The recent acquisition by Zijin Mining Group has raised several questions about the capabilities and resources of the company it has chosen to invest in: Zijin International's purchase of a 24.82% stake in the A-share listed company, Zangge Mining, for a staggering 13.7 billion yuan. This move not only solidifies Zijin's position as the largest shareholder with a total stake of 25%, but it also sparks intrigue regarding the underlying motives behind such a significant investment.

At first glance, the differences in scale between the two companies are glaring. Zijin Mining, often dubbed the "King of Gold in China," boasts a market value exceeding 450 billion yuan, while Zangge Mining's valuation sits at a mere 50 billion yuan. The disparity is significant, leading many to wonder what specific attributes attracted Zijin to Zangge.

To understand this acquisition, we must delve into Zangge Mining’s core business operations, which primarily revolve around only two key products: potassium chloride and lithium carbonate. The company's revenue from these commodities has fluctuated, largely reliant on market prices that have seen significant volatility in recent years. For instance, in the first half of 2024, potassium chloride accounted for 65% of its revenue, while lithium carbonate contributed around 34.7%.

Significantly, Zangge Mining ranks as the second-largest producer of potassium chloride in China, commanding a substantial 23% of the national capacity. The company's production activities are heavily rooted in the Chaerhan Salt Lake – the largest salt lake in China and the second largest in the world. Zangge Mining holds mining rights over 724 square kilometers east of the railway in the area, with an impressive annual production capacity of 2 million tons of potassium chloride, second only to Salt Lake Company in China.

In addition to the Chaerhan Salt Lake, Zangge Mining is also advancing three other potash projects in Qinghai province and is working on two international projects in Laos, which are expected to yield 2 million tons upon completion, planned for 2028. Furthermore, the company has a lithium carbonate production capacity of 10,000 tons and additional planned capacity of 100,000 tons.

Since 2017, Zangge Mining has intelligently pivoted to capitalize on the renewable energy transition by integrating lithium production lines into its existing potash operations. The construction of its first-phase battery-grade lithium carbonate production, finalized in 2018, has proven successful. Zangge Mining employs a self-developed "one-step" lithium extraction process, which achieves a remarkable lithium recovery rate exceeding 95%, significantly reducing production costs.

This cost advantage associated with lithium production is not negligible. The production cost of lithium carbonate for Zangge Mining typically remains between 30,000 to 40,000 yuan per ton, allowing the company to maintain a healthy profit margin. In fact, despite the recent downturn in lithium prices, Zangge is projected to maintain a gross margin of 50.28% for its lithium segment in the first half of 2024. Moreover, the future expansion in capacity for lithium production lies in the promising Mami Co Salt Lake project, which has an identified lithium chloride resource of roughly 2.5 million tons, equating to about 2.17 million tons of lithium carbonate. Zangge Mining holds a 24% stake in this precious asset.

Revisiting the earlier question about what specifically Zijin Mining finds attractive about Zangge Mining, it becomes evident that Zijin may be more interested in Zangge's lithium operations than its potassium chloride projects. Given Zijin Mining's absence in the potash market prior to this acquisition and its concerted efforts to enhance its lithium portfolio since 2021 through acquisitions in Canada and the Democratic Republic of the Congo, this decision aligns seamlessly with its strategic focus.

Furthermore, it’s crucial to highlight Zangge's hidden gem - copper. While the company is often associated with potassium and lithium, copper production is also a noteworthy aspect of its business. The margins related to Zangge’s operations have remained consistently robust despite fluctuations in the potassium and lithium markets. For example, while its gross margins faced downsizing, net profit margins surged to as high as 80.06% in 2024’s first three quarters, driven largely by investment returns, specifically from its stake in Julong Copper.

Julong Copper, once a subsidiary of Zangge Mining, now belongs partially to Zijin Mining, as the latter acquired a 50.1% stake in 2020. This copper mine is notable for having the highest recorded metallic resource in China at 25.88 million tons and is expected to hit a production capacity of 150,000 tons per year in response to Zijin Mining's investment and development efforts.

Considering these factors, it becomes apparent that Zijin Mining's acquisition also aims to enhance its control over Julong Copper, potentially turning it into a significant profit-generating machine that complements its expanding portfolio. With investment in Julong Copper set to pay dividends, Zangge's future appears brighter with Zijin’s backing as it enhances its prospects in the potassium, lithium, and copper markets.

However, despite the promising fundamentals behind Zangge Mining's resource base, its recent performance casts a shadow over its immediate profitability. Unfortunately, since 2023, Zangge Mining has seen its earnings dip for two consecutive years, attributed primarily to the downturn in potassium and lithium prices, which directly impacts revenue and profitability.

In terms of overarching market dynamics, while Zangge Mining faces substantial challenges due to excess supply in the potassium and lithium sectors, its long-term growth prospects remain optimistic. China, the largest potassium fertilizer consumer globally, has a growing demand for potassium chloride, 60% of which is currently met through imports. As prices stabilize post the geopolitical disruptions that previously drove prices to unsustainable heights, Zangge's potassium chloride segment stands to benefit from stabilized pricing and increased production capacity.

Moreover, the growth of Julong Copper is set to further bolster Zangge Mining's revenue base. The current production level of 150,000 tons is on track to expand to 300,000-350,000 tons following phase two enhancements, which are expected to roll out in early 2026. If phase three advancements gain approval, the capacity could rise dramatically to 600,000 tons annually.

As such, while Zangge Mining may find itself under pressure in the short term due to pricing dynamics in the lithium and potassium markets, the infusion of Zijin Mining's resources and technological prowess, among other operational advantages, paints a positive future. Zangge Mining is not just riding the coattails of a more robust market; it’s gearing up to leverage its refined operational capabilities for long-term success.

Ultimately, the acquisition of Zangge Mining by Zijin Mining differs from conventional strategic moves, representing a calculated expansion into burgeoning sectors with substantial upside potential. With its rich reserves, diversified mineral servicing portfolio, and solid backing from Zijin, Zangge Mining is on the cusp of transformative growth in a dynamic industry landscape.