2322488-v1\BRIDMS 1 CHANGES TO DISCLOSURE OBLIGATIONS FOR MINING COMPANIES: STILL UNSURE OF YOUR OBLIGATIONS? Philip Christensen Baker & McKenzie Brisbane This paper addresses: • Key changes to the ASX Listing Rules • Key changes to the JORC Code • Problem areas that became evident in the last year KEY CHANGES TO THE ASX LISTING RULES IN 2014/15 The following key changes are set out in chronological order - not order of importance. The main change was the commencement of the Corporate Governance Listing Rules. These corporate governance rules came into effect 1 July 2014. The annual reports for the year ended 30 June 2015 will show the extent of adoption by ASX listed companies. These corporate governance rules are set out in more detail below - and are fully set out in the ASX Corporate Governance Principles and Recommendations - 3rd Edition. Refer website http://www.asx.com.au/documents/asx-compliance/cgc-principles-andrecommendations-3rd-edn.pdf 30 January 2015 - Updated guidance on share trading policies and debt securities Guidance Notes 27, 29, 30 & 34 (Listed Entities Update 02/15). These guidance notes form part of the ASX’s rolling two-to-three year Guidance Note refreshment program. 1. Guidance Note 27 Trading Policies addresses several issues including reasons why entities are required to implement a trading policy, who should be restricted from trading in the entities securities, and the types of trading that should be restricted. The note also covers circumstances in which exceptions can be made to the rules, and the necessary procedures to follow in the event that an entity grants clearance to trade. 2322488-v1\BRIDMS 2 The updated guidance note incorporates learnings from market developments since the last update was announced in January 2012. The update clarifies the principle adopted by the ASX, which is to not only minimise the risk of insider trading, but to protect an entity from the appearance of insider trading and the reputational damage it can cause. 2. Updated Guidance Note 29 ASX Debt Listings is aimed at assisting entities who wish to apply for admission to the official list as a debt listing rather than an equity listing. 3. Updated Guidance Note 34 Naming Conventions for Debt and Hybrid Securities is intended to assist entities that are proposing to issue ASX-quoted or hybrid securities to guide the entities in naming requirements for securities for the purposes of offer documents and other significant documentation. 30 September 2014 - Listing Rules Guidance Note 12 (Listed Entities Update 11/14) The Guidance Note changes included: 4. Section 3.2 (the main circumstances in which ASX will apply Listing Rules 11.1.2 and 11.1.3). The Section 3.2 changes will apply when the doubling-up test is applied, which is used by ASX to determine whether or not a transaction requires further examination if it is a backdoor listing. ASX will use the entity’s most recent published financial statements or Appendix 3B filings as the reference point for different financial measures referred to in this section of the Guidance Note. 5. Section 3.6 (meeting the minimum spread test). This test is used in the event that an entity is undertaking a significant capital raising as well as a re-compliance listing. The holder's securities must have a value of at least $2,000 in order to meet the minimum spread test. The ASX will generally use the issue price of the prospectus or PDS for the capital raising to determine whether the holder meets the requirements. The test is used where an entity is undertaking a material capital raising in conjunction with a re-compliance listing on the ASX. However, the ASX may use a different measure to determine the value of a holder’s securities if the entity is not undertaking a material capital raising in conjunction with its re-compliance with the admission of requirements or if ASX has concerns in 2322488-v1\BRIDMS 3 regards to the issue price, and its failure to fairly reflect the market value of its main class of securities. 6. Section 3.7 (meeting the profit test or assets test) – This was not altered, but more so expanded upon to provide general guidance on how ASX applies the profit test and assets test to a re-compliance listing. The following points are worth nothing: • If an entity fails to lodge required financial statements as per Chapter 4 in the relevant period prior to re-admission, or the financial documents have not been properly reviewed, ASX will insist that the default is rectified prior to readmission. This rule will apply to any re-admission, regardless of whether or not it would ordinarily have to produce audited or reviewed financial statements for that test; • where an entity is required under Listing Rule 11.1.3 to re-comply with admission requirements, it must provide a reviewed pro forma statement of financial position to ASX, along with the review. This is treated as though it were being admitted for the first time. The reviewed pro-forma statement must reflect any material changes in the financial position of the entity from the balance date of the last financial statement provided to ASX under the Chapter 4 requirements. 7. Section 3.8 (Escrow requirements for restricted securities) - Where ASX exercises its discretion under Listing Rule 11.1.3 to require re-compliance with the admission requirements in relation to a particular transaction and the entity has issued any securities for cash shortly before or after the announcement of the transaction, those issues will be looked at carefully by ASX to determine whether they should be classified as restricted securities. If these are classified as restricted securities, they will be subject to the escrow requirements in Chapter 9 and Appendices 9A and 9B. 8. Section 3.9 (The 20 cent rule) – ASX has announced a new policy adoption on the application of the 20 cent rule in relation to compliance listings. The new policy recognises that where an entity's securities have been trading on ASX at less than 20 cents, along with other factors, the ASX will consider a request from the entity not to apply the 20 cent rule provided that: • the issue price or sale price for any securities being issued or sold as part of, or in conjunction with, the transaction: 2322488-v1\BRIDMS 4 - is not less than two cents each; and - is approved by security holders as part of the approvals obtained under Listing Rule 11.1.2; and - ASX is otherwise satisfied that the entity’s proposed capital structure after the transaction will satisfy Listing Rules 1.1 and 2.5 (appropriate structure for a listed entity). • This new policy recognises that where an entity is not proposing to undertake a capital raising as part of, or in conjunction with, a significant change to the nature or scale of its activities, the 20 cent rule (and restrictions) do not apply. 9. Section 3.10 (minimum option exercise price) – The ASX has adopted a new policy on the application of the “minimum option exercise price rule” as it relates to recompliance listings. The new policy will apply where an entity is proposing to issue options over ordinary securities as part of, or in conjunction with, a transaction that has forced ASX to apply Listing Rule 11.1.3 (provided that its ordinary securities have also been trading at less than 20 cents). ASX will consider a request from the entity for ASX not to apply minimum option exercise price rule, provided that: • exercise price for options is not less than two cents each; • exercise price is not approved by security holders as part of the approvals obtained under Listing Rule 11.1.2; and • ASX is otherwise satisfied that the proposed capital structure of the entity after the transaction in question will satisfy Listing Rule 1.1. 10. Section 3.12 (requirement for additional information): • ASX may require an entity that is required under Listing Rule 1.1.3 to recomply with the admission requirements to disclose additional information that exceeds the disclosure requirements under Appendix 1A and the accompanying Information Form and Checklist (ASX listings); and • where a transaction involves the listed entity acquiring a non listed entity, the ASX will generally require a non-listed entity’s financial statements together with any audit documents in relation to those financial statements: - for the last 3 financial years (or shorter period if ASX allows); and 2322488-v1\BRIDMS 5 - if a non-listed entity’s last full financial year ended more than 8 months before the listed entity applied for admission, for the last half year (or longer period if available) from the end of the last full financial year. Prior to this, the ASX will not effect re-admission. 11. Section 6.1 (The contents of the notice) - The ASX announced a new guidance direction relating to the information that should be provided in a notice of meeting approving a transaction under Listing Rules 11.1.2 or 11.2 stating that where an entity must obtain security holder approval and re-comply with admission requirements, ASX expects all material information to also be lodged. This includes any prospectus/PDS/information memorandum lodged. This information must also be included in the notice of meeting to security holders. 17 July 2014 - Corporate Governance amendments (Listed Entities Update) 12. Governance-related Listing Rules – ASX governance related Listing Rules commenced on 1 July 2014. ASX released: • its Supplementary Consultation Response; • updated version of governance-related Listing Rule Amendments; and • a mark-up of the changes in the final version compared to the proposed changes. 29 October 2014 - Listing Rules Guidance Note 17 (Update Number 10/14) 13. The ASX announced requirements for Ore Reserves under the JORC Code 2012 commencing 1 December 2014. Beginning 1 December 2014 clause 29 of the JORC Code will require Ore Reserves to be "defined by studies at Pre-Feasibility or Feasibility level as appropriate that include application of Modifying Factors”. It is worth noting that clause 29 of 2012 JORC Code does not require a formal Pre Feasibility or Feasibility Study. These are now referred to as "studies" but rather “studies” at Pre Feasibility or Feasibility Level. Where an entity does not have an operating mine and it has not undertaken the necessary studies prior to declaring an Ore Reserve, it will need to do so before 2322488-v1\BRIDMS 6 1 December 2014. If this requirement is not complied with, it must downgrade the Ore Reserve to a Mineral Resource Any material change to an Ore Reserve on or after 1 December 2013 will need to comply with the new disclosure rules and particularly clauses 4, 5 and 35 of the 2012 JORC Code. If it is the case that a particular criterion is not relevant or material, a disclosure that it is not relevant or material and an explanation of why this is the case must be lodged in lieu. The second part of this paper addresses the 2012 JORC Code and associated Listing Rule changes. 14. Update to ASX Listing Rules Guidance Note 17 Waivers and In Principle Advice: • Section 4 (Standard vs non standard waivers) The ASX confirmed that they will grant a standard waiver upon request and without requiring detailed submissions in support of the application; • Section 6 (Applications for waivers) has been updated to more clearly differentiate between the contents ASX expects to be included in an application for a standard waiver versus an application for non standard waiver; • Annexure (Standard waiver requests) the ASX added 3 new standard waivers: Waiver One: - The underwritten securities are issued not later than 15 business days after the dividend/distribution payment date. - Related parties and associates do not act as underwriter or subunderwriters to the DRP unless they obtain prior security holder approval under Listing Rule 10.11. - DRP does not contain a limit on security holder participation. - Any securities issued in accordance with the instructions of the underwriter or sub-underwriter are issued at a price to or greater than the price at which other securities under the DRP are issued. 2322488-v1\BRIDMS 7 Waiver Two - In respect of Listing Rule 14.7 to permit the securities to be issued outside the three month and one month period respectively, provided that: o securities issued on the same terms and conditions that have been approved by holders of ordinary securities and before the suspension is lifted; and o the circumstances of the entity have not materially changed since the holders of ordinary securities approved the issue of securities. Waiver Three - From Listing Rule 14.7 the waiver permits the entity not to comply with the voting exclusion statement in its notice so that the votes of security holders who participated or propose to participate in the issue may be counted subject to and to the extent only that those holders are acting solely in a nominee, trustee, custodial or other fiduciary capacity on behalf of beneficiaries who did not or will not participate in the issue on the following conditions: o the beneficiaries provide written confirmation to the Nominee Holders that they did not and will not participate in the issue or proposed issue nor are they an associate of a person who participated in the issue or will participate in the proposed issue; o the beneficiaries direct the Nominee Holders how to vote on the resolution; o the Nominee Holders do not exercise discretion in casting a vote on behalf of the beneficiaries; and o the terms of the waivers are immediately released to the markets. 2322488-v1\BRIDMS 8 Dilution factor Following recent public consultation, ASX will change the methodology to calculate a dilution factor for a special dividend and other forms of non recurring special cash distribution, in the following way: - effective 3 November 2014 a dilution factor for special dividend will only be calculated and published if the value of the payment is greater than or equal to five per cent of the shares closing price at the time of calculation; - change will apply to special dividends with an ex-date after the effective date – will be no recalculation of past dilution factors that have been published for special dividends with an ex-date prior to the effective date. Corporate Governance Principles and Recommendations 15. Listing Rule 4.10.3 provides that a company must include in its annual report, a statement disclosing the extent to which the company has followed the recommendations of the ASX Corporate Governance Council. Purpose of ASX Principles and Recommendations The purpose of publishing the Corporate Governance Principles and Recommendations is to provide entities listed on the ASX with a platform of approved corporate governance practices that will, in the Council's view, likely achieve good governance outcomes and meet the reasonable expectations of investors. The Corporate Governance Council acknowledges that different entities may adopt different and acceptable practices based on a range of factors including size, complexity, history and corporate culture. The principles and recommendations set out by the Corporate Governance Council are therefore not mandatory. 2322488-v1\BRIDMS 9 “If not, why not” The Board of Directors will choose which governance practices to adopt for governing the entity. Under the Council’s recommendations, if the Board of Directors of an entity consider that a recommendation is not appropriate for the entity, it does not have to be adopted. If the entity decides not to adopt it, it must explain why – hence, the "if not, why not" principle. Requiring an explanation from the entity ensures that the market is appropriately informed for the following reasons: - security holders and stakeholders are properly informed when discussing governance matters with the Board of Directors; - security holders can consider the reason for rejecting the recommendation when making decisions on how to vote; - investors can use this information when deciding whether or not to invest in the entity's securities. This approach is fundamental to the operation of all Principles and Recommendations. Application The Principles and Recommendations apply to all and only ASX listed entities, whether or not they are established in Australia, and whether or not they are internally or externally managed. Although the Principles and Recommendations are created only for listed ASX entities, the Council's recommendations are useful for other bodies in looking for governance guidance. Structure of Principles and Recommendations There are 29 recommendations intended to give effect to the following principles: Principle 1 - Lay solid foundations for management and oversight • A listed entity should establish and disclose the respective roles and responsibilities of its board and management and how their performance is monitored and evaluated. Principle 2 - Structure the Board to add value • A listed entity should have a board of an appropriate size, composition, skills and commitment to enable it to discharge it duties efficiently. 2322488-v1\BRIDMS 10 Principle 3 - Act ethically and responsibly • A listed entity should act ethically and responsibly. Principle 4 - Safeguard integrity in corporate reporting • A listed entity should have formal and rigorous processes that independently verify and safeguard the integrity of its corporate reporting. Principle 5 - Make timely and balanced disclosure • A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities. Principle 6 - Respect the rights of security holders • A listed entity should respect the rights of its security holders by providing them with appropriate information and facilities to allow them to exercise those rights effectively. Principle 7 - Recognise and manage risk • A listed entity should establish a sound risk management framework and periodically review the effectiveness of the framework. Principle 8 - Remunerate fairly and responsibly • A listed entity should pay director remuneration sufficient to attract and retain high quality directors and design its executive remuneration to attract, retain and motivate high quality senior executives and to align their interests with the creation of value for security holders. Interaction with ASX’s Listing Rules Pursuant to Listing Rule 4.10.3 each entity is required to release an annual report which includes either a corporate governance statement that meets the requirements of the rule, or the URL on its website where such a statement is located. The corporate governance statement must disclose the extent to which the entity has followed the recommendations of the Council during the reporting period. If the recommendation was not followed, the entity must provide which recommendation 2322488-v1\BRIDMS 11 was not followed, the period it was not followed for, and the reason it was not followed. It must also identify the practices adopted instead of the recommendation, and these must then be approved by the Board. This Listing Rule encourages listed entities to adopt reporting practices suggested by Council but does not force them to do so, allowing the entity enough flexibility to pursue their own governance, but also protecting stakeholders and potential investors from unpalatable practices that they may not have been aware if, if it weren’t for the “if not, why not” principle. Each entity must also provide a completed Appendix 4G statement, along with its annual report. Appendix 4G is a checklist that the director or company secretary must sign, indicating whether or not they have followed all 29 of the Council’s recommendations or if they have developed their own (and must identify where they can be located). KEY CHANGES TO THE JORC CODE 16. Chapter 5 of the Listing Rules requires mining and exploration companies to comply with the JORC Code in reporting their results. The JORC Code has long been the cornerstone of mining and exploration reporting obligations. Accordingly, the 2012 JORC Code was a significant change. It replaced the 2004 edition to bring the Code up to world’s best practice. Chapter 5 of the Listing Rules was substantially revised. Interestingly oil and gas companies did not have the equivalent of a JORC Code. The SPE-PRMS has become that equivalent. The 2012 JORC Code is set out in Appendix 5B of the Listing Rules. 17. Chapter 5 of the Listing Rules requires oil and gas companies to report petroleum resources in accordance with SPE-PRMS. That is, the Petroleum Resources Management System sponsored by the Society of Petroleum Engineers, the American Association of Petroleum Geologists, the World Petroleum Council and the Society of Petroleum Evaluation Engineers. 18. The new Listing Rules came into effect on 1 December 2013 with an exception being the requirement for a feasibility or pre-feasibility study prior to the declaration of an Ore Reserve estimate. That requirement is effective from 1 December 2014. 2322488-v1\BRIDMS 12 It is not the intent of this paper to go through all of the changes to the JORC Code or analyse the SPE-PRMS. Those codes are capable of an entire presentation of themselves. Chapter 5 of the Listing Rules was substantially re-written and there were significant consequential amendments to Guidance Note 31 (Reporting on Mining Activities) and there was a new Guidance Note 32 (Reporting on Oil and Gas Activities). 19. The following are the broad changes to Chapter 5 of the Listing Rules as applicable to the 2012 JORC Code SPE-PRMS. All Public Reports Listing Rule 5.6 requires all public reports to be in accordance with Listing Rules 5.7 to 5.24 and the 2012 JORC Code if the report relates to: • Exploration targets • Exploration results • Mineral resources or ore reserves • Production targets It must be remembered that the JORC Code also applies to numerous other reports concerning mineral exploration and mining. For example, prospectuses, product disclosure statements, annual reports, takeover statements and various disclosures to the ASX. Material Mining Projects Listing Rules 5.7 - 5.10 contain new, enhanced reporting requirements for a material mining project. A material mining project is a new concept and means a mining project in which a company or group holds an economic interest which is material in the context of the overall business operations or financial results of the company or group. It is intended to be a somewhat “self evident” test. Exploration Results When reporting exploration results for the first time or any new exploration results, a company must, by way of separate report, provide all information material to understanding the results. This must be done by reference to the Table 1 criteria of the JORC Code. 2322488-v1\BRIDMS 13 If one or more of the criteria set out in the Table are regarded as not material, then an explanation must be made as to why it is not material. Mineral Resources Listing Rule 5.8 requires that in the case of: • inferred mineral resources, • indicated mineral resources, or • measured mineral resources (in relation to a material mining project) being reported either for the first time or which have materially changed from when those estimates were last reported, a report must include the new information required under the 2012 JORC Code. The information requirement for a market announcement must be "a fair and balanced representation of all information". It must address the items set out in Listing Rule 5.8.1. Listing Rule 5.8.2 requires a separate report to the market announcement which must reference the relevant criteria in Table 1 of the JORC Code. Again, by reference to Table 1, an “if not, why not” analysis must be included in the report. Ore Reserves Under Listing Rule 5.9, if: • probable ore reserves, and • proved ore reserves in relation to a material mining project are reported either for the first time or have materially changed since those last estimates were reported then the company must report these in accordance with Listing Rule 5.9 and the 2012 JORC Code. Listing Rule 5.9 follows the terms of Listing Rules 5.7 and 5.8 and requires a "fair and balanced representation of the information" to be contained in the market announcement. Listing Rule 5.9.2 requires a separate report to be an appendix to the announcement. That report must contain the relevant information set out in Table 1 of the JORC Code. 2322488-v1\BRIDMS 14 Again, the "if not, why not" principle is introduced for the adoption or otherwise of the relevant Table 1 requirements. Competent Persons to Sign Off The concept of the "competent person" is a cornerstone of the JORC Code. This continues. However, under Listing Rule 5.2.3 the primary rule (Listing Rule 5.22) does not apply to repeated statements provided there is no new material information that would materially change the previously reported position. Historical and Foreign Estimates Listing Rules 5.10 - 5.14 concern reporting of historical estimates and foreign estimates of mineralisation for material mining projects. A company with historical estimates or foreign estimates need not conform them to the new 2012 JORC Code (Listing Rule 5.6) provided it complies with Listing Rules 5.12 - 5.14. Importantly, note that a company cannot include historical estimates or foreign estimates in an economic analysis. An economic analysis includes a feasibility study and even a scoping study. An exception is if these are "qualifying foreign estimates". Listing Rules 5.12.1 to 5.12.10 are detailed requirements of the content of any announcement containing historical or foreign estimates. Importantly, a competent person must sign off that the information in the announcement is "an accurate representation". If new exploration information becomes available which "materially impacts" on the reliability of the historical or foreign estimates, then Listing Rule 5.12 can no longer be relied on as an exemption from Listing Rule 5.6. The Listing Rules encourage companies to conform historical estimates and foreign estimates to the 2012 JORC Code. An annual report must indicate such progress (Listing Rule 5.14.1). If after three years from the initial reporting of historical estimates or foreign estimates there remains non-conformity with the JORC Code an explanation must be provided as to why not and the company's intention to comply. 2322488-v1\BRIDMS 15 Production Targets / Forecast Financial Information Listing Rules 5.15 - 5.19 concern reporting around production targets. A company must not announce a production target if it is based 'solely' on an exploration target or 'solely' on a combination of an exploration target and an inferred mineral resource. Further, a company must not announce a production target if based 'solely' or 'partly' on historical estimates or foreign estimates (with the exception of a qualifying foreign estimate). If a company announces a production target if must contain the information set out in Listing Rules 5.16.1 - 5.16.7. If the production target is all or partly based on an exploration target or based solely on inferred mineral resources, a "cautionary statement" must be included (Listing Rules 5.16.5, 5.16.6). Listing Rules 5.17 - 5.18 deal with financial forecasts from production targets. Where the financial forecast is based on ore reserves or ore reserves and measured mineral resources (or non-material indicated mineral resources) then the requirements of Listing Rule 5.16 and 5.17 are not applicable. If otherwise, (i.e., lesser quality mineralisation classification) Listing Rule 5.17 requires a range of information to be included, for example, all material assumptions on which the forecast financial information is based. Cautionary Statements As described above, the Listing Rules have introduced (Listing Rule 5.16.5 and 5.16.6) the requirement of a "cautionary statement". Listing Rule 5.16.5 provides: "5.16.5 If a proportion of the *production target is based on an *exploration target, a statement of the factors that lead the *entity to believe that it has a reasonable basis for reporting a *production target in that context, and a cautionary statement proximate to, and with equal prominence as, the reported *production target, stating that: "The potential quantity and grade of an exploration target is conceptual in nature, there has been insufficient exploration to determine a mineral resource and there is 2322488-v1\BRIDMS 16 no certainty that further exploration work will result in the determination of mineral resources or that the production target itself will be realised"." Annual Disclosure Listing Rules 5.20 and 5.21 set out the requirements for the annual report of a: • mining exploration company (Listing Rule 5.20) • mining company (Listing Rule 5.21). Listing Rule 5.24 confirms that a competent person must sign off. Oil and Gas Oil and gas activities are reported under Listing Rules 5.25 - 5.45. This paper does not propose to review these Listing Rules - other than to note that they are consistent with the mineral reporting obligations set out in Listing Rules 5.1 - 5.24. The headlines are: • Requirements applicable to all public reporting (Listing Rules 5.25 - 5.28). • Requirements applicable to reporting on geophysical surveys (Listing Rule 5.29). • Requirements applicable to reporting petroleum reserves for material oil and gas projects (Listing Rules 5.31 - 5.32). • Requirements applicable to reporting contingent resources for material oil and gas projects (Listing Rules 5.33 - 5.34). • Requirements applicable to reporting prospective resources for material oil and gas projects (Listing Rules 5.35 - 5.36). • Annual Report requirements (Listing Rules 5.37 - 5.40). • Qualified petroleum reserves and resources evaluation requirements (Listing Rules 5.41- 5.44). 2322488-v1\BRIDMS 17 PROBLEM AREAS THAT BECAME EVIDENT LAST YEAR 20. The only industry-wide "problem area" in 2014 (and which is continuing so far this year) is the listed exploration company sector. The problem is the growing concern of the ASX that many exploration companies have cash balances insufficient to carry out their exploration activities over the following one or two quarters. The ASX has been watching this area very carefully and has written to a significant number of listed exploration companies seeking information as to their cash position, relationship to proposed expenditure and reminding them of their continuous disclosure obligations under Listing Rule 3.1 - 3.1B. The ASX is also raising concerns with compliance with Listing Rule 12.2. Commodity Prices 21. The back-drop in commodity prices can be seen by the decline in prices across a range of minerals. 1 1 Pervan, M. 2015 "ANZ Commodity Strategy, Re-setting expectations lower" ANZ, p. 4 2322488-v1\BRIDMS 18 22. The exploration business is historically characterised by low cash balances and a continuous search to raise cash to meet the exploration programs of the company. The "hope" of an exploration company is that increased exploration activity will lead to increased value, hence raising equity will also be easier. Debt plays little role in the exploration sector - other than debt provided by related bodies corporate (which may well be better regarded as equity by another name). What I see occurring with the continued downward slide in commodity prices is that the exploration companies are finding it more and more difficult to raise cash. Cash preservation generally means shrinking exploration activity. The spectre of insolvency is a topic of increasing discussion. Cash Reporting 23. An exploration company listed on the ASX is required by Listing Rule 5.5 to lodge an Appendix 5B Quarterly Report within 30 days of the end of each quarter. In essence, the Appendix 5B report requires disclosure of cash inflows and outflows culminating in cash at hand at the end of each quarter. Against that, the company is required to report the estimated cash outflows for the next quarter. BDO, in its BDO Explorer Quarterly Cash Update for Q.2 2014 produced the table below. 2322488-v1\BRIDMS 19 2 BDO commented that "Our analysis of the December 2014 quarter cash position of Australian-listed explorers, confirms that an increasing number of junior explorers are undercapitalised and have insufficient cash reserves to continue operating effectively for any extended period of time". BDO also noted "… one in nine junior explorers reported that they didn’t undertake any exploration during the period". This is a continuing trend. ASX Inquiries 24. The ASX somewhat standard letter typically asks the following questions. Is it possible to conclude, on the basis of the information provided, that if the company were to continue to expend cash at the rate for the quarter indicated by Appendix 5B, … the company may not have sufficient cash to fund its activities. Is this the case, or are their other factors that should be taken into account in assessing the company's position? Does the company expect that in the future it will have negative operating cashflow similar to that reported in Appendix 5B for the quarter and, if so, what steps has it taken to ensure that it has sufficient funds in order to continue its operations at that rate? 2 2015 "Q2 - Explorer Quarterly Cash Update", BDO, p.3 2322488-v1\BRIDMS 20 What steps has the company taken, or what steps does it propose to take, to enable it to continue to meet its business objectives? Can the company confirm that it is in compliance with the Listing Rules, and in particular, Listing Rule 3.1? Please comment on the company's compliance with Listing Rule 12.2, with reference to the matters discussed in the note to the rule. Listing Rule 3.1 is the primary rule regarding continuous disclosure. It provides "once an entity is or becomes aware of any information concerning it, that a reasonable person would expect to have a material effect on the price or the value of the entity's securities, the entity must immediately tell ASX that information". Listing Rule 12.2 is in Chapter 12, which is the "Ongoing Requirements" chapter. Listing Rule 12.2 reads "An entity's financial condition (including operating results) must, in ASX's opinion, be adequate to warrant the continued quotation of its securities and its continued listing". 25. A review of the responses by a number of listed explorers has a sameness to the responses. Typical responses are along the following lines: "The company is pursuing opportunities to source further funding." "The company's major shareholder provides funds to the company on an 'as needs' basis." "The company raises capital from existing shareholders and new shareholders through various mechanisms." "The company has the ability to raise capital via a placement at short notice, or pro rata issue to existing shareholders as well as the ability to farm-in or farm-out certain expenditure in relation to existing exploration leases." "The company has an intention to perform a rights issue to raise a minimum of $xxx." "The company continues to explore and secure various debt or equity capital raising opportunities." 2322488-v1\BRIDMS 21 All the responses we sighted unequivocally confirmed that the company was in compliance with the Listing Rules and in particular Listing Rule 3.1. Similarly, each response unequivocally confirmed that the company was in compliance with the Listing Rule 12.2. Insolvency 26. I think it is worthwhile to take a quick look at the insolvency law under Corporations legislation as this ties into Listing Rule 12.2. Section 588G sets out the basis for the directors' duty to prevent insolvent trading by a company. Under section 588G(1), a director has personal liability if, at the time the company incurs a debt, the company is insolvent or becomes insolvent by incurring that debt and at that time there are reasonable grounds for suspecting that the company is insolvent or would so become insolvent. Continuous Disclosure 27. Listing Rule 3.1 creates an intense focus on the company's ability to, in effect, carry out its exploration activities. The disclosure inherent in the lodgement of Appendix 5B is simply compliance with Listing Rule 5.5. Appendix 5B is historical. Continuous disclosure is in the present. The critical issue on a continuing daily basis is whether the various endeavours which the company has planned to raise further cash to carry out its planned activities will be successful. If these endeavours will not be successful, the company may have to take action to conserve its cash. Depending on the action required to be taken, disclosure under Listing Rule 3.1 may apply. Thus, for example, I would think that if a company was to undertake no further exploration or a substantial reduction in exploration from that undertaken the previous quarters, then that fact should be disclosed under Listing Rule 3.1. Another means of conserving cash is to relinquish mineral tenements. Mineral tenements have expenditure obligations attached. There is an inherent relinquishment obligation in the exploration licence conditions. Often exploration companies seek to 'hang on' to as much area as possible - but anecdotally many are now accelerating the relinquishment. 2322488-v1\BRIDMS 22 The test is "material impact on price" and more drastic action may require disclosure. By way of reminder, note that Corporations Legislation chapter 6CA (Continuous Disclosure). Section 674 gives legislative backing to Listing Rule 3.1 and a director may be personally liable if there is a contravention of section 674.