”), all of which are subject to change, or change in interpretation, possibly with retroactive effect. In addition, this discussion is based in part upon the assumption that each obligation in the deposit agreement and any related agreements will be performed according to its terms.
You are a “U.S. holder” if you are a beneficial owner of H Shares or ADSs and, for U.S. federal income tax purposes, are:
124 If a partnership (including any entity or arrangement treated as a partnership for U.S. federal tax purposes) holds H Shares or ADSs, the tax treatment of the partnership and a partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. If an investor is a partner in a partnership that holds H Shares or ADSs, such investor should consult its tax advisor.
In general, if you hold ADSs evidencing H Shares, you will be treated as the owner of the H Shares represented by the ADSs. Exchanges of H Shares for ADSs, and ADSs for H Shares, generally will not be subject to United States federal income tax.
The tax treatment of your H Shares or ADSs will depend in part on whether or not we are classified as a passive foreign investment company, or PFIC, for United States federal income tax purposes. Except as discussed below under “—Passive Foreign Investment
INVESTORS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR TAX CONSIDERATIONS APPLICABLE TO THEM RELATING TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE H SHARES OR ADSs, INCLUDING THE APPLICABILITY OF U.S. FEDERAL, STATE AND LOCAL TAX LAWS OR NON-U.S. TAX LAWS, ANY CHANGES IN APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS.
Distributions on the H Shares or ADSs
The gross amount of any distribution (without reduction for any PRC tax withheld) we make on the H Shares or ADSs, other than certain pro-rata distributions of the H Shares, will be includible in income as dividend income when you, in the case of the H Shares, or the depositary, in the case of ADSs, receive the distribution, actually or constructively. Because we do not calculate earnings and profits in accordance with U.S. tax principles, all distributions by us to U.S. holders will generally be treated as dividends. Any dividend will not be eligible for the dividends-received deduction allowed to certain U.S. corporations in respect of dividends received from U.S. corporations.
If you are a noncorporate U.S. holder, dividends that constitute qualified dividend income will be taxable to you at the preferential rates applicable to long-term capital gains provided that you hold the H Shares or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends we pay with respect to the ADSs generally will be qualified dividend income. Dividends that we pay with respect to the H Shares will be qualified dividend income,
The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the HK dollar payments made, determined at the spot HK dollar/U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. Dividends paid by us generally will constitute income from sources outside the United States for U.S. foreign tax credit limitation purposes and will generally be categorized as “passive income” for U.S. foreign tax credit purposes. We may be required to withhold PRC income tax on dividends paid to U.S. holders on the H Shares or ADSs. Subject to various limitations, any PRC tax withheld from distributions in accordance with the Treaty will be deductible or creditable against your U.S. federal income tax liability.
You may not be able to claim a foreign tax credit (and instead may qualify to claim a deduction) for non-U.S. taxes imposed on dividends paid on the H Shares or ADSs if you (i) have held the H Shares or ADSs for less than a specified minimum period, or (ii) are obligated to make related payments with respect to positions in substantially similar or related property (for example, pursuant to a short sale). The rules relating to the U.S. foreign tax credit are complex and U.S. holders may be subject to various limitations on the amount of foreign tax credits that are available. In addition, in the case of a noncorporate U.S. holder, rules similar to the special rules that apply in determining the foreign tax credit limitation when the taxpayer has foreign source capital gains that are taxed in the 125
Sale, Exchange or Other Disposition
Upon a sale, exchange or other disposition of the H Shares, you will generally recognize capital gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the U.S. dollar value of the amount realized and your tax basis, determined in U.S. dollars, in such H Shares. Generally, gain or loss recognized upon the sale or other disposition of H Shares or ADSs will be capital gain or loss, will be long-term capital gain or loss if the U.S. holder’s holding period for such H Shares or ADSs exceeds one year, and will be income or loss from sources within the United States for foreign tax credit limitation purposes. Long-term capital gains of noncorporate U.S. holders are generally taxed at preferential rates. The deductibility of capital losses is subject to significant limitations.
With respect to the sale or exchange of H Shares, the amount realized upon a sale of H Shares generally will be the U.S. dollar value on the settlement date for the sale in the case of a cash basis U.S. holder (or an accrual basis U.S. Holder that so elects). If H Shares are traded on an “established securities market,” a cash basis taxpayer or, if it so elects, an accrual basis taxpayer, will determine the U.S. dollar value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale. A U.S. holder will have a tax basis in the foreign currency received equal to the U.S. dollar amount realized. Any currency exchange gain or loss realized on a subsequent conversion of the foreign currency into U.S. dollars for a different amount generally will be treated as ordinary income or loss from sources within the United States. However, if such foreign currency is converted into U.S. dollars on the date received by the U.S. holder, a cash basis or electing accrual basis U.S. holder should not recognize any gain or loss on such conversion.
Any gain or loss that you recognize upon a sale of the H Shares or ADSs will generally be U.S. source gain or loss for foreign tax credit limitation purposes and, as a result of the U.S. foreign tax credit limitation, foreign taxes, if any, imposed upon capital gains in respect of H Shares or ADSs may not be currently creditable. Under the Treaty, however, if any PRC tax were to be imposed on any gain from the disposition of H Shares or ADSs, the gain could be treated as PRC source income. U.S. holders are urged to consult their tax advisors regarding the tax consequences if a foreign tax is imposed on a disposition of H Shares or ADSs, including the availability of the foreign tax credit under their particular circumstances. Any Hong Kong stamp duty paid will not be a creditable tax for United States federal income tax purposes, although the proceeds that you are treated as receiving upon a sale of the H Shares will be reduced by the amount of the stamp duty.
Passive Foreign Investment Company Rules
A non-U.S. corporation is a PFIC for any taxable year in which, after applying relevant look-through rules with respect to the income and assets of subsidiaries:
Passive income generally includes dividends, interest, gains from the sale or exchange of investment property, rents and royalties, and certain other specified categories of income. However, passive income does not include certain rents and royalties derived from the active conduct of a trade or business. If the stock of a non-U.S. corporation is publicly traded for the taxable year, the asset test is applied using the fair market value of the assets for purposes of measuring such corporation’s assets. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of the PFIC tests, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income for purposes of the PFIC income and asset tests.
126 Based on the composition of our assets and income and the current expectations regarding the price of the H Shares and ADSs, we believe that we were not a PFIC for U.S. federal income tax purposes with respect to our 2018 taxable year and we do not intend or anticipate becoming a PFIC in the foreseeable future. However, the determination of PFIC status is a factual determination that must be made annually at the close of each taxable year and, therefore, there can be no certainty as to our status in this regard until the close of the current or any future taxable year. Changes in the nature of our income or assets or a decrease in the trading price of our shares may cause us to be considered a PFIC in the current or any subsequent year. If we were a PFIC in any year during a U.S. holder’s holding period for the H Shares or ADSs, we would ordinarily continue to be treated as a PFIC for each subsequent year during which the U.S. holder owned the H Shares or ADSs. If we were a PFIC in any taxable year that you held the H Shares or ADSs, you generally would be subject to special rules with respect to “excess distributions” made by us on the H Shares or ADSs and with respect to gain from your disposition of the H Shares or ADSs. An “excess distribution” generally is defined as the excess of the distributions you receive with respect to the H Shares or ADSs in any taxable year, other than the taxable year in which your holding period in the H Shares or ADSs begins, over 125% of the average annual distributions you have received from us during the shorter of the three preceding years, or your holding period for the H Shares or ADSs that preceded the taxable year in which you receive the distribution. Generally, you would be required to allocate any excess distribution or gain from the disposition of the H Shares or ADSs ratably over your holding period for the H Shares or ADSs. The portion of the excess distribution or gain allocated to a prior taxable year, other than a year prior to the first year in which we became a PFIC, would be taxed at the highest U.S. federal income tax rate in effect for such taxable year, and you would be subject to an interest charge on the resulting tax liability, determined as if the tax liability had been due with respect to such particular taxable years. The portion of the excess distribution or gain that is not allocated to prior taxable years, together with the portion allocated to the years prior to the first year in which we became a PFIC, would be included in your gross income for the taxable year of the excess distribution or disposition and taxed as ordinary income.
These adverse tax consequences may be mitigated if the U.S. holder is eligible to and does elect to annually mark-to-market the H Shares or ADSs. If a U.S. holder makes a mark-to-market election, such holder will generally include as ordinary income the excess, if any, of the fair market value of the H Shares or ADSs at the end of each taxable year over its adjusted basis, and will be permitted an ordinary loss in respect of the excess, if any, of the adjusted basis of the H Shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included in income as a result of the mark-to-market election). Any gain recognized on the sale or other disposition of the H Shares or ADSs will be treated as ordinary
A U.S. holder’s adjusted tax basis in the H Shares or ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If a U.S. holder makes a mark-to-market election it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the H Shares or ADSs are no longer regularly traded on a qualified exchange or the IRS consents to the revocation of the election. U.S. holders are urged to consult their tax advisors about the availability of the mark-to-market election, and whether making the election would be advisable in their particular circumstances. However, the stock of any of our subsidiaries that were PFICs would not be eligible for the mark-to-market election.
Alternatively, a timely election to treat us as a qualified electing fund could be made to avoid the foregoing rules with respect to excess distributions and dispositions. You should be aware, however, that if we become a PFIC, we do not intend to satisfy the recordkeeping requirements that would permit you to make a qualified electing fund election.
127 In addition, notwithstanding any election you make with regard to the shares or ADSs, dividends that you receive from us will not constitute qualified dividend income to you if we are a PFIC (or are treated as a PFIC with respect to you) either in the taxable year of the distribution or the preceding taxable year. Dividends that you receive that do not constitute qualified dividend income are not eligible for taxation at the preferential rates applicable to qualified dividend income. Instead, you must include the gross amount of any such dividend paid by us in your gross income, and it will be subject to tax at rates applicable to ordinary income. If we were regarded as a PFIC, a U.S. holder of H Shares or ADSs may be required to file an information return on IRS Form 8621.
U.S. holders should consult their tax advisors concerning the U.S. federal income tax consequences of holding the H Shares or ADSs if we were considered to be a PFIC.
Information with Respect to Foreign Financial Assets
Owners of “specified foreign financial assets” with an aggregate value in excess of $50,000 (and in some circumstances, a higher threshold) may be required to file an information report with respect to such assets with their tax returns. “Specified foreign financial assets” may include financial accounts maintained by foreign financial institutions, as well as the following, but only if they are held for investment and not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-United States persons, (ii) financial instruments and contracts that have non-United States issuers or counterparties, and (iii) interests in foreign entities. Holders are urged to consult their tax advisors regarding the application of this reporting requirement to their ownership of the H Shares or ADSs.
Backup Withholding and Information Reporting
If you are a noncorporate U.S. holder, information reporting requirements, on IRS Form 1099, generally will apply to dividend payments or other taxable distributions made to you within the United States, and the payment of proceeds to you from the sale of the H Shares or ADSs effected at a United States office of a broker.
Additionally, backup withholding may apply to such payments if you fail to comply with applicable certification requirements or (in the case of dividend payments) are notified by the IRS that you have failed to report all interest and dividends required to be shown on your federal income tax returns.
Payment of the proceeds from the sale of the H Shares or ADSs effected at a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, a sale effected at a foreign office of a broker could be subject to information reporting in the same manner as a sale within the United States (and in certain cases may be subject to backup withholding as well) if (i) the broker has certain connections to the United States, (ii) the proceeds or confirmation are sent to the United States or (iii) the sale has certain other specified connections with the United States.
You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the IRS.
Hong Kong Taxation
The following discussion summarizes the material Hong Kong tax provisions relating to the ownership of H Shares or ADSs held by you.
Dividends
Under current Hong Kong Inland Revenue Department practice, no Hong Kong tax is payable by the recipient in respect of dividends paid by us, either by withholding or otherwise, unless such dividends are attributable to a trade, profession or business carried on in Hong Kong.
128 Taxation of Capital Gains
Hong Kong profits tax is currently charged at a flat rate of 16.5% for corporations and 15% for unincorporated businesses and individuals, except that the respective half-rates of 8.25% and 7.5% apply for the first HK$2 million of assessable profits for years of assessment beginning on or after April 1, 2018.
No Hong Kong tax is imposed on capital gains arising from the sale of property (such as H Shares) acquired and held as a capital investment. However, if a person carries on a business in Hong Kong that includes trading and dealing in securities, and derives trading gains from such activities or from other Hong Kong sources, Hong Kong profits tax will be payable. Gains from sales of H Shares effected on the Hong Kong Stock Exchange are considered to be from a Hong Kong source for this purpose. The source of gains from off-exchange transactions is less clear and, generally, will depend on whether the purchase and sale contracts were negotiated and, in substance, concluded in Hong Kong. In addition, exemption from profits tax is available for certain classes of taxpayers, notably privately offered onshore and offshore funds operating in Hong Kong, as well as non-Hong Kong residents who do not otherwise carry on business in Hong Kong,
The Hong Kong tax position with respect to gains from the disposal of ADSs is similar. However, no Hong Kong tax will apply on trading gains arising from the sale of ADSs where the purchase and sale were effected on the NYSE.
Hong Kong Stamp Duty
Hong Kong stamp duty is payable by each seller and purchaser for every sold note and every bought note created for every sale and purchase of “Hong Kong stock” (which means stock the transfer of which is required to be registered in Hong Kong), including the H Shares. Stamp duty is charged at the total rate of 0.2% of the value of the H Shares transferred (the buyer and seller each paying half of such stamp duty). In addition, a fixed duty of HK$5 is currently payable on an instrument of transfer of H Shares. If one of the parties to a sale is a non-resident of Hong Kong and does not pay the required stamp duty, the unpaid stamp duty will be assessed on the instrument of transfer (if any), and the transferee will be liable for the full payment of such amount.
If the withdrawal of H Shares when ADSs are surrendered or the issuance of ADSs when H Shares are deposited results in a change of beneficial ownership in the H Shares under Hong Kong law, Hong Kong stamp duty at the rate described above for sale and purchase transactions will apply. The issuance of ADSs for deposited H Shares issued directly to the depositary or for the account of the depositary should not lead to a Hong Kong stamp duty liability. Holders of the ADSs are not liable for the Hong Kong stamp duty on transfers of ADSs outside of Hong Kong so long as the transfers do not result in a change of beneficial interest in the H Shares under Hong Kong law.
Estate Duty
The Revenue (Abolition of Estate Duty) Ordinance 2005 came into effect on February 11, 2006 in Hong Kong. No Hong Kong estate duty is payable and no estate duty clearance papers are needed for an application for a grant of representation in respect of holders of H Shares or ADSs whose death occurs on or after February 11, 2006.
Not applicable.
Not applicable.
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file an annual report under Form 20-F no later than four months after the close of each of our fiscal years, which is December 31, for fiscal years ended after December 15, 2011. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the SEC’s public reference room located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website atwww.sec.gov that contains reports and other information regarding registrants that make electronic filings with the SEC using its EDGAR filing system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders of ours are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. 129
Not applicable.
We are exposed to various types of market risks, including credit risk relating to financial assets and changes in foreign exchange rates, interest rates and the prices of alumina and primary aluminum, in the normal course of business.
We borrow short-term, medium-term and long-term funds, including variable rate debts, principally denominated in Renminbi. We hedge a limited amount of our sales through the trade of futures contracts on the SHFE and LME. Our hedging activities are subject to policies approved by our senior management. Substantially all of the financial instruments we hold are for purposes other than trading.
The following discussion, which contains “forward-looking statements” that involve risks and uncertainties, summarize our market-sensitive financial instruments. Such discussions address markets risk only and do not present other risks, which we face in the normal course of business.
Credit Risk
Credit risk arises from balances with banks and financial institutions, trade and notes receivables, other current and non-current receivables as well as credit exposures of customers, including outstanding receivables and committed transactions. We also provide financial guarantees to certain subsidiaries and a joint venture. The carrying amounts of these receivables and amounts of financial guarantees represent our maximum exposure to credit risk in relation to our financial assets and guarantees.
We maintain substantially all of our bank balances and cash and short-term investments in several major state-owned banks in the PRC. Our directors are of the opinion that these assets are not exposed to significant credit risk. With regard to receivables, the marketing department assesses the credit quality of the customers and related parties, taking into account their financial positions, past experience and other factors. We perform periodic credit evaluations of our customers and believe that adequate provisions for impairment of receivables have been made in the financial statements. Management does not expect any further losses from non-performance by these counterparties.
For the year ended December 31, 130
Foreign Exchange Rate Risk
We conduct our business primarily in Renminbi, which is our functional and reporting currency. We convert a portion of our Renminbi revenues into other currencies to meet foreign currency obligations and to pay for imported equipment and materials.
Many foreign currency exchange transactions involving Renminbi, including foreign exchange transactions under our capital account, are subject to foreign exchange controls and require the approval of the SAFE. Actions taken by the PRC government could cause future exchange rates to vary significantly from current or historical exchange rates. On July 21, 2005, the PBOC announced a reform of its exchange rate system. Under the reform, the Renminbi is no longer effectively linked to the U.S. dollar but instead is allowed to fluctuate within a narrow and managed band against a basket of foreign currencies, according to market demand and supply conditions. In April 2012, the PRC government took a milestone step in turning the Renminbi into a global currency by doubling the size of its trading band against the U.S. dollar, pushing through a crucial reform that further liberalizes its financial markets. The PBOC allows the Renminbi to rise or fall 1% from a mid-point every day, effective on April 16, 2012, compared with its previous 0.5% limit. The PBOC allows the Renminbi to rise or fall 2% from a mid-point every day, effective on March 17, 2014, compared with its previous 1% limit. In August 2015, the PBOC announced that thedailycentral parityquotes the market-makersreported to the China Foreign ExchangeTrade System operated by the PBOCbefore themarket opens should be based on the closing rate of the inter-bank foreign exchange ratemarket on the previous day, supply and demandin the market, and price movement of majorcurrencies, effective on August 11, 2015.Any appreciation of the Renminbi will increase the prices of our export sales denominated in foreign currencies and reduce the Renminbi equivalent value of our trade and notes receivable denominated in foreign currencies, which may adversely affect our financial condition and results of operations. Our financial condition and operating performance may also be affected by changes in the value of currencies other than Renminbi in which our earnings and obligations are denominated.
Our bank balances and cash on hand as of December 31,
As of December 31,
As the assets and liabilities denominated in other foreign currencies other than U.S. dollars were relatively minimal to our total assets and liabilities, our directors are of the opinion that we were not exposed to any significant foreign currency risk arising from these foreign currency denominated assets and liabilities as of December 31,
Interest Rate Risk
As of December 31,
Most of the bank deposits are maintained in savings and time deposit accounts in the PRC. The interest rates are regulated by the PBOC and our Group treasury closely monitors the fluctuation on such rates periodically. The interest rates of entrusted loans are fixed. As the interest rates applied to the entrusted loans were fixed, our directors are of the opinion that we 131
The interest rate risk for our financial liabilities primarily arises from interest-bearing loans. Loans borrowed at floating interest rates expose us to cash flow interest rate risk. We enter into debt obligations to support general corporate purposes including capital expenditures and working capital needs. Our Group treasury closely monitors market interest rates and maintains a balance between variable rate and fixed rate borrowings in order to reduce the exposures to the interest rate risk described above. As of December 31,
Our interest rate risk for our financial liabilities also arises from medium-term notes and short-term bonds issued at fixed rates. As the fluctuation of comparable interest rates of corporate bonds with similar terms was relatively low, our directors are of the opinion that we are not exposed to any significant fair value interest rate risk for its fixed interest rate borrowings held as of December 31, Commodity Price Risk
We are exposed to fluctuations in the prices of alumina, primary aluminum and other products. We import a small portion of our alumina supply from suppliers outside China. Such purchases are made at market prices. In addition, all our sales of alumina, primary aluminum and other products are made at market prices. Therefore, fluctuations in the prices of alumina and primary aluminum have a significant effect on our operating performances.
We use mainly futures contracts and option contracts traded on the SHFE and the LME to hedge against fluctuations in primary aluminum prices. We use the futures contract for hedging other than speculation. As of December 31,
As of December 31,
Liquidity risk
We monitor rolling forecasts of our liquidity requirements to ensure we have sufficient cash to meet operational needs while maintaining sufficient headroom on our undrawn committed borrowing facilities at all times so that we do not breach borrowing limits or covenants (where applicable) on any of our borrowing facilities. Such forecast takes into consideration our debt financing plans, covenant compliance, compliance with internal balance sheet ratio targets and, if applicable, external regulatory or legal requirements. Our management also monitors rolling forecasts of our liquidity reserve on the basis of expected cash flows.
As of December 31, 132
The following table sets forth the maturity profile of our financial liabilities as of December 31,
Not applicable.
Not applicable.
Not applicable.
The following table summarizes the fees and charges that a holder of our ADSs may have to pay, directly or indirectly, in connection with the ownership of Chalco’s 133
The Bank of New York Mellon, as depositary, has agreed to reimburse certain expenses related to the administration and maintenance of our ADR program incurred by us in connection with the program. From January 1,
None.
None.
134
Our management, with the participation of our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act) as of the end of the period covered by this annual report, have concluded that, as of such date, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d- 15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of and with the participation of the principal executive officer and principal financial officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31,
Based on our evaluation under the framework in Internal Control-Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission, our management concluded that, as of December 31,
The effectiveness of our internal controls over financial reporting as of December 31,
Changes in Internal Control over Financial Reporting
During
Item 16A. Audit Committee Financial Expert
Our audit committee members are three independent non-executive directors, namely, Ms. Chen Lijie, Mr. Hu Shihai and Mr. Lie-A-Cheong Tai Chong, David. Our Board has determined that Mr. Lie-A-Cheong Tai Chong, David, the chairman of the audit committee, qualifies as an “audit committee financial expert” as defined in Item 16A of Form 20-F and is the financial expert serving on our audit committee. See “Item 6. Directors, Senior Management and Employees.”
135
We have adopted a code of ethics that applies to our chief executive officer, chief financial officer, other directors, independent non-executive directors, senior management and employees. We have posted our code of ethics on our website: http://www.chalco.com.cn/chalcoen/whzr/ddgf/A130516web_1.htm. A hard copy of this code of ethics is available to investors free of charge upon written request to the address on the cover of this annual report on Form 20-F.
Item 16C. Principal Accountant Fees and Services
Ernst & Young Hua Ming LLP served as our independent auditor for the fiscal years ended December 31,
Our audit committee pre-approves all audit, audit-related services, tax services and other services performed by Ernst & Young Hua Ming LLP, Ernst & Young and Ernst & Young (China) Advisory Limited, for the years ended December 31,
Item 16D. Exemptions
Not applicable.
Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers
We 136
Item 16F. Change in Registrant’s Certifying Accountant
On March 26, 2020, our Board resolved, as approved and recommended by our audit committee, to propose change in our independent registered public accounting firms, Ernst & Young Hua Ming LLP (“EY”), upon the expiration of its current term of office at the close of the forthcoming annual general meeting of the shareholders to be held in June 2020 (the “2019 AGM”) due to the relevant regulations issued by the MOF and the SASAC, which impose certain restrictions in respect of the number of years of audit services that an accounting firm may continuously provide to a state-owned enterprise and its subsidiaries. As a result, EY will not offer themselves for re-appointment at the 2019 AGM. EY’s audit reports on the consolidated financial statements as of December 31, 2018 and 2019, and for the years ended December 31, 2018 and 2019, do not contain any adverse opinion or any disclaimer of opinion, and are not qualified or modified as to uncertainty, audit scope, or accounting principles. During the years ended December 31, 2018 and 2019 and through April 22, 2020, there have been no (i) disagreements between us and EY on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of EY, would have caused them to make reference thereto in their audit reports on the consolidated financial statements for such years, or (ii) reportable events as defined in Item 16F(a)(1)(v) of Form 20-F. As used herein, the term “reportable event” means any of the items listed in paragraphs (a)(1)(v)(A)-(D) of Item 16F of Form 20-F. We have provided a copy of the above statements to EY and have requested that EY furnish us with a letter addressed to the SEC stating whether they agree with the above statements, and if not, stating the respects in which they do not agree. A copy of such letter, dated April 22, 2020, furnished by EY is filed as Exhibit 15.1 to this annual report on Form 20-F.
On March 26, 2020, our Board resolved, as approved and recommended by our audit committee, to propose to appoint PricewaterhouseCoopers Zhong Tian LLP (“PwC”) as our new independent registered public accounting firm, subject to the approval of our shareholders at the 2019 AGM, upon which the tenure of the office of PwC will commence. During the years ended December 31, 2018 and 2019 and through April 22, 2020, neither we nor anyone on our behalf consulted PwC regarding (i) the application of accounting principles to a specified transaction, either completed or proposed, (ii) the type of audit opinion that might be rendered on our financial statements, and neither a written report nor oral advice was provided to us that PwC concluded was an important factor considered by us in reaching a decision as to any accounting, auditing, or financial reporting issue, (iii) any matter that was the subject of disagreement as defined in Item 16F(a)(1)(iv) of Form 20-F and the related instructions to this Item, or (iv) any reportable events as defined in paragraphs Item 16F(a)(1)(v) of Form 20-F.
Item 16G. Corporate Governance
The NYSE has imposed a series of corporate governance standards for companies listed on the NYSE in Section 303A of the NYSE Listed Company Manual. However, the NYSE provides that listed companies that are foreign private issuers, subject to certain limitations and conditions, are permitted to follow “home country” practice in lieu of the provisions of Section 303A of the NYSE Listed Company Manual. As a foreign private issuer listed on the NYSE, we are required to disclose a summary of the significant differences between our corporate governance practice and NYSE corporate governance rules that apply to U.S. domestic issuers.
137
Item 16H. Mine Safety Disclosure
As of the date of this annual report, we do not own or operate any mine in the United States. For details of the mining safety control of our bauxite mines in China, see “Item 4. Information on the Company - B. Business Overview - Raw Materials - Alumina - Own Mines.”
We have elected to provide the financial statements and related information specified in Item 18 in lieu of Item 17.
The audited Consolidated Financial Statements as required under Item 18 are attached hereto starting on page F-1 of this Form 20-F.
Item 19. Exhibits 138
* Filed with this annual report on Form 20-F 139 SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
ALUMINUM CORPORATION OF CHINA LIMITED
Consolidated Financial Statements
For the Years Ended December 31,
Together with Reports of Independent Public Accounting Firm
F-1
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
ALUMINUM CORPORATION OF CHINA LIMITED F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Aluminum Corporation of China Limited
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Group’s internal control over financial reporting as of December 31,
Adoption of New Accounting Standards
As discussed in Note
As discussed in Note
Basis for Opinion
These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the Group’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the
We conducted our audits in accordance with the standards of the Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
F-3
F-4
/s/ Ernst & Young Hua Ming LLP
We have served as the Group’s auditor since 2012. Beijing, the People’s Republic of China April 22, 2020
F-5 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors
Opinion on Internal Control
We have audited Aluminum Corporation of China
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statements of financial position of the Group as of December 31,
Basis for Opinion
The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young Hua Ming LLP
Beijing, the People’s Republic of China April
ALUMINUM CORPORATION OF CHINA LIMITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As of December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-7 ALUMINUM CORPORATION OF CHINA LIMITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION(Continued) As of December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The accompanying notes are an integral part of these financial statements.
F-8 ALUMINUM CORPORATION OF CHINA LIMITED CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-9
ALUMINUM CORPORATION OF CHINA LIMITED CONSOLIDATED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Details of the dividends payable and proposed for the year are disclosed in
The accompanying notes are an integral part of these financial statements.
F-10 ALUMINUM CORPORATION OF CHINA LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-11
ALUMINUM CORPORATION OF CHINA LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-12
ALUMINUM CORPORATION OF CHINA LIMITED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The accompanying notes are an integral part of these financial statements.
F-13
ALUMINUM CORPORATION OF CHINA LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-14
ALUMINUM CORPORATION OF CHINA LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The accompanying notes are an integral part of these consolidated financial statements. F-15 ALUMINUM CORPORATION OF CHINA LIMITED
2019
Aluminum Corporation of China Limited (the “Company”) (中國鋁業股份有限公司) and its subsidiaries (together the “Group”) are principally engaged in the manufacture and distribution of alumina, primary aluminum and energy products. The Group is also engaged in the development of bauxite-related resources, the production, fabrication and distribution of bauxite, carbon and relevant non-ferrous metal products and the trading and logistics and transport services of non-ferrous metal products and coal products.
The Company is a joint stock company which is domiciled and was established on September 10,
The Company’s shares have been listed on the Main Board of the Hong Kong Stock Exchange and the New York Stock Exchange since 2001. The Company also listed its A shares on the Shanghai Stock Exchange in 2007.
In the opinion of the directors, the ultimate holding company and the parent of the Company is Aluminum Corporation of China (“Chinalco”) (中國鋁業集团有限公司), a company incorporated and domiciled in the PRC and wholly owned by the State-owned Assets Supervision and Administration Commission of the State Council.
Information about subsidiaries
Particulars of the Company’s principal subsidiaries are as follows:
F-16 ALUMINUM CORPORATION OF CHINA LIMITED
2019
Information about subsidiaries(Continued)
F-17 ALUMINUM CORPORATION OF CHINA LIMITED
2019
Information about subsidiaries(Continued)
The above table lists the subsidiaries of the Company which, in the opinion of the directors, principally affected the results of the year or formed a substantial part of the net assets of the Group. To give details of the other subsidiaries would, in the opinion of the directors, result in particulars of excessive length.
F-18 ALUMINUM CORPORATION OF CHINA LIMITED
2019
The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
2.1Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“
These financial statements are presented in thousands of
Going concern
As at December 31,
The directors of the Company believe that the Group has adequate resources to continue operations for the foreseeable future of not less than 12 months from December 31,
F-19 ALUMINUM CORPORATION OF CHINA LIMITED
2.1Basis of preparation(Continued) Consolidation
The consolidated financial statements comprise the financial statements of the Company and all of its subsidiaries for the year ended December 31,
Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:
The Group reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary.
Profit or loss and each component of other comprehensive income (“OCI”) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. F-20 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.1Basis of preparation (Continued) Consolidation (
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it:
The consolidated financial statements incorporate the financial statements of the combining entities or businesses in business
The net assets of the combining entities or businesses are consolidated using the carrying amount from the ultimate holding company’s
The consolidated statement of
The comparative financial data have been restated to reflect the business combinations under common control
Transaction costs, including professional fees, registration fees, costs of furnishing information to shareholders, costs or losses incurred in combining operations of the previously separate businesses and other costs incurred in relation to the common control combination that is to be accounted for by using the merger accounting method are recognized as expenses in the period in which they are incurred. F-21 ALUMINUM CORPORATION OF CHINA LIMITED
2.1Basis of preparation (Continued) Consolidation (Continued)
The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group, other than common control combinations. The value. For each business combination, the Group elects whether to measure the non-controlling interests in the acquiree that are present ownership interests and entitle their holders to a
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts of the acquiree.
If the business combination is achieved in stages, the previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognized in profit or loss.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. The Group performs its annual impairment test of goodwill as at December 31. For the purpose of impairment testing, goodwill acquired in a business combination is, Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash- generating units) to which the goodwill relates. Where the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognized. An impairment loss recognized for goodwill is not
F-22 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.1 Basis of preparation (Continued) Consolidation (Continued)
A subsidiary is an entity, directly or indirectly, controlled by the Company. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee (i.e., existing rights that give the Group the current ability to direct the relevant activities of the investee).
When the Company has, directly or indirectly, less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:
Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
Inter-company transactions, balances, income and expenses on transactions between group companies are eliminated. Profits and losses resulting from inter-company transactions that are recognized in assets are also eliminated. Amounts reported by subsidiaries have been adjusted where necessary in the consolidated financial statements to conform with the policies adopted by the Group.
In the Company’s statement of financial position, as permitted under IFRS 1, the investments in subsidiaries acquired prior to January 1, 2008, being the date of transition to IFRS, are stated at deemed cost as required under the previously adopted accounting standards. Subsidiaries acquired after that date that are not classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are stated at cost less provision for impairment losses. The results of subsidiaries are accounted for by the Company on the basis of dividends received and receivable. F-23 ALUMINUM CORPORATION OF CHINA LIMITED
2.2 Changes in accounting policies and disclosures The Group has adopted the following new and revised IFRSs for the first time for the current year’s financial statements.
Except for the amendments to IFRS 9 and IFRS 19 and Annual Improvements to IFRS 2015–2017 Cycle, which are not relevant to the preparation of the Group’s financial statements, the nature and the impact of the new and revised IFRSs are described below:
IFRS 16 replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC 15 Operating Leases-Incentives and SIC 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model to recognize and measure right-of-use assets and lease liabilities, except for certain recognition exemptions. Lessor accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors continue to classify leases as either operating or finance leases using similar principles as in IAS 17. Therefore, IFRS 16 did not have any financial impact on leases where the Group is the lessor. The Group has adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of January 1, 2019. Under this method, the standard has been applied retrospectively with the cumulative effect of initial adoption recognized as an adjustment to the opening balance of retained earnings at January 1, 2019, and the comparative information for 2018 was not restated and continues to be reported under IAS 17 and related interpretations. New definition of a lease Under IFRS 16, a contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period of time in exchange for consideration. Control is conveyed where the customer has both the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset. The Group elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed. Therefore, the definition of a lease under IFRS 16 has been applied only to contracts entered into or changed on or after January 1, 2019. F-24 ALUMINUM CORPORATION OF CHINA LIMITED
2.2 Changes in accounting policies and disclosures(Continued)
As a lessee- Leases previously classified as operating leases Nature of the effect of adoption of IFRS 16 The Group has lease contracts for various items of property, machinery, vehicles and other equipment. As a lessee, the Group previously classified leases as either finance leases or operating leases based on the assessment of whether the lease transferred substantially all the rewards and risks of ownership of assets to the Group. Under IFRS 16, the Group applies a single approach to recognize and measure right-of-use assets and lease liabilities for all leases, except for two elective exemptions for leases of low-value assets (elected on a lease-by-lease basis) and leases with a lease term of 12 months or less (“short-term leases”) (elected by class of underlying asset). Instead of recognising rental expenses under operating leases on a straight-line basis over the lease term commencing from January 1, 2019, the Group recognizes depreciation (and impairment, if any) of the right-of-use assets and interest accrued on the outstanding lease liabilities (as finance costs). Impacts on transition Lease liabilities at January 1, 2019 were recognized based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at January 1, 2019 and included in interest-bearing loans and borrowings. The right-of-use assets were measured at the amount of the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to the lease recognized in the consolidated statement of financial position immediately before January 1, 2019. All these assets were assessed for any impairment based on IAS 36 on that date. The Group elected to present the right-of-use assets separately in the statement of financial position. This includes the lease assets recognized previously under finance leases of RMB6,721 million that were reclassified from property, plant and equipment, land use right of RMB4,307 million that were disclosed separately in the statement of financial position, and prepaid rental of RMB20 million that were included in other non-current assets. F-25 ALUMINUM CORPORATION OF CHINA LIMITED
2.2 Changes in accounting policies and disclosures(Continued) (a) IFRS 16 Leases(Continued) As a lessee- Leases previously classified as operating leases(Continued) Impacts on transition(Continued) The Group has used the following elective practical expedients when applying IFRS16 at January 1, 2019:
The Group did not change the initial carrying amounts of recognized assets and liabilities at the date of initial application for leases previously classified as finance leases. Accordingly, the carrying amounts of the right-of-use assets and the lease liabilities at January 1, 2019 were the carrying amounts of the recognized assets and liabilities (i.e., finance lease payables) measured under IAS 17. The impact arising from the adoption of IFRS16 at January 1, 2019 is as follows:
F-26 ALUMINUM CORPORATION OF CHINA LIMITED
2.2 Changes in accounting policies and disclosures(Continued) (a) IFRS 16 Leases(Continued) As a lessee- Leases previously classified as operating leases(Continued) Impacts on transition(Continued) The lease liabilities as at January 1, 2019 reconciled to the operating lease commitments as at December 31, 2018 is as follows:
Amendments to IAS 28 clarify that the scope exclusion of IFRS 9 only includes interests in an associate or joint venture to which the equity method is applied and does not include long-term interests that in substance form part of the net investment in the associate or joint venture, to which the equity method has not been applied. Therefore, an entity applies IFRS 9, rather than IAS 28, including the impairment requirements under IFRS 9, in accounting for such long-term interests. IAS 28 is then applied to the net investment, which includes the long-term interests, only in the context of recognising losses of an associate or joint venture and impairment of the net investment in the associate or joint venture. The Group assessed its business model for its long-term interests in associates and joint ventures upon adoption of the amendments on January 1, 2019 and concluded that the long-term interests in associates and joint ventures continue to be measured at amortized cost in accordance with IFRS 9. Accordingly, the amendments did not have any impact on financial position or performance of the Group. F-27 ALUMINUM CORPORATION OF CHINA LIMITED
2.2 Changes in accounting policies and disclosures(Continued)
IFRIC 23 addresses the accounting for income taxes (current and deferred) when tax treatments involve uncertainty that affects the application of IAS 12 (often referred to as “uncertain tax positions”). The interpretation does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The interpretation specifically addresses (i) whether an entity considers uncertain tax treatments separately; (ii) the assumptions an entity makes about the examination of tax treatments by taxation authorities; (iii) how an entity determines taxable profits or tax losses, tax bases, unused tax losses, unused tax credits and tax rates; and (iv) how an entity considers changes in facts and circumstances. Upon adoption of the interpretation, the Group assessed whether it has any uncertain tax positions arising from transactions during the year. Based on the Group’s assessment, the directors are of opinion that the eventual outcome of the uncertainty position shall not have a material adverse financial effect.
Amendments to IFRS 10 and IAS 28 (2011) address an inconsistency between the requirements in IFRS 10 and in IAS 28 (2011) in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The amendments require a full recognition of a gain or loss when the sale or contribution of assets between an investor and its associate or joint venture constitutes a business. For a transaction involving assets that do not constitute a business, a gain or loss resulting from the transaction is recognized in the investor’s profit or loss only to the extent of the unrelated investor’s interest in that associate or joint venture. The amendments are to be applied prospectively. The Group adopted the amendments on January 1, 2019, and assessed the sale or contribution of assets transaction with its associate or joint venture. The amendments did not have any significant impact on the Group’s financial statements. F-28 ALUMINUM CORPORATION OF CHINA LIMITED
The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective, in these financial statements.
Further information about those IFRSs that are expected to be applicable to the Group is described below. Amendments to IAS 1 and IAS 8 provide a new definition of material. The new definition states that information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements. The amendments clarify that materiality will depend on the nature or magnitude of information. A misstatement of information is material if it could reasonably be expected to influence decisions made by the primary users. The Group expects to adopt the amendments prospectively from January 1, 2020. The amendments are not expected to have any significant impact on the Group’s financial statements. Amendments to IFRS 3 clarify and provide additional guidance on the definition of a business. The amendments clarify that for an integrated set of activities and assets to be considered a business, it must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. A business can exist without including all of the inputs and processes needed to create outputs. The amendments remove the assessment of whether market participants are capable of acquiring the business and continue to produce outputs. Instead, the focus is on whether acquired inputs and acquired substantive processes together significantly contribute to the ability to create outputs. The amendments have also narrowed the definition of outputs to focus on goods or services provided to customers, investment income or other income from ordinary activities. Furthermore, the amendments provide guidance to assess whether an acquired process is substantive and introduce an optional fair value concentration test to permit a simplified assessment of whether an acquired set of activities and assets is not a business. The Group expects to adopt the amendments prospectively from January 1, 2020. Since the amendments apply prospectively to transactions or other events that occur on or after the date of first application, the Group will not be affected by these amendments on the date of transition. Amendments to IFRS 9, IAS 39 and IFRS 7 address the effects of interbank offered rate reform on financial reporting. The amendments provide temporary reliefs which enable hedge accounting to continue during the period of uncertainty before the replacement of an existing interest rate benchmark. In addition, the amendments require companies to provide additional information to investors about their hedging relationships which are directly affected by these uncertainties. The amendments are effective for annual periods beginning on or after January 1, 2020. Early application is permitted. The amendments are not expected to have any significant impact on the Group’s financial statements. F-29 ALUMINUM CORPORATION OF CHINA LIMITED
2.4 Investments in associates and joint ventures An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. The Group’s investments in associates and joint ventures are stated in the consolidated statement of financial position at the Group’s share of net assets under the equity method of accounting, less any impairment losses. Adjustments are made to bring into line any dissimilar accounting policies that may exist. The Group’s share of the post-acquisition results and other comprehensive income of associates and joint ventures is included in the consolidated statement of profit or loss and other comprehensive income. In addition, when there has been a change recognized directly in the equity of the associate or joint venture, the Group recognizes its share of any changes, when applicable, in the consolidated statement of changes in equity. Unrealized gains and losses resulting from transactions between the Group and its associates or joint ventures are eliminated to the extent of the Group’s investments in the associates or joint ventures, except where unrealized losses provide evidence of an impairment of the assets transferred. Goodwill arising from the acquisition of associates or joint ventures is included as part of the Group’s investments in associates or joint ventures. After application of the equity method, the Group determine whether it is necessary to recognize an impairment loss on its investment in its associate and joint venture in the profit or loss. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, then recognizes the loss in the profit or loss. If an investment in an associate becomes an investment in a joint venture or vice versa, the retained interest is not remeasured. Instead, the investment continues to be accounted for under the equity method. In all other cases, upon loss of significant influence over the associate or joint control over the joint venture, the Group measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the associate or joint venture upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognized in profit or loss. When an investment in an associate or a joint venture is classified as held for sale, it is accounted for in accordance with IFRS 5Non-current Assets Held for Sale and Discontinued Operations F-30 ALUMINUM CORPORATION OF CHINA LIMITED
2019
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-makers. The chief operating decision-makers, who are responsible for allocating resources and assessing the performance of the operating segments, have been identified as the presidents of the Company that make strategic decisions.
2.6 Related parties
A party is considered to be related to the Group if:
or
ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.7 Fair value measurement
The Group measures its derivative financial instruments and equity investments at fair value at the end of each reporting period. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value,
All assets and liabilities for which fair value is measured or disclosed in the financial statements are
Level 1 — Based on quoted (unadjusted) prices in active markets for identical assets or liabilities
Level 2 — Based on valuation techniques for which the lowest level input that is significant to the fair value measurement is observable, either directly or indirectly
Level 3 — Based on valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable
For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing F-32 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.8 Impairment of non-financial assets Where an indication of impairment exists, or when annual impairment testing for an asset is required (other than inventories, deferred tax assets, non-current assets classified as held for sales and goodwill or intangible assets with indefinite useful life), the asset’s recoverable amount is estimated. An asset’s recoverable amount is the higher of the asset’s or cash-generating unit’s value in use and its fair value less costs of disposal, and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged to profit or loss in the period in which it arises in those expense categories consistent with the function of the impaired asset. An assessment is made at the end of each reporting period as to whether there is an indication that previously recognized impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amount is estimated. A previously recognized impairment loss of an asset other than goodwill is reversed only if there has been a change in the estimates used to determine the recoverable amount of that asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation/amortization) had no impairment loss been recognized for the asset in prior years. A reversal of such an impairment loss is credited to profit or loss in the period in which it arises. F-33 ALUMINUM CORPORATION OF CHINA LIMITED 2.9 Foreign currency translation
Functional and presentation currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in RMB, which is the Company’s functional currency and the Group’s presentation currency.
Transactions and balances
Foreign currency transactions recorded by the entities in the Group are initially recorded using their respective functional currency rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rates of exchange ruling at the end of the reporting period. Differences arising on settlement or translation of monetary items are recognized in profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was measured. The gain or loss arising on translation of a non-monetary item measured at fair value is treated in line with the recognition of the gain or loss on change in fair value of the item.
In determining the exchange rate on initial recognition of the related asset, expense or income on the derecognition of a non-monetary asset or non-monetary liability relating to an advance consideration, the date of initial transaction is the date on which the Group initially recognizes the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, the Group determines the transaction date for each payment or receipt of the advance consideration.
Group companies
The results and financial positions of all the group entities (none of which has the currency of a hyper-inflationary economy) that has a functional currency different from the presentation currency are translated into the presentation currency as follows:
Goodwill and fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. Exchange differences arising are recognized in other comprehensive income. F-34 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.10 Property, plant and equipment
Property, plant and equipment, other than construction in progress, are stated at cost less accumulated depreciation and any impairment losses. When an item of property, plant and equipment is classified as held for sale or when it is part of a disposal group classified as held for sale, it is not depreciated and is accounted for in accordance with IFRS 5. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.
Expenditure incurred after items of property, plant and equipment have been put into operation, such as repairs and maintenance, is normally charged to profit or loss in the period in which it is incurred. In situations where the recognition criteria are satisfied, the expenditure for a major inspection is capitalized in the carrying amount of the asset as a replacement. Where significant parts of property, plant and equipment are required to be replaced at intervals, the Group recognizes such parts as individual assets with specific useful lives and depreciates them accordingly.
Depreciation is calculated on the straight-line basis to write off the cost of each item of property, plant and equipment to its residual value over its estimated useful life. The principal annual rates used for this purpose are as follows:
An item of property, plant and equipment including any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss on disposal or retirement recognized in profit or loss in the year the asset is derecognized is the difference between the net sales proceeds and the carrying amount of the relevant asset.
Construction in progress (“CIP”) represents buildings under construction, F-35 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.11 Investment properties Investment properties are interests in land and buildings (including the leasehold property held as a right-of-use asset (2018: leasehold property under an operating lease) which would otherwise meet the definition of an investment property) held to earn rental income and/or for capital appreciation, rather than for use in the production or supply of goods or services or for administrative purposes; or for sale in the ordinary course of business. Such properties are measured initially at cost, including transaction costs. After initial recognition, the Group uses the cost methods to measure all of its investment properties. Depreciation is calculated on the straight-line basis to write off the cost to investment property’s residual value over its estimated useful life. The estimated useful lives are as follows:
Any gains or losses on the retirement or disposal of 2.12 Non-current assets and disposal groups Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered principally through a sales transaction rather than through continuing use. For this to be the case, the asset or disposal group must be available for immediate sale in its present condition subject only to terms that are
F-36
ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.13 Intangible assets (other than goodwill) Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value at the date of acquisition. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are subsequently amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year end.
The Group’s mineral exploration rights and mining rights relate to coal, bauxite and other mines.
Mineral exploration rights are converted to mining rights when technical feasibility and commercial viability of extracting a mineral resource are demonstrable, and are subject to amortization when commercial production has commenced.
The Group assesses the stage of each mine under construction to determine when a mine moves into the production stage. The criteria used to assess the start date are determined based on the unique nature of each mine construction project. The Group considers various relevant criteria, such as completion of a reasonable period of testing of the mine and equipment, ability to produce in saleable form (within specifications) and ability to sustain ongoing production to assess when a mine is substantially complete and ready for its intended use.
Amortization of bauxite and other mining rights (except for coal mining rights) is provided on a straight-line basis according to the shorter of the expiration date of the mining certificate and the mineable period of natural resources. Estimated mineable periods of the majority of the mining rights range from 3 to 30 years.
Coal mining rights are amortized on a unit-of-production basis over the economically recoverable reserves evaluated based on the reserves estimated in accordance with the standards in the Solid Mineral Resource/Reserve Classification of the PRC (GB/
An impairment review is performed when there are indicators that the carrying amount of the mineral exploration rights and mining rights may exceed their recoverable amounts. To the extent that this occurs, the excess is fully provided as an impairment loss. F-37 ALUMINUM CORPORATION OF CHINA LIMITED
(Amounts expressed in thousands of RMB unless otherwise stated)
2.13 Intangible assets (other than goodwill)(Continued)
Acquired computer software licences are capitalized on the basis of the costs incurred to acquire and bring to use specific software. These costs are amortized over their estimated useful lives, which do not exceed 10 years. Costs associated with maintaining computer software programmes are recognized as an expense as incurred.
Other intangible assets mainly include profit-sharing rights of Maochang mine, which are initially recorded at costs incurred to acquire the specific right. Amortization is calculated on the straight-line basis over its estimated useful life. The estimated useful live of profit-sharing rights of Maochang mine is 22.5 years.
For intangible assets with finite useful
2.14 Research and development costs
Research and development expenditures are classified as research expenditures and development expenditures according to the nature of the expenditures and whether there is significant uncertainty of development activities transforming to assets.
Research expenditures are recognized in profit or loss for the current period. Development expenditures are recognized as assets when all of the following criteria are met:
Development expenditures that do not meet the criteria above are recorded in profit or loss for the current period as incurred. Development expenditures that have been recorded in profit or loss in previous periods will be not recognized as assets in subsequent periods. The Group has not had any development expenditure capitalized. F-38 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.15 Leases (applicable from January 1, 2019) The Group assesses at contract inception whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Group as a lessee The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets. (a) Right-of-use assets Right-of-use assets are recognized at the commencement date of the lease (that is the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and any impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-us assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payment made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease terms and the estimated useful lives of the assets as follows:
If ownership of the
Lease liabilities are recognized
The Group’s lease liabilities are included in F-39 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.15 Leases (applicable from January 1, 2019)(Continued)
(c) Short-term leases and leases of low-value assets The Group applies the short-term lease recognition exemption to its short-term leases of machinery and equipment (that is those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the recognition exemption for leases of low-value assets to leases of office equipment that are Lease payments on short-term leases and Group as a lessor When the Group acts as a lessor, it classifies at lease inception (or when there is a lease modification) each of its leases as either an operating lease Leases in which
2.16 Leases (applicable before January 1, 2019) Leases that transfer substantially all the rewards and risks of ownership of assets to the Group, other than legal title, are accounted for as finance leases. At the inception of a finance lease, the cost of the leased asset is capitalized at the present value of the minimum lease payments and recorded together with the obligation, excluding the interest element, to reflect the purchase and financing. Assets held under capitalized finance leases, including prepaid land lease payments under finance leases, are included in property, plant and equipment, and Assets acquired through hire purchase contracts of a financing nature are accounted for F-40 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.16 Leases (applicable before January 1, 2019)(Continued)
Prepaid land lease payments under operating leases are initially stated at cost and subsequently recognized on the straight-line basis over the lease terms. 2.17 Investments and other financial assets IFRS 9
Initial recognition and measurement
Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other comprehensive income, and fair value through profit or loss.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient of not adjusting the effect of a significant financing component, the Group initially measures a financial asset at its fair value, plus in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15 in accordance with the policies set out for “Revenue
In order for a financial asset to be classified and measured at amortized cost or fair value through other comprehensive income, it needs to give rise to cash flows that are solely payments of principal and interest (“SPPI”) on the principal amount outstanding. Financial assets with cash flows that are not SPPI are classified and measured at fair value through profit or loss, irrespective of the business model.
The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets classified and measured at amortized cost are held within a business model with the objective to hold financial assets in order to collect contractual cash flows, while financial assets classified and measured at fair value through other comprehensive income are held within a business model with the objective of both holding to collect contractual cash flows and selling. Financial assets which are not held within the aforementioned business models are classified and measured at fair value through profit or loss.
All regular way purchases and sales of financial assets are recognized on the trade date, that is, the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.
F-41 ALUMINUM CORPORATION OF CHINA LIMITED
2.17 Investments and other financial assets(Continued) Subsequent measurement
The subsequent measurement of financial assets depends on their classification as follows:
Financial assets at amortized cost (debt instruments)
Financial assets at amortized cost are subsequently measured using the effective interest method and are subject to impairment. Gains and losses are recognized in
Financial assets at fair value through other comprehensive income (debt instruments) For debt investments at fair value through other comprehensive income, interest income, foreign exchange revaluation and impairment losses or reversals are recognized in profit or loss and computed in the same manner as for financial assets measured at amortized cost. The remaining fair value changes are recognized in other comprehensive income. Upon derecognition, the cumulative fair value change recognized in other comprehensive income is recycled to profit or loss. Financial assets designated at fair value through other comprehensive income (equity investments)
Upon initial recognition, the Group can elect to classify irrevocably its equity investments as equity investments designated at fair value through other comprehensive income when they meet the definition of equity under IAS 32 Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument-by-instrument basis.
Gains and losses on these financial assets are never recycled to
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognized in profit or loss.
This category includes derivative instruments, wealth management products and equity investments which the Group had not irrevocably elected to classify at fair value through other comprehensive income. Dividends on equity investments classified as financial assets at fair value through profit or loss are also recognized as other gains in profit or loss when the right of payment has been established, it is probable that the economic benefits associated with the dividend will flow to the Group and the amount of the dividend can be measured reliably.
A derivative embedded in a hybrid contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate derivative if the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the hybrid contract is not measured at fair value through profit or loss. Embedded derivatives are measured at fair value with changes in fair value recognized in profit or loss. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss category.
F-42 ALUMINUM CORPORATION OF CHINA LIMITED
2.17 Investments and other financial assets(Continued) Subsequent measurement(Continued) Financial assets at fair value through profit or loss(Continued) A derivative embedded within a hybrid contract containing a financial asset host is not accounted for separately. The financial asset host together with the embedded derivative is required to be classified in its entirety as a financial asset at fair value through profit or loss.
Derecognition of financial assets
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Group’s consolidated statement of financial position) when:
When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risk and rewards of ownership of the asset. When it has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the Group continues to recognize the transferred asset to the extent of the Group’s continuing involvement. In that case, the Group also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Impairment of financial assets The Group recognizes an allowance for expected credit losses (“ECLs”) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The ECL at December 31, 2019 was estimated based on a range of forecast economic conditions as at that date. Since early January 2020, the coronavirus outbreak has spread across mainland China and beyond, causing disruption to business and economic activity. The impact on GDP and other key indicators have been considered when determining the severity and likelihood of downside economic scenarios that are used to estimate ECL under IFRS 9 in 2020. F-43 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.17 Investments and other financial assets(Continued) Impairment of financial assets(Continued) General approach ECLs are recognized in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12 months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL). At each reporting date, the Group assesses whether the credit risk on a financial instrument has increased significantly since initial recognition. When making the assessment, the Group compares the risk of a default occurring on the financial instrument as at the reporting date with the risk of a default occurring on the financial instrument as at the date of initial recognition and considers reasonable and supportable information that is available without undue cost or effort, including historical and forward-looking information. The Group considers a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows. Debt investments at fair value through other comprehensive income and financial assets at amortized cost are subject to impairment under the general approach and they are classified within the following stages for measurement of ECLs except for trade receivables and contract assets which apply the simplified approach as detailed below.
F-44 ALUMINUM CORPORATION OF CHINA LIMITED
2.17 Investments and other financial assets(Continued)
Impairment of financial assets(Continued) Simplified approach For trade receivables and contract assets that do not contain a significant financing component or when the Group applies the practical expedient of not adjusting the effect of a significant financing component, the Group applies the simplified approach in calculating ECLs. Under the simplified approach, the Group does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment. For trade receivables and contract assets that contain a significant financial component and lease receivables, the Group chooses as its accounting policy to adopt the simplified approach in calculating ECLs with policies as described above. 2.18 Financial liabilities Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.
All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
The Group’s financial liabilities include
Subsequent measurement
The subsequent measurement of financial liabilities depends on their classification as follows:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognized in
F-45 ALUMINUM CORPORATION OF CHINA LIMITED
2019
Subsequent measurement
Financial liabilities at After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost, using the effective interest rate method unless the effect of discounting would be immaterial, in which case they are stated at cost. Gains and losses are recognized in profit or loss
Financial guarantee contracts
Financial guarantee contracts issued by the Group are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. A financial guarantee contract is recognized initially as a liability at its fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequent to initial recognition, the Group measures the financial guarantee contracts at the higher of: (i) the ECL allowance determined in accordance with the policy as set out in “Impairment of financial
Derecognition of financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged or cancelled, or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and a recognition of a new liability, and the difference between the respective carrying amounts is recognized in profit or loss.
Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously.
Initial recognition and subsequent measurement
The Group uses derivative financial instruments, such as futures and option contracts, to reduce its exposure to fluctuation in the price of primary
Any gains or losses arising from changes in fair value of derivatives are taken directly to profit or loss. F-46 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.21 Inventories
Inventories comprise raw materials, work-in-progress, finished goods, spare parts and packaging materials and others, and are stated at the lower of cost and net
Provision for impairment of inventories is usually determined by the excess of cost over the net
For the purpose of the consolidated statement of cash flows, cash and cash equivalents comprise cash on hand and demand deposits, and short term highly liquid investments that are readily convertible into known amounts of cash, are subject to an insignificant risk of changes in value, and have a short maturity of generally within three months when acquired, less bank overdrafts which are repayable on demand and form an integral part of the Group’s cash management.
For the purpose of the consolidated statement of financial position, cash and cash equivalents comprise cash on hand and at banks, including term deposits, and assets similar in nature to cash, which are not restricted as to use.
2.23 Provisions A provision is recognized when a present obligation (legal or constructive) has arisen as a result of a past event and it is probable that a future outflow of resources will be required to settle the obligation, provided that a reliable estimate can be made of the amount of the obligation. When the effect of discounting is material, the amount recognized for a provision is the present value at the end of the reporting period of the future expenditures expected to be required to settle the obligation. The increase in the discounted present value amount arising from the passage of time is included in finance costs in profit or loss. F-47 ALUMINUM CORPORATION OF CHINA LIMITED 2.24 Government grants In 2018, the management of the Group performed an analysis on the nature of the Group’s government grants. After reassessing the gross vs. net presentation policy, management considered that presenting government grants in the net method can provide reliable and more relevant information about the effects of transactions to the users of the financial statements. As such, the Company proposed a voluntary change in the accounting policy. Up to the year of 2017, the Group recognized and measured government grants according to the gross method: Asset-related government grants are recognized when the government document designates that the government grants are used for constructing or forming long-term assets. Asset-related government grants are recognized as deferred income and are amortized evenly in profit or loss over the useful lives of the related assets. Income-related government grants that are used to compensate subsequent related expenses or losses of the Group are recognized as deferred income and recorded in profit or loss when the related expenses or losses are incurred. When the grants are used to compensate expenses or losses that were already incurred, they are directly recognized in profit or loss for the current period. After the voluntary change in the accounting policy, the Group recognized government grants according to the net method. For asset related government grants, had the asset already existed upon receiving the government grant, the Group directly deducted the grant amount from the book value of the assets related to the government grant instead of recording the government grants as deferred income. For government grants related to income and expenses already incurred by the Group, which are specific to compensate certain cost and expenses, the Group would directly offset the grant amount against the related cost or expense.
Government grants are recognized
Asset-related government grants are recognized when the government document designates that the government grants are used for constructing or forming long-term assets. If the government document is inexplicit, the Group should make a judgement based on the basic conditions to obtain the government grants, and recognizes them as asset-related government grants if the conditions are to construct or to form long-term assets. Otherwise, the government grants should be income-related.
For asset-related government grants that
Income-related government grants that are specific to compensate expenses or costs that have already incurred, they are directly recognized in profit or loss for the current period as deduction of the related expenses or costs. If the income-related government grants are specific to compensate future expenses or costs of the Group, they are recognized as deferred income and will be F-48 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.25 Employee benefits
Employee benefits mainly include salaries, bonuses, allowances and subsidies, pension insurance, social insurance and housing funds, labour union fees, employees’ education fees and other expenses related to the employees for their services. The Group recognizes employee benefits as liabilities during the accounting period when employees rendered the services and allocates the related cost of assets and expenses based on different beneficiaries.
The expected cost of bonus plans is recognized as a liability when the Group has a present legal or constructive obligation as a result of services rendered by employees and a reliable estimate of the obligation can be made.
The Group primarily pays contributions on a monthly basis to participate in a pension plan
The Group provides other social insurance and housing funds to the qualified employees in the PRC based on certain percentages of their salaries. These percentages are not to exceed the upper limits of the percentages prescribed by the Ministry of Human Resources and Social Security of the PRC. These benefits are paid to social security organisations and the amounts are expensed as incurred. The Group has no legal or constructive obligations for further contributions if the fund does not hold sufficient assets to pay all employees the benefit relating to their current and past services.
Termination and early retirement benefit obligations are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy and/or early retirement in exchange for these benefits. The Group recognizes termination and early retirement benefit obligations when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without F-49 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.26 Income tax
Income tax comprises current and deferred tax. Income tax relating to items recognized outside profit or loss is recognized outside profit or loss, either in other comprehensive income or directly in equity.
Current tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period, taking into consideration interpretations and practices prevailing in the countries in which the Group operates.
Deferred tax is provided, using the liability method, on all temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognized for all taxable temporary differences, except:
Deferred tax assets are recognized for all deductible temporary differences, the
F-50 ALUMINUM CORPORATION OF CHINA LIMITED
2019
2.26 Income tax(Continued)
The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Deferred tax assets and deferred tax liabilities are offset if and only if the Group has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.
2.27 Perpetual securities
Perpetual securities are classified as equity if they are non-redeemable, or redeemable only at the issuer’s option, and any interest and distributions are discretionary. Interest and distributions on perpetual securities classified as equity are recognized as distributions within equity.
The perpetual securities issued by the Company are recognized as other equity instruments, and the perpetual securities issued by a subsidiary of the Company are recognized as non-controlling interests.
F-51 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
Revenue from contracts with customers The Group adopted IFRS 15 from January 1, 2018 using the modified retrospective method of adoption. The Group applied IFRS 15 to contracts that are initiated after the effective date and contracts that had remaining obligations as of the effective date. In respect of the prior periods, the Group retained prior period’s figures as reported under the previous standards, recognising the cumulative effect of applying IFRS 15 as an adjustment to the opening balance of equity as at January 1, 2018. The Group concluded that the transitional adjustment to be made on January 1, 2018 to accumulated losses upon initial adoption of IFRS 15 is nil. It is because the Group recognizes revenue upon the transfer of significant risks and rewards, which coincides with the fulfilment of performance obligations. Additionally, the Group’s contracts with customers generally has only one performance obligation.
Revenue from contracts with customers is recognized when control of goods or services is transferred to the customers at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services.
When the consideration in a contract includes a variable amount, the amount of consideration is estimated to which the Group will be entitled in exchange for transferring the goods or services to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognized will not occur when the associated uncertainty with the variable consideration is subsequently resolved. When the contract contains a financing component which provides the customer with a significant benefit of financing the transfer of goods or services to the customer for more than one year, revenue is measured at the present value of the amount receivable, discounted using the discount rate that would be reflected in a separate financing transaction between the Group and the customer at contract inception. When the contract contains a financing component which provides the Group a significant financial benefit for more than one year, revenue recognized under the contract includes the interest expense accreted on the contract liability under the effective interest method. For a contract where the period between the payment by the customer and the transfer of the promised goods or services is one year or less, the transaction price is not adjusted for the effects of a significant financing component, using the practical expedient in IFRS 15.
Revenue from the sale of industrial products
Revenue from services is recognized over time, using an input method to measure progress towards complete satisfaction of the service, because the customer simultaneously receives and consumes the benefits provided by the Group. Revenue is recognized on a straight-line basis because the entity’s inputs are expended evenly throughout the performance period.
Interest income is recognized on an accrual basis using the effective interest method by applying the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, when appropriate, to the net carrying amount of the financial asset.
Dividend income is recognized when the shareholders’ right to receive payment has been established, it is probable that the economic benefits associated with the dividend will flow to the Group and the amount of the dividend can be measured reliably. F-52 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs capitalized. All other borrowing costs are
Dividend distribution to the Company’s shareholders is recognized as a liability in the Group’s and Company’s financial statements in the period in which the dividends are approved by the Company’s
F-53 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Uncertainty about these judgements, assumptions and estimates could result in outcomes that require a material adjustment to the carrying amounts of assets or liabilities affected in future periods.
Judgements
In the process of applying the Group’s accounting policies and preparing the Group’s consolidated financial statements, management has made the following judgements, apart from those involving estimates, which have a significant effect on the amounts recognized in the consolidated financial statements.
As disclosed in Note 8, the Group owned a 10.04% equity interest in Yunnan Aluminium Co., Ltd.* (“Yunnan Aluminum”) (雲南鋁業股份有限公司). The Group considers that it has significant influence over Yunnan Aluminum even though it owns less than 20% of the voting rights, on the grounds that the Group is the second largest shareholders of Yunnan Aluminum and one out of the eleven directors of the board of directors of Yunnan Aluminum exercises director’s rights on behalf of the Group.
At December 31,
At December 31,
At December 31,
At December 31,
F-54 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
Judgements(Continued)
At December 31,
As disclosed in
F-55 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Group’s assumptions and estimates are based on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur.
In accordance with the Group’s accounting policy, each asset or cash-generating unit is evaluated in every reporting period to determine whether there are any indications of impairment. If any such indication exists, an estimate of the net recoverable amount is performed and an impairment loss is recognized to the extent that the carrying amount exceeds the recoverable amount. The recoverable amount of an asset or cash-generating unit of assets is measured at the higher of fair value less costs of disposal and value in use.
A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
Value in use is generally determined as the present value of the estimated future cash flows of those expected to arise from the continued use of the asset in its present form and its eventual disposal. Present values are determined using a risk-adjusted pre-tax discount rate appropriate to the risks inherent in the asset. Future cash flow estimates are based on significant estimates and judgments involved in the projections of the future prices of aluminum and alumina, expected production and sales volumes, F-56 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Estimates and assumptions
The Group’s management determines the estimated useful lives and residual values (if applicable) and consequently the related depreciation/amortization charges for its property, plant and equipment and intangible assets (excluding goodwill). These estimates are based on the historical experience of the actual useful lives of property, plant and equipment of similar nature and functions, or based on value-in-use calculations or market valuations according to the estimated periods that the Group intends to derive future economic benefits from the use of intangible assets. Management will increase the depreciation/ amortization charge where useful lives are less than previously estimated, and it will write off or write down technically obsolete or non-strategic assets that have been abandoned or sold.
Actual economic lives may differ from estimated useful lives and actual residual values may differ from estimated residual values. Periodic review could result in change in depreciable lives and residual values and therefore change in depreciation/amortization expense in future periods.
In accordance with the Group’s accounting policy, goodwill is allocated to the Group’s cash generating units (“CGU”) as it represents the lowest level within the Group at which the goodwill is monitored for internal management purposes and is tested for impairment annually or more frequently if events or changes in circumstance indicated that the carrying amount may be impaired, by comparing the recoverable amount of the CGU and the carrying amount of the CGU. The recoverable amount is the higher of value in use and the fair value less costs of disposal. The recoverable amount of the underlying CGUs involved estimates and judgments, including future prices of aluminum and alumina, expected production and sales volumes, production costs, operating expenses, terminal growth rates used to estimate future cash flows and discount rates applied to these forecasted future cash flows of the underlying CGUs. These estimates and judgments may be affected by unexpected changes in future market or economic conditions.
The Group uses a provision matrix to calculate ECLs for trade receivables. The provision rates are based on days past due for groupings of various customer segments that have similar loss patterns (i.e., by product type, customer type, and coverage by letters of credit and other forms of credit insurance).
The provision matrix is initially based on the Group’s historical observed default rates. The Group will calibrate the matrix to adjust the historical credit loss experience with forward-looking information. For instance, if forecast economic conditions (i.e., gross domestic products) are expected to deteriorate over the next year which can lead to an increased number of defaults in the manufacturing sector, the historical default rates are adjusted. At each reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are
The assessment of the correlation among historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and forecast economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of the customer’s actual default in the future. The information about the ECLs on the Group’s trade receivables is disclosed in F-57 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Estimates and assumptions
In accordance with the Group’s accounting policy, the Group’s management tests whether inventories suffered any impairment based on
It is reasonably possible that if there is a significant change in circumstances, including the Group’s business and the external environment, outcomes within the next financial year would be significantly affected.
External qualified valuation professionals evaluate “economically recoverable reserves” based on the reserves estimated by external qualified exploration engineers in accordance with the PRC standards. The estimates of coal reserves are inherently imprecise and represent only the approximate amounts of the coal reserves because of the subjective judgements involved in developing such information. Economically recoverable reserve estimates are evaluated on a regular basis and have taken into account recent production and technical information about each mine. F-58 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Estimates and assumptions
The Group estimates its income tax provision and deferred taxation in accordance with the prevailing tax rules and regulations, taking into account any special approvals obtained from the relevant tax authorities and any preferential tax treatment to which it is entitled in each location or jurisdiction in which the Group operates. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated tax audit issues based on the estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, the differences will impact on the income tax and deferred tax provisions in the period in which the determination is made.
Deferred tax assets are recognized for unused tax losses and deductible temporary differences, such as the provision for impairment of receivables, inventories and property, plant and equipment and accruals of expenses not yet deductible for tax purposes, to the extent that it is probable that taxable profits will be available against which the losses
An entity shall recognize a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, except to the extent that both of the following conditions are satisfied:
The Group considers that it has recorded adequate current tax provision and deferred taxes based on the prevailing tax rules and regulations and its current best estimates and assumptions. In the event that future tax rules and regulations or related circumstances change, adjustments to current and deferred taxation may be necessary which would impact on the Group’s results or financial position. F-59 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Estimates and assumptions
In accordance with the Group’s accounting policy, each investment in a joint venture and an associate is evaluated in every reporting period to determine whether there are any indicators of impairment. If any such indicators
A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
Value in use is also generally determined as the present value of the estimated future cash flows of those expected to arise from the continued use of the asset in its present form and its eventual disposal. Present values are determined using a risk-adjusted pre-tax discount rate appropriate to the risks inherent in the asset. Future cash flow estimates are based on expected production and sales volumes, commodity prices (considering current and historical prices, price trends and related factors) and operating costs. This policy requires management to make these estimates and assumptions which are subject to risk and uncertainty; hence there is a possibility that changes in circumstances will alter these projections, which may impact on the recoverable amounts of the investments. In such circumstances, some or all of the carrying value of the investments may be impaired and the impairment would be charged against profit or loss.
The Group cannot readily determine the interest rate implicit in a lease, and therefore, it uses an incremental borrowing rate (“IBR”) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group “would have to pay”, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when it needs to be adjusted to reflect the terms and conditions of the lease. The Group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating). F-60 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Revenue recognized during the years is as follows:
For the year ended December 31, 2018
F-61 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
4. REVENUE AND SEGMENT INFORMATION(Continued)
For the year ended December 31, 2019
F-62 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated) 4. REVENUE AND SEGMENT INFORMATION(Continued)
The following table shows the amounts of revenue recognized in the current reporting period that were included in the contract liabilities at the beginning of the reporting
Information about the Group’s performance obligations is
Revenue from sales of products (including sales of and other materials)
The performance obligation is satisfied upon delivery of the industrial products and payment is generally due within 30 to 90 days from delivery, except for new customers, where payment in advance is normally required.
Sale of goods were made in a short period of time and the performance obligation was mostly satisficed in one year or less at the end of each year.
Rendering of services
The performance obligation is satisfied over time as services are rendered and payment is generally due upon completion of the relevant services.
The transaction prices allocated to the remaining performance obligations (unsatisfied or partially unsatisfied) as at December 31, 2018 and December 31, 2019 are as follows:
The remaining performance obligations expected to be recognized in more than one year relate to rendering of services that are to be satisfied within 1–10 years. All the other remaining performance obligations are satisfied in one year or less at the end of each year. F-63 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The presidents of the Company have been identified as the chief operating decision-makers. They are responsible for the review of internal reports in order to allocate resources to operating segments and assess their performance of these operating segments.
The presidents monitor the business from a product perspective comprising alumina, primary aluminum and energy products which are identified as separate reportable operating segments. In addition, the Group’s trading business is identified as a separate reportable operating segment. The Group’s operating segments also include corporate and other operating activities.
The presidents assess the performance of operating segments based on profit or loss before income tax in related periods. Unless otherwise stated below, the manner of assessment used by the presidents is consistent with that applied in these financial statements. Management has determined the operating segments based on the reports reviewed by the presidents that are used to make strategic decisions. F-64 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The Group’s five reportable operating segments are
Prepaid current income tax and deferred tax assets are excluded from segment assets, and income tax payable and deferred tax liabilities are excluded from segment liabilities. All sales among the operating segments were conducted on terms mutually agreed among group companies, and have been eliminated on consolidation. F-65 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
4. REVENUE AND SEGMENT INFORMATION(Continued)
Note:
F-65 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Note:
F-66 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Note:
F-67 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-68 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
The Group mainly operates in Mainland China. Operating segment information by geographical location as follows:
For the year ended December 31, F-69 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-70 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
For the year ended December 31,
As at December 31,
As at December 31, F-71 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Impairment testing of goodwill
The lowest level within the Group at which goodwill is monitored for internal management purposes is the operating segment level. Therefore, goodwill is allocated to the Group’s cash-generating units (“CGUs”) and groups of CGUs according to operating segments. A summary of goodwill allocated to each segment is presented below:
The recoverable amount of a CGU is determined based on value-in-use calculations. These
The directors of the Company are of the view that, based on their assessment, there was no impairment of goodwill as at December 31, F-72 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-73 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-74 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
For the years ended December 31,
As at December 31,
As at December 31,
For the year ended December 31,
As at December 31,
As at December 31,
The F-75 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
Impairment testing for property, plant and equipment
When any indicators of impairment are identified, property, plant and equipment are reviewed for impairment based on each CGU. The CGU is an individual plant or entity. The carrying
For the CGUs with indicators of impairment identified,the assets were not further impaired during the current year based on the impairment testing
In addition to the CGUs for which impairment was tested based on value in use, the Group also assessed the recoverable amounts for property, plant and equipment about to be disposed or abandoned, and impairment losses of F-76 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The Group’s investment properties consist of land use rights held for capital appreciation and buildings leased to third parties under operating leases.
As at December 31,
As at December 31, F-77 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Movements in investments in joint ventures are as follows:
As at December 31,
Guangxi Huayin, which is considered a material
F-78 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
The following table illustrates the summarized financial information in respect of Guangxi Huayin :
F-79 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
The following table illustrates the aggregate financial information of the Group’s joint ventures that are not individually material:
There were no material contingent liabilities relating to the Group’s interests in the joint ventures and the joint ventures themselves.
Movements in investments in associates are as follows:
Note (1): Investment to Yunnan Aluminium On December 19, 2019, the Company and Yunnan Aluminum entered into a Share Subscription Agreements (“Subscription Agreements”), pursuant to which the Company subscribed for 314,050,688 shares of Yunnan Aluminum at a price of RMB4.10 per share with the total subscription amount of RMB1,288 million. Upon completion of the subscription, the Company obtained 10.04% equity interests in Yunnan Aluminum. The Group considers that it has significant influence over Yunnan Aluminum even though it owns less than 20% of the voting rights, on the grounds that after the investment, the Group is the second largest shareholder of Yunnan Aluminum and one out of the eleven directors of the board of directors of Yunnan Aluminum exercises director’s rights on behalf of the Group. F-80 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
As at the date of this announcement, Chinalco is the controlling Shareholder of the Company, and Yunnan Aluminum is a subsidiary of Chinalco. Therefore, Yunnan Aluminum is a connected person of the Company under the Hong Kong Listing Rules. As such, the transaction contemplated under the Shares Subscription Agreement constitutes a connected transaction under Chapter 14A of the Hong Kong Listing Rules. The investment constitutes a related party transaction which was disclosed in Note 35 (a). The investment to Yunnan Aluminum, which is a listed company, is conducive for resolving business competitions between the Company and Yunnan Aluminum and is in line with the development strategies and in the whole interests of the Company. The excess of the fair value of identifiable net assets as at the acquisition date over the consideration transferred approximates to RMB204 million, which was mainly arising from the fair value adjustments for certain intangible assets according to a professional valuer’s report, was recognized in other gains for the year ended December 31, 2019. Note (2): Investment to Yixin Aluminum On December 10, 2019, the Company entered into the Capital Contribution Agreement with shareholders of Yixin Aluminum, including Yunnan Aluminum, Wenshan Aluminum Co., Ltd. (“Wenshan Aluminum”) and three individual shareholders, pursuant to which the Company agreed to make a capital contribution of RMB850 million in cash to Yixin Aluminum. Upon completion of the capital contribution, the Company holds approximately 38.90% equity investments of Yixin Aluminum. Chinalco is the controlling Shareholder of the Company, and Yunnan Aluminum, Wenshan Aluminum and Yixin Aluminum are subsidiaries of Chinalco. Therefore, Yunnan Aluminum, Wenshan Aluminum and Yixin Aluminum are connected persons of the Company under the Hong Kong Listing Rules. As such, the transaction contemplated under the Capital Contribution Agreement constitutes a connected transaction under Chapter 14A of the Hong Kong Listing Rules. The investment constitutes a related party transaction which was disclosed in Note 35(a). The investment to Yixin Aluminum is to facilitate the Company in participating in the green development layout on the integration of water, electricity and aluminum in Yunnan Province and obtaining competitive assets for its principal business. The excess of the fair value of identifiable net assets as at the acquisition date over the consideration transferred approximated to RMB91 million, which was mainly arising from the fair value adjustments for constructions according to a professional valuer’s report, was recognized in other gains for the year ended December 31, 2019.
As at December 31,
F-81 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 (Amounts expressed in
The following table illustrates the aggregate financial information of the Group’s associates that are not individually material:
As at December 31, 2019, there were no proportionate interests of the Group in theassociates’ capital commitments (December 31, 2018: Nil). As at December 31, 2019, the Group had pledged investments in associates amounting to RMB539 million (December 31, 2018: investments in associates amounting to RMB536 million) as set out in Note 24 to the financial statements. There were no material contingent liabilities relating to the F-82 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The above equity investments were irrevocably designated at fair value through other comprehensive income as the Group considers these investments to be strategic in nature.
Note:
Included in the unlisted investments is mainly the equity investment in Size Industry Investment Fund. In 2017, the Company entered into a series of agreements with Bank of Communications International Trust Co., Ltd. (“BOCOMMTRUST”) (交銀國際信託有限公司), Bocommtrust Asset Management Co., Ltd.* (“Bocommtrust Asset”) ( 交銀國信資產管理有限公司), a subsidiary of BOCOMMTRUST, and Chinalco Jianxin Investment Fund Management (Beijing) Company Limited* (“Chinalco Jianxin”) (中鋁建信投資基金管理(北京)有限公司) to establish Beijing Chalco Bocom Size (“Size Industry Investment F-83 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Note:
As at December 31,
Because the variable return of Size Industry Investment Fund depends on the selection of investment targets, the timing and size of the investment fund and the rate of return, which are all determined by BOCOMMTRUST under its full authority, the directors of the Company are of the opinion that the Company did not have control or joint control over, or significant influence over Size Industry Investment Fund. Therefore, the Company’s investment in Size Industry Investment Fund was accounted for as an equity investment designated at fair value through other comprehensive income.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current income tax assets against current income tax liabilities and when the deferred taxes relate to the same tax authority.
The movements in deferred tax assets and liabilities during the year ended December 31,
Movements in deferred tax assets:
F-84 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Movements in deferred tax liabilities:
The temporary differences associated with investments in the Group’s associates and joint ventures, for which a deferred tax liability has not been recognized in the periods presented, aggregate to RMB827 million (2018: RMB438 million), considering dividends from investments in associates and joint ventures are exempted from the PRC income tax and the Group has no plan to dispose any of these investees in the foreseeable future.
For presentation purposes, certain deferred tax assets and liabilities have been offset in the consolidated statement of financial position. The following is an analysis of the deferred tax balances of the Group for financial reporting purposes:
As at December 31,
F-85 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
As at December 31,
Note:As disclosed in Note 20, the Group entered into several sale and leaseback agreements which constitute finance leases during the year. The deferred losses resulted from the sale are classified as other non-current assets and were amortized over the useful lives of the assets leased back.
As at December 31,
As at December 31, F-86 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Movements in the provision for impairment of inventories are as follows:
As at December 31, F-87 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
As at December 31,
Included in the Group’s trade and notes receivables are amounts due from the Group’s joint ventures and associates of
As at December 31,
Trade receivables are non-interest-bearing and are generally on terms of 3 to 12 months. Certain of the Group’s sales were on advance payments or documents against payment. In some cases, these terms are extended for qualifying long term customers that have met specific credit requirements. As at December 31,
F-88 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Impairment under IFRS 9 for the year ended December 31, 2018 and 2019
An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns (i.e., by geographical region, product type, customer type and rating, and coverage by letters of credit or other forms of credit insurance). The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions.
Set out below is the information about the credit risk exposure on the Group’s trade receivables using a provision matrix:
As at December 31, 2018
F-89 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
As at December 31, 2019
F-90 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
Movements in the loss allowance for impairment of trade and notes receivables are as follows:
As at December 31,
The derecognized notes receivable had a maturity of one to six months at the end of the reporting period. In accordance with the Law of Negotiable Instruments in the PRC, the holders of the derecognized notes receivable have a right of recourse against the Group if the PRC banks default (the “Continuing Involvement”). In the opinion of the directors, the Group has transferred substantially all risks and rewards relating to the derecognized notes receivable. Accordingly, it has derecognized the full carrying amounts of the derecognized notes receivable and the associated trade payables. The maximum exposure to loss from the Group’s Continuing Involvement in the derecognized notes receivable and the undiscounted cash flows to repurchase these derecognized notes receivable is equal to their carrying amounts. In the opinion of the directors, the fair values of the Group’s Continuing Involvement in the derecognized notes receivable are not significant.
During the year ended December 31, F-91 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-92
ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
As at December 31,
As at December 31,
As at December 31,
Movements in the provision for impairment of other current assets are as follows:
F-93 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Impairment under IFRS 9 for the year ended December 31, 2018 and 2019
Financial assets included in other current assets at amortized cost are subject to impairment under the general approach and they are classified within the following stages for measurement of ECLs.
ALUMINUM CORPORATION OF CHINA LIMITED
2019
Restricted cash mainly represented deposits held for use in issued notes payable and letters of credit.
As at December 31,
Cash at banks earns interest at floating rates based on daily bank deposit rates. The bank balances, time deposits and restricted cash are deposited with creditworthy banks with no recent history of default.
F-96 ALUMINUM CORPORATION OF CHINA LIMITED
2019
As at December 31,
On January 31, 2018, the Company and eight investors, including Huarong Ruitong Equity Investment Management Co., Ltd. (華融瑞通股權投資管理有限公司), China Life Insurance Co., Ltd. (中國人壽保險股份有限公司), Shenzhen Zhao Ping Aluminum Investment Center (limited partnership) (深圳市招平中鋁投資有限(有限合夥)), China Pacific Life Insurance Co., Ltd. ( 中國太平洋人壽保險股份有限公司), China Cinda Asset Management Co., Ltd. ( 中國信達資產管理股份有限公司), BOC Financial Asset Investment Co, Ltd. (中銀金融資產投資有限公司), ICBC Financial Asset Investment Co., Ltd. (工銀金融資產投資有限公司) and ABC Financial Asset Investment Co., Ltd.(農銀金融資產投資有限公司) (collectively called “Transferors”) entered into the equity acquisition agreements, pursuant to which, the Company agreed to acquire and the Transferors agreed to sell their non-controlling equity interests in Chalco Shandong Co., Ltd., Chalco Zhongzhou Aluminum Co., Ltd., Baotou Aluminum Co., Ltd. and Chalco Mining Co., Ltd. (collectively called the “Target Companies”), at a consideration of approximately 2.1 billion ordinary shares of the Company, which was determined at the fair value of the non-controlling interests in the Target Companies of approximately RMB12.7 billion. Upon signing the equity acquisition agreements, together with the investment agreements and debt to equity swap agreements signed in 2017, the Transferors effectively surrendered their non-controlling interests in the Target Companies, which included the rights to profit or loss, voting rights and other shareholder rights of the Target Companies to the Group. Consequently the carrying values of the Transferors’ non-controlling interests in the Target Companies of RMB10.7 billion were derecognized, and were transferred to the capital reserve of the Group in 2018. On February 25, 2019, the Company completed the issuance of ordinary shares to these Transferors, and the total number of shares issued was 2,118,874,715. The number of the Company’s
The amounts of the Group’s reserves and the movements therein for the current and prior years are presented in the consolidated statement of changes in equity of the financial statements.
F-97
ALUMINUM CORPORATION OF CHINA LIMITED
2019
F-98 ALUMINUM CORPORATION OF CHINA LIMITED
2019
As at December 31,
As at December 31,
* As at December 31, 2019, Shandong Huayu Alloy Materials Co., Ltd. (“Shandong Huayu”), a subsidiary of the Group, has overdue short-term loans of RMB649 million. Since overdued on its bank debts, Shandong Huayu actively communicated with relevant bank creditors, participated in relevant litigation process in accordance with law, and coordinated the repayments of its debts with its own assets, and sought the understanding and support of relevant bank creditors. As of the date of approval of the report, Shandong Huayu’s default on debts did not lead to a renegotiation of debt terms. F-99 ALUMINUM CORPORATION OF CHINA LIMITED
2019
Note:
Outstanding medium-term bonds & private placement notes of the Group as at December 31,
Medium-term notes and bonds and private placement notes were issued for capital expenditure and operating cash flows purposes, as well as for the purpose of re-financing of bank loans.
F-100 ALUMINUM CORPORATION OF CHINA LIMITED
2019
Note:
Other loans were entrusted loans provided by state-owned companies to the Group.
The weighted average annual interest rate of short-term bank and other loans for the year ended December 31,
Outstanding short-term bonds as at December 31,
All the above short-term bonds were issued for working capital needs.
F-101 ALUMINUM CORPORATION OF CHINA LIMITED
2019
Note:
Details of the interest-bearing loans and borrowings in which the Group received guarantees are set out as follows:
Note:
The assets pledged for bank and other borrowings were set out in
F-102 ALUMINUM CORPORATION OF CHINA LIMITED
2019
Note:
In
The directors of the Company are of the view that the Company is free from the assumption of risk of gold price fluctuations due to the fixed repurchase price under the general hedging agreements, and therefore, this arrangement should be accounted for as short-term loans with fixed interest rates (ranging from 3.70% to 4.50%) (2018: ranging from 4.10% to 4.50%), net of the Banks’ charges. F-103 ALUMINUM CORPORATION OF CHINA LIMITED
2019
The Group as a lessee The Group has lease contracts for various items of plant and machinery, motor vehicles and other equipment used in its operations. Lump sum payments were made upfront to acquire the leased land from the owners with lease periods of 20 to 30 years, and no ongoing payments will be made under the terms of these land leases. Leases of plant and machinery generally have lease terms between 3 and 5 years, while motor vehicles generally have lease terms between 2 and 5 years. Other equipment generally has lease terms of 12 months or less and/or is individually of low value. Generally, the Group is restricted from assigning and subleasing the leased assets outside the Group. There are several lease contracts that include extension and termination options and variable lease payments, which are further discussed below. (a) Land use rights (before January 1, 2019)
As at December 31, 2018, the Group has pledged land use rights at a net carrying value amounting to RMB328 million for bank and other borrowings as set out in Note 24 to the financial statements. F-104 ALUMINUM CORPORATION OF CHINA LIMITED
The Group as a lessee(Continued) (b) Right-of-use assets The carrying amounts of the Group’s right-of-use assets and the movements during the year are as follows:
As at December 31, 2019, the Group was in the process of applying for the certificates of land use rights with a carrying amount of RMB74 million (December 31, 2018: RMB687 million). There has been no litigations, claims or assessments against the Group for compensation with respect to the use of land parcels to date. As at December 31, 2019, the carrying value of these land parcels only represented approximately 0.04% of the total asset value of the Group (December 31, 2018: 0.34%). Management considers that it is probable that the Group can obtain the relevant ownership certificates from the appropriate authorities. The directors of the Company are of the opinion that the Group legally owns and has the right to use the above land, and that there is no material adverse impact on the overall financial position of the Group. As at December 31, 2019, the Group has pledged land use rights at a net carrying value amounting to RMB373 million for bank and other borrowings as set out in Note 24 to the financial statements. F-105 ALUMINUM CORPORATION OF CHINA LIMITED
The Group as a lessee(Continued) (c) Lease liabilities The carrying amount of lease liabilities (included under interest-bearing bank and other borrowings) and the movements during the year are as follows:
(d) The amounts recognized in profit or loss in relation to leases are as follows:
F-106 ALUMINUM CORPORATION OF CHINA LIMITED
The Group as a lessee(Continued) (e) Extension and termination options The Group has several lease contracts that include extension and termination options. These options are negotiated by management to provide flexibility in managing the leased-asset portfolio and align with the Group’s business needs. Management exercises significant judgement in determining whether these extension and termination options are reasonably certain to be exercised. Set out below are the undiscounted potential future rental payments relating to periods following the exercise date of extension and termination options that are not included in the lease terms:
(f) The total cash outflow for leases and future cash outflows relating to leases that have not yet commenced are disclosed in Notes 34(c) and 42, respectively, to the financial statements The Group as a lessor Rental income recognized by the Group during the year was RMB318 million (2017: RMB153 million, 2018: RMB240 million), details of which are included in Note 4 to the financial statements. In the opinions of the directors, the undiscounted lease payments receivable by the Group in future periods under non-cancellable operating leases is not material. F-107 ALUMINUM CORPORATION OF CHINA LIMITED
At December 31, 2018, the total future minimum lease payments under finance leases and their present values
During the year ended December 31, 2018,
F-108 ALUMINUM CORPORATION OF CHINA LIMITED
2019
F-109 ALUMINUM CORPORATION OF CHINA LIMITED
2019
Note:
From 2014, certain subsidiaries and branches implemented certain early retirement benefit schemes which allow qualified employees to early retire on a voluntary basis. The Group undertakes the obligations to pay the early
As at December 31,
F-110 ALUMINUM CORPORATION OF CHINA LIMITED
2019
As at December 31, F-111 ALUMINUM CORPORATION OF CHINA LIMITED
2019
As at December 31,
The ageing analysis of trade and notes payables is as follows:
The trade and notes payables are non-interest-bearing and are normally settled within one year. F-112 ALUMINUM CORPORATION OF CHINA LIMITED
2019
The Group has pledged various assets as collateral against certain secured borrowings as set out in
As at December 31, F-113 ALUMINUM CORPORATION OF CHINA LIMITED
2019
An analysis of profit before income tax is as follows:
Note:
F-114 ALUMINUM CORPORATION OF CHINA LIMITED
2019
For the year ended December 31,
ALUMINUM CORPORATION OF CHINA LIMITED
2019 27. OTHER GAINS, NET(Continued) Notes:(Continued)
F-116 ALUMINUM CORPORATION OF CHINA LIMITED
An analysis of finance income/finance costs is as follows:
An analysis of employee benefit expenses is as follows:
Employee benefit expenses include remuneration payables to directors, supervisors and senior management as set out in
ALUMINUM CORPORATION OF CHINA LIMITED
2019
F-118 ALUMINUM CORPORATION OF CHINA LIMITED
(Amounts expressed in thousands of RMB unless otherwise stated)
The remuneration of each director and supervisor of the Company for the year ended December 31, 2017 is set out below:
F-119 ALUMINUM CORPORATION OF CHINA LIMITED
2019
The remuneration of each director and supervisor of the Company for the year ended December 31, 2018 is set out below:
F-120 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
The remuneration of each director and supervisor of the Company for the year ended December 31, 2019 is set out below:
F-121 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
Note:
On June 25, 2019, Ms. Shan Shulan were elected as the shareholder representative Supervisors of the seventh session of the Supervisory Committee of the Company at the 2018 annual general meeting of the Company. On June 25, 2019, Mr. Guan Xiaoguang was elected as an employee representative Supervisor of the seventh session of the Supervisory Committee of the Company at the employees’ representatives meeting of the Company. On December 10, 2019, Mr. Ou Xiaowu, nominated by Chinalco, the controlling shareholder of the Company on October 24, 2019, was elected as a shareholder representative Supervisor of the seventh session of the Supervisory Committee of the Company at the 2019 third extraordinary general meeting of the Company. On December 10, 2019, Mr. Yue Xuguang was elected as an employee representative Supervisor of the seventh session of the Supervisory Committee of the Company at the employees’ representatives meeting of the Company. F-122 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The remuneration of the directors and supervisors of the Company fell within the following band:
During the year, no options were granted to the directors or the supervisors of the Company
During the year, no emoluments were paid to the directors or the supervisors of the Company (among which included the five highest paid employees) as an inducement to join or upon joining the Company or as compensation for loss of office
No directors or supervisors of the Company waived any remuneration during the years 2017, 2018 and
During the year ended December 31,
The number of the remaining
ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
In general, the Group’s PRC entities are subject to PRC corporate income tax at the standard rate of 25%
ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
A reconciliation of the tax expense applicable to profit before tax at the statutory rates for the countries in which the Company and the majority of its subsidiaries are domiciled to the tax expense at the effective tax rates, and a reconciliation of the applicable rates to the effective tax rates are as follows:
Share of income tax expense of associates and joint ventures of
ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
According to the articles of association of the Company, the Company considers that the maximum limit of profit appropriation to its shareholders is the lowest of:
According to the resolution of the board of directors dated
ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-127 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-128 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The table below details changes in the Group’s liabilities from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are liabilities for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statement of cash flows as cash flows from financing activities.
F-129 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
F-130 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
F-131 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The Company is controlled by Chinalco, the parent company and a state-owned enterprise established in Mainland China. Chinalco itself is controlled by the PRC government, which also owns a significant portion of the productive assets in Mainland China. In accordance with IAS 24Related Party Disclosures, government-related entities and their subsidiaries, directly or indirectly controlled, jointly controlled or significantly influenced by the PRC government, are defined as related parties of the Group. On that basis, related parties include Chinalco and its subsidiaries (other than the Group), other government-related entities and their subsidiaries (“other state-owned
For the purposes of the related party transaction disclosures, the directors of the Company consider that meaningful information in respect of related party transactions has been adequately disclosed.
In addition to the related party information and transactions disclosed elsewhere in the consolidated financial statements, the following is a summary of significant related party transactions in the ordinary course of business between the Group and its related parties during the year.
ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-133 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-134 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
All transactions with related parties were conducted at prices and on terms mutually agreed by the parties involved, which are determined as follows:
F-135 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
All transactions with related parties are conducted at prices and terms mutually agreed by the parties involved, which are determined as follows:
ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
All transactions with related parties are conducted at prices and terms mutually agreed by the parties involved, which are determined as follows:
F-137 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Other than those disclosed elsewhere in the consolidated financial statements, the outstanding balances with related entities at the year end are as follows:
F-138
ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-139
ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
As at December 31,
The terms of all balances with the exception of the entrusted loans were unsecured and were in accordance with terms as set out in the respective agreements or as mutually agreed between the parties concerned.
* The year-on-year increase in the salaries of key management personnel was mainly due to the Company’s addition of a salaried supervisor this year and changes in the positions of some key management personnel, which caused the year-on-year changes in the scope and duration of salaries paid by the company.
Details of directors’ remuneration are included in
As at December 31,
F-140 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
The Group’s activities expose it to a variety of financial risks, including market risk (including foreign currency risk, interest rate risk and commodity price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise the potential adverse effects on the Group’s financial performance.
Risk management is carried out by the treasury management department (the “Group
Foreign currency risk primarily arises from certain significant foreign currency deposits, trade and notes receivables, trade and notes payables, advances paid to suppliers, and short-term and long-term loans denominated in United States dollars (“USD”), Australian dollars (“AUD”), Euro (“EUR”), Japanese yen (“JPY”), and Hong Kong dollars (“HKD”). Related exposures are disclosed in
As at December 31,
As the assets and liabilities denominated in other foreign currencies other than USD were relatively minimal to the total assets and liabilities of the Group, the directors of the Company are of the opinion that the Group was not exposed to any significant foreign currency risk arising from these foreign currency denominated assets and liabilities as at December 31, F-141 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
As at December 31,
Most of the bank deposits are maintained in savings and time deposit accounts in the PRC. The interest rates are regulated by the People’s Bank of China and the Group Treasury closely monitors the fluctuation on such rates periodically. The interest rates of entrusted loans are fixed. As the interest rates applied to the entrusted loans were fixed, the directors of the Company are of the opinion that the Group was not exposed to any significant interest rate risk for its financial assets held as at December 31,
The interest rate risk for the Group’s financial liabilities primarily arises from interest-bearing loans. Loans borrowed at floating interest rates expose the Group to cash flow interest rate risk. The Group enters into debt obligations to support general corporate purposes including capital expenditures and working capital needs. The Group Treasury closely monitors market interest rates and maintains a balance between variable rate and fixed rate borrowings in order to reduce the exposures to the interest rate risk described above.
As at December 31, F-142 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The interest rate risk of the Group mainly arises from medium-term notes and short-term bonds issued at fixed rates. As the fluctuation of comparable interest rates of corporate bonds with similar terms was relatively low, the directors of the Company are of the opinion that the Group
The Group uses futures and option contracts to reduce its exposure to fluctuations in the price of primary aluminum and other products. The Group uses the futures contract for hedging other than speculation. With reference to the hedging of primary aluminum, production company hedges the output of primary aluminum and trading company hedges the quantities of buyout and self-supporting.
The Group uses mainly futures contracts and option contracts traded on the Shanghai Futures Exchange and London Metal Exchange (“
F-143 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
As at December 31,
F-144 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Credit risk arises from balances with banks and financial institutions, trade and notes receivables, other current and non-current receivables as well as credit exposures of customers, including outstanding receivables and committed transactions.
The Group maintains substantially all of its bank balances and cash and short-term investments in several major state-owned banks in the PRC. With strong support from the PRC government to these state-owned banks, the directors of the Company are of the opinion that there is no significant credit risk on such assets being exposed to losses.
The Group applies the simplified approach to most of its trade receivables to provide for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for trade receivables. The Group has made individual assessment for trade receivables from clients with top rating and those receivables with pledged assets separately and impairment provisions are made.
To measure the expected credit losses of trade receivables excluding individually assessed and impaired receivables, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The expected credit loss model also incorporates forward-looking information. F-145 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The Group has performed historical analysis and identified the key economic variables impacting credit risk and expected credit losses. It considers available reasonable and supportive forwarding-looking information. Especially the following indicators are incorporated:
The Group measures expected credit loss rates on the basis of a loss rate approach by segmenting its portfolio into appropriate groupings based on shared credit risk characteristics. At the end of each year, the Group updates its historical loss information with forward-looking information. As the historical credit loss rates were comparatively stable and no significant changes were expected to the forward-looking information after the consideration of reasonable and supportable forecasts of comparatively stable customer relationship and customers’ credit ratings, the expected credit loss rates remained consistent during F-146 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Maximum exposure and year-end staging as at December 31, 2018 and 2019
The table below shows the credit quality and the maximum exposure to credit risk based on the Group's credit policy, which is mainly based on past due information unless other information is available without undue cost or effort, and year-end staging classification as at December 31,
F-147 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The carrying amounts of short-term investments and these receivables included in
For the year ended December 31, F-148 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Cash flow forecast is performed in the operating entities of the Group and aggregated by the Group Treasury. The Group Treasury monitors rolling forecasts of the Group’s liquidity requirements to ensure
As at December 31,
In addition, as at December 31,
Management also monitors rolling forecasts of the Group’s liquidity reserve on the basis of the expected cash flows. F-149 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The table below
F-150 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
F-151 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The carrying amounts of each of the categories of financial instruments of the Group as at the end of the reporting period are as follows:
F-152 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
36.2 Financial instruments(Continued)
F-153 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
36.2 Financial instruments(Continued)
F-154 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
36.2 Financial instruments(Continued)
F-155 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Fair value
The carrying amounts and fair values of the Group’s financial instruments, other than those with carrying amounts that reasonably approximate to fair values and those carried at fair value, are as follows:
F-156 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Fair value
Management has assessed that the fair values of cash and cash equivalents, restricted cash and time deposits, trade and notes receivables, financial assets included in other current assets, entrusted loans, trade and notes payables, financial liabilities included in other payables and accrued liabilities, short-term and the current portion of interest-bearing loans and borrowings, interest payable and the current portion of long-term payables approximate to their carrying amounts largely due to the short term maturities of these instruments.
The fair values of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
The fair values of the financial assets included in other non-current assets and financial liabilities included in other non-current liabilities and long-term interest-bearing loans and borrowings have been calculated by discounting the expected future cash flows using rates currently available for instruments on with similar terms, credit risk and remaining maturities.
The Group’s own non-performance risk for financial liabilities included in other non-current liabilities and long-term interest-bearing loans and borrowings as at December 31, F-157 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Fair value hierarchy
The following tables illustrate the fair value measurement hierarchy of the Group’s financial instruments:
Assets measured at fair value
F-158 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Fair value hierarchy(Continued)
Liabilities measured at fair value
F-159 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Fair value hierarchy(Continued)
Assets for which fair values are disclosed
F-160 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Fair value hierarchy(Continued)
Liabilities for which fair values are disclosed
During the year ended December 31, F-161 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Fair value hierarchy(Continued)
Liabilities for which fair values are disclosed
Below is a summary of significant unobservable inputs to the valuation of financial instruments as at December 31,
F-162 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The Group’s capital management objectives are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, issue new shares or sell assets to reduce debts.
Consistent with other entities in the industry, the Group monitors capital on the basis of its gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total liabilities (excluding deferred tax liabilities, income tax payable and deferred government grants) less restricted cash, time deposits and cash and cash equivalents. Total capital is calculated as equity, as shown in the consolidated statement of financial position, plus net debt less non-controlling interests.
The gearing ratio as atDecember 31, 2018 and 2019 is as follows:
F-163 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Other than the senior perpetual securities issued by a subsidiary of the Group, which is disclosed in
F-164
ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The following tables illustrate the
F-165 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The following tables illustrate the
F-166 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The following tables illustrate the
F-167 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2017, 2018 and 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
The following tables illustrate the summarized financial information of the above subsidiaries. The amounts disclosed are before any inter-company eliminations:(Continued)
F-168 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
On December 28, 2017, Chalco Shandong, a subsidiary of the Company, entered into an equity transfer agreement with Chinalco, pursuant to which Chalco Shandong acquired 100% equity interest of Qingdao Light Metal from Chinalco. The consideration for the acquisition was RMB162 million which was determined based on the appraisal value of the 100% equity interest in Qingdao Light Metal. The Company has paid all consideration as of December 31, 2017. The transaction date was December 29, 2017 which was the date that the Group obtained control of Qingdao Light Metal. Before and after the acquisition, both Qingdao Light Metal and the Company were controlled by Chinalco, and the control was not temporary. Thus, the acquisition of 100% equity interest in Qingdao Light Metal is considered to be a business combination under common control.
The carrying amounts of the assets and liabilities of Qingdao Light Metal as at the transaction date and the comparative financial figures were as follows:
F-169 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
On December 28, 2017, Shanxi New Material, a subsidiary of the Company, entered into an assets transfer agreement with Chalco Shanxi Aluminum, a subsidiary of Chinalco, pursuant to which, Shanxi New Material acquired Shanxi Aluminum Sewage Treatment Plant at a total consideration of RMB50 million. The consideration was determined based on the appraisal report issued by an independent qualified valuer. In the opinion of directors of the Company, the sewage treatment plant constitutes a business. Before and after the acquisition, both entities were controlled by Chinalco, and the control was not temporary. Thus, the acquisition is considered to be a business combination under common control. The acquisition date was December 28, 2017, which is determined by the date of transfer of the assets.
The carrying amount of the assets and liabilities of Shanxi Aluminum Sewage Treatment Plant as at the transaction date and the comparative financial figures were as follows:
The acquisition of Shanxi Aluminum Sewage Treatment Plant has no impact on the Group’s cash and cash equivalents.
F-170 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
In April 2015, Ningxia Energy and Zhejiang Power Group Co., Ltd.* (“Zhejiang Power”) (浙江省能源集團有
In August 2017, to minimize coal procurement costs and to secure long-term coal supply to Yinxing Power, Ningxia Energy and Zhejiang Power entered into an acting-in-concert agreement which was effective on August 31,
F-171 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The fair value of identifiable assets and liabilities of Yinxing Power at the acquisition date are as follows:
F-172 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Details of the 51% equity interest held by the Group before the acquisition of Yinxing Power and the profit from the investment are as follows:
An analysis of the cash flows in respect of the acquisition of Yinxing Power is as follows:
The operating results and cash flows of Yinxing Power since the merger date to the end of the year are as follows:
F-173 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
In May 2017, the Company, together with Hangzhou Jinjiang, Guizhou Investment and Qingzhen Investment jointly established Guizhou Huaren. The registered capital of Guizhou Huaren is RMB1,200 million, of which the Company holds 40% of equity interest in Guizhou Huaren, Hangzhou Jinjiang holds 30%, while each of the other two shareholders holds 15% equity interest, respectively. According to the article of association of Guizhou Huaren, the directors of the Company considered that the Company had significant influence over Guizhou Huaren, which was accounted for as an associate.
In December 2017, the Company and Hangzhou Jinjiang entered into an acting-in-concert agreement which became effective on January 1, 2018. According to the acting-in-concert agreement, Hangzhou Jinjiang agreed to exercise the board members’ and shareholder’s vote in concert with the Company. Accordingly, the directors of the Company considered that the Company obtains control over Guizhou Huaren and has consolidated Guizhou Huaren’s financial position and performance into the Group’s consolidated financial statements since January 1, 2018.
F-174 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The fair value of identifiable assets and liabilities of Guizhou Huaren at the acquisition date are as follows:
F-175 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Details of the 40% equity interest held by the Company before the acquisition of Guizhou Huaren and the profit from the investment are as follows:
Note: The fair value was determined by the valuation report issued by an independent qualified valuer. F-176 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
An analysis of the cash flows in respect of the acquisition of Guizhou Huaren is as follows:
The operating results and cash flows of Guizhou Huaren since the acquisition date to December 31, 2018 are as follows:
F-177 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
In February 2017, the Company entered into a capital injection and enlargement agreement on Shanxi Zhongrun with Huarun (Coal) Group Co., Ltd.* (“Huarun (Coal) Group”) (華潤(煤業)集團有限公司), Shanxi Xishan Coal and Electricity Power Co., Ltd.* (“Xishan Coal Electricity”) (山西西山煤電股份有限公司) and Jin Energy Power Group Co., Ltd.* (“Jin Energy Power”) (晉能電力集團有限公司). After the capital contribution, the registered capital of Shanxi Zhongrun is RMB500 million, of which the Company holds 40% of equity interest in Shanxi Zhongrun while each of the other three shareholders holds a 20% equity interest, respectively. The Company can appoint two out of the five directors of the board of directors. According to the article of association of Shanxi Zhongrun and the agreement, the directors of the Company considered that the Company had significant influence over Shanxi Zhongrun, which was accounted for as an associate.
In December 2017, the Company and Huarun (Coal) Group entered into an acting-in-concert agreement which was effective on January 1, 2018. According to the acting-in-concert agreement, Huarun (Coal) Group agreed to exercise the board members’ and shareholder’s vote in concert with the Company. Accordingly, the directors of the Company considered that the Company obtains control over Shanxi Zhongrun and has consolidated Shanxi Zhongrun’s financial position and performance into the Group’s consolidated financial statements since January 1, 2018.
F-178 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
The fair value of identifiable assets and liabilities of Shanxi Zhongrun at the acquisition date are as follows:
F-179 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Details of the 40% equity interest held by the Company before the acquisition of Shanxi Zhongrun and the profit from the investment are as follows:
Note: The fairvaluewas determined by the valuation report issued by an independent qualified valuer.
F-180 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
An analysis of the cash flows in respect of the acquisition of Shanxi Zhongrun is as follows:
The operating results and cash flows of Shanxi Zhongrun since the acquisition date to December 31, 2018 are as follows:
F-181 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
On December 31, 2017, the Company, Chalco Hong Kong and Baotou Communication Investment held 10%, 40% and 50% of the shares of Shanxi Huaxing, respectively. According to the articles of association of Shanxi Huaxing, the Group can exercise joint control over Shanxi Huaxing and therefore, which was accounted for as a joint venture accordingly.
In December 2018, the Company entered into an equity transfer agreement with Baotou Communication Investment. According to the agreement, the Company acquired 50% of Shanxi Huaxing’s equity with a consideration at RMB2,665 million in cash. Upon completion of the transaction, the Group held a total of 100% of Shanxi Huaxing’s shares. The directors of the Company considered that the Company obtains control over Shanxi Huaxing and has consolidated Shanxi Huaxing’s financial position and performance into the Group’s consolidated financial statements since the acquisition date of December 6, 2018. F-182 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, 2019 (Amounts expressed in thousands of RMB unless otherwise stated)
The fair value of identifiable assets and liabilities of Shanxi Huaxing at the acquisition date are as follows:
F-183 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
Details of the 50% equity interest held by the Group before the acquisition of Shanxi Huaxing and the profit from the investment are as follows:
Note: The fairvaluewas determined by the valuation report issued by an independent qualified valuer. F-184 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
An analysis of the cash flows in respect of the acquisition of Shanxi Huaxing is as follows:
The operating results and cash flows of Shanxi Huaxing since the acquisition date to December 31, 2018 are as follows:
F-185 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
On August 31, 2018, Chalco Shandong, a subsidiary of the Company, entered into an asset transfer agreement with Shandong Aluminum Plant, pursuant to which, Chalco Shandong acquired Shandong Aluminum Carbon Plant from Shandong Aluminum at a total consideration of RMB146 million. The consideration was determined based on the appraisal report issued by an independent qualified valuer. Chalco Shandong has paid all consideration as of December 31, 2018. In the opinion of the directors of the Company, Shandong Aluminum Carbon Plant constitutes a business. Before and after the acquisition, Chalco Shandong and Shandong Aluminum were controlled by Chinalco, and the control was not temporary. As such, the acquisition is considered to be a business combination under common control. The acquisition date was August 31, 2018, which is determined by the date of transfer of the assets.
The carrying amounts of the assets and liabilities of Shandong Aluminum Carbon Plant as at the transaction date and the comparative financial figures were as follows:
F-186 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
On August 30, 2018, Guangxi Branch of the Company entered into an asset transfer agreement with Pingguo Aluminum, pursuant to which, Guangxi Branch of the Company acquired Pingguo Aluminum Carbon Plant from Pingguo Aluminum at a total consideration of RMB92 million. The consideration was determined based on the appraisal report issued by an independent qualified valuer. Guangxi Branch of the Company has paid all consideration as of December 31, 2018. In the opinion of the directors of the Company, the Pingguo Aluminum Carbon Plant constitutes a business. Before and after the acquisition, Guangxi Branch and Pingguo Aluminum were controlled by Chinalco, and the control was not temporary. As such, the acquisition is considered to be a business combination under common control. The acquisition date was August 30, 2018, which is determined by the date of transfer of the assets.
The carrying amounts of the assets and liabilities of Pingguo Aluminum Carbon Plant as at the transaction date and the comparative financial figures were as follows:
F-187 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
On August 30, 2018, Chalco Mining, a subsidiary of the Company, entered into an equity transfer agreement with China Great Wall Aluminum and Henan Great Wall Zhongxin, pursuant to which, Chalco Mining acquired 57.69% and 19.96% equity interest in Red Chibi Great Wall from China Great Wall Aluminum and Henan Great Wall Zhongxin, respectively. The consideration for the acquisition was RMB202 million, which was determined based on the appraisal value of the 77.65% equity interest in Chibi Great Wall Carbon. As at December 31, 2018, Chalco Mining has paid the consideration in receivables amounting to RMB70 million and cash amounting to RMB132 million, respectively. The transaction date was August 30, 2018, which was the date that the Group obtained control of Chibi Great Wall Carbon. Before and after the acquisition, both Chibi Great Wall Carbon and Chalco Mining were controlled by Chinalco, and the control was not temporary. Thus, the acquisition of the 77.65% equity interest in Chibi Great Wall Carbon is considered to be a business combination under common control.
The carrying amounts of the assets and liabilities of Red Cliff Carbon as at the transaction date and the comparative financial figures were as follows:
F-188 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
On August 30, 2018, China Aluminum Logistics Group Corporation Co., Ltd. (“China Aluminum Logistics Group”) (“中鋁物流集團有限公司”), a subsidiary of the Company, entered into an equity transfer agreement with Northeast Light Alloy Co., Ltd., pursuant to which, Chalco Aluminum Logistics acquired a 51% equity interest in East Light Logistics from Northeast Light Alloy Co., Ltd. The consideration for the acquisition was RMB3 million, which was determined based on the appraisal value of the 51% equity interest in East Light Logistics and China Aluminum Logistics Group has paid all consideration as of December 31, 2018. The transaction date was August 30, 2018, which was the date that the Group obtained control of East Light Logistics. Before and after the acquisition, both East Light Logistics and China Aluminum Logistics Group were controlled by Chinalco, and the control was not temporary. As such, the acquisition of the 51% equity interest in East Light Logistics is considered to be a business combination under common control.
The carrying amount of the assets and liabilities of East Light Logistics as at the transaction date and the comparative financial figures were as follows:
F-189 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated)
On
The
F-190 ALUMINUM CORPORATION OF CHINA LIMITED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued) For the years ended December 31, (Amounts expressed in thousands of RMB unless otherwise stated) 39. DISPOSAL OF BUSINESSES
On October 31, 2017, the Company and CHALIECO entered into an equity transfer agreement, pursuant to which the Company agreed to sell and CHALIECO agreed to acquire 60% equity interest in Shandong Engineering at a consideration of RMB360 million. The consideration was determined based on the appraised value of the 60% equity interest in Shandong Engineering. Full consideration has been received by the Group in November 2017.
The directors of the Company are of the opinion that the Group lost control over Shandong Engineering and accounted for it as an associate accordingly. As of the date of disposal, the carrying amount of Shandong Engineering was RMB350 million, and the Group recognized gain of disposal of subsidiary of RMB153 million for 60% equity interests disposed of. The Group re-measured the remaining 40% equity interest of Shandong Engineering to a fair value of RMB240 million and recognized the fair value gain of RMB102 million accordingly. In addition, unrealized profit arisen from construction services provided by Shandong Engineering previously eliminated upon consolidation amounting to RMB59 million was reversed and recognized in other gains. F-191
ALUMINUM CORPORATION OF CHINA LIMITED
The details of the net assets disposed of are as follows:
An analysis of the cash flow of cash and cash equivalents in respect of the Disposal of Shandong Engineering is as follows:
F-192
ALUMINUM CORPORATION OF CHINA LIMITED
The Company previously had a 50% equity interest in Shanxi China Huarun Co., Ltd.* (“Shanxi Zhongrun”) (山西中鋁華潤有限公司). According to the then acting-in-concert agreement entered into by the Company and the other shareholders of Shanxi Zhongrun, Huarun (Coal) Group Co., Ltd. * (“Huarun (Coal) Group”) (華潤
On February 15, 2017, the Company entered into a capital injection and enlargement agreement on Shanxi Zhongrun with Huarun (Coal) Group, Shanxi Xishan Coal and Electricity Power Co., Ltd.* (“Xishan Coal Electricity”) (西山煤電), and Jin Energy Power Group Co., Ltd.* (“Jin Energy Power”) (晉能電力). Pursuant to the agreement, the Company, Xishan Coal Electricity and Jin Energy Power had each subscribed RMB100 million, respectively. After the capital contribution, the Company’s equity interest in Shanxi Zhongrun decreased to 40% while each of the other three shareholders hold a 20% equity interest, respectively, and the acting-in-concert agreement between the Company and Huarun (Coal) Group also ceased to be effective since then. The directors of the Company are of the opinion that the Group lost control over Shanxi Zhongrun and accounted for it as an associate accordingly. As of the date of deemed disposal, the Company re-measured the 40% equity of Shanxi Zhongrun to a fair value of RMB100 million and recognized the fair value gain of RMB4 million accordingly. F-193
ALUMINUM CORPORATION OF CHINA LIMITED
In November 2017, Chalco Trading, a subsidiary of the Company, agreed to transfer 50% equity interest in Zibo International Trading Co. Ltd. *
In September 2017, Shanxi Hejin
In September 2017, Beijing Shijingshan
In August 2018, Chalco Trading, a subsidiary of the Company, agreed to transfer a 51% equity interest in Zhengzhou Chalco Longyu Mining Co., Ltd.* (“Longyu Mining”) (“鄭州中鋁龍宇礦業有限公司”) to a third party. As of the date of disposal, the Group recognized a gain of disposal of subsidiary of RMB8 million.
In March 2018, Shanxi Jiexiu People’s Court accepted the liquidation petition filed by the Group’s subsidiary, Shanxi Huatai Carbon Co., Ltd.* (“山西華泰碳素有限責任公司”). Upon the liquidation, administrators took control over Shanxi Huatai Carbon Co., Ltd., and the directors of the Company considered that the Company lost control over Shanxi Huatai Carbon Co., Ltd. and therefore, ceased to consolidate Shanxi Huatai Carbon Co., Ltd. since then. The Group recognized a loss of RMB2 million for lost control over Shanxi Huatai Carbon Co., Ltd.
In June 2018, Shanxi Hejin People’s Court accepted the liquidation petition filed by the Group’s subsidiary, Hedong Carbon Co., Ltd.* (“河東碳素”). Upon the liquidation, administrators took control over Hedong Carbon Co., Ltd., and the directors of the Company considered that the Company lost control over Hedong Carbon Co., Ltd. and therefore, ceased to consolidate Hedong Carbon Co., Ltd. since then. The Group recognized a loss of RMB2 million for lost control over Hedong Carbon Co., Ltd.
F-194
ALUMINUM CORPORATION OF CHINA LIMITED
In January 2019, the Company entered into a Capital Contribution Agreement with Chinalco and its subsidiary Chinalco Innovative, pursuant to which the Company shall make a capital contribution to Chinalco Innovative in form of its 100% equity interests in China Aluminum Nanhai Alloy Co., Ltd. (“China Aluminum Nanhai Alloy”). After the transaction, the Company holds 19.4852% in Chinalco Innovative. As of the date of deemed disposal, the Company re-measured the equity of China Aluminum Nanhai Alloy to a fair value of RMB350 million and recognized the fair value gain of RMB258 million accordingly.
On February 20, 2019, Chalco Energy Co., Ltd., a wholly-owned subsidiary of the Company, entered into equity transfer agreements with Chinalco Environment Protection Co., Ltd. on the partial disposal of 40% equity interests in Inner Mongolia Fengrong Co., Ltd. and 60% equity interests in Ningxia Fenghao Co., Ltd., respectively. A gain of RMB3,014 thousands from partial disposal of the two subsidiaries was recorded by the Group in the current period.
Chalco Trade, a subsidiary of the Company, held 100% equity interest of Shanghai Chalco Kailin Aluminum Co., Ltd. * (上海中鋁凱林鋁業有限公司) (“Shanghai Kailin”). In July 2019, Shanghai Kailin was deregistered, from which the Company recorded a gain of RMB160 thousands.
Zhongzhou Aluminum, a subsidiary of the Company, held a 51% equity interest in Ruzhou Chinalco Jinhua Mining Co., Ltd. * (汝州中鋁金華礦業有限公司) (“Ruzhou Jinhua”). In July 2019, Zhongzhou Aluminum disposed all of its equity interests of Ruzhou Jinhua, and a gain of RMB113 thousands from the disposal was included in other gains during the year ended December 31, 2019.
F-195 ALUMINUM CORPORATION OF CHINA LIMITED
On October 22, 2013, a subsidiary of the Company, Chalco Hong Kong Investment Company Limited (“Chalco Hong Kong Investment”, or the
On October 31, 2018, the Group redeemed the senior perpetual security, and paid $373 million in principal and interest, approximately RMB2,592 million.
On October 27, 2015, the Company issued RMB2,000 million perpetual medium-term notes with an initial distribution rate at 5.50% (the “2015 Perpetual Medium-term F-196
ALUMINUM CORPORATION OF CHINA LIMITED
On October 31, 2016, Chalco Hong Kong Investment issued USD500 million senior perpetual securities with an initial distribution rate at 4.25% (the “2016 Senior Perpetual
On October 19, 2018, the Company issued RMB2,000 million perpetual medium-term notes with an initial distribution rate at 5.10% (the “2018 Perpetual Medium-term On November 19, 2019, the Company issued RMB1,500 million perpetual medium-term notes with an initial distribution rate at 4.20% (the “2019 Perpetual Medium-term Notes”). The proceeds from the issuance of the 2019 Perpetual Medium-term Notes were RMB1,499 million. The proceeds were used for the repayment of interest-bearing loans and borrowings. Coupon payments of 4.20% per annum on the 2019 Perpetual Medium-term Notes have been made annually in arrears from November 19, 2019 and may be deferred at the discretion of the Company. The 2019 Perpetual Medium-term Notes have no fixed maturity date and are callable only at the Group’s option on November 20, 2022 or any coupon distribution date after November 20, 2022 at their principal amounts together with any accrued, unpaid or deferred coupon distribution payments. The coupon distribution rate will be reset to a percentage per annum equal to the sum of (a) the initial spread of 1.31 percent, (b) the China Treasury Rate, and (c) a margin of maximum 300 Bps every five years after November 20, 2022. While any coupon distribution payments are unpaid or deferred, the Company cannot declare or pay dividends to shareholders or decrease the share capital, or make material fixed asset investments.
Pursuant to the terms and conditions of the 2013 Senior Perpetual Securities, the
F-197
ALUMINUM CORPORATION OF CHINA LIMITED
The Group was sued in the second quarter of 2019 against the project construction, financing arrangement and others, collectively aggregating to RMB591 million, which mainly arose from contract variation orders without merits and disagreed by the Group. As an administrative process, the local courts held to freeze the Group’s bank accounts or other equivalent assets amounting to RMB214 million. As at December 31, 2019 and as at the date of approval of these financial statements, the local courts have already frozen several bank accounts of the Group aggregating to RMB61 million and a real estate of the Group of a net book value amounting to RMB46 million. Currently the lawsuits are in progress and the outcomes are unknown. The directors, based on the advice from the Group’s legal counsels, believe that the Group has valid defence against all the allegations and accordingly, have not provided for any claim arising from the litigations, other than the related legal and other costs. 42. COMMITMENTS
The future aggregate minimum lease payments as at December 31, 2018 pursuant to non-cancellable lease agreements entered into by the Group are
As at December 31,
F-198
ALUMINUM CORPORATION OF CHINA LIMITED
F-199 ALUMINUM CORPORATION OF CHINA LIMITED
Certain comparative amounts have been restated as a result of the business combinations under common control
The comparative consolidated statements of cash flows for the years ended December 31, 2017 have been revised to reclassify the cash outflows for the purchase of non-controlling interests and business combination under common control from investing activities to financing activities in accordance with IAS 7Statement of Cash Flows. This change did not impact the consolidated statement of financial position or consolidated statement of profit or loss and other comprehensive income for the prior periods.
The financial statements were approved and authorized for issue by the board of directors on April
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