Commentary: Hong Kong Exchange’s new rules for miners

Hong Kong, China — Hong Kong Exchanges and Clearing Ltd. has published its Consultation Conclusions on New Listing Rules for Mineral Companies for both the Main Board and Growth Enterprise Market, and the new rules for mining companies under Chapter 18 of the Listing Rules.

The new rules came into effect on June 3, 2010.

In addition to laying out new disclosure reporting standards, continuing obligations, and social and environmental standards, the new rules expand the eligibility requirements for mineral-company applicants, increase capitalization requirements, add provisions to ensure that such applicants have adequate rights to participate actively in the relevant exploration and/or extraction work, and provide an alternative for those applicants who are unable to meet current financial track-record requirements.

Rule 18.01 defines a “mineral company” as a “new applicant whose major activity (whether directly or through its subsidiaries) is the exploration for and/or extraction of natural resources (which includes both mineral and/or petroleum).”

The term “major activity” is one that represents 25% or more of the total assets, revenue or operating expenses of the issuer and its subsidiaries.

The new rule 18.03 requires that new mineral-company applicants demonstrate by one of two methods that they have adequate rights to participate actively in the exploration and/or extraction of a substantial portfolio of resources (indicated or contingent resources) that are satisfactory to the exchange.

Under the first method, a mineral company seeking a new listing needs to 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 natural resources or, through other rights, has significant influence over the extraction of those resources.

Under the second method, such an applicant must demonstrate that it has adequate agreements with the third party possessing the relevant rights. For new listing applicants that have not reached the production stage, rule 18.07 requires disclosure of its plans to proceed to production with indicative dates and costs.

These plans must be supported by at least a scoping study, substantiated by the opinion of a “competent person.”

If exploration rights or rights to extract resources and/or reserves have not yet been obtained, relevant risks to securing the rights must be disclosed.

With respect to new capitalization requirements, new mineral-company applicants are now required to provide disclosure in relation to their cash operating costs and working capital under rule 18.03. Required working capital disclosures include, at a minimum, general, administrative and operating costs, property holding costs, and the cost of proposed exploration and/or development.

The applicants must demonstrate that they have sufficient working capital for 125% of their budgeted working capital needs for the next 12 months.

Estimates of cash operating costs include the specific items listed in rule 18.03(3).

However, there are also alternative eligibility requirements under rule 18.04 for newly applying mineral companies that cannot meet the financial track record requirements under rule 8.05.

Such companies may comply by showing that their boards and senior management, taken together, have sufficient experience relevant to the exploration and/or extraction activity that the mineral company is pursuing.

Individuals 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.

Existing listed issuers engaged in the resources sector would not be automatically treated as mineral companies unless they complete a “relevant notifiable transaction (i.e. transactions which are classed as ‘major’ or above under chapter 14 of the Listing Rules) involving the acquisition of mineral or petroleum assets” after June 3, 2010, unless the exchange decides otherwise.

New rules 18.09, 18.12 and 18.13 provide more details.

The new rules add new requirements for “competent persons” issuing “competent -persons’ reports.

A competent person must have a minimum of five years experience relevant to the style of mineralization and type of deposit under consideration or to the type of petroleum exploration, reserve estimate, and to the activity, which the mineral company is undertaking.

He or she must be professionally qualified, and be a member in good standing of a relevant and recognized professional organization, as defined in rule 18.01.

The new rule 18.22 also requires that competent persons must be independent. This means that the expert retained must: have no economic or beneficial interest (present or contingent) in any of the assets being reported on; not be remunerated with a fee dependent on the findings of the competent person’s report; in the case of an individual, not be an officer, employee or proposed officer of the issuer or any group, holding or associated company of the issuer; and in the case of a firm, not be a group, holding or associated company of the issuer.

To perform valuations of natural resources properties, a competent evaluator must: meet the requirements set out in rules 18.21(2) and 18.22 described above; have at least 10 years relevant and recent general mineral or petroleum experience; have at least five years relevant and recent experience in the assessment and/or valuation of mineral or petroleum assets or securities; and hold all necessary licenses.

In conclusion, the new rules are a major expansion of the Listing Rules as they regard new-applicant mineral companies.

The new rules require new applicant mineral companies to demonstrate their possession of adequate exploration and/or extraction rights and demonstrate sufficient capitalization and cash flow. Further, the new rules provide an alternative for those applicants unable to meet existing financial track record requirements.

– The author is a lawyer with the Hong Kong office of Dorsey & Whitney (www.dorsey.com), and advised Sino Gold Mining and SouthGobi Energy in their listings on the Hong Kong Stock Exchange. He can be reached at richardson.david@dorsey.com or tel. +852-2105-0234.