20-F 1 chalco_2017_20-f_mainbody.htm ALUMINUM CORPORATION OF CHINA LIMITED

 

 

As filed with Securities and Exchange Commission on April 19, 2018

 
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
 
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, 2017

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)

 

Yu Dehui

No. 62 North Xizhimen Street, Haidian District, Beijing

People’s Republic of China (100082)

(86) 10 8229 8322

ir@chalco.com.cn

(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

Name of each exchange on which registered

American Depositary Shares* 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, 2017:    
Domestic Shares, par value RMB1.00 per share 10,959,832,268  
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 ü 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 ü

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 ü No __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ü 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 the definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ü 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.

2

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 ü
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 ü

(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 __

 
 
3

TABLE OF CONTENTS  

 

Forward-Looking Statements ii
Certain Terms and Conventions iii
PART I 1
Item 1.    Identity of Directors, Senior Management and Advisors 1
Item 2.    Offer Statistics and Expected Timetable 1
Item 3.    Key Information 1
Item 4.    Information on the Company 20
Item 4A.  Unresolved Staff Comments 57
Item 5.    Operating and Financial Review and Prospects 57
Item 6.    Directors, Senior Management and Employees 82
Item 7.    Major Shareholders and Related Party Transactions 91
Item 8.    Financial Information 100
Item 9.    The Offer and Listing 101
Item 10.   Additional Information 102
Item 11.   Quantitative and Qualitative Disclosures about Market Risk 115
Item 12.   Description of Securities Other Than Equity Securities 118
PART II 119
Item 13.   Defaults, Dividend Arrearages and Delinquencies 119
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds 120
Item 15.   Controls and Procedures 120
Item 16A. Audit Committee Financial Expert 121
Item 16B. Code of Ethics 121
Item 16C. Principal Accountant Fees and Services 121
Item 16D. Exemptions From the Listing Standards for Audit Committees 121
Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers 121
Item 16F. Change in Registrant’s Certifying Accountant 121
Item 16G. Corporate Governance 122
Item 16H. Mine Safety Disclosure 122
PART III 123
Item 17. Financial Statements 123
Item 18. Financial Statements 123
Item 19. Exhibits 123

 

i

Forward-Looking Statements

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;
our proposed asset restructuring;
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.

Certain Terms and Conventions

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 Shares” and “domestic shares” refer to our domestic ordinary shares, with a par value of RMB1.00 each, which are listed on the Shanghai Stock Exchange;

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, 74.33% of the equity interest of which is owned by us;

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;

CBEX” refers to China Beijing Equity Exchange, an approved equity exchange for the transfer of state-owned assets;

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, our wholly-owned subsidiary established under Hong Kong Law;

Chalco Iron Ore” refers to Chalco Iron Ore Holding Limited, our subsidiary until December 2013 when we disposed of 65% of its equity interest to Chinalco;

Chalco Liupanshui” refers to Chalco Liupanshui Hengtaihe Mining Co., Ltd., 49% of the equity interest of which is owned by us;

Chalco Mining” refers to Chalco Mining Co., Ltd., 18.86% of the equity interest of which is owned by us;

Chalco Nanhai” refers to Chalco Nanhai Alloy Company, 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;

iii

Chalco Shandong” refers to Chalco Shandong Co., Ltd., 69.20% of the equity interest of which is owned by us;

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 Xing County Alumina Project” refers to the Bayer process production system and ancillary facilities at Xing County, Lv Liang City of Shanxi Province with production capacity of 800,000 tonnes of metallurgical grade alumina per year;

“Chalco Zhongzhou” refers to Chalco Zhongzhou Aluminum Co., Ltd., 63.10% of the equity interest of which is owned by us;

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 United Assets Appraisal” refers to China United Assets Appraisal Group Co., Ltd., a PRC qualified valuer;

Chinalco” and “Chinalco Group” refer 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;

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;

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;

iv

Gansu Huayang” refers to Gansu Huayang Mining Development Company Limited, 70% of the equity interest of which is owned by us;

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 Yuneng” refers to Guizhou Yuneng Mining Co., Ltd., 25% of the equity interest of which is owned by us;

H Shares” refers to overseas listed foreign shares 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., a subsidiary of Baotou Aluminum;

Japanese Yen” refers to the lawful currency of Japan;

Jiaozuo Wanfang” refers to Jiaozuo Wanfang Aluminum Manufacturing Co. Ltd.;

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 from April 2007 until July 2007 when it was divided into two wholly-owned entities: Lanzhou branch and Northwest Aluminum;

Liancheng branch” refers to our wholly-owned branch, which was formerly known as Lanzhou Liancheng Longxing Aluminum Company Limited, before we acquired 100% of its equity interest;

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;

v

Nanchu” refers to ENanchu (http://www.enanchu.com/), an 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;

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;

Rio Tinto” refers to Rio Tinto plc, a company incorporated in England and Wales, the shares of which are listed on the London Stock Exchange and the New York Stock Exchange;

RMB” and “Renminbi” refer to the lawful currency of the PRC;

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;

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., formerly a wholly-owned subsidiary of our Group. We disposed of 50% of the equity interest in Shanxi Huaxing in 2015, and as a result Shanxi Huaxing has become our joint venture in accordance with relevant accounting standards;

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 seven 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, Niucaogou mine and Xiwupu mine in Shanxi Province;

vi

SHFE” refers to the Shanghai Futures Exchange;

Simandou Project” refers to the project to develop and operate the Simandou iron ore mine located in Guinea in West Africa as further described in the Simandou joint development agreement dated July 29, 2010, entered into among Rio Tinto, Rio Tinto Iron Ore Atlantic Limited and us for the purpose of development of the Simandou Project;

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;

Zhangze Electric Power” refers to Shanxi Zhangze Electric Power Co., Ltd., which owns 14.02% of equity interest in Shanxi New Material;

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;

Zunyi Alumina” refers to Chalco Zunyi Alumina Co., Ltd., 73.28% of the equity interest of which is owned by us; and

Zunyi Aluminum” refers to Zunyi Aluminum Co., Ltd., 62.10% 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 RMB6.5063 to US$1.00, the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board for December 29, 2017. 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. See “Item 3. Key Information - A. Selected Financial Data - Exchange Rate Information” for historical exchange rates between Renminbi and U.S. dollar.

Any discrepancies in any table between the amounts identified as total amounts and the sum of the amounts listed therein are due to rounding.

vii

PART I

Item 1.  Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2.  Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

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, 2016 and 2017, and the selected consolidated statements of comprehensive income (except for earnings per ADS) and consolidated cash flow data for the years ended December 31, 2015, 2016 and 2017, 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, 2013, 2014 and 2015 and the selected consolidated statements of comprehensive income (except for earnings per ADS) and consolidated cash flow data for the years ended December 31, 2013 and 2014 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.

We disposed of substantially all of our aluminum fabrication operations to Chinalco in June 2013. As a result, the operating results of our aluminum fabrication segment were presented as a discontinued operation in our consolidated statement of comprehensive income for the year ended December 31, 2013. As the business combination under common control incurred in the years ended December 31, 2015, 2016 and 2017, the comparative financial data for the years ended December 31, 2013, 2014, 2015 and 2016 are revised to reflect the business combination under common control.

   For the Year Ended December 31,
   2013  2014  2015  2016  2017  2017
   RMB  RMB  RMB  RMB  RMB  US$
   (in thousands, except per share and per ADS data)
Consolidated Statements of Comprehensive Income Data
Revenue    169,941,495    142,244,119    123,667,667    144,228,916    180,080,750    27,677,904 
Continuing Operations                              
Cost of sales    (167,201,987)   (141,617,985)   (121,172,307)   (133,674,345)   (165,675,021)   (25,463,784)
Gross profit    2,739,508    626,134    2,495,360    10,554,571    14,405,729    2,214,120 
Selling and distribution expenses    (1,878,719)   (1,770,459)   (1,787,815)   (2,069,430)   (2,342,484)   (360,033)
General and administrative expenses    (2,959,390)   (4,854,547)   (2,358,789)   (3,360,710)   (4,568,246)   (702,127)
Research and development expenses    (193,620)   (293,766)   (168,870)   (168,862)   (494,590)   (76,017)
Impairment loss on property, plant and equipment    (501,159)   (5,679,521)   (10,011)   (57,080)   (15,632)   (2,403)
Other income    805,882    832,239    1,787,774    745,269    342,171    52,591 
Other gains, net    7,399,252    356,045    5,023,553    166,383    319,996    49,182 
Operating profit/(losses) from continuing operations   5,411,754    (10,783,875)   4,981,202    5,810,141    7,646,944    1,175,313 
Finance costs, net    (5,278,318)   (5,705,117)   (5,167,030)   (4,204,179)   (4,483,630)   (689,121)
Operating profit/(loss) from continuing operations less finance costs    133,436    (16,488,992)   (185,828)   1,605,962    3,163,314    486,192 
Share of profits and losses of joint ventures    148,749    89,510    23,238    (95,508)   8,151    1,253 
Share of profits and losses of associates    511,869    350,575    284,531    115,091    (165,249)   (25,398)
Profit/(loss) before income tax from continuing operations    794,054    (16,048,907)   121,941    1,625,545    3,006,216    462,047 
Income tax (expense)/benefit from continuing operations    (339,551)   (1,076,973)   225,961    (404,172)   (642,267)   (98,715)
Profit/(loss) for the year from continuing operations    454,503    (17,125,880)   347,902    1,221,373    2,363,949    363,332 
1

 

   For the Year Ended December 31,
   2013  2014  2015  2016  2017  2017
   RMB  RMB  RMB  RMB  RMB  US$
   (in thousands, except per share and per ADS data)
Profit/(loss) per share from continuing operations    0.05    (1.20)   0.01    0.02    0.09    0.0138 
Discontinued operation (loss)/profit for the year from discontinued operation    228,334    —      —      —      —      —   
Profit/(loss) for the year    682,837    (17,125,880)   347,902    1,221,373    2,363,949    363,332 
Profit/(loss) attributable to:                              
Owners of the parent    907,249    (16,293,309)   129,511    368,412    1,378,435    211,862 
Non-controlling interests    (224,412)   (832,571)   218,391    852,961    985,514    151,471 
Dividends    —      —      —      —      —      —   
Basic and diluted earnings/(loss) per share    0.07    (1.20)   0.01    0.02    0.09    0.0138 
Earnings/(loss) per ADS    1.68    (30.12)   0.22    0.43    2.13    0.3270 
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,
   2013  2014  2015  2016  2017  2017
   RMB  RMB  RMB  RMB  RMB  US$
   (in thousands, except per share and per ADS data)
Consolidated Statements of Financial Position Data
Total current assets    63,487,130    63,725,469    64,489,886    66,486,679    68,349,306    10,505,096 
Total non-current assets    138,281,995    131,498,619    127,930,459    124,024,763    131,797,310    20,256,876 
Total assets    201,769,125    195,224,088    192,420,345    190,511,442    200,146,616    30,761,972 
Total current liabilities    97,295,050    105,020,284    82,128,972    83,179,841    89,976,902    13,829,197 
Total non-current liabilities    49,092,354    48,839,310    58,357,586    51,544,793    44,655,835    6,863,476 
Total liabilities    146,387,404    153,859,594    140,486,558    134,724,634    134,632,737    20,692,673 
Net assets    55,381,721    41,364,494    51,933,787    55,786,808    65,513,879    10,069,299 
Long-term interest bearing loans and borrowings (excluding current portion)    46,294,828    44,774,211    54,000,874    47,322,748    40,289,703    6,192,414 
Capital stock    13,524,488    13,524,488    14,903,798    14,903,798    14,903,798    2,290,672 

 

   For the Year Ended December 31,
   2013  2014  2015  2016  2017  2017
   RMB  RMB  RMB  RMB  RMB  US$
   (in thousands)
OTHER FINANCIAL DATA
Net cash flows generated from operating activities    8,298,677    13,729,139    7,317,746    11,530,400    13,127,777    2,017,702 
Net cash flows (used in)/generated from investing activities    (8,530,126)   (5,140,277)   2,392,555    (4,998,596)   (7,133,382)   (1,096,381)
Net cash flows generated from/(used in) financing activities    2,533,315    (3,805,258)   (5,448,013)   (3,671,920)   (1,835,878)   (282,169)
Net increase in cash and cash equivalents    2,301,866    4,833,604    4,262,288    2,859,884    4,158,517    639,152 

 

Exchange Rate Information

The following table sets forth information concerning exchange rates between Renminbi and U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve H.10 Statistical Release. On April 13, 2018, the exchange rate for Renminbi was US$1.00 = RMB6.2725.

2

Period Period End  Average(1)  High  Low
     (RMB per US$1.00)   
2013  6.0537   6.1412   6.2438   6.0537 
2014  6.2046   6.1704   6.2591   6.0402 
2015  6.4778   6.2869   6.4896   6.1870 
2016  6.9430   6.6549   6.9580   6.4480 
2017  6.5063   6.7569   6.9575   6.4773 
September  6.6533   6.5690   6.6591   6.4773 
October  6.6328   6.6254   6.6533   6.5712 
November  6.6090   6.6200   6.6385   6.5967 
December  6.5063   6.5932   6.6210   6.5063 
2018                
January  6.2841   6.4233   6.5263   6.2841 
February  6.3280   6.3183   6.3471   6.2649 
March  6.2726   6.3174   6.3565   6.2685 
April (through April 13, 2018)  6.2725   6.2889   6.3045   6.2655 

 

   
(1)Annual average is calculated by averaging the rates on the last business day of each month during the annual period. Monthly averages are calculated by averaging the rates on each business day during the month.

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.

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. 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, 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. 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. 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.

3

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 historically fluctuated and are expected to continue fluctuating in response to general economic conditions, supply and demand and the level of global inventories, 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 2015 to a high of US$354.5 per tonne and a low of US$200 per tonne and a high of US$1,959.1 per tonne and a low of US$1,423.5 per tonne, respectively, and further declined in 2016 to 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. As a result, the average external selling prices for our self-produced alumina and primary aluminum were RMB2,875 per tonne and RMB14,629 per tonne respectively in 2017, which increased by approximately 43% and 20%, respectively, as compared to the prices in 2016. There is no assurance that there will not be any further 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. 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.

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. 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.” 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, including our credit ratings. 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 including 2015, 2016 and 2017, we recorded a net loss of approximately RMB17.1 billion in 2014, and 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. Failure to obtain sufficient funding at reasonable costs and on acceptable terms for our development plans could adversely affect our business and prospects.

4

Our historical results may not be indicative of our future prospects.

In the past few years, we have entered into a new business segment and streamlined our existing business to focus on the productions of alumina and primary aluminum. For instance, in 2013, we acquired an aggregate of 70.82% of the equity interest in Ningxia Energy, 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. After the acquisition of Ningxia Energy, we established an energy segment in January 2013 to include (i) operations of Ningxia Energy and (ii) our other energy related operations that were formerly included in our corporate and other operating segment. In November 2015, we acquired relevant assets and liabilities of High-Purity Aluminum Plant and Light Metal Material Plant of Baotou Aluminum Group. Baotou Aluminum Group is a subsidiary of Chinalco. In addition, in line with our development strategy to focus on the development of our core business in alumina and primary aluminum production, where we have an established leading market positions, and to reduce future capital expenditures on iron ore development, improve asset-to-debt ratio and generate expected cash flows, we disposed of our 65% equity interest in Chalco Iron Ore to a wholly-owned subsidiary of Chinalco on December 26, 2013. In December 2015, we transferred a 50% equity interests in Shanxi Huaxing, a wholly owned subsidiary of our Company, through the Shanghai United Assets and Equity Exchange at a price of RMB2,351 million. Pursuant to a resolution passed at the 2015 second general meeting of the Company held on December 29, 2015, the proceeds raised from the disposal of the equity interests in Shanxi Huaxing would be used for permanent replenishment of liquidity required for the operation of the Company. In May 2017, we and Chinalco entered into an equity transfer agreement pursuant to which we have agreed to acquire Chinalco’s 40% equity interests in Chinalco Shanghai, which primarily engages in trading and management of engineering projects, to implement our strategic layout and business development plan. Chinalco Shanghai became our wholly-owned subsidiary upon completion of the transfer. For further details, 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. In addition, 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. As a result, our historical results may not be indicative of our future prospects and results of operations.

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 invested in business expansion in line with our development strategy through organic growth, acquisitions and joint 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. For example, we have successfully enhanced our energy-related operations through the acquisition of Ningxia Energy in 2013 and participation in joint ventures and strategic investments in coal mining since 2010.

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 PRC laws;
5

maintain adequate control on our business expansion to prevent, among other things, project delays or cost overruns;
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.

Our joint ventures and strategic investment may not be successful.

We may from time to time enter into joint ventures or make strategic investment to grow our business and operations. For example, since 2010, we have participated in joint ventures and strategic investment 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. In addition, we have acted as joint venture partner or strategic investor in certain projects which engage in primary aluminum, aluminum alloy and light alloy manufacturing to diversify our product offering, strategically position ourselves along the industrial chain and facilitate our enterprise transformation and upgrade. For further details of these projects, please see “Item 4. Information on the Company - D. Property, Plants and Equipment – Our Expansion.”

6

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 which operate coal mines were facing increasing risks in recent years. Due to more stringent regulations on environmental protection, imbalances between supply and demand in the coal market and level of inventory, coal prices declined in 2015. In the first half of 2016, the coal prices continued their downward trend 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. However, we cannot assure you the coal price will continue to increase or maintain at the current price level in the future. If coal prices decrease in the future, the business, financial condition and results of operations of these joint ventures which operate coal mines may be adversely affected.

We are implementing the proposed asset restructuring, the finalization of which is still subject to uncertainty.

We are in the process of implementing the proposed asset restructuring. On December 4, 2017, we entered into certain investment and debt conversion agreements with several investors (the “Restructuring Investors”). Pursuant to these agreements, in December 2017, certain of the Restructuring Investors made cash contributions to our subsidiaries, Chalco Shandong, Chalco Zhongzhou, Baotou Aluminum and Chalco Mining (together the “Target Subsidiaries”), while the principal of loans owed by Chalco Mining to some of the Restructuring Investors prior to signing of the investment and debt conversion agreements was converted into equity interest in Chalco Mining held by these investors. Subsequently, on January 31, 2018, we entered into equity purchase agreements with the Restructuring Investors pursuant to which we have agreed to purchase all their equity interest in the Target Subsidiaries with consideration in the form of our A shares to be issued to the Restructuring Investors. Cash contributions received from the investors have been used by us for the repayment of loans. The proposed asset restructuring has helped reduce the gearing ratios of these subsidiaries and the Group as a whole.

The completion of the issuance of additional A Shares to these investors is still conditioned upon various factors, including the approval by SASAC and CSRC, and the general and class approvals by shareholders of the Company. Please refer to “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 further details.

There is no assurance as to whether and when these approvals will be obtained, or whether the asset restructuring can be completed without undue delays or at all. In addition, we may continue to incur high gearing ratios in the future and our exposure to liquidity risk may restrict our ability to make capital expenditure or develop business opportunities in the future, which may adversely affect our results of operations and financial positions.

7

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 remoulding 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. In February 2017, the PRC government issued the 2017 Working Plan of Air Pollution Prevention and Control for Beijing-Tianjin-Hebei and Surrounding Areas to improve regional air quality and strengthen air pollution control in the winter heating season. Accordingly, the output of and the utilization rates of production facilities at Chalco Shandong, Chalco Mining and Chalco Zhongzhou in the winter heating season have been reduced. 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.

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 2015 and 2016, we recorded impairment loss of property, plant and equipment of RMB10.0 million and RMB57.1 million, respectively. In 2017, we recorded impairment loss of property, plant and equipment of RMB15.6 million and impairment losses of intangible assets of RMB8.1 million. 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. The price of electricity sold by grid operators is set by the PRC government. In recent years, the PRC government has implemented various rules and measures in relation to the electricity system reform. Pursuant to these rules, we have been authorized to purchase electricity we consume directly from electric power plants at negotiated prices, which have been lower than the price of electricity purchased from grid operators. However, due to the increase of coal price in 2017 which has resulted in a general increase of price of electricity in the same period, our average electricity cost per kWh of our primary aluminum smelters still increased by approximately 21% in 2017 from the level in 2016. There is no assurance that the PRC government will not introduce further changes to these rules and measures from time to time which may affect the price of electricity and increase our average electricity cost, or that other factors 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.

8

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. In addition, our average purchase price per unit tonne of thermal coal used in our alumina production increased by approximately 42% in 2017 from the level in 2016. If we are unable to pass on increases 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.

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 profit or loss arising from increased or decreased demand for our products and indirectly, from 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 3.2% of our total revenues in 2017 (after elimination of inter-segment sales), we might still be affected by the growth of 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.

9

We may not be able to continue competing successfully in the markets in which we operate.

In 2017, we sold all of our self-produced alumina and primary aluminum to domestic customers. Our alumina (with chemical alumina products included) and primary aluminum production represented approximately 20.5% and 9.8%, respectively, of total domestic production in China in 2017. 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, including the bauxite mining projects in Laos and Indonesia. 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.

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; 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; 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 Government of Indonesia 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.

10

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 may cause interruption to the transportation system, which could in turn affect the transportation of our products. 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.

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 programmes 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 programme 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 programme 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, 2017, we had approximately RMB62.8 billion in outstanding short-term bonds and short-term bank borrowings (including the current portion of long-term bank and other borrowings) and RMB40.3 billion in outstanding long and medium-term bonds and long-term bank and other borrowings (excluding the current portion of these borrowings). Please see Note 19 to our audited consolidated financial statements for more detailed information about our borrowings. 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. We cannot assure you that our business 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 of US$350 million in aggregate principal amount of 6.625% senior perpetual capital securities and US$500 million in aggregate principal amount of 4.25% senior perpetual capital securities (altogether, the “Securities”) in October 2013 and November 2016, respectively, through Chalco Hong Kong Investment Company Limited (the “Bond Issuer”) with guarantees to the repayment obligations of the Securities provided by Chalco Hong Kong and its certain subsidiaries (the “Subsidiary Guarantors”). Please refer to “Item 4. Information on the Company - A. History and Development of the Company - Senior Perpetual Capital Securities Offering” for further details. 

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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 Guarantors’ 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.

The Securities are guaranteed by Chalco Hong Kong and its certain subsidiaries. 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 these subsidiary guarantors or pledgers. 

In addition to the Securities, our Company issued RMB2,000 million in aggregate principal amount of 5.50% perpetual medium-term notes (the “2015 Perpetual Medium-term Notes”) in China. Pursuant to the terms of the 2015 Perpetual Medium-term Notes, 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. Therefore, our ability to pay dividends in respect of our ordinary shares and the ADSs may be limited under certain circumstances.

The interests of our controlling shareholder who exerts significant influence over us may conflict with ours.

As of December 31, 2017, our largest shareholder, Chinalco, directly owned 32.81% of our issued share capital and indirectly owned an additional 1.96% 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, Chinalco and a number of its subsidiaries and associates 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. 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.

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.

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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 received an administrative penalty of RMB100,000 from Lanzhou Municipal Environmental Protection Bureau due to the fact that our Lanzhou branch did not conduct the application registration for storage of residues generated from overhaul of electrobath according to relevant requirements. We paid such penalty in full in November 2017. In December 2017, the Ministry of Environmental Protection of China posted on its website request for our Lanzhou branch to complete the rectification process by March 31, 2018. We started the rectification process in December 2017 and completed as requested through a series of measures, including, among others, relocation of the non-compliantly-stowed overhaul residues to plants in compliance with applicable 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.

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.

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 remoulding certain production facilities. Due to serious haze hovering in certain areas in China, the government of the PRC has issued and may continue to issue rules and regulations to restrict production of certain industries in certain areas to alleviate air pollution. For example, in February 2017, the PRC government issued the 2017 Working Plan of Air Pollution Prevention and Control for Beijing-Tianjin-Hebei and Surrounding Areas to improve regional air quality and strengthen air pollution control in the winter heating season. Accordingly, we have reduced the output of Chalco Shandong, Chalco Mining and Chalco Zhongzhou in the winter heating season. 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, the Ministry of Industry and Information Technology of the PRC (“MIIT”) issued the Standard Conditions for Aluminum Industry, which sets forth various standards for existing and new projects, including standards for environment protection, energy consumption, and utilization of resources. Although we have been in compliance with the 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. 

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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, 2017, the book value of our properties with defective titles is RMB6,942 million, which represents approximately 3.47% 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, 2017, the book value of these land parcels is RMB516 million, representing approximately 0.26% 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.

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 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 2017, we only engaged in the export of certain chemical alumina products to foreign countries including South Korea and India and revenues generated from such export accounted for approximately 0.5% of our total revenues in 2017. Such foreign jurisdictions and other countries, such as the United States, may take restrictive measures, including, among others, imposition of tariffs, anti-dumping duties and other non-tariff barriers, to protect their own markets. Our sales 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. 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.

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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. 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. 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 than disputes with counterparties in the private sector, and payments from these entities and organizations may be delayed as a result.

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.

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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.

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;
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.

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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.

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 continually work to safeguard our systems and mitigate potential risks, 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.

Our operations are affected by a number of risks relating to conducting business in the PRC.

As a significant majority 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.
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 and continued in the past few years, coupled with the on-going structural reform of the PRC economy, has led to a marked slowdown in the economic growth of the PRC. For example, the GDP growth rate of the PRC decreased from 11.4% in 2007 to 6.9% in 2017. There is no assurance that the GDP growth rate of the PRC will not further decline. A slowdown in economic growth could reduce business activities and demand for our products. In addition, the PRC government exercises control over China’s economic growth through the allocation of resources, control of payments of obligations denominated in foreign currencies and monetary and tax policies. Some of these measures benefit the overall economy of China, but may have a materially adverse impact on us.
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 crisis with increasing pressure on the Renminbi to appreciate. 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 People’s Bank of China further 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. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. Any appreciation or depreciation of the Renminbi will affect the value of our U.S. dollar-denominated borrowings and overseas investments, the prices of our export sales denominated in foreign currencies and the Renminbi equivalent value of our trade and notes receivable denominated in foreign currencies, which may 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.
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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. The overall effect of legislation over the past decades has significantly enhanced the protections afforded to foreign investors in general. However, because these laws, rules and regulations are relatively new, and because of the relatively limited volume of published cases and their non-binding nature, and because the laws, rules and regulations often give the relevant administrative and court authorities significant discretion in how to interpret and enforce them, uncertainties regarding the interpretation and enforcement of these laws, rules and regulations may adversely affect our operations.

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 US 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.

The inability 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.

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.

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.

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 seven subsidiaries mainly engaged in bauxite mining; one integrated alumina and primary aluminum production plant; eight stand-alone alumina refineries; eight stand-alone primary aluminum smelters; two 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.

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.

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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.

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. As of the date of this annual report, the payment had been fully settled by Chinalco.

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. As of the date of this annual report, the payment had been fully settled by Northwest Aluminum Fabrication Plant.

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. As of the date of this annual report, the payment had been fully settled by Guizhou Aluminum Plant.

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.

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Disposal of Equity Interest in Shanxi Huaxing

The proceeds from the private placement of A Shares was proposed to invest in Chalco Xing County Alumina Project, the Chalco Zhongzhou Bayer Ore-dressing Process Expansion Construction Project, and the replenishment of our working capital. 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 the 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 Group entered into an equity transfer agreement with Shenzhen CR Yuanta Asset Management Co., Ltd., a state- 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 price was determined based on the appraisal value provided by an independent qualified appraisal company. According to the 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 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.

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 electrolytic aluminum plant of Guizhou branch shall be transferred to the respective land resources and reserve authorities, Guizhou branch agreed to sell the relevant assets, including buildings and structures located on the land occupied by the electrolytic 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.

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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. In 2016 and 2017, we 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. In 2016 and 2017, the total proceeds from gold leasing financing, which will be used to replenish working capital for our production and operation, amounted to RMB10.8billion.

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.”

Overseas Development

On July 29, 2010, we entered into a joint development agreement with Rio Tinto and Rio Tinto Iron Ore Atlantic Limited, an affiliate of Rio Tinto, for the development and operation of the Simandou Project, a premium open-pit iron ore mine located in Guinea, West Africa. This agreement provides that we (via our subsidiary) would acquire 47% of the equity interest in a joint venture company to be incorporated by Rio Tinto for an earn-in payment of US$1.35 billion, and Rio Tinto would transfer its entire 95% of the equity interest in its project company for the Simandou Project, Simfer S.A., to the joint venture company.

On April 22, 2011, Rio Tinto Mining & Exploration Limited, a wholly-owned subsidiary of Rio Tinto, Simfer S.A. and the Government of Guinea entered into a settlement agreement, which, amongst other things, provided that the Government of Guinea would be entitled to acquire up to 35% of the equity interest in Simfer S.A. On November 28, 2011, we, through Chalco Hong Kong, established Chalco Iron Ore under the laws of Hong Kong with the China-Africa Development Fund and three leading PRC enterprises in the steel, port building and railway construction industries to serve as an investment vehicle for investing in the Simandou Project. We, through Chalco Hong Kong, hold 65% and the other investors collectively hold 35% of the equity interest in Chalco Iron Ore.

Following the approvals of the relevant PRC authorities in March and April 2012, Chalco Hong Kong contributed approximately US$878 million to Chalco Iron Ore, representing 65% of the US$1.35 billion earn-in to be paid by Chalco Iron Ore to Simfer Jersey Limited, the joint venture company incorporated by Rio Tinto under the laws of Jersey to implement the joint development agreement, as amended. On April 24, 2012, Chalco Iron Ore paid in full the total earn-in payment of US$1.35 billion to Rio Tinto and acquired its 47% equity interest in Simfer Jersey Limited. Simfer Jersey Limited currently holds 95% of the equity interest in Simfer S.A., with the remaining 5% being held by International Finance Corporation. In addition, during the period from May 2012 to the end of 2013, Chalco Iron Ore injected approximately US$561.5 million in the form of capital contribution based on its proportion of equity interest to Simfer Jersey Limited for the development and operation of the Simandou Project pursuant to the joint development agreement, as amended. Meanwhile, the other shareholder of Simfer Jersey Limited also injected the capital contribution based on its proportion of equity interest to Simfer Jersey Limited. On October 18, 2013, we entered into a share purchase agreement with Chinalco and its wholly-owned subsidiary, Aluminum Corporation of China Overseas Holdings Limited (“Chinalco Overseas Holdings”), to dispose of 65% of the equity interest in Chalco Iron Ore and transfer outstanding bank loans provided by China Development Bank Corporation (“CDB”) to Chinalco Overseas Holdings for a consideration of US$2,066.5 million (the “Equity Interest”) and US$438.8 million (the “Loan Consideration”), respectively. The bank loans were used for Chalco Hong Kong’s capital contribution in Chalco Iron Ore. The Equity Interest was determined with reference to 65% of the valuation of Chalco Iron Ore and the Loan Consideration was determined based on the principal amount of such outstanding bank loans as shown in the financial statements of Chalco Hong Kong.

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We believe that such disposal will enable us to focus on the development of our core business of alumina and primary aluminum operations, where we have established leading market positions, and to reduce future capital expenditures on iron ore development and to improve asset-to-debt ratio and generate expected cash flows. Pursuant to the agreement, in the event that we obtain the consent from CDB on the transfer of the bank loans, Chinalco agreed to pay the consideration for the Equity Interest in five installments, namely, US$438.8 million (which will be net off by the Loan Consideration), US$387.9 million, US$413.3 million, US$413.3 million and US$413.3 million, with the relevant interests at the London Interbank Offered Rate plus 0.9%, with the last installment to be paid by December 31, 2017. The transactions were approved at the 2013 second extraordinary general meeting held on November 29, 2013. We obtained the consent from Rio Tinto relating to such disposal on December 19, 2013. We completed the transactions on December 26, 2013. As of the date of this annual report, the bank loans had been transferred to net off the first installment and Chinalco had paid all five installments.

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, Chalco Zhongzhou 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 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 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 Shares of the Company was increased from 13,524,487,892 to 14,903,798,236.

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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 will 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.

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 was 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 was RMB2,000 million and will be 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.

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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.

Proposed Issuance of H Shares

On June 28, 2017, our shareholders at the 2016 annual general meeting passed a special resolution, which will remain valid until the earliest of (i) the conclusion of our next 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.

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.

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 and a new partnership agreement in relation 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, 2017, the Industry Fund had made debt investments in two of our associates and two of our joint ventures with a total amount of RMB5,600 million, of which we had contributed RMB1,848 million.

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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, Chalco Zhongzhou, 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, Chalco Zhongzhou, 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 within 12 months after signing of the Initial Agreements based on terms to be further negotiated and agreed upon. 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 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. The Proposed Issuance is subject to SASAC and CSRC approvals and the general and class approvals by shareholders of the Company.

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 the Group as a whole.

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 growth of the PRC aluminum market, one of the world’s fastest growing major aluminum markets. 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), 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 and 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, energy segment, trading segment and corporate and other operating segment accounted for approximately 7.6%, 20.3%, 3.2%, 68.6% and 0.3%, respectively, of our total revenues in 2017.  

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Our alumina segment includes the mining and purchasing of bauxite and other raw materials, and production and sale of alumina as well as alumina-related products, such as alumina hydrate, alumina-based chemical products and gallium. Alumina accounted for approximately 81.8% of our total production volume for this segment in 2017. Chemical alumina products are used in the production of chemical, pharmaceutical, ceramic and construction materials. In the process of refining bauxite into alumina, we also produce gallium as a by-product. Gallium is a rare, high value metal with applications in the electronics and telecommunication industries.

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 electrolytic aluminum products. Our principal primary aluminum products are ingots, molten aluminum and aluminum alloys, which accounted for approximately 24%, 44% and 32%, respectively, of our total production volume of primary aluminum in 2017. 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.

Our trading segment is mainly engaged in the trading of alumina, primary aluminum, other non-ferrous metal products, and crude fuels such as coal products, as well as supplemental materials 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.

Our energy segment includes coal mining and power generation, including conventional coal-fire power generation and renewable energy generation such as wind power and photovoltaic 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. In 2017, 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, including power generation enterprises and cement plants.

Our corporate and other operating segment mainly includes corporate and other aluminum-related research, development, and other activities of the Group.

Our Production Capacity

As of December 31, 2017, our annual alumina production capacity and primary aluminum production capacity was approximately 16.86 million tonnes and 3.93 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, 2017

Plant

Alumina

Primary
Aluminum

  (in thousand tonnes)(1)
Guangxi branch 2,210 -

 

 

28

 

 

 

As of December 31, 2017

Plant

Alumina

Primary
Aluminum

  (in thousand tonnes)(1)
Chalco Zhongzhou 3,050 -
Qinghai branch - 420
Guizhou branch - 170
Chalco Mining 2,410 -
Chalco Shandong 2,270 -
Zunyi Alumina 1,000 -
Chongqing branch 800 -
Shanxi New Material 2,600 424
Lanzhou branch - 450
Shanxi Huasheng - 240
Zunyi Aluminum - 375
Shandong Huayu - 200
Baotou Aluminum(2) - 1,100
Zhengzhou Institute 20 -
Liancheng branch - 550
Guizhou Huajin 1,600 -
Xinghua Technology

900

-

Total

16,860

3,929

 

   
(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 2017, we produced approximately 12.81 million tonnes of alumina and 3.61 million tonnes of primary aluminum. Our production of alumina (with chemical alumina products included) and primary aluminum represented approximately 20.5% and 9.8%, respectively, of the total output of alumina (with chemical alumina products included) and primary aluminum in China in 2017.

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

2015

2016

2017

  (in thousand tonnes, except Gallium)
Alumina segment      
Alumina 13,296 12,027 12,810
Chemical alumina products 1,959 2,479 2,853
Gallium (in tonnes) 121 71 72
Primary aluminum segment      
Primary aluminum(1) 3,308 2,953 3,607
Carbon 1,787 1,680 1,962

 

   
(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).

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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.

Production Facilities

Alumina

We currently operate nine alumina refineries and one research institute with a total designed annual production capacity of approximately 16.86 million tonnes as of December 31, 2017. One of our refineries is integrated with primary aluminum smelters. In 2017, we produced approximately 12.81 million tonnes of alumina, approximately 2.85 million tonnes of chemical alumina products and approximately 72 tonnes of gallium. The overall utilization rate for our refineries was 81% as of December 31, 2017. In 2017, we supplied approximately 5.71 million tonnes, or 45% of our total production of alumina to our own smelters and sold the remaining alumina to other domestic smelters. All of the chemical alumina products that we produced in 2017 were sold by alumina refineries directly to external customers or internally to Chalco Trading for subsequent external trading.

The following table sets forth the annual production capacity, output of alumina and chemical alumina products, utilization rate of and production process applied in each of our alumina refineries and our Zhengzhou Institute:

 

As of December 31, 2017

For the Year Ended December 31, 2017

 

Annual
Production
Capacity(1)

Utilization
Rate(2)

Alumina
Production
Output

Chemical
Alumina
Products
Output

Production Process
  (in thousand tonnes, except percentages)
Shanxi New Material 2,600 100% 1,845.97 68.35 Bayer-sintering
Chalco Mining 2,410 71% 1,627.82 130.35 Bayer-sintering
Chalco Shandong 2,270 70% 1,780.75 1,798.15 Sintering and Bayer
Chalco Zhongzhou 3,050 70% 1,929.87 581.80 Sintering and Bayer
Guangxi branch 2,210 100% 2,462.12 112.92 Bayer
Zunyi Alumina 1,000 100% 1,080.01 0.28 Bayer
Chongqing branch 800 -    - - Bayer-sintering
Zhengzhou Institute(3) 20 -    - 41.58 Bayer

 

30

  

 

 

As of December 31, 2017

For the Year Ended December 31, 2017

 

Annual
Production
Capacity(1)

Utilization
Rate(2)

Alumina
Production
Output

Chemical
Alumina
Products
Output

Production Process
  (in thousand tonnes, except percentages)
Guizhou Huajin 1,600 100% 1,600.85 -    Bayer
Xinghua Technology

900

100%

482.39

119.76

Bayer
Total

16,860

81%

12,809.78

2,853.18

 

 

   
(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 nine primary aluminum smelters in China. Our smelters had an aggregate annual production capacity of approximately 3.93 million tonnes as of December 31, 2017.

In 2017, we produced approximately 3.61 million tonnes of primary aluminum and the average utilization rate for our smelters was 98% as of December 31, 2017. 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, 2017

For the Year Ended December 31, 2017

Plant(1)

Annual
Production
Capacity(2)

Utilization
Rate(3)

Aluminum
Output(4)

Smelting Equipment
  (in thousand tonnes, except percentages)
Baotou Aluminum(5) 1,100 98% 812.86 200Ka, 240Ka, 400Ka and 500Ka pre-bake
Guizhou branch 170 96% 282.09 230Ka pre-bake
Lanzhou branch 450 98% 390.99 200Ka and 350Ka pre-bake
Qinghai branch 420 99% 401.46 180Ka and 210Ka pre-bake
Shandong Huayu 200 92% 212.82 240Ka pre-bake
Shanxi Huasheng 240 99% 224.83 300Ka pre-bake
Shanxi New Material 424 99% 436.73 300Ka pre-bake
Zunyi Aluminum 375 100% 331.16 200Ka and 400Ka pre-bake
Liancheng branch

550

97%

514.45

200Ka and 500Ka pre-bake
Total

3,929

98%

3,607.40

 

 

   
(1)As of December 31, 2017, the primary aluminum production facilities in Fushun Aluminum, Gansu Hualu and Chalco Shandong had been or were in the process of being disposed of by us. These plants did not have annual primary aluminum production capacity as of December 31, 2017. We did not produce any primary aluminum at these plants in 2017.
(2)Production capacity takes into account designed capacity, downtime for ordinary maintenance and repairs and subsequent capacity modifications.
(3)Capacity utilization rate is calculated by dividing our utilized production capacity as of the date indicated by our total designed annual production capacity.
(4)Includes ingots, molten aluminum and aluminum alloys.
(5)

Including the primary aluminum production facilities at Inner Mongolia Huayun, a subsidiary of Baotou Aluminum.

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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.

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. 2 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, to a lesser extent, international suppliers.
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On average, our refineries consumed approximately 2.26 tonnes of bauxite to produce one tonne of alumina in 2017. Our mines supplied approximately 14.68 million tonnes of bauxite to our refineries in 2017. We purchase bauxite from a number of suppliers and do not depend on any supplier for our bauxite requirements. In 2017, bauxite secured from other suppliers accounted for approximately 53.0% 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,

  2015 2016 2017
 

Bauxite
Supply

Percentage
of Bauxite
Supply

Bauxite
Supply

Percentage
of Bauxite
Supply

Bauxite
Supply

Percentage
of Bauxite
Supply

   

%

 

%

 

%

  (in thousand tonnes, except percentages)
Own mines 17,930.2 55.4 13,603.5 46.9 14,679.6 47.0
Other suppliers

14,452.0

44.6

15,384.3

53.1

16,566.5

53.0

Total

32,382.2

100.0

28,987.8

100.0

31,246.1

100.0

 

Own Mines. As of December 31, 2017, we owned and operated 18 mines in China that had approximately 249 million tonnes of aggregate bauxite reserves and we continue to explore new bauxite reserves to replenish our reserves. We also own a bauxite mine in Laos through Lao Service Mining, in which we held 60% of the equity interest. We also hold the requisite mining permit or exploration permit for two bauxite mines and are in the process of applying for mining right for PT VISITAMA 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 since September 2014 due to restraints on export of bauxite imposed by the Government of Indonesia. In 2017, the Government of Indonesia issued 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.

For the years ended December 31, 2015, 2016 and 2017, we extracted approximately 17.9 million tonnes, 14.5 million tonnes and 17.0 million tonnes, respectively, of bauxite from our mines. 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, 2015, 2016 and 2017, 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, 2017:

Mine Location Nature of
ownership
Mining
method
Permit
Renewal(1)
Present
Condition/
Current State
of Exploration
Bauxite
Production
(in thousand
tonnes)
Pingguo mine Guangxi Zhuang Autonomous Region, China 100% owned and operated by Chalco Open pit October 2030 - April 2036 Fully developed and operational 5,668
Guizhou mine(2) Guizhou Province, China 100% owned and operated by Chalco Open pit/underground March 2019 - December 2038 Partly developed and operational 1,410
Zunyi mine Guizhou Province, China 100% owned and operated by Chalco Open pit/underground February 2020 – August 2027 Partly developed and operational 496
Xiaoyi mine Shanxi Province, China 100% owned and operated by Chalco Open pit December 2017(3) - May 2035 Fully developed and operational 1,771
Shanxi Other Mines Shanxi Province, China 100% owned and operated by Chalco Open pit/underground September 2017(3) - July 2035 Fully developed and operational 289
Mianchi mine Henan Province, China 100% owned and operated by Chalco Open pit/underground May 2018 - October 2031 Partly developed and operational 408
Luoyang mine Henan Province, China 100% owned and operated by Chalco Open pit/underground December 2015(3) - October 2031 Partly developed and operational 779

 

33

 

 

Mine Location Nature of
ownership
Mining
method
Permit
Renewal(1)
Present
Condition/
Current State
of Exploration
Bauxite
Production
(in thousand
tonnes)
Xiaoguan mine Henan Province, China 100% owned and operated by Chalco Open pit/underground August 2018 - October 2031 Fully developed and operational 640
Gongyi mine Henan Province, China 100% owned and operated by Chalco Open pit/underground August 2017(3) - April 2029 Fully developed and operational 668
Dengfeng mine Henan Province, China 100% owned and operated by Chalco Open pit/underground July 2016(3) - July 2019 Partly developed and operational 423
Xinmi mine Henan Province, China 100% owned and operated by Chalco Open pit/underground July 2017(3) - July 2020 Fully developed and operational 42
Sanmenxia mine Henan Province, China 100% owned and operated by Chalco Underground November 2018 - April 2027 Fully developed and operational 468
Xuchang mine Henan Province, China 100% owned and operated by Chalco Open pit/underground February 2017(3) - August 2024 Partly developed and operational 90
Jiaozuo mine Henan Province, China 100% owned and operated by Chalco Open pit/underground September 2018 - October 2024 Partly developed and operational 430
Pingdingshan mine(4) Henan Province, China 100% owned and operated by Chalco Open pit/underground June 2017(3) - October 2024 Partly developed and operational 521
Yangquan mine Shanxi Province, China 100% owned and operated by Chalco Open pit September 2031 - May 2036 Fully developed and operational 2,880
Nanchuan mine Chongqing Municipality, China 100% owned and operated by Chalco Underground May 2017(3) - November 2026 Suspended production -
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 December 2015 In the process of acquiring mining right -
Laos bauxite mine Attapeu Province and Sekong Province, Laos Owned and operated by Lao Service Mining Co., Ltd., a 60% subsidiary of Chalco Open pit June 2017(4) Exploration completed -

 

   
(1)All conditions to retain our properties or leases have been fulfilled as of December 31, 2017. Each mine may be covered by one or more mining permits or exploration permits and the range of permit renewal dates is set forth above.
(2)Including both Guizhou No. 1 mine and Guizhou No. 2 mine.
(3)We are in the process of renewing these permits.
(4)We are applying for extension to the mineral right to the Laos bauxite mine.

 

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 and Laos, neither proven nor probable reserves have been established as of the date of this annual report. The following table sets forth certain estimated details of the reserves for our mines in China as of December 31, 2017:

34

Mine

Reserves (1)(2)
(million tonnes)

Al2O3

S1O2

Ratio of
Average A/S(3)

Pingguo mine 52.21 53.65 4.80 11.18
Guizhou No. 1 mine 1.23 65.08 11.30 5.76
Guizhou No. 2 mine 43.38 64.17 9.12 7.04
Zunyi mine 8.46 59.98 10.99 5.46
Xiaoyi mine 12.63 65.09 12.47 5.22
Shanxi Other Mines 8.95 65.82 11.97 5.50
Mianchi mine 2.99 62.59 12.91 4.85
Luoyang mine 3.30 61.04 10.18 6.00
Xiaoguan mine 25.36 63.65 15.05 4.23
Gongyi mine 2.34 64.21 13.59 4.73
Dengfeng mine 1.43 62.11 12.82 4.84
Xinmi mine 2.27 65.95 11.40 5.79
Sanmenxia mine 46.78 63.27 12.79 4.95
Xuchang mine 1.30 62.76 9.33 6.73
Jiaozuo mine 1.27 58.76 14.95 3.93
Pingdingshan mine 1.69 61.19 12.33 4.96
Yangquan mine 4.40 59.04 13.51 4.37
Nanchuan mine 29.09 60.60 13.84 4.38
Total (average) reserves 249.08 61.09 10.68 5.72
By reserve type        
Proven reserve 75.05 61.12 10.58 5.78
Probable reserve 174.03 61.08 10.72 5.70
Total (average) reserves 249.08 61.09 10.68 5.72

 

   
(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.

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 2017, we extracted approximately 17.0 million tonnes of bauxite from our 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 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 53% of our total bauxite supply in 2017.

Bauxite Procurement. The corporate management department at our headquarters is responsible for the oversight and coordination of our supply of 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, an efficient application of the Bayer process requires bauxite with an alumina-to-silica ratio of 10:1 or higher, while the Bayer-sintering process can refine bauxite with an alumina-to-silica ratio as low as 4:1. In 2017, the average alumina-to-silica ratio of the proven and probable reserves of our mines ranges from approximately 3.93:1 to 11.18:1.

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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
the market conditions relating to purchases from overseas.

The average purchase price of bauxite per tonne from our other suppliers in 2015, 2016 and 2017 was approximately RMB383, RMB328 and RMB369, respectively. The average cost of bauxite per tonne from our mines in 2015, 2016 and 2017 was approximately RMB251.6, RMB219.0 and RMB226.2, 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,

 

2015

2016

2017

  (RMB in thousands)
Capital Expenditures      
Infrastructure construction 950,980.6 478,024.6 405,920.0
Facility upgrade

62,910.9

35,222.9

24,016.9

Total

1,013,891.5

513,247.5

429,936.9

 

Primary Aluminum

An average of approximately 1.911 tonnes of alumina and 13,411 kWh of electricity was required to produce one tonne of primary aluminum ingots in 2017.

Alumina and electricity, the two principal components of costs in the smelting process, accounted for approximately 43% and 34%, respectively, of our unit primary aluminum production costs in 2017. 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 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.

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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 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.

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, 2017, we held minority interests in a number of coal mining enterprises, including Shanxi Jiexiu, Qinghai Energy, Xuehugou Coal Industry Co., Ltd., Datong Coal Group 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 mining rights for coal deposits 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, is under development. The production of Huozhou Coal Group Xingshengyuan Coal Co., Ltd. and one of the mines owned by Chalco Liupanshui is currently suspended due to production technology renovation. 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.

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, 2017, eight 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 RMB0.35/kWh in 2017, which increased by 21% compared to 2016, primarily due to the increase of coal price in 2017 which resulted in a general increase of price of electricity in the same period.

Carbon anodes and cathodes are key raw materials in the smelting process. Each of our smelters is able to produce carbon products necessary for its operations other than carbon cathodes. Guizhou branch is able to produce carbon cathodes.

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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. 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 for subsequent external trading. For all of our self-produced products that are sold either through Chalco Trading 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.

Alumina

We sell our self-produced alumina to customers primarily through Chalco Trading, 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 2017, we supplied approximately 5.71 million tonnes of alumina produced at our refineries to our smelters, which represented approximately 45% 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. We sold approximately 2.05 million tonnes of outsourced alumina in 2017.

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. Chalco Trading sells our self-produced alumina and alumina sourced from third-party suppliers to smelters throughout China. All 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 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 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.
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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.

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 neighbouring 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 at prices based on the spot prices of primary aluminum on Yangtze or Nanchu. We establish pricing guidelines for Chalco Trading 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 then coordinates the external sales of primary aluminum. Chalco Trading 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 2.02 million tonnes of outsourced primary aluminum in 2017.

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 for subsequent external trading.

We sell most of our chemical alumina products and all of gallium in China. Prices for our chemical alumina products and gallium are determined through negotiations with our customers, taking into consideration the market conditions. Our total sales of gallium in 2015, 2016 and 2017 amounted to approximately RMB28 million, RMB108 million and RMB74 million, respectively.

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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. We sold approximately 6.30 million tonnes of outsourced coal in 2017.

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, 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 2017, we sold approximately 1.51 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 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 21 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, 2017. In 2017, our Guangxi branch produced approximately 2,462,120 tonnes of alumina, along with approximately 112,920 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 uses 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. As of December 31, 2017, our Guizhou branch had an annual primary aluminum production capacity of approximately 170,000 tonnes. In 2017, our Guizhou branch produced approximately 282,090 tonnes of primary aluminum.

Our Guizhou branch also contains a modern carbon production facility, which produces carbon cathodes and carbon anodes.

Chalco Mining

Chalco Mining was incorporated as one of our subsidiaries in the PRC in 2007. Due to the proposed Asset Restructuring, we currently hold 18.86% of the equity interest in Chalco Mining. Please see “– A. History and Development of the Company – Subscription of Equity Interest of Certain Subsidiaries and Subsequent Issuance of Additional A Shares” for further details. 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 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, 2017. In 2017, Chalco Mining produced approximately 1,627,820 tonnes of alumina and 130,350 tonnes of chemical alumina products.

Chalco Shandong

Chalco Shandong was incorporated as one of our subsidiaries in the PRC in 2015. The predecessor of Chalco Shandong was our Shandong branch, which commenced operations in 1954. Due to the proposed Asset Restructuring, we currently hold 69.2% of the equity interest in Chalco Shandong. Please see “– A. History and Development of the Company – Subscription of Equity Interest of Certain Subsidiaries and Subsequent Issuance of Additional A Shares” for further details. 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. 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, 2017. It produced approximately 1,780,750 tonnes of alumina in 2017.

In addition, Chalco Shandong produces substantial amount of chemical alumina products. In 2017, it produced approximately 1,798,150 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 were completed. Chalco Shandong did not have any annual primary aluminum production capacity as of December 31, 2017 and did not produce any primary aluminum in 2017.

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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 in 1987 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. It 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 Chalco Zhongzhou 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, 2017. It produced approximately 401,460 tonnes of primary aluminum in 2017.

Chalco Zhongzhou

Located in Henan Province, Chalco Zhongzhou is a stand-alone alumina plant, located near abundant bauxite, coal and water supplies. Chalco Zhongzhou was incorporated as one of our subsidiaries in the PRC in 2015. The predecessor of Chalco Zhongzhou was our Zhongzhou branch. Due to the proposed Asset Restructuring, we currently hold 63.1% of the equity interest in Chalco Zhongzhou. Please see “– A. History and Development of the Company – Subscription of Equity Interest of Certain Subsidiaries and Subsequent Issuance of Additional A Shares” for further details. Chalco Zhongzhou 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. Chalco Zhongzhou obtains bauxite supplies partly from extractions of our mines, and partly from external suppliers in Henan and Shanxi Provinces and overseas.

Chalco Zhongzhou had an annual alumina production capacity of approximately 3,050,000 tonnes as of December 31, 2017. Chalco Zhongzhou produced approximately 1,929,870 tonnes of alumina and approximately 581,800 tonnes of chemical alumina products in 2017.

Zunyi Alumina

Zunyi Alumina is located in Zunyi, Guizhou Province. In April 2006, we entered into a joint venture agreement with Guizhou Wujiang Hydroelectric Co., Ltd., to establish a joint venture company, Zunyi Alumina. We held a 73.28% equity interest in Zunyi Alumina. Zunyi Alumina completed the construction of alumina production facilities and commenced operations in 2010. Zunyi Alumina had an annual alumina production capacity of approximately 1,000,000 tonnes as of December 31, 2017. Zunyi Alumina produced approximately 1,080,010 tonnes of alumina and 280 tonnes of chemical alumina products in 2017.

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, 2017. Chongqing branch did not produce any alumina or chemical alumina products in 2017. 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.

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, 2017. Guizhou Huajin produced approximately 1,600,850 tonnes of alumina products in 2017.

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Lanzhou Branch

Located in Lanzhou city in Gansu Province, our Lanzhou branch is a stand-alone primary aluminum plant. It was part of Lanzhou Aluminum before July 2007 and was acquired by us through share exchange in April 2007. In July 2007, Lanzhou Aluminum was divided into two entities: our Lanzhou branch and Northwest Aluminum. Our Lanzhou branch owns a primary aluminum smelting plant with a designed annual primary aluminum production capacity of approximately 450,000 tonnes as of December 31, 2017. It produced approximately 390,990 tonnes of primary aluminum in 2017.

Shanxi New Material (formerly known as Shanxi Huaze)

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, 2017 and produced approximately 1,845,970 tonnes of alumina and 68,350 tonnes of chemical alumina products in 2017. Its designed annual production capacity of primary aluminum was approximately 424,000 tonnes as of December 31, 2017 and it produced approximately 436,730 tonnes of primary aluminum in 2017. 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 240,000 tonnes as of December 31, 2017. In 2017, Shanxi Huasheng produced approximately 224,830 tonnes of primary aluminum. We currently hold 51% equity interest in Shanxi Huasheng.

Zunyi Aluminum

Zunyi Aluminum is situated in Guizhou Province. We currently hold 62.1% equity interest in Zunyi Aluminum. Zunyi Aluminum’s annual primary aluminum production capacity was approximately 375,000 tonnes as of December 31, 2017. In 2017, it produced approximately 331,160 tonnes of primary aluminum.

Fushun Aluminum

Fushun Aluminum is situated in Liaoning Province, and is 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 suspended production 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. In 2017, 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, 2017 and did not produce any primary aluminum in 2017.

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, 2017. Shandong Huayu also has supporting facilities and coal-fired generators. In 2017, Shandong Huayu produced approximately 212,820 tonnes of primary aluminum.

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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 2017, the primary aluminum production facilities in Gansu Hualu has been disposed or in the process of disposal. Gansu Hualu had no annual primary aluminum production capacity as of December 31, 2017 and did not produce any primary aluminum in 2017.

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. Due to the proposed Asset Restructuring, we currently hold 74.33% of the equity interest in Baotou Aluminum. Please see “– A. History and Development of the Company – Subscription of Equity Interest of Certain Subsidiaries and Subsequent Issuance of Additional A Shares” for further details. In April 2015, Baotou Aluminum and Baotou Transportation Investment Group Co., Ltd. established Inner Mongolia Huayun. Inner Mongolia Huayun commenced operations in 2017. Together with the primary aluminum production facilities at Inner Mongolia Huayun, Baotou Aluminum had a consolidated annual primary aluminum production capacity of approximately 1,100,000 tonnes as of December 31, 2017 and a consolidated output of approximately 812,860 tonnes of primary aluminum in 2017.

Liancheng Branch

Our 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. Our Liancheng branch had an annual primary aluminum production capacity of approximately 550,000 tonnes as of December 31, 2017. It produced approximately 514,450 tonnes of primary aluminum in 2017.

Chalco Nanhai

Established in June 2007 and located in Foshan, Chalco Nanhai specializes in aluminum fabrication. Chalco Nanhai commenced its commercial operation in 2011 and had an annual aluminum fabrication production capacity of approximately 110,000 tonnes as of December 31, 2017. Since 2015, we suspended production and have not produced any aluminum fabrication products at Chalco Nanhai.

Ningxia Energy

We acquired a 70.82% equity interest in Ningxia Energy in January 2013. Please see “Item 3. Key Information - D. Risk Factors - Our historical results may not be indicative of our future prospects.” Ningxia Energy was established in June 2003. It is an integrated power generation company with total installed capacity of 4,299 MW as of December 31, 2017. 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 2017, Ningxia Energy produced approximately 9.99 million tonnes of coal and approximately 15.85 billion kWh of electricity.

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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 institute in China dedicated to light metals research 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, 2017, 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, 2017. It produced approximately 482,390 tonnes of alumina and approximately 119,760 tonnes of chemical alumina in 2017.

Competition

Competition from Domestic Competitors

Alumina

We sold all of our self-produced alumina to domestic customers in 2017. Our competitors include other domestic and international alumina producers that conduct sales in China. In 2017, our alumina production (with chemical alumina products included) represented approximately 20.5% of total domestic production in China.

The Group is a leading enterprise in non-ferrous metal industry in China. As of December 31, 2017, 17 alumina producers in China (including Chalco) each had annual production capacity of 500,000 tonnes or above, which collectively represented approximately 96% of the total alumina production capacity in China. As of the same date, among these 17 alumina producers, 14 alumina producers (including Chalco) each had annual production capacity of one million tonnes or above, which collectively represented approximately 94% 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 “Standard Conditions for Aluminum Industry” (the “Standard Conditions”) in July 2013, which established a high entry barrier for new alumina producers in China and imposed stringent requirement for existing alumina companies.

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.
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Primary Aluminum

We derived all of our primary aluminum revenues from domestic sales in 2017. Our competitors include other domestic and international primary aluminum producers that conduct sales in China. In 2017, our primary aluminum production represented approximately 9.8% of total domestic production in China.

We are a leading enterprise in non-ferrous metal industry in China. As of December 31, 2017, 19 primary aluminum producers in China (including Chalco) each had annual production capacity of 500,000 tonnes or above, which collectively represented approximately 86% of the total primary aluminum production capacity in China. As of the same date, among these 19 primary aluminum producers, 12 primary aluminum producers (including Chalco) each had annual production capacity of one million tonnes or above, which collectively represented approximately 74% 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 Standard Conditions and other administrative regulations, new primary aluminum projects for expanding production capacity must be approved by the relevant administrative departments and must have stable supply of alumina. 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 nine 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 more sophisticated and efficient technology than most of our domestic competitors. The FHEST technology developed and employed by us is currently the most advanced energy saving technology in primary aluminum smelting in China. In addition, in terms of technological support and research and development capabilities, we are equipped with the most advanced research and development institute within the aluminum industry in China and enjoy advantages over other domestic smelters in technology advancement.
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 2017, China had net import of approximately 2.81 million tonnes of alumina (with chemical alumina products included), representing approximately a 4% decrease from 2016. China had net import of approximately 101,900 tonnes of primary aluminum in 2017, which represented a 44% decrease from 2016. The decrease in net import of primary aluminum in 2017 was primarily due to a sharp decrease in import, since the price of primary aluminum generally showed a stronger trend of increase in the international market than in the domestic market, while the amount of export from China remained relatively stable in the same period.

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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 smelters.

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 2017, we completed 139 technological projects, including 70 independent research and development projects, 57 special key science and technology projects and 12 science and technology application projects. In addition, we filed a total of 105 patent applications in 2017.

As of December 31, 2017, we owned 1,403 patents, which were primarily related to technologies and processes, equipment and new products. Once registered, 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, 2017, 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 neither involved in any material intellectual property disputes against us nor are we pursuing any legislation relating to intellectual property rights against any party.

Environmental Protection

Our operations are subject to a wide variety of PRC national and local environmental laws and regulations, including those governing waste discharge, generation, treatment and disposal of hazardous materials, land reclamation, air and water emissions and mining matters. For example, the PRC government has set discharge standards for air and water emissions to air and water. To enforce these standards, national environmental protection authorities imposed discharge fees in proportion to the amount of discharge prior to January 1, 2018. The relevant PRC government agencies are authorized to order any operations that exceed discharge limits to take remediation measures as approved by the relevant agency, or order the closure of any operations that fail to comply with applicable regulations. In December 2016, the PRC government promulgated the Environmental Protection Tax Law which became effective from January 1, 2018. The Environmental Protection Tax Law has replaced discharge fees with environmental protection tax levy, which is calculated based on the pollution equivalents converted from pollutant emissions.

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.

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 2017, 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” plants. Since 2009, we have achieved our target of zero industrial waste water emission in our alumina and primary aluminum production.

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Our total expenditures for maintaining compliance with environmental laws and regulations were RMB627.3 million, RMB657.5 million and RMB691.9 million for 2015, 2016 and 2017, respectively. In 2017, 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 RMB33.2 million, RMB35.8 million and RMB44.1 million in 2015, 2016 and 2017, respectively.

Seasonality

Our business is not subject to seasonality.

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 2017, 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.

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 Land and 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.
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The following is a brief summary of the principal laws, regulations, policies and administrative directives to which we are subject.

Requirements for Capital Investments

Any capital 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 investment in the exploring and mining of alumina and primary aluminum is permitted by the PRC government.

Standard Conditions for Aluminum Industry

The Standard Conditions provides that bauxite mining, alumina and primary aluminum projects must comply with the state industry policies and overall plans on the development of aluminum industry, land use, urban planning and designation of functional zones. Aluminum smelting enterprises must be appropriately distributed across the relevant regions according to certain conditions including availability of resources, energy and environment. Pursuant to the Standard Conditions, aluminum smelting enterprises located in regions lacking competitive production elements should be gradually moved to more competitive region, and the amount 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. 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. Most of our production branches and subsidiaries have met the Standard Conditions and are included on these lists.

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, Chinese 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, Chinese 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.

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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 Environmental Protection 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. Environmental protection bureaus at the county level or above are responsible for environmental protection within their respective jurisdictions.

Environmental regulations require each enterprise to file an environmental impact report with the relevant environmental bureau 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.

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.

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 Land and Resources. Exploration and exploitation of mineral resources are also subject to examination and approval by the Ministry of Land and 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.

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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.

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 on July 2, 2016. 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. 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 electrolytic aluminum and aluminum oxide 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 and the Ministry of Environmental Protection 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.

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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. 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 Ministry of Finance (the “MOF”) and the State Administration of Taxation (the “SAT”) jointly promulgated “Notice on Implementing the Pilot Program of Replacing Business Tax with Value-Added Tax in an All-round Manner,” 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.

C. Organizational Structure

Set out below is a chart illustrating our corporate structure as of March 31, 2018:

Below sets forth further information of our principal subsidiaries as of December 31, 2017:

Company

Percentage of
ownership interest
attributable to the
Company

Principal activities

Baotou Aluminum Co., Ltd. 74.33% Manufacture and distribution of primary aluminum, aluminum alloy and related fabricated products and carbon products
Chalco Hong Kong Ltd.(1) 100.00% Overseas investments and alumina import and export activities
Chalco Zunyi Alumina Co., Ltd. 73.28% Manufacture and distribution of alumina
China Aluminum International Trading Co., Ltd. 100.00% Trading, import and export activities
Chalco Mining Co., Ltd. 18.86% Manufacture, acquisition and distribution of bauxite mines, limestone ore, manufacturing and distribution of alumina
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Company

Percentage of
ownership interest
attributable to the
Company

Principal activities

Shandong Huayu Alloy Materials Co., Ltd. 55.00% Manufacture and distribution of aluminum alloy
Chinalco Shanxi Jiaokou Xinghua Technology Ltd. (2) 66% Manufacture and distribution of alumina
Chalco Shanghai Company Limited 100.00% Trading and engineering project management
Shanxi Huasheng Aluminum Co., Ltd. 51.00% Manufacture and distribution of primary aluminum, aluminum alloy and carbon-related products
Chalco Shanxi New Material Co., Ltd. 85.98% Manufacture and distribution of alumina, primary aluminum, alloy and anode carbon products and electricity generation and supply
Zunyi Aluminum Co., Ltd. 62.10% Manufacture and distribution of primary aluminum
Chalco Energy Co., Ltd. 100.00% Thermoelectric supply and investment management
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. 69.20% Manufacture and distribution of alumina
Chalco Zhongzhou Aluminum Co., Ltd. 63.10% Manufacture and distribution of alumina
China Aluminum Logistics Group Corporation Co., Ltd.  100.00% Logistic transportation

 

   
(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.
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 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 Luochuan mine. The exploration permit will expire in October 2018. 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”).

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. The mining permit will expire in December 2018. We have completed the exploration but have not commenced development of Laodonghe mine. 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. 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. The exploration permit of Yinxingyijing mine will expire in August 2018. We obtained the mining permit in February 2018 and it 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)Wangwa mine is currently under construction for expansion, the original production capacity of which was 1.5 million tonnes.
(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, 2017, Ningxia Energy incurred capital expenditures of approximately RMB1,385 million on infrastructure construction.

Land

Chinalco leases to us 401 pieces or parcels of land, located in eight provinces, covering an aggregate area of approximately 47.39 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:

389 pieces of allocated land with an area of approximately 46.09 million square meters. Chinalco has obtained authorization from the relevant administrative authorities to manage and lease the land use rights for such land; and
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12 pieces of land with an area of approximately 1.3 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 RMB 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 302 buildings to Chinalco, with an aggregate gross area of approximately 301,671 square meters, while Chinalco leased 109 buildings to us, with an aggregate gross area of approximately 222,588 square meters. In March 2016, 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 12th to 16th floors and 18th to 31st floors of No. 62 North Xizhimen Street, Haidian District, Beijing, PRC, with an aggregate gross floor area of 22,285 square meters. This agreement expired on December 31, 2017. We are in the process of renewing the tenancy agreement with China Aluminum Investment and Development Co., Ltd.

Our Expansion

Our expansion projects in 2017 primarily include:

Capacity expansion and technology upgrade of Wangwa mine: The project is planned to have a total annual capacity of 6 million tonnes. We expect to invest a total amount of approximately RMB3,063 million in this project. By the end of 2017, investment in project construction amounted to RMB1,175 million. The project is under construction and planned to be completed by the end of 2018.
The 500,000-tonne aluminum alloy product structure adjustment, upgrade and technical innovation project of Inner Mongolia Huayun: We expect to invest a total amount of approximately RMB6,450 million in this project. By the end of 2017, an aggregate of RMB3,375 million of capital expenditure had been incurred. The project has been officially put into operation.
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The 400,000-tonne light alloy material project of Guangxi Hualei New Material Co., Ltd.: We expect to invest a total amount of approximately RMB6,200 million in this project. By the end of 2017, an aggregate of RMB5,132 million of capital expenditure had been incurred. Production facilities relating to light alloy manufacturing and power generation was put into operation in batches towards the end of 2017.
The 400,000-tonne project of Guizhou Huaren New Materials Company Limited: We expect to invest a total amount of approximately RMB2,957 million in this project. By the end of 2017, an aggregate of RMB2,897 million of capital expenditure had been incurred. Production capacity of 300,000 tonnes has been put into operation and another 100,000 tonnes of production capacity is expected to be put into operation in the first half of 2018.

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 and 2017, the comparative financial data for the years ended December 31, 2013, 2014, 2015 and 2016 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, 2015 and 2016 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 alumina-related products, such as alumina hydrate, alumina-based chemical products and gallium. Alumina accounted for approximately 81.8% of the total production volume for this segment in 2017. Chemical alumina products are used in the production of chemical, pharmaceutical, ceramic and construction materials. In the process of refining bauxite into alumina, we also produce gallium as a by-product. Gallium is a rare, high-value metal with applications in the electronics and telecommunication industries.
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 electrolytic aluminum products. Our principal primary aluminum products are ingots, molten aluminum and aluminum alloys which accounted for approximately 24%, 44% and 32%, respectively, of our total production volume of primary aluminum in 2017. 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, which mainly consists of the trading of alumina, primary aluminum, other non-ferrous metal products, and crude fuels such as coal products, as well as supplemental materials 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.
Our energy segment, which consists of coal mining and power generation, including conventional coal-fire power generation and renewable energy generation such as wind power and photovoltaic 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. In 2017, 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, including power generation enterprises and cement plants.
Our corporate and other operating segment, which consists of corporate and other aluminum-related research, development, and other activities of the Group.

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 to have our 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 IASB, 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.

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 depreciates them accordingly.

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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

 

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 less any 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.

Intangible assets - goodwill

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred, the amount recognized for non-controlling interests and any fair value of our previously held equity interests in the acquiree over the identifiable net assets acquired and liabilities assumed. If the sum of this consideration and other items is lower than the fair value of the net assets acquired, the difference is, after reassessment, recognized in profit or loss as a gain on bargain purchase.

For the purposes of impairment testing, goodwill acquired in a business combination is allocated to each of the 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 represents the lowest level within the entity at which the goodwill is monitored for internal management purposes. Goodwill is monitored at the operating segment level.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized. An impairment loss recognized for goodwill is not reversed in a subsequent period. Any impairment is recognized immediately as an expense and is not subsequently reversed.

Intangible assets - mining rights and mineral exploration rights

Our mineral exploration rights and mining rights relate to coal, bauxite and other mines. 

(i) Recognition
     
    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

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Mineral exploration rights are converted to mining rights when technical feasibility and commercial viability of extracting a mineral resource are demonstrable. Mineral exploration rights 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.

Non-current assets and disposal groups held for sale

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 usual and customary for the sale of such assets or disposal groups and its sale must be highly probable. All assets and liabilities of a subsidiary classified as a disposal group are reclassified as held for sale regardless 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 measured at the lower of their carrying amounts and fair values less costs to sell. Property, plant and equipment and intangible assets classified as held for sale are not depreciated or amortized.

Estimated impairment of trade and other receivables and inventories

A provision for impairment of trade and other receivables is established when there is objective evidence that we will not be able to collect all amounts due according to the original repayment terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered as indicators that a trade receivable is impaired. The amount of provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to trade and other receivables are discounted if the effect of discounting is material. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in profit or loss. When a trade and other receivable is uncollectible, it is written-off against the allowance account for trade and other receivables. Subsequent recoveries of amounts previously written-off are recognized as income in profit or loss. The impairment is subject to our management’s assessment at the end of the reporting period, and hence, the provision amount is subject to uncertainty.

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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 their net recoverable amount of inventories. For inventories held for executed sales contracts, our management estimates the net recoverable 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. For raw materials and work-in-progress, our management has established a model in estimating the net recoverable 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 depreciation 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 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 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 value of our deferred tax assets as of December 31, 2017 was RMB1,661 million, compared with approximately RMB1,687 million as of December 31, 2016, without taking into consideration the offsetting of the balances within the same tax jurisdiction. The amount of unrecognized tax losses as of December 31, 2017, was RMB18,214 million, compared with approximately RMB21,991 million as of December 31, 2016.

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.  

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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

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). 

(i) Sales of goods
     
    Revenue from the sales of goods is recognized when we have already transferred the significant risks and rewards of ownership of the goods to the buyers, provided that we maintain neither managerial involvement to the degree usually associated with ownership nor effective control over the goods sold.
     
    If we are acting solely as an agent, the related revenue is reported on a net basis.
     
  (ii) Rendering of services
     
    We provide machinery processing, transportation and packaging services and other services to third- party customers. These services are recognized in the period when the related services are provided.

Investment in joint ventures and associates - recoverable amount

In accordance with the Group’s accounting policy, each investment in joint ventures and associates is evaluated in every reporting period to determine whether there are any indications of impairment. If any such indication 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.

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.

New IFRS Pronouncements

For a detailed discussion of new accounting pronouncements, please see Note 2 to our audited consolidated financial statements.

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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 and 6.9% from 2016 to 2017, as compared to 7.5% from 2013 to 2014.

The global output of alumina (with chemical alumina products included) in 2017 increased approximately 7.7% from 2016 to approximately 130.50 million tonnes. The global alumina consumption (with chemical alumina products included) in 2017 increased approximately 6.6% from 2016 to approximately 130.32 million tonnes. In 2017, the domestic output of alumina (with chemical alumina products included) increased approximately 16.8% from 2016 to approximately 70.25 million tonnes and the domestic consumption for alumina (with chemical alumina products included) increased approximately 12.6% from 2016 to approximately 72.49 million tonnes.

The global output of primary aluminum in 2017 increased approximately 7.5% from 2016 to approximately 63.28 million tonnes. The global consumption of primary aluminum in 2017 increased approximately 6.7% from 2016 to approximately 63.59 million tonnes. In 2017, the domestic output of primary aluminum increased approximately 12.8% from 2016 to approximately 36.66 million tonnes and the domestic consumption of primary aluminum increased approximately 8.3% from 2016 to approximately 35.40 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 2017, revenues generated from alumina, primary aluminum, trading and energy segments (after elimination of inter-segment sales) accounted for 7.6%, 20.3%, 68.6% and 3.2%, 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 have shown a general increase trend in 2017 as a result of the increase in primary aluminum price and a tight supply of bauxite in China. In 2017, the spot price of alumina in the international market reached a high of approximately US$484 per tonne and bottomed out at approximately US$272 per tonne. The average spot price of alumina in the international market was approximately US$354 per tonne, representing an increase of 39% from 2016. The spot price of alumina in the domestic market reached a high of RMB3,805 per tonne and bottomed out at RMB2,215 per tonne. The average spot price of alumina in the domestic market was approximately RMB2,909 per tonne, representing an increase of 41% from 2016. Our average selling price of alumina increased by 41% from RMB2,016 per tonne in 2016 to RMB2,845 per tonne in 2017.

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 2017, three month aluminum futures prices reached a high of USD2,290.5 per tonne and a low of USD1,676.5 per tonne on LME; and a high of RMB17,320 per tonne and a low of RMB12,505 per tonne on SHFE. The average three-month aluminum futures prices at SHFE increased by 22% from RMB12,101 per tonne in 2016 to RMB14,731 per tonne in 2017. Our average selling price of primary aluminum increased by 17% from RMB12,496 per tonne in 2016 to RMB14,567 per tonne in 2017. In 2017, recovery of the world’s major economies boosted the demand for primary aluminum, while the PRC government advanced the supply-side structural reform by closing down production capacity of primary aluminum in violation of applicable rules and regulations, and restricted the output of primary aluminum in Beijing-Tianjin-Hebei and surrounding areas (“2+26” cities) in the winter heating season. The prices of various raw materials also increased in 2017. All these factors contributed to the significant increase of primary aluminum prices in global and domestic markets in 2017.

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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 2017 was approximately RMB100,496 million, representing approximately 81.3% 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, 2015, 2016 and 2017, bauxite supplied by our mines accounted for 55%, 47% and 47%, 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 2017, as a result of increases in prices of raw materials, fuel and electricity, our average cost of alumina per tonne increased by approximately 22% from that in 2016.

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 2017. 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 decreased by 16% from 2015 to 2016 and increased by 21% from 2016 to 2017.

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 2017, we continued to focus on lowering production costs and increasing production efficiency through reducing raw material consumption by improving technology and internal management.

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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 PRC government’s policy on credit markets. 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. In recent years, the PRC government had tightened its monetary policies to control inflation, including increasing interest rates on bank loans and deposits and tightening the money supply. Any change towards stricter lending policies in the future may, among other things, affect our ability to obtain financing and may in turn adversely affect our operating results.

Our finance costs increased by 3.4% from 2016 to 2017, primarily due to the increase in exchange loss. 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. In 2010, we established our trading business as a new business segment.

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, 2015, 2016 and 2017, our cost of sales was RMB121,172.3 million, RMB133,674.3 million and RMB165,675.0 million, respectively, and accounted for 98.0%, 92.7% and 92.0%, 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, 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. Selling and distribution expenses accounted for 41.4%, 36.6% and 31.5% of our total operating expenses for the years ended December 31, 2015, 2016 and 2017, respectively.

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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, 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 54.5%, 59.4% and 61.6% of our total operating expenses for the years ended December 31, 2015, 2016 and 2017, 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 43.3%, 51.0% and 51.3% of our total general and administrative expenses for the years ended December 31, 2015, 2016 and 2017, respectively.

Research and Development Expenses. Our research and development expenses accounted for 3.9%, 3.0% and 6.7% of our total operating expenses for the years ended December 31, 2015, 2016 and 2017, respectively.

Impairment loss on property, plant and equipment. Our impairment loss on property, plant and equipment accounted for 0.2%, 1.0% and 0.2% of our total operating expenses for the years ended December 31, 2015, 2016 and 2017, respectively.

Other Income

Other income consists primarily of research subsidies, grants on energy saving, environment protection projects and industrial development support from the government.

Other Gains, net

Our other net gains in 2017 were RMB320.0 million, which consisted primarily of gains on deemed disposal and disposal of subsidiaries and gains on previously held equity interest remeasured at acquisition-date fair value, partially offset by losses and unrealised losses on future, forward and option contracts.

Finance Income

Our finance income consists primarily of interest income. For the year ended December 31, 2017, our finance income was RMB706.3 million, and accounted for 0.4% 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. Interest rates on loans related to capital expenditures and working capital set by banks generally follow guidelines issued by the People’s Bank of China. The People’s Bank of China 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 2017, we incurred interest expense (net of capitalized interest) of RMB4,817.2 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,

 

2015

2016

2017

  RMB (%) RMB (%) RMB US$ (%)
  (in millions, except percentage)
Revenue 123,667.7 100.0 144,228.9 100.0 180,080.8 27,677.9 100.0
Cost of Sales

(121,172.3)

(98.0)

(133,674.3)

(92.7)

(165,675.0)

(25,463.8)

(92.0)

Gross Profit 2,495.4 2.0 10,554.6 7.3 14,405.8 2,214.1 8.0
Selling and distribution expenses (1,787.8) (1.4) (2,069.4) (1.4) (2,342.5) (360.0) (1.3)
General and administrative expenses (2,358.8) (1.9) (3,360.7) (2.3) (4,568.2) (702.1) (2.5)
Research and development expenses (168.9) (0.1) (168.9) (0.1) (494.6) (76.0) (0.3)
Impairment loss on property, plant and equipment (10.0) <0.1 (57.1) <0.1 (15.6) (2.4) <0.1
Other income 1787.7 1.4 745.2 0.5 342.0 52.6 0.2
Other gains, net

5,023.6

4.1

166.4

0.1

320.0

49.1

0.2

Operating profit 4,981.2 4.0 5,810.1 4.0 7646.9 1,175.3 4.2
Finance Income 812.5 0.7 815.8 0.6 706.3 108.6 0.4
Finance cost (5,979.5) (4,8) (5,019.9) (3.5) (5,189.9) (797.8) (2.9)
Share of profits and losses of joint ventures 23.2 <0.1 (95.5) (0.1) 8.2 1.3 <0.1
Share of profits and losses of associates

284.5

0.2

115.0

0.1

(165.3)

(25.4)

(0.1)

Profit before income tax 121.9 0.1 1,625.5 1.1 3,006.2 462.0 1.7
Income tax benefit/(expense)

226.0

0.2

(404.1)

(0.3)

(642.3)

(98.7)

(0.4)

Profit for the year

347.9

0.3

1,221.4

0.8

2,363.9

363.3

1.3

 

No customer individually accounted for more than 10% of our total sales for the year ended December 31, 2017. Sales to Chinalco and its subsidiaries, joint ventures, associates and other related parties accounted for approximately 11.6%, 9.0% and 8.3% of consolidated revenues for the years ended December 31, 2015, 2016 and 2017, 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.

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Year Ended December 31, 2017 Compared with Year Ended December 31, 2016

Revenue

Our revenue increased by 24.9% from RMB144,228.9 million for the year ended December 31, 2016, to RMB180,080.8 million for the year ended December 31, 2017, primarily due to the increase in prices and trading volume of products.

Cost of Sales

Our cost of sales increased by 23.9% from RMB133,674.3 million for the year ended December 31, 2016, to RMB165,675.0 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 RMB2,342.5 million for the year ended December 31, 2017, representing an increase from RMB2,069.4 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 35.9% from RMB3,360.7 million for the year ended December 31, 2016, to RMB4,568.2 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 RMB494.6 million for the year ended December 31, 2017, primarily due to an increase in the research and development investment in advanced techonologies relating to aluminum alloy and alumina.

Other Income

Other income decreased from RMB745.2 million in the year ended December 31, 2016 to RMB342.0 million for the year ended December 31, 2017, primarily due to a decrease in government grants.

Other Gains, Net

Our net other gains increased from RMB166.4 million for the year ended December 31, 2016 to RMB320.0 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 RMB815.8 million for the year ended December 31, 2016 to RMB706.3 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 3.4% from RMB5,019.9 million for the year ended December 31, 2016 to RMB5,189.9 million for the year ended December 31, 2017, primarily due to the increase in exchange loss. 

68

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 RMB115.0 million in our share of profits and losses of associates for the year ended December 31, 2016, whereas we incurred a loss of RMB165.3 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 RMB404.1 million for the year ended December 31, 2016 to RMB642.3 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 RMB1,221.4 million for the year ended December 31, 2016 to RMB2,363.9 million for the year ended December 31, 2017.

Year Ended December 31, 2016 Compared with Year Ended December 31, 2015

Revenue

Our revenue increased by 16.6% from RMB123,667.7 million for the year ended December 31, 2015, to RMB144,228.9 million for the year ended December 31, 2016, primarily due to the increase of trading volume during the year.

Cost of Sales

Our cost of sales increased by 10.3% from RMB121,172.3 million for the year ended December 31, 2015, to RMB133,674.3 million for the year ended December 31, 2016, primarily due to the increase of trading volume during the year.

Selling and Distribution Expenses

Our selling and distribution expenses amounted to RMB2,069.4 million for the year ended December 31, 2016, representing an increase by 15.8% from RMB1,787.8 million for the year ended December 31, 2015.

General and Administrative Expenses

Our general and administrative expenses increased by 42.5% from RMB2,358.8 million for the year ended December 31, 2015, to RMB3,360.7 million for the year ended December 31, 2016, primarily attributable to costs incurred for the reposition of certain redundant personnel for the purpose of enhancing productivity.

Research and Development Expenses

Our research and development expenses remain relatively stable around RMB168.9 million from 2015 to 2016.

69

Other Income

Other income decreased from RMB1,787.7 million in the year ended December 31, 2015 to RMB745.2 million for the year ended December 31, 2016, primarily due to changing of the way that the government provided support for our Group.

Other Gains, Net

Our net other gains decreased from RMB5,023.6 million for the year ended December 31, 2015 to RMB166.4 million for the year ended December 31, 2016, primarily due to relatively more gains generated from disposal of property, plant and equipment and land use rights and equity interests in Jiaozuo Wanfang and Shanxi Huaxing in 2015.

Finance Income

Our finance income slightly increased from RMB812.5 million for the year ended December 31, 2015 to RMB815.8 million for the year ended December 31, 2016.

Finance Costs

Our finance costs decreased by 16.0% from RMB5,979.5 million for the year ended December 31, 2015 to RMB5,019.9 million for the year ended December 31, 2016, primarily due to decline in lending rates and adjustment to the size of interest-bearing liabilities.

Share of Profits and Losses of Joint Ventures

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, whereas we had a profit of RMB23.2 million in our share of profits and losses of joint venture for the year ended December 31, 2015. This was primarily attributable to decrease in the profits of our joint ventures.

Share of Profits and Losses of Associates

Our share of profits and losses of associates decreased by 59.6% from RMB284.5 million for the year ended December 31, 2015 to RMB115.0 million for the year ended December 31, 2016, primarily attributable to the decrease in the profit of our associates.

Income Tax

Our income tax benefit was RMB226.0 million for the year ended December 31, 2015, whereas we had income tax expense of RMB404.1 million for the year ended December 31, 2016. This was mainly attributable to more income taxes recognized as a result of increase in profit for the year 2016.

Results of Operations

As a result of the foregoing, our net profit increased from RMB347.9 million for the year ended December 31, 2015 to RMB1,221.4 million for the year ended December 31, 2016.

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.

70

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,
 

2015

2016

2017

2017

2017

2017

  RMB RMB RMB US$ % %
  (in millions, except percentage)
Revenue            
Alumina:            
External sales 6,853.5 9,518.9 13,665.9 2,100.4 5.7 7.6
Inter-segment sales

26,643.8

20,508.3

24,413.3

3,752.2

10.2

 
Total

33,497.3

30,027.2

38,079.2

5,852.6

15.9

 
Primary aluminum:            
External sales 28,111.8 29,482.3 36,552.0 5,617.9 15.3 20.3
Inter-segment sales

8,861.4

4,981.9

10,693.6

1,643.6

4.5

 
Total

36,973.2

34,464.2

47,245.6

7,261.5

19.8

 
Trading            
External sales 84,222.2 100,439.4 123,655.4 19,005.5 51.7 68.6
Inter-segment sales

9,908.9

13,906.5

23,159.1

3,559.5

9.7

 
Total

94,131.1

114,345.9

146,814.5

22,565.0

61.4

 
Energy            
External sales 4,192.8 4,382.3 5,733.7 881.3 2.4 3.2
Inter-segment sales

98.1

137.5

517.3

79.5

0.2

 
Total

4,290.9

4,519.8

6,251.0

960.8

2.6

 
Corporate and others            
External sales 287.4 406.0 473.8 72.8 0.2 0.3
Inter-segment sales

15.0

98.4

171.5

26.4

0.1

 
Total

302.4

504.4

645.3

99.2

0.3

 
Total Revenues before inter-segment eliminations 169,194.9 183,861.5 239,035.6 36,739.1 100.0  
Eliminations of inter-segment sales

(45,527.2)

(39,632.6)

(58,954.8)

(9,061.2)

(24.7)

 
Consolidated total revenues

123,667.7

144,228.9

180,080.8

27,677.9

75.3

100.0

 

The following table sets forth segment results before income tax by segment for the periods indicated: 

 

Year Ended December 31,

 

2015

2016

2017

2017

  RMB RMB RMB US$
  (in millions)
Alumina:        
Revenues 33,497.3 30,027.3 38,079.1 5,852.7
Cost and expenses(1)

(31,601.6)

(29,116.9)

(34,827.3)

(5,352.9)

Segment results(2)

1,895.7

910.4

3,251.8

499.8

Primary aluminum:        
Revenues 36,973.2 34,464.2 47,245.6 7,261.5
71

 

Year Ended December 31,

 

2015

2016

2017

2017

  RMB RMB RMB US$
  (in millions)
Cost and expenses(1)

(38,360.1)

(32,280.4)

(46,419.0)

(7,134.5)

Segment results(2)

(1,386.9)

2,183.8

826.6

127.0

Trading:        
Revenues 94,131.1 114,345.9 146,814.5 22,565.0
Cost and expenses(1)

(95,365.7)

(113,536.8)

(146,084.4)

(22,452.8)

Segment results(2)

(1,234.6)

809.1

730.1

112.2

Energy:        
Revenues 4,290.9 4,519.8 6,251.0 960.8
Cost and expenses(1)

(4,365.1)

(4,486.4)

(6,422.3)

(987.1)

Segment results(2)

(74.2)

33.4

(171.3)

(26.3)

Corporate and others        
Revenues 302.4 504.4 645.3 99.2
Cost and expenses(1)

431.4

(2,497.6)

(2,373.9)

(364.9)

Segment results(2)

733.8

(1,993.2)

(1,728.6)

(265.7)

Elimination(3)

188.1

(318.0)

97.6

15.0

Total (loss)/profit before income tax

121.9

1,625.5

3,006.2

462.0

 

   
(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 profit/(loss) before income tax.
(3)Elimination refers to the aggregate inter-segment eliminations of segment results of each segment.

Year Ended December 31, 2017 Compared with Year Ended December 31, 2016

Alumina Segment

Revenues. Total revenue generated by the alumina segment increased by 26.8% from RMB30,027.3 million for the year ended December 31, 2016, to RMB38,079.1 million for the year ended December 31, 2017, primarily due to the increase in the price and trading volume of alumina.

Revenue from external sales of the alumina segment increased by 43.6% from RMB9,518.9 million for the year ended December 31, 2016, to RMB13,665.8 million for the year ended December 31, 2017, primarily due to the increase in the price of the external sales of alumina.

Revenue from inter-segment sales of the alumina segment increased from RMB20,508.4 million for the year ended December 31, 2016, to RMB24,413.3 million for the year ended December 31, 2017.

Cost and expenses. The total cost and expenses for our alumina segment increased from RMB29,116.9 million for the year ended December 31, 2016, to RMB34,827.3 million for the year ended December 31, 2017, primarily due to the increase in the prices of bauxite, other raw materials and energy.

Segment results. The segment profit for our alumina segment significantly increased from RMB910.4 million for the year ended December 31, 2016 to RMB3,251.8 million for the year ended December 31, 2017, primarily due to the increase in profit margin and trading volume.

Primary Aluminum Segment

Revenues. Total revenue generated by the primary aluminum segment increased by 37.1% from RMB34,464.2 million for the year ended December 31, 2016, to RMB47,245.6 million for the year ended December 31, 2017, primarily due to the increase in trading volume and price of primary aluminum.

72

Revenue from external sales of the primary aluminum segment increased by 24.0% from RMB29,482.3 million for the year ended December 31, 2016, to RMB36,552.0 million for the year ended December 31, 2017, primarily due to increase in the price and trading voulme for the external sales of primary aluminum.

Revenue from inter-segment sales of primary aluminum segment increased from RMB4,981.9 million for the year ended December 31, 2016, to RMB10,693.6 million for the year ended December 31, 2017, primarily due to the increase in price of inter-segment sales of primary aluminum.

Cost and expenses. The total cost and expenses for our primary aluminum segment increased from RMB32,280.4 million for the year ended December 31, 2016, to RMB46,419.0 million for the year ended December 31, 2017, primarily due to the increase in the prices of alumina and electricity and trading volume of primary aluminum.

Segment results. The segment profit for our primary aluminum segment decreased from RMB2,183.8 million for the year ended December 31, 2016 to RMB826.6 million for the year ended December 31, 2017, primarily due to the increase in the price of alumina and the costs of electricity consumed in primary aluminum smelting.

Trading Segment

Revenues. Total revenue generated by the trading segment increased from RMB114,345.9 million for the year ended December 31, 2016 to RMB146,814.5 million for the year ended December 31, 2017, primarily due to the increase in prices and trading volume and prices of main products, such as alumina, aluminum alloy, copper and zinc.

Revenue from external sales of the trading segment increased from RMB100,439.4 million for the year ended December 31, 2016 to RMB123,655.4 million for the year ended December 31, 2017, primarily due to the increase in prices and trading volume of the external trading of main products, such as alumina, aluminum alloy, copper and zinc.

Revenue from internal sales of the trading segment increased from RMB13,906.5 million for the year ended December 31, 2016 to RMB23,159.1 million for the year ended December 31, 2017, primarily due to the increase in prices and trading volume of the inter-segment trading of main products, such as alumina and coal.

Cost and expenses. The total cost and expenses for our trading segment increased from RMB113,536.8 million for the year ended December 31, 2016 to RMB146,084.4 million for the year ended December 31, 2017, primarily due to the increase in purchasing prices and trading volume.

Segment results. The segment profit for our trading segment decreased from RMB809.1 million for the year ended December 31, 2016 to RMB730.1 million for the year ended December 31, 2017. This was mainly attributable to the decrease in profit margin.

Energy Segment

Revenues. Total revenue generated by the energy segment increased from RMB4,519.8 million for the year ended December 31, 2016 to RMB6,251.0 million for the year ended December 31, 2017, primarily due to the increase in the price and trading volume of coal.

Revenue from external sales of the energy segment increased from RMB4,382.3 million for the year ended December 31, 2016 to RMB5,733.7 for the year ended December 31, 2017, primarily due to the increase in the price and trading volume of the external sales of coal.

Revenue from internal sales of the energy segment increased from RMB137.5 million for the year ended December 31, 2016 to RMB517.3 million for the year ended December 31, 2017, primarily due to the increase in price and trading volume of the inter-segment sales of coal.

Cost and expenses. The total cost and expenses for our energy segment increased from RMB4,486.4 million for the year ended December 31, 2016 to RMB6,422.3 million for the year ended December 31, 2017, primarily due to the increase in trading volume of coal.

73

Segment results. We had a segment profit of RMB33.4 million for the year ended December 31, 2016, whereas we recorded a segment loss of RMB171.3 million for the year ended December 31, 2017. This was mainly because we incurred gains on disposal of non-current assets in 2016.

Corporate and Other Operating Segment

Revenues. Revenue from the corporate and other operating segment increased from RMB504.4 million for the year ended December 31, 2016 to RMB645.3 million for the year ended December 31, 2017.

Segment results. The segment loss for our corporate and other operate segment decreased from RMB1,993.2 million for the year ended December 31, 2016 to RMB1,728.6 million for the year ended December 31, 2017.

Year Ended December 31, 2016, Compared with Year Ended December 31, 2015

Alumina Segment

Revenues. Total revenue generated by the alumina segment decreased by 10.4% from RMB33,497.3 million for the year ended December 31, 2015, to RMB30,027.3 million for the year ended December 31, 2016, primarily due to a decrease in average selling price of alumina.

Revenue from external sales of the alumina segment increased by 38.9% from RMB6,853.4 million for the year ended December 31, 2015, to RMB9,518.9 million for the year ended December 31, 2016, primarily due to the increase in the external sales volume of alumina.

Revenue from inter-segment sales of the alumina segment decreased from RMB26,643.9 million for the year ended December 31, 2015, to RMB20,508.4 million for the year ended December 31, 2016.

Cost and expenses. The total cost and expenses for our alumina segment decreased from RMB31,601.6 million for the year ended December 31, 2015, to RMB29,116.9 million for the year ended December 31, 2016, primarily due to a decrease in the prices of materials and energy and improvement in energy efficiency during the manufacturing process.

Segment results. The segment profit for our alumina segment decreased from RMB1,895.7 million for the year ended December 31, 2015 to RMB910.4 million for the year ended December 31, 2016, primarily due to gains from remeasurement of remaining equity interest in Shanxi Huaxing recognized in 2015 and a decrease of approximately 15% in the price of alumina, partially offset by the decrease of approximate 12% in cost.

Primary Aluminum Segment

Revenues. Total revenue generated by the primary aluminum segment decreased from RMB36,973.2 million for the year ended December 31, 2015, to RMB34,464.2 million for the year ended December 31, 2016, primarily due to decreases in the sales volume of our primary aluminum products.

Revenue from external sales of the primary aluminum segment increased from RMB28,111.8 million for the year ended December 31, 2015, to RMB29,482.3 million for the year ended December 31, 2016, primarily due to increase in the average external selling price in our primary aluminum products.

Revenue from inter-segment sales of primary aluminum segment decreased from RMB8,861.4 million for the year ended December 31, 2015, to RMB4,981.9 million for the year ended December 31, 2016.

Cost and expenses. The total cost and expenses for our primary aluminum segment decreased from RMB38,360.1 million for the year ended December 31, 2015, to RMB32,280.4 million for the year ended December 31, 2016, primarily due to the decreases in prices of raw materials and electricity and sales volume of our primary aluminum products.

74

Segment results. Segment loss for our primary aluminum segment was RMB1,386.9 million for the year ended December 31, 2015 whereas we had a segment profit of RMB2,183.8 million for our primary aluminum segment for the year ended December 31, 2016. This was mainly attributable to a year-on-year decrease of approximately 17% in the costs of primary aluminum products.

Trading Segment

Revenues. Total revenue generated by the trading segment increased from RMB94,131.1 million for the year ended December 31, 2015 to RMB114,345.9 million for the year ended December 31, 2016, primarily due to increase in trading volume.

Revenue from external sales of the trading segment increased from RMB84,222.2 million for the year ended December 31, 2015 to RMB100,439.4 million for the year ended December 31, 2016, primarily due to increase in trading volume.

Revenue from internal sales of the trading segment increased from RMB9,908.9 million for the year ended December 31, 2015 to RMB13,906.5 million for the year ended December 31, 2016.

Cost and expenses. The total cost and expenses for our trading segment increased from RMB95,365.7 million for the year ended December 31, 2015 to RMB113,536.8 million for the year ended December 31, 2016, primarily due to increase in trading volume.

Segment results. We incurred segment loss for our trading segment of RMB1,234.6 million for the year ended December 31, 2015 whereas we had a segment profit of RMB809.1 million for the year ended December 31, 2016. This was mainly attributable to the increase in selling prices of the products and timely destocking.

Energy Segment

Revenues. Total revenue generated by the energy segment slightly increased from RMB4,290.9 million for the year ended December 31, 2015 to RMB4,519.8 million for the year ended December 31, 2016.

Revenue from external sales of the energy segment slightly increased from RMB4,192.8 million for the year ended December 31, 2015 to RMB4,382.3 million for the year ended December 31, 2016.

Revenue from internal sales of the energy segment increased from RMB98.1 million for the year ended December 31, 2015 to RMB137.5 million for the year ended December 31, 2016.

Cost and expenses. The total cost and expenses for our energy segment slightly increased from RMB4,365.1 million for the year ended December 31, 2015 to RMB4,486.4 million for the year ended December 31, 2016.

Segment results. We incurred a segment loss of RMB74.2 million for the year ended December 31, 2015, whereas we had a segment profit of RMB33.4 million for the year ended December 31, 2016. This was mainly attributable to gains on disposal of environmental protection business.

Corporate and Other Operating Segment

Revenues. Revenue from the corporate and other operating segment increased from RMB302.4 million for the year ended December 31, 2015 to RMB504.4 million for the year ended December 31, 2016.

Segment results. We had segment profit of RMB733.8 million for the year ended December 31, 2015 whereas we incurred a segment loss of RMB1,993.2 million for the year ended December 31, 2016. This was mainly attributable to gains from capital operation in 2015, while it did not occur in 2016.

75

 

B. Liquidity and Capital Resources

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, 2017, our current assets amounted to RMB68,349.3 million, representing an increase of 2.8% from RMB66,486.7 million as of December 31, 2016. As of December 31, 2017, our trade and notes receivable amounted to RMB8,026.2 million, representing an increase of 9.2% from RMB7,349.6 million as of December 31, 2016. As of December 31, 2017, our restricted cash and time deposits and cash and cash equivalents balance amounted to RMB29,903.2 million, representing an increase of 15.5% from RMB25,901.2 million as of December 31, 2016, primarily due to an increase in cash and cash equivalents.

As of December 31, 2017, our current liabilities amounted to RMB89,976.9 million, representing an increase of 8.2% from RMB83,179.8 million as of December 31, 2016, primarily due to the increase in our bonds payable and long-term borrowings reclassified to be due within one year.

As of December 31, 2017, our net current liabilities amounted to RMB21,627.6 million, representing an increase of 29.6% from RMB16,693.1 million as of December 31, 2016. As of December 31, 2017, our current ratio (current assets/current liabilities) was 0.76, compared with 0.80 as of December 31, 2016. Our quick ratio ((current assets - inventories - prepayments)/current liabilities) was 0.52 as of December 31, 2017, compared with 0.55 as of December 31, 2016.

We have considered our available sources of funds as follows:

Our expected net cash inflows from operating activities in 2018;
As of December 31, 2017, we had total banking facilities of approximately RMB152,080 million, of which RMB69,414 million had been utilized and unutilized banking facilities amounted to RMB82,666 million as of December 31, 2017, among which, banking facilities of approximately RMB56,104 million will be subject to renewal during the next 12 months from January 1, 2018. We are confident that all banking facilities could be renewed upon their expiration based on our past experience with banks and our good credit standing; and
Other available sources of financing from banks and other financial institutions based on our good credit history.

We believe that we have adequate resources to continue in operational existence for the foreseeable future not less than 12 months from December 31, 2017. 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:

 

Year Ended December 31,

 

2015

2016

2017

2017

  RMB RMB RMB US$
  (in millions)
Net cash flows generated from operating activities 7,317.7 11,530.4 13,127.8 2,017.7
Net cash flows generated from/(used in) investing activities 2,392.6 (4,998.6) (7,133.4) (1,096.4)
Net cash flows used in financing activities

(5,448.0)

(3,671.9)

(1,835.9)

(282.2)

76

 

 

Year Ended December 31,

 

2015

2016

2017

2017

  RMB RMB RMB US$
  (in millions)
Net increase in cash and cash equivalents

4,262.3

2,859.9

4,158.5

639.1

 

Net Cash Flows Generated from Operating Activities

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 outflows of RMB14,708.4 million and net cash generated from operating activities of RMB13,127.8 million. The adjustment primarily consisted of non-cash and non-operating activities items such as depreciation of property, plant and equipment of RMB6,606.3 million and finance cost of RMB5,189.9 million and outflows of RMB632.7 million for changes in working capital and outflows of income tax of RMB947.9 million. The outflows from changes in working capital consisted primarily of (i) an increase in inventories of RMB2,605.9 million and (ii) an increase in trade and notes receivables of RMB2,123.2 million, and partially offset by (i) an increase in other payables and accrued liabilities of RMB1,875.0 million, (ii) an increase in trade and notes payables of RMB1,511.9 million and (iii) a decrease in other current assets of RMB1,275.5 million.

For the year ended December 31, 2016, we had cash inflows before changes in working capital but after adjustment for non-cash items and non-operating cash outflows of RMB13,160.4 million and net cash generated from operating activities of RMB11,530.4 million. The adjustment consisted primarily of non-cash and non-operating activities items such as realized and unrealized loss on futures, option and forward contracts of RMB1,135.7 million, finance cost of RMB5,019.9 million, net gains on disposal of other property, plant and equipment and land use rights of RMB816.7 million and depreciation of property, plant and equipment of RMB6,577.5 million and outflows of RMB1,575.1 million for changes in working capital and outflows of income tax of RMB54.9 million. The outflows from changes in working capital consisted primarily of (i) an increase in trade and notes receivables of RMB3,679.8 million and (ii) a decrease in trade and notes payable of RMB3,401.5 million, and partially offset by (i) a decrease in inventories of RMB2,412.8 million and (ii) a decrease in other current assets of RMB3,466.5 million.

For the year ended December 31, 2015, we had cash inflows before changes in working capital but after adjustment for non-cash items and non-operating cash outflows of RMB7,395.7 million and net cash generated from operating activities of RMB7,317.7 million. The adjustment consisted primarily of non-cash and non-operating activities items such as finance cost of RMB5,979.5 million, gains on disposal and deemed disposal of RMB2,569.3 million, net gains on disposal of other property, plant and equipment and land use rights of RMB2,317.9 million and depreciation of property, plant and equipment of RMB6,945.0 million and inflows of RMB199.4 million for changes in working capital and outflows of income tax of RMB277.4 million. The inflows from changes in working capital consisted primarily of (i) a decrease in inventories of RMB1,805.1 million and (ii) an increase in other payables and accrued liabilities of RMB1,024.2 million, partially offset by an increase in other current assets of RMB804.8 million. 

Net Cash Flows Generated from /(Used in) Investing Activities

The net cash flows used in investing activities was RMB7,133.4 for the year ended December 31, 2017, whereas the net cash flows used in investing activities was RMB4,998.6 million for the year ended December 31, 2016. This was mainly attributable to an increase in our capital expenditure. In 2015, we had net cash flows generated from investing activities of RMB2,392.6 million.

Net Cash Flows Used in Financing Activities

The net cash flows used in financing activities were RMB1,835.9 for the year ended December 31, 2017, representing a decrease of net cash outflows of RMB1,836.0 million from the net outflows of RMB3,671.9 million for the year ended December 31, 2016, mainly because of the capital injection from non-controlling shareholders of RMB12,717.8 million and that we incurred net cash inflows from the drawdown and repayment of interest-bearing loans in 2017 whereas we incurred net cash outflows from the same activities in 2016. Our net cash used in financing activities for the year ended December 31, 2017, consisted primarily of repayments of short-term and long-term loans of RMB78,673.5 million, repayments of short-term bonds and medium-term notes of RMB16,300.0 million and interest payments of RMB5,217.0 million, partially offset by drawdown of short-term and long-term loans of RMB83,523.7 million and capital injection from non-controlling shareholders of RMB12,717.8 million.

77

The net cash flows used in financing activities were RMB3,671.9 million for the year ended December 31, 2016, representing a decrease of net cash outflows of RMB1,776.1 million from the net outflows of RMB5,448.0 million for the year ended December 31, 2015, mainly attributable to decrease in cash outflow for repayments of short-term and long-term loans. Our net cash used in financing activities for the year ended December 31, 2016, consisted primarily of repayments of short-term and long-term loans of RMB48,648.6 million, repayments of short-term bonds and medium-term notes of RMB13,500.0 million and interest payments of RMB5,128.4 million, partially offset by drawdown of short-term and long-term loans of RMB44,691.9 million and proceeds from issuance of bonds and notes, net of issuance costs, of RMB11,070.7 million.

Loans and Borrowings

During the past years, we engaged in debt financing to fund our operations and business expansion. As of December 31, 2016 and 2017, our gearing ratio (net debts/total capital attributable to owners of the parent as defined in Note 36.3 to our audited consolidated financial statements) was approximately 74% and 72%, respectively.

 

As of December 31,

 

2016

2017

2017

  RMB RMB US$
  (in millions)
Short-term loans and borrowings      
Short-term bank and other loans 32,321.8 30,834.4 4,739.2
Short-term bonds 8,020.0 3,601.6 553.6
Gold leasing arrangements 2,990.6 6,818.4 1,048.0
Current portion of finance lease payable 2,008.7 2,115.6 325.2
Current portion of medium-term notes 8,393.1 12,492.4 1,920.0
Current portion of long-term bank and other loans

4,725.2

6,890.2

1,058.9

Sub-total

58,459.4

62,752.6

9,644.9

Long-term loans and borrowings      
Finance lease payable 6,692.3 5,607.6 861.9
Long-term bank and other loans 31,700.3 40,483.3 6,222.2
Medium-term notes and bonds and
long-term bonds
24,057.1 15,697.0 2,412.6
Less:      
Current portion of medium-term notes (8,393.1) (12,492.4) (1,920.0)
Current portion of long-term bank and other loans (4,725.2) (6,890.2) (1,059.1)
Current portion of finance lease payable

(2,008.7)

(2,115.6)

(325.2)

Sub-total

47,322.7

40,289.7

6,192.4

Total borrowings

105,782.1

103,042.3

15,837.3

Less: Bank balances and cash

25,901.1

29,903.2

4,596.0

Net

79,881.0

73,139.1

11,241.3

 

Bank and Other Loans

The weighted average annual interest rate of short-term bank and other loans for the year end December 31, 2017, was 4.43%. Our short-term bank and other loans will mature within one year.

The weighted average annual interest rate of long-term bank and other loans for the years ended December 31, 2017, was 5.67%. The following table sets forth the aggregate maturities of our outstanding long-term bank and other loans as of December 31, 2017:

78

 

 

As of December 31, 2017

 

RMB

US$

  (in millions)
Within 1 year 6,890.1 1,059.1
Between 1 and 2 years 5,174.0 795.2
Between 2 and 5 years 8,673.8 1,333.1
Over 5 years

19,745.4

3,034.8

Total

40,483.3

6,222.2

 

As of December 31, 2017, we had secured loans of RMB16,008.2 million (including long-term and short-term loans). As of December 31, 2017, long-term loans and borrowings amounting to RMB11,932 million (current portion of RMB997 million and non-current portion of RMB10,935 million) were secured by the contractual right to charge users for electricity generated in the future and no short-term loans and borrowings were secured by letters of credit.

As of December 31, 2017, we had foreign currency denominated loans with a principal amount of RMB21 million in Japanese Yen and RMB1,860 million in U.S. dollars.

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, 2017:

 

Face value/maturity

Effective
interest rate

December 31,
2017

  (RMB in thousands)
2015 medium-term notes 3,000,000/2018 5.53%

2,999,030

2015 medium-term notes 1,500,000/2018 5.01%

1,496,503

2013 medium-term bonds 3,000,000/2018 5.99%

2,999,211

2015 medium-term bonds 3,000,000/2018 6.11%

2,999,359

2015 medium-term bonds 2,000,000/2018 6.08%

1,998,275

2016 private placement notes 3,215,000/2019 5.12%

3,204,583

Total    

15,696,961

 

The following table sets forth face value, maturity, effective interest rate and outstanding amount of our outstanding short-term bonds as of December 31, 2017:

 

Face value /maturity

Effective
interest rate

December 31,
2017

  (RMB in thousands)
2017 short-term bonds 3,000,000/2018 4.30% 3,101,573
2017 short-term bonds 500,000/2018 4.90%

500,000

Total    

3,601,573

 

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.

79

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 2015, 2016 and 2017, and the capital expenditures of each segment as a percentage of our total capital expenditures for the periods indicated:

   Year Ended December 31 
   2015   2016   2017 
    RMB    %    RMB    %    RMB    % 
   (in millions, except percentage) 
Alumina    5,528.3    53.2    2,842.0    32.4    2,558.7    25.5 
Primary aluminum    1,997.2    19.3    4,121.9    46.8    5,533.4    55.2 
Trading    17.5    0.2    81.6    0.9    86.4    0.9 
Energy    2,411.6    23.3    1,609.8    18.3    1,580.5    15.8 
Corporate and others    412.7    4.0    143.9    1.6    262.2    2.6 
Total    10,367.3    100.0    8,799.2    100.0    10,021.2    100.0 

 

 

In 2017, we spent approximately RMB10,021 million of our capital expenditures (excluding equity interest investments) primarily in investments in energy saving and consumption reduction, environmental governance, resources acquisition and technological research and development.

Our capital expansion plan for 2018 requires a total of approximately RMB12.5 billion in capital expenditures for infrastructure and technology upgrading.

As of December 31, 2017, our Group’s contractual but not provided capital commitment to fixed assets investment amounted to RMB2,967.5 million.

As of December 31, 2017, our commitment under operating leases amounted to RMB15,315.5 million, of which the amount payable within one year was RMB658.6 million, the amount payable from one to five years was RMB2,112.8 million and the amount payable after five years was RMB12,544.1 million.

As of December 31, 2017, our commitments to make capital contribution to our associates and joint ventures amounted to RMB374.8 million, comprised of the capital contributions of RMB320.0 million to Huaneng Ningxia Energy Co., Ltd., RMB21.0 million to Chalco Shituo Intelligence Technology Company Limited, RMB27.8 million to Shanxi Chalco Taiyue New Materials Co., Ltd. and RMB6.0 million to Chinalco Tendering Company Limited, respectively.

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.

C. Research and Development

Our department of science and technology management is responsible for organizing and coordinating the research and development efforts of the Company. The Zhengzhou Institute, the only organization in China dedicated to aluminum smelting research, is responsible for taking the lead in the research and development of important and key technologies for our operations and providing technology services for our plants. The technology centers at our plants focus on providing solutions for specific issues of each plant and applying our developed technologies. Each of the plants also has opportunities to participate in operational testing and pilot industralization relating to research and development of important and key technologies. We also collaborate with universities and other research institutions in China on some of our complicated projects.

80

Our total expenditure for research and development was approximately RMB168.9 million, RMB168.9 million and RMB494.6 million in 2015 and 2016 and 2017, respectively.

D. Trend Information

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, 2017, to December 31, 2017, that are reasonably likely to have a material effect on our revenue, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E. Off-Balance-Sheet Arrangements

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.

F. Tabular Disclosure of Contractual Obligations

The following table summarizes our contractual obligations and commercial commitments for the periods indicated as of December 31, 2017:

 

Payment due by period

 

Total

Within 1 year

1 to 2 years

2 to 5 years

Thereafter

  (RMB in millions)
Finance lease payable, including current portion 6,098.5 2,372.0 1,762.6 1,890.3 73.6
Long-term bank and other loans, including current portion 40,483.3 6,890.1 5,174.0 8,673.8 19,745.4
           
Medium-term notes and bonds, including current portion 15,715.0 12,500.0 3,215.0
Short-term bonds 3,500.0 3,500.0
Gold leasing arrangement 6,818.4 6,818.4
Short-term bank and other loans 30,834.4 30,834.4
Interest payables for borrowings 12,559.9 5,282.0 2,123.2 4,106.0 1,048.7
Financial liabilities at fair value through profit or loss 89.4 89.4
Financial liabilities included in other payables and accrued liabilities, excluding accrued interest 10,307.3 10,307.3
Financial liabilities included in other non-current liabilities 804.4 107.8 108.9 587.7
Trade and notes payables

12,322.0

12,322.0

Subtotal

139,532.6

90,915.6

12,382.6

14,779.0

21,455.4

Capital commitments 2,967.5 N/A N/A N/A N/A
Commitments for capital contribution

374.8

N/A N/A N/A N/A
Commitments under operating lease

15,315.5

658.6 643.8 1,469.0 12,544.1
Total

18,657.8

       

 

81

 

G. Safe Harbor

See “Forward-Looking Statements” at the beginning of this annual report.

Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management

Directors

The sixth session of our Board currently consists of nine directors, including three executive directors, three non-executive directors and three independent non-executive directors. In accordance with our Articles of Association, our affairs are managed by our Board. The business address of each of our directors is No. 62 North Xizhimen Street, Hai Dian District, Beijing, People’s Republic of China, 100082.

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, 2017, and up to date of this Annual Report.

Name

Age

Positions with the Company

Executive Directors (1)    
Yu Dehui (2) 58 Executive Director and Chairman of the Board
Ao Hong (3) 56 Executive Director and President (resigned)
Lu Dongliang (4) 44 Executive Director and President
Jiang Yinggang 54 Executive Director and Vice President
Non-executive Directors (5)    
Ao Hong (3) 56 Non-executive Director
Liu Caiming 55 Non-executive Director
Wang Jun 52 Non-executive Director
Independent Non-executive Directors    
Chen Lijie 63 Independent Director
Hu Shihai 63 Independent Director
Lie-A-Cheong Tai Chong, David 58 Independent Director

 

   
(1)Mr. Yu Dehui was re-designated by the Board from a non-executive director to an executive director of the Company on August 17, 2017. Mr. Ao Hong resigned from the position of the President of the Company and was re-resigned by the Board from an executive director to a non-executive director on February 13, 2018. As of the date of this annual report, we had three executive directors.
(2)On August 17, 2017, Mr. Yu Dehui was re-designated by the Board from a non-executive director to an executive director of the Company.
(3)Due to other work commitment, Mr. Ao Hong resigned from the position of the President of the Company at the twentieth meeting of the sixth session of the Board, with effect from February 13, 2018. On the same date, Mr. Ao was re-designated by the Board from an executive director to a non-executive director of the Company.
(4)On February 13, 2018, Mr. Lu Dongliang was appointed by the Board as the President of the Company and dismissed from the original position of senior vice president of the Company.
(5)On February 13, 2018, the Board resolved to re-designate Mr. Ao from an executive director to a non-executive director. As of the date of this annual report, we had three non-executive directors.
82

Executive Directors

Yu Dehui, aged 58, currently serves as an executive director and the Chairman of our Board. Mr. Yu graduated from Ecole des Hautes Etudes en Sciences Sociales (EHESS) and School of Economics of Paris University Nanterre, majoring in development economics, with a doctoral degree in economics, and he has been a professor. Mr. Yu has extensive experience in various areas such as energy, non-ferrous metals, economics and management. He successively served as the general director for technology of SPEIC, the general director of the department of science, technology and standards of the State Environmental Protection Administration. He also served as a deputy mayor of Baotou City, a vice governor of the government of the Inner Mongolia Autonomous Region, a vice president of China Power Investment Corporation, and a vice president of State Power Investment Corporation. Mr. Yu currently also serves as the president, a director and the deputy secretary of the Communist Party Committee of Chinalco. Mr. Yu served as a non-executive director on our Board from April 8, 2016 to August 16, 2017, and has been serving as the Chairman of our Board since April 8, 2016 and as an executive director of the Company since August 17, 2017.

Lu Dongliang, aged 44, is currently an executive director and the President of the Company. Mr. Lu graduated from North China University of Technology majoring in accounting. He holds a bachelor’s degree in economics and is an accountant. Mr. Lu has more than 20 years of work experience in financial management and in the non-ferrous metals industry. He successively served as the cadre in the audit department of China Non-ferrous Metals Industry Corporation, the officer-in-charge of the capital division of the finance department of China Copper Lead& Zinc Group Corporation, the head of the accounting division and the capital division of the finance department of Chinalco, the deputy manager and manager of the treasure management division of the finance department, the manager of the general management office, the deputy general manager and general manager of the finance department of the Company, the chief financial officer of Chalco Gansu Aluminum Electricity Co., Ltd., the assistant to the president of the Company and the general manager of Lanzhou branch of the Company, the executive director and president of Chalco Gansu Aluminum Electricity Co., Ltd., and a senior vice president of the Company.

Jiang Yinggang, aged 54, is currently an executive director and a vice president of the Company. Graduating from Central South University of Mining and Metallu