Executive summary The Securities Commission of Malaysia (SC) published a consultation paper regarding its proposed policy on the admission of mineral, oil and gas (MOG) exploration or extraction corporations or assets to the main market of Bursa Malaysia Securities Bhd (Bursa) (the SC Consultation Paper) on 15 October 2015.
Immediately after this, on 16 October 2015, Bursa published a consultation paper which contained a review of the post-listing disclosure obligations for MOG listed issuers (the Bursa Consultation Paper, together with the SC Consultation Paper, the Consultation Papers).
Below we consider the proposed changes and whether they are likely to have a substantial impact on the number of MOG corporations listing on Bursa.
SC Consultation Paper
When an applicant’s primary activity will be considered to be MOG The SC is proposing that an IPO applicant’s (theMOG Applicant) primary activity will be considered to be MOG when its MOG activities represent 50 per cent or more of any one of its group total assets, revenue, operating expenses or after tax profit.
In order to demonstrate that it is a suitable candidate for listing, the MOG Applicant must comply with the requirements in chapter 5 of the SC’s Equity Guidelines.
The MOG Applicant must also: (i) demonstrate that it has an adequate portfolio of at least contingent resources (for oil and gas) or indicated resources (for minerals) substantiated by an independent competent person’s report; (ii) demonstrate that it has obtained the legal rights for and has control over the exploration or extraction activities for the MOG assets; and (iii) ensure that at least one of the independent directors appointed to its board has appropriate MOG industry experience and expertise.
Profits test and market capitalisation test Currently, the market capitalisation test, as specified in the Listing Rules (theMarket Capitalisation Test), requires an applicant to have at least one full financial year of operating revenue and positive cash flow from operations. If an applicant is in the exploration stage or early production stage, this requirement can affect its ability to list.
Consequently, the SC is proposing that if a MOG Applicant is able to demonstrate certain requirements then the SC may consider allowing it to apply for a waiver of the requirement under the Market Capitalisation Test that an applicant must have at least one full financial year of operating revenue and positive cash flow from operating activities.
The requirements which a MOG Applicant may have to satisfy in order to be able to apply for such a waiver may include a clear plan to advance the MOG assets to commercial production within two years or that the directors and management of the MOG Applicant have sufficient MOG industry experience to effectively implement the said programme.
If such a waiver is granted, the requirement for a minimum market capitalisation of RM500 million and other additional eligibility requirements will still apply.
Significant operations in a MOG business The SC has also proposed that where a MOG Applicant has significant operations in a MOG business (being when the MOG activities represent 25 per cent or more of the group total assets, revenue or operating expense of the MOG Applicant), any listing documentation must contain a technical report on the MOG Applicant’s MOG resources. Such a report should be prepared by an independent competent person.
In the case of a reverse takeover or a backdoor listing, a valuation report on the resources to be acquired may also need to be prepared and contained in the listing documentation. The proposals set out minimum standards for the competent person report and the independent valuer report.
Bursa Consultation Paper Bursa has been looking into putting disclosure obligations in place for MOG issuers (MOG Issuers) for some time. It carried out an industry consultation in 2014 and, following feedback from that consultation, including from the existing MOG Issuers, further research and engagement with other market regulators was conducted and the current proposals were subsequently drafted.
Designation as a MOG issuer It is proposed that a corporation will be deemed to be an MOG Issuer if: (i) its MOG activities represent 25 per cent or more of its total assets, revenue or operating expenses; or (ii) where it has acquired a corporation whose core business is in MOG activities and any one of the percentage ratios is 25 per cent or more; or (iii) where it has acquired MOG assets and any one of the percentage ratios is 25 per cent or more.
Bursa stated that “25 per cent is an appropriate threshold for post listing disclosure purposes, to ensure that shareholders are kept appraised of the development of an issuer’s MOG activities.”
Announcements to Bursa Bursa is proposing that any MOG Issuer must immediately announce the following to Bursa: (i) any material exploration results; (ii) any material discovery of new MOG reserves or resources; (iii) any material change to MOG reserves or resources; (iv) any decision to abort material MOG activity (and the rationale for the decision); (v) any change in the acceptable reporting standard adopted (including the reasons for the change and the impact, if any, on the level of MOG reserves and resources published or announced previously); and (vi) any appointment of a new competent person or competent valuer.
Next steps The deadline for submitting comments on the Consultation Papers was 13 November 2015. It is our understanding that the SC and Bursa are unlikely to publish any results. They will instead take on board any comments received and amend the policies accordingly.
We believe that the Consultation Papers have been received reasonably well by the market, principally because some of the proposed changes were already being implemented. Despite current market conditions, we believe that it is unlikely that there will be any deferral of the proposed changes.
Going forward While the proposed changes represent a welcome attempt by the SC and Bursa to attract more MOG corporations to list in Kuala Lumpur, there are a number of other hurdles to be overcome if they are to succeed.
Notably, there needs to be investment in relevant expertise across the capital markets sector in Malaysia so that MOG companies are better understood by sponsors, brokers, analysts, legal and accounting advisers and ultimately investors. Traditionally, MOG companies have had most success on the London Stock Exchange, Australia’s ASX and the Toronto Stock Exchange, each of which has a deep pool of relevant expertise and experience. Such an ecosystem takes time to build and can involve significant financial and other commitments with little prospect of short term reward.
In addition, the risk appetite of the regulators and other market participants needs to be in tune with the nuances of the MOG sector, particularly when it comes to exploration assets which are inherently riskier.
SC and Bursa will no doubt have observed that the Singapore Stock Exchange (SGX) has recently undertaken a similar exercise. SGX introduced amended rules for MOG companies in 2013 in order to try and attract more listings from the sector. However, so far, this initiative has met with limited success, which a number of commentators attribute to the limited number of market participants with real expertise in the sector, together with a reluctance on the part of both SGX and sponsors to list exploration assets unless they are part of a portfolio which includes a preponderance of assets in production. The capacity building issue is arguably easy to resolve as it essentially comes down to hiring and retaining the necessary talent. However, when it comes to funding exploration assets, the challenge is more difficult as companies with substantial production can generally use the resulting cashflow to fund their exploration activities and are hence less likely to seek funding via an IPO.
Ultimately, the regulatory changes being ushered in by SC and Bursa are just one part of the infrastructure that will be needed to develop a sustainable population of listed MOG companies. Only time will tell whether the other issues identified above will be addressed, but there is certainly no shortage of capital-hungry MOG companies hoping that they can be.