The Hong Kong Stock Exchange (the “Exchange”) has built an international reputation largely on the strength of its listed financial, property and manufacturing companies. Seeking to expand this base and encourage new listings by Mineral Companies, the Exchange recently amended Chapter 18 of the Listing Rules to encourage listings by overseas mining and petroleum companies (the “Updated Rules”). The Updated Rules became effective on 3 June 2010.
The recent amendments have brought Hong Kong more in line with globally recognised standards and provide greater clarity to the disclosure requirements for mining and petroleum companies seeking to list. The Updated Rules, in connection with the recent Exchange decisions adding Australia and Canada (British Columbia and Ontario) to the list of acceptable overseas jurisdictions for listing applicants, are likely to increase the number of mining companies seeking a listing in Hong Kong. In addition to listing applicants, the Updated Rules affect existing listed mineral companies, as well as other listed entities that acquire or dispose of significant mineral or petroleum assets.
This article provides an overview of the key changes brought about by the Updated Rules. Capitalised terms used herein but not defined have the meanings set forth in the Updated Rules.
Application of the updated rules
The most significant impact of the Updated Rules will be on listing applicants that satisfy the definition of a Mineral Company; being a new applicant whose Major Activity is the exploration for and/or extraction of minerals or petroleum products. A Major Activity is one that represents 25% or more of the total assets, revenue or operating expenses of the issuer and its subsidiaries. Existing listed issuers in the resources section are not treated as Mineral Companies for purposes of the Updated Rules unless they have completed a qualifying transaction and acquired mineral or petroleum assets after the Updated Rules came into effect. Certain continuing disclosure obligations will apply to listed companies that currently disclose information regarding their mineral or petroleum resources.
The Updated Rules allow Mineral Companies with at least a meaningful portfolio of Contingent Resources (for petroleum companies) and Indicated Resources (for mining companies) to list. Importantly, however, although the Updated Rules now provide an alternative qualifying route for Mineral Company applicants who are unable to meet current financial track record requirements, early-stage exploration companies without identifiable mineral or petroleum reserves or resources will not be deemed to qualify as suitable listing candidates. Amongst other changes, the Updated Rules provide guidance on (i) capitalization requirements, (ii) requirements for demonstrating the right to explore and/or extract resources and control of assets, and (iii) acceptable reporting standards for technical and valuation reports.
To qualify for listing, a new applicant Mineral Company must demonstrate that it has available working capital for 125% of its working capital needs for the next twelve months. The analysis of an applicant’s working capital needs must include at a minimum: general, administrative and operating costs, property holding costs and the costs of proposed exploration and/or development. Where a Mineral Company has not yet begun production, it must disclose its plans to proceed to production with indicative dates and costs.
New applicant Mineral Companies must demonstrate in one of two ways that they have adequate rights to participate actively in the exploration and/or extraction of the relevant resources. First, an applicant Mineral Company can demonstrate that it has either control over a majority (by value) of the assets in which it has invested together with adequate rights over the exploration for and/or extraction of the relevant resources. Alternatively, an applicant Mineral Company can demonstrate that it has adequate agreements with a third party possessing the relevant rights to provide sufficient influence in decisions over the exploration for and/or the extraction of those resources. The Exchange will also recognise rights granted under government mandates.
The Updated Rules also require applicant Mineral Companies to provide an independent technical report substantiating the relied-upon resources under a recognised reporting standard. The report must be prepared by a Competent Person. A Competent Person is someone who has at least five years’ relevant experience and appropriate professional qualifications. The Competent Person submitting the report must also be independent of the applicant and its directors, senior management and advisers.
New applicant Mineral Companies that are unable to meet the traditional financial track record requirements may now take advantage of an alternative option to the comply with the track record requirement. Such companies may comply by demonstrating that their boards and senior management, taken together, have sufficient experience in the type of exploration and/or extraction activity that the Mineral Company is pursuing. Individuals who are relied on must have a minimum of five years’ relevant industry experience and details of the relevant experience must be disclosed in the new applicant’s listing document.
Disclosure reporting standards
The Updated Rules have adopted internationally accepted reporting standards including, for mineral resources, the JORC Code, NI 43-101 and the SAMREC Code (as modified by the Updated Rules). For petroleum resources and reserves, the Updated Rules provide that the Mineral Company must disclose information regarding such resources under PRMS. The Exchange may allow other reporting standards to be used; however, the Mineral Company must then provide a reconciliation to an adopted code. Currently, the Russian and Chinese standards are not recognised and reconciliations to another reporting standard would be required.
Any valuation of a Mineral Company’s mineral or petroleum assets must be prepared under the CIMVAL Code, SAMVAL Code or VALMIN Code, and the basis of the valuation, relevant assumptions and reason for choosing a particular method of valuation must be clearly stated.
A newly listed Mineral Company must include in its interim (half-yearly) and annual reports details of its exploration, development and mining production activities and a summary of expenditure incurred on these activities during the relevant period. A listed issuer that publicly discloses details of Resources and/ or Reserves must also give an update of those Resources and/or Reserves once a year in its annual report, in accordance with the reporting standard under which they were previously disclosed or another accepted reporting standard. These updates must be presented in a format that can be easily understood by investors. Annual updates are not required to be supported by a Competent Person Report and may take the form of a no material change statement. For any major acquisition of Natural Resources assets, a Competent Person’s Report and valuation report must be included in the shareholder circular. For any major disposal of Natural Resources assets, details of any material liabilities that will remain with the company after the disposal must be disclosed.