China Northern Rare Earth

Phase A — Understand the business

Lens 1 · Company Overview

China Northern Rare Earth (Group) High-Tech Co., Ltd (中国北方稀土) is the largest rare-earth producer on Earth by volume and the listed vehicle of the rare-earth assets controlled by state-owned Baogang Group (Baotou Iron & Steel). The business is conceptually simple: rare-earth concentrate mined as a co-product of iron ore at the Bayan Obo deposit in Inner Mongolia is sold by Baogang's Baotou Steel arm to the listed company, which smelts and separates it into rare-earth oxides, salts, metals, NdFeB magnetic materials, polishing powders and other functional/application products. It is overwhelmingly a light rare-earth house — lanthanum, cerium, praseodymium, neodymium — and the dominant single source of separated NdPr oxide, the feedstock for permanent magnets.

Three structural facts define everything downstream:

1. It is an SOE and a price administrator. As one of only two state groups (with China Rare Earth Group) eligible to receive China's production quotas from 2024 — down from six — it effectively sets domestic reference prices for light REs.
2. It does not control its own feedstock cost. The ore comes from its parent under a related-party pricing formula, re-struck quarterly — the single most important number for its margin (Lens 10).
3. Foreign investors can barely own it. Access is A-share only, gated to Qualified Foreign Institutional Investors. This is a Chinese-domestic equity, not a globally fungible one — a critical caveat for any MenFem position.

Scale (FY2025): revenue ¥42.56B (~$5.9B ), +29.11% YoY; net income ¥2.25B (~$313M ), +124.17% YoY; "major product production hit record highs".

Lens 2 · Supply Chain

Names along the chain — this lens fails if generic, so here it is concrete:

• Resource / mine: Bayan Obo, Inner Mongolia — world's largest RE ore body, >40% of global REE reserves, ~80% of China's RE reserves, >100Mt proven RE. Mined by Baotou Steel Union (Bao Gang United Steel) as an iron-ore co-product; 2025 plan included 390,000 mt of rare-earth concentrate alongside 15.6Mt crude steel.
• Concentrate seller (the chokepoint): Inner Mongolia Baogang Group / Baotou Steel Union → sells concentrate to the listed co under a quarterly related-party formula.
• The company (midstream): Baotou smelting/separation complex (~150km south of the mine) — oxides, chlorides, carbonates, metals, NdFeB alloy/magnets, polishing powder.
• Quota gatekeeper: MIIT (with the Ministry of Natural Resources) sets the mining + smelting-separation quotas twice yearly; CNRE is the largest single recipient (2024: 188,650 mt rock-mineral mining + 170,001 mt smelting-separation — roughly 70% of the national totals of 270,000 / 254,000 mt).
• Downstream buyers: magnet makers feeding EV traction motors, wind-turbine direct-drive generators, industrial/automation and robotics motors, consumer electronics; plus a contracted export book in PrNd products.

Single-source dependency runs the wrong way for shareholders: the company is captive to one supplier (its parent) for feedstock, while its parent is captive to it as the licensed separator. The state arbitrates the split — and lately the split has moved toward the parent (Lens 10).

Lens 3 · Competitive Advantages (moats)

The moat is real, durable, and largely not the company's own — it is sovereign.

• Resource + quota + license. Bayan Obo is irreplaceable, and the right to mine/separate it is a state grant restricted to two firms. No Western entrant can replicate this; it is the deepest moat in the complex.
• Cost position. Light-RE co-production with iron ore makes CNRE one of the lowest-cost separated-oxide producers globally; it has cited a 17.21% cost advantage in Q3 2024 and 14.45% in Q2 2025 vs. the field.
• Scale. ~Half of global rare-earth production traces to Bayan Obo; CNRE is the single largest NdPr source.

But bargaining power is asymmetric against the shareholder. Over its customers and over Western buyers, CNRE (and Beijing) hold enormous leverage — the April + October 2025 export-control regime is the proof (Lens 8). Over its supplier, the listed entity is weak: Baogang sets the concentrate price and has been raising it faster than product prices, capturing the cycle's upside at the parent level. The moat protects the Chinese state's control of rare earths far more than it protects a minority A-share holder's earnings stream. That gap is the whole thesis.

Lens 4 · Segments

No segments.csv data exists (`` unavailable) and CNRE's English disclosure of a clean product split is thin. What is sourceable:

• Reported segments include Rare Earth Functional Materials & Application Products and an Environmental Protection & Others segment.
• The economic reality: revenue is dominated by smelting & separation products (oxides/salts/metals), with magnetic materials (NdFeB) the value-added growth layer and polishing/other functional materials smaller.
• >50% of rare-earth product sales are under medium/long-term agreements (the rest spot/retail), and the company has flagged above-plan international "add-on" orders in PrNd.
• Geography is overwhelmingly domestic China, with a contracted export tail.

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Phase B — Measure performance

Lens 5 · Earnings Result

The print that matters is a commodity-price-leveraged earnings explosion off a depressed base:

• Driver: almost entirely price — "prices of major rare-earth products fluctuating upward," specifically the PrNd oxide rally; volumes (production/sales of major products) also rose YoY.
• Margin context (the catch): FY2024 operating margin was a thin ~5.6% and FY2025 ROE only ~7.31% — extraordinary growth rates off a low-margin base. This is not a high-return business; it is a low-return business having a good year.
• Balance sheet / market reaction: market cap +113.4% YoY to ¥180.57B (~$25B ); shares re-rated to P/E ~65.9, forward P/E ~38.6, EPS ¥0.76 (+98%). The stock has repeatedly hit the daily limit on quota/export-control headlines.
• Unusual vs. its own history: the +124% net-income jump is real but follows years of margin compression under low RE prices — the swing is cyclical, not a step-change in business quality.

Lens 6 · Earnings Calls (sentiment trend)

No transcripts in the research layer (transcripts=0); SOE A-shares don't run Western-style quarterly calls. From disclosures/statements ``:

• Tone shift Q4'24 → 2026: from defensive to confident. 2024 commentary was about cost discipline amid weak prices; through 2025–Q1'26 management leans into record production, above-plan export add-ons, and "strengthening" market prices.
• Recurring themes: quota leadership ("keeps top position"), the stability of the Baogang concentrate pricing mechanism, and long-term-contract coverage (>50% of sales).
• What they stopped saying: the 2024 "cost advantage / slim margin" framing recedes as prices do the work — a tell that current earnings quality is price-dependent, not structurally improved.

Lens 7 · Comps

Peer table — note the central distortion: CNRE is by far the largest producer yet trades on the lowest revenue multiple, because the Western names are priced as strategic/sovereignty options, not on cash earnings. Multiples `` with date; gaps = n/a.

Read: On EV/EBITDA and EV/Sales, CNRE is the cheapest major rare-earth equity in the world relative to its physical output — and deservedly so, because (a) the earnings are state-administered and parent-taxed, and (b) foreigners can't freely own it. The ~$25B cap on $5.9B revenue is a growth/policy premium on a commodity processor, not a bargain. (Hard EV/EBITDA, EV/EBIT and 5-yr-avg ROE columns are n/a — never fabricated.)

Lens 8 · Stock-Price Catalysts (>5% moves, last ~5y)

The tape reacts to policy, not to operations. Pattern over 2025–26:

• Apr 4, 2025 — export licensing on 7 REs + magnets (two days after US "Liberation Day" tariffs): magnet exports to Korea/Japan collapsed ~91–93% by May; the entire complex re-rated.
• Jul 2025 — quietly-issued quotas restricted to two SOEs: scarcity signal; CNRE confirmed as top recipient.
• Oct 9, 2025 — the big one: FDPR + 5 more REs (12 of 17 controlled): first use of the foreign-direct-product rule in rare earths; rare-earth stocks surged globally (USA Rare Earth +15%, NioCorp +12%, MP +2%). CNRE hit daily limits on the Chinese tape.
• Oct/Q4 2025 → Q2 2026 — concentrate price hikes (+37% Q4'25, +44.6% to ¥38,804/t Q2'26): Baotou Steel + CNRE both surged intraday on the announcements.
• Nov 10, 2025 — China suspends the Oct controls for one year (to Nov 2026); the April regime stays in force.

What the market actually reacts to for this name: Beijing's export-control posture and the quota/concentrate-price administrative signals — i.e. the state's hand, with the NdPr spot price as the transmission belt. Company-specific operational news barely moves it independently.

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Phase C — Judge people & books

Lens 9 · Management

• Who: Party Secretary & Chairman Liu Peixun; CEO Zhao Dianqing (赵殿清); General Manager Qu Yedong (瞿业栋). 2025 saw board reshuffles (e.g. Bai Baosheng → Chief Business Director; a board-seat reclassification flagged as a governance signal).
• Archetype: State professional managers / Party-appointed, not founder-owner-operators. Incentives align with national industrial policy and Party objectives (supply security, price administration, mixed-ownership reform) ahead of minority-shareholder TSR. Insider ownership in the Western sense is n/a — not applicable (control is the state via Baogang).
• Capital allocation: dividend payout rose from 12.6% (2024) to 20.87% (2025), yield only ~0.28%, EPS ¥0.76, **5-yr DPS growth ~+13% ** — i.e. earnings are largely retained/reinvested into the chain, not returned. ROE ~7.3% is mediocre for a "dominant" producer — value leaks to the parent (concentrate price) and the state (quota/tax), not to the float.
• Red flag (structural, not personal): the related-party concentrate purchase from the controlling parent is the textbook minority-dilution channel for a Chinese SOE — see Lens 10.

Lens 10 · Forensic Red Flags

No SEC/EDGAR exposure — regulatory/regulatory-findings.md confirms 0 SEC LR/AAER (no CIK, not an SEC filer). No US-style forensic filing trail exists; that is itself a disclosure-quality caveat for a foreign investor.

The dominant forensic issue is the related-party feedstock transaction, and it is material:

• CNRE buys substantially all concentrate from parent Baogang/Baotou Steel under a quarterly formula (re-struck in the first ten days of each quarter, referenced to the prior quarter's RE product prices), in force since Apr 1 2023; board- and EGM-approved.
• The price has been ratcheted hard: Q1'25 ¥18,618/t → Q2'25 ¥18,825/t → Q4'25 ¥26,205/t (+37.1% QoQ) → Q1'26 ¥26,834/t → Q2'26 ¥38,804/t (~$5,390; +44.6% QoQ).
• Why it's a flag: in an up-cycle, the parent captures margin at the listed company's expense — every concentrate hike is a transfer from minority holders to the state parent, and the formula's backward reference means CNRE's input cost keeps rising into the next quarter even if product prices stall. The >50% long-term-contract sales book partly fixes the output side while the input side floats up — a margin scissors that can compress earnings while revenue still grows. This is the single most important number to model, and it points the wrong way for the float.
• Other items (label /, none independently verified to filing): thin operating margin (~5.6% FY24) means small input-cost moves swing net income disproportionately; SBC, leases, goodwill, receivables/inventory-vs-revenue divergence are n/a (no English filing detail in the layer).

Regulatory findings (required): No SEC LR/AAER (verified via EDGAR EFTS, per regulatory-findings.md, 2026-06-24). Non-SEC web search ("China Northern Rare Earth" (FTC OR DOJ OR FDA OR... ) enforcement) surfaced no material Western enforcement action against the company itself — the relevant regulatory events are the Chinese MOFCOM export-control regime (Apr + Oct 2025) it operates under/benefits from, not actions against it. 10-K Item 3 legal proceedings: n/a — company files no 10-K. Net: No material regulatory or legal findings against the company — verified via SEC EDGAR EFTS and web search as of 2026-06-24; note this rests on web sources only, as no audited Western filing exists.

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Phase D — Project & stress-test

Lens 11 · Forward Projection

Bottom-up is constrained by the absence of a sourced segment model, so this is an explicitly-labelled `` scaffold off the FY2025 actuals, not a precision forecast. Anchor: FY2025 revenue ¥42.56B, NI ¥2.25B, EPS ¥0.76, ~3.62B shares.

• The swing variable is the margin scissors: NdPr spot opened 2026 ~$53/kg and ran to ~$137/kg by end-April (+~160% YTD), which lifts product revenue — but the Q2'26 concentrate price +44.6% raises COGS with a one-quarter lag. Net margin direction depends on which moves faster.

Per --watchlist rules: no forecast.ts create logged (breadth mode; no committed base case).

Lens 12 · Bull vs Bear

Bull case. The deepest, most durable moat in critical materials — irreplaceable Bayan Obo resource, a state-granted two-firm oligopoly on quotas, lowest-cost light-RE separation, and the single largest NdPr supply into a structurally deficit market. Demand is secular: EVs +28% to ~22.9M units in 2026 (1–3kg NdFeB each), wind direct-drive, and a robotics/automation magnet wave; NdPr demand ~+7%/yr to 2030, second consecutive supply-deficit year in 2026. As prices rise, a low-margin processor's earnings lever violently (FY25 NI +124%). Beijing wants this name to be strong — policy is a tailwind, not a risk.

Bear case (2–3 things that permanently impair the shareholder).

1. The parent eats the cycle. The related-party concentrate formula transfers up-cycle margin to Baogang; ROE stuck ~7% even in a banner year proves the float is structurally short-changed. This doesn't break in a downturn — it is the steady state.
2. Demand destruction above ~$150/kg. NdPr is inelastic at $30–60/kg but highly elastic above ~$150; at ~$137 and climbing, buyers are at the redesign threshold (Toyota cut Prius RE demand ~15% post-2011). Ferrite substitution + recycling could cut magnet RE demand up to 40% over a decade. A price spike sows its own reversal.
3. It's a policy instrument you can't freely own. Earnings are administered (quota, export controls, concentrate price); A-share/QFII access means most MenFem-relevant capital can't hold it cleanly, and the equity is a hostage to US-China geopolitics in both directions.

Pre-mortem (18 months out, thesis broke): NdPr round-tripped from ~$137 back toward ~$70 as demand destruction + Western supply (MP/Lynas mine-to-magnet) bit; Baogang kept concentrate prices sticky-high; CNRE's margin scissored shut and NI fell despite "record volumes"; the P/E ~66 de-rated to ~20 and the stock halved. Plausible.

Contrarian view of what the market refuses to see: the bull narrative conflates China's rare-earth power with this equity's earnings power. They are not the same asset. The state's control is maximal; the minority holder's claim on it is taxed at the parent and capped by policy. The market is paying a 66x multiple for a ~7%-ROE commodity processor because it's reading a geopolitical headline, not an income statement.

Lens 13 · Devil's Advocate (short-seller)

• What breaks the money-making: a NdPr price reversal — the earnings are ~entirely price-driven off a thin margin, so a 30% NdPr drop can erase most of the net-income growth, and the concentrate cost lags down slowly (parent protects itself).
• Concentration: revenue is a single commodity (light-RE/NdPr) in a single geography (China-domestic + a thin export tail), feedstock from a single related supplier, under a single regulator (MIIT/MOFCOM). Every axis is concentrated.
• Weaker-than-it-looks moat: the moat accrues to the state, not the shareholder; bulls underestimate how much value the parent extracts via the concentrate formula.
• Most dangerous competitor bulls underrate: not MP or Lynas (too small) — it's substitution and recycling (ferrite, magnet-free motors, iron-nitride) triggered by China's own price hikes, plus the political impetus those hikes give Western "mine-to-magnet" buildouts.
• Worst capital-allocation / governance move: acquiescing to ever-higher related-party concentrate prices that transfer minority value to the parent, while paying out only ~21% and yielding ~0.28%.
• Assumptions that must hold for today's price: NdPr stays elevated (>$110/kg), the concentrate formula doesn't fully neutralise it, demand destruction stays distant, and geopolitics doesn't cut the export tail. If growth disappoints 20–30%, a 66x P/E is indefensible — fair value compresses toward a ~20x commodity multiple, i.e. ~50% downside.
• Single scenario that permanently impairs: a sustained NdPr down-cycle combined with sticky concentrate costs — margin scissors shut for multiple years; the SOE keeps producing to quota regardless, so there's no supply discipline to rescue the price.

Lens 14 · Management Questions (ordered by information value)

1. What is the explicit formula linking the Baogang concentrate price to prior-quarter RE product prices, and what cap/floor (if any) protects the listed company's gross margin in an up-cycle?
2. At what NdPr price level do you observe order cancellations or customer redesign toward ferrite/magnet-free motors — i.e. where is your demand-destruction threshold?
3. What was FY2025 gross and operating margin by product line (smelting/separation vs. magnetic materials vs. functional)?
4. How much of FY2025's net-income growth was price vs. volume vs. cost — decompose it.
5. What share of revenue is export vs. domestic, and how exposed is it to the April-2025 licensing regime and the Nov-2026 expiry of the October-controls suspension?
6. What is the 2026 quota allocation to CNRE (mining + smelting-separation), and how should we think about quota as a hard cap on volume growth?
7. How do you weigh minority-shareholder returns against national supply-security objectives when they conflict (e.g. concentrate pricing, retained earnings)?
8. What is the capex plan for magnetic-materials/downstream value-add, and the expected ROIC on it?
9. What proportion of sales sits under medium/long-term contracts vs. spot, and at what reference price — how fixed is your realised price if spot falls?
10. What is your inventory position in oxides/metals, and how is it marked as prices swing?
11. How do you view Western mine-to-magnet (MP, Lynas) and recycling as a structural ceiling on price over five years?
12. What is the dividend-policy trajectory — is the rise from 12.6% to 20.87% payout a trend or a one-off?
13. How does the mixed-ownership reform agenda change governance, related-party oversight, or minority protections?
14. What is your all-in cost per kg of NdPr oxide including the related-party concentrate, and how does it move with REO grade?
15. What single operational risk (not price, not policy) most concerns management over 3 years — water/power/permitting at Baotou, ore-grade decline at Bayan Obo, or downstream execution?

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