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New MB Chapter 18 / GEM Chapter 18A Mineral Companies

New MB Chapter 18 / GEM Chapter 18A Mineral Companies. Janet Chiu Assistant Vice President Compliance and Monitoring Department Listing Division, HKEx. Background. 2. Ensure investors are provided with material, relevant and reliable information relating to mineral assets

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New MB Chapter 18 / GEM Chapter 18A Mineral Companies

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  1. New MB Chapter 18 / GEM Chapter 18A Mineral Companies Janet Chiu Assistant Vice President Compliance and Monitoring Department Listing Division, HKEx

  2. Background 2

  3. Ensure investors are provided with material, relevant and reliable information relating to mineral assets Align our rules with international standards Broaden investor choice by allowing the listing of exploration companies with “identified resources” (i.e. at least indicated mineral resources / contingent petroleum resources) Purpose of the reform 3

  4. The brand-new Main Board Chapter 18 / GEM Chapter 18A set out: additional eligibility and disclosure requirements for new listing of mineral companies disclosure requirements for transactions involving mineral and/or petroleum assets continuing obligations to provide update on issuers’ mining operations Main Board Guidance Note 7 / GEM Practice Note 4 provides a suggested risk assessment for mineral companies Main Board Appendix 25 / GEM Appendix 18 specifies the content of a competent person’s report for petroleum assets New Listing Rules for Mineral Companies 4

  5. Agenda • Definition of “Mineral Company” • New listing requirements for Mineral Companies • Impact of the new Rules on listed issuers • Transaction related obligations • Continuing obligations 5

  6. What is a mineral company?

  7. A new applicant whose major activity is the exploration for and/or extraction of natural resources Activity representing ≥ 25% of assets, revenue or operating expenses of the issuer group A listed issuer that completes a major or above acquisition of mineral and/or petroleum assets Who will become a “Mineral Company”? (1) 7

  8. They will not be automatically treated as Mineral Companies. They would be treated as Mineral Companies only if they undertake major (or above) acquisitions of mineral and/or petroleum assets after the new Rules take effect. Who will become a “Mineral Company”? (2) 8

  9. New listing requirements for Mineral Companies

  10. Exploration / extraction rights • MLR 18.03(1) / GLR 18A.03(1) • Must have adequate rights which provides sufficient influence over the exploration for and/or extraction of natural resources, either through: • control over majority of assets; or • other rights under arrangements acceptable to the Exchange 10

  11. Portfolio of reserves / resources • MLR 18.03(2) / GLR 18A.03(2) • Must have discovered at least a portfolio of: • Indicated resources (for mineral companies) • Contingent resources (for petroleum companies) • This portfolio must be meaningful and of sufficient substance to justify the listing. • Early stage exploration assets are not eligible for listing at this time. 11

  12. Working Capital • Must have sufficient working capital for 125% of present requirement for at least the next 12 months (MLR 18.03(4) / GLR 18A.03(4)) • Must also provide production details • Companies in production • provide an estimate of cash operating costs (MLR 18.03(3) and 18.06 / GLR 18A.03(3) and 18A.06) • Companies not yet start production • demonstrate a clear path (with indicative dates and costs) to commercial production supported by an independent Scoping Study (i.e. a preliminary evaluation of economic viability of mineral resources) (MLR 18.07 / GLR 18A.07) 12

  13. Track record requirement • MLR 18.04 / GLR 18A.04 • Mineral Companies unable to satisfy the track record requirements can still apply for listing if: • its directors and senior managers, taken together, have sufficient experience relevant to the exploration and/or extraction activity that the mineral company is pursuing (individuals relied on must have at least 5 years experience) • Considerations: • The company’s primary activity is the exploration for and/or extraction of natural resources • Companies that are already in production will not be considered favourably unless they have development activity on hand and can demonstrate a path to commercial production 13

  14. MLR 18.05-18.08 / GLR 18A.05-18A.08 set out the required disclosures, including: A Competent Person’s Report on reserves and resources A statement confirming no material changes since the effective date of the Competent Person’s Report / descriptions of any material changes Details of all prospecting, exploration, exploitation, land use and mining rights, and details of material rights to be obtained Specific and general risks Disclosure on social and environmental considerations, if relevant and material For those not yet in production, plans to production with indicative dates and costs supported as least by a Scoping Study Listing documents for new applicants 14

  15. Impact of the new Rules on listed issuers

  16. Impact of the new Rules on listed issuers (1) • The new Rules only affect Non-Mineral Companies if: • they acquire material mineral and/or petroleum assets • they publicly disclose details of their reserves and/or resources • The new Rules are not intended to have retrospective effect. • On completion of the acquisition, they will be treated as a Mineral Company 16

  17. Impact of the new Rules on listed issuers (2) • In addition to the above, they are subject to additional disclosure obligations when they: • dispose of material mineral and/or petroleum assets • publish interim / annual reports 17

  18. Summary of events triggering listed issuers’ obligations under the new Rules

  19. Transaction related obligations

  20. Key principles • To provide investors and shareholders with sufficient and reliable information on significant transactions involving mineral and/or petroleum assets. • Information on mineral and petroleum assets must be: • prepared in accordance with widely recognised reporting codes • substantiated by independent competent person • presented in readily understandable manner with sufficient details 20

  21. What Transactions are subject to the new Rules? Note: Aggregation principles under MLR14.22 / GLR19.22 apply 21

  22. What should be disclosed for acquisition cases? (1) • For acquisition transactions, on top of MB Ch 14 & 14A / GEM Ch 19 & 20 (if relevant) requirements, the circular must include the following additional information in respect of the assets being acquired: • A Competent Person’s Report (MLR 18.09(2) / GLR 18A.09(2)) • No material changes statement / descriptions of any material changes since the effective date of the Competent Person’s Report (MLR 18.05(2) / GLR 18A.05(2)) • Disclosure of specific and general risks (MLR 18.05(5) / GLR 18A.05(5)) • Other relevant and material information (MLR 18.05(3), (4) & (6) / GLR 18A.05(3), (4) & (6)) • However, a Valuation Report on the mineral or petroleum assets being acquired must be provided in this scenario (MLR 18.09(3) / GLR 18A.09(3)) 22

  23. What should be disclosed for acquisition cases? (2) • MLR 18.12 / GLR 18A.12 provides for dispensation from the CPR or Valuation Report requirements if the issuer can: • provide a previously published report which complies with the required reporting standard and is no more than six months old; and • provide a statement confirming no material changes since the effective date of the previously published report; • The issuer must obtain prior written consent of the responsible Competent Person/ Competent Evaluator for the publication of these materials. (MLR 18.13 / GLR 18A.13) (FAQ series 12, No. 14) 23

  24. What should be disclosed for disposal cases? • For disposal transactions, on top of MB Ch 14 & 14A / GEM Ch 19 & 20 (if relevant) requirements, the circular must include the following additional information in respect of the assets being disposed of: • a Competent Person’s Report (MLR 18.09(2) / GLR 18A.09(2)) • details of any material liabilities that remain with the issuer on the disposal (Note to MLR 18.09(4) / GLR 18A.09(4)) • The Exchange may dispense with the requirement for a CPR on disposals where shareholders have sufficient information on the assets being disposed of • (FAQ series 12, No. 12) 24

  25. Competent Person’s Report (CPR) (1) MLR 18.28-18.33 / GLR 18A.28-18A.33 specify the reporting standards for CPR: Notes: • Subject to modifications under MLR 18.30/18.33 or GLR 18A.30/18A.33 • MB Appendix 25 / GEM Appendix 18 set out the content of a CPR for petroleum assets

  26. The required reporting standards assess what is commercially extractable while some standards focus on “in-situ” estimates. Where information is presented in accordance with other reporting standards, a reconciliation to the required reporting standards must be provided. We will monitor the development of other codes to ensure our position reflects international best practice. (FAQ series 12, No. 18) Competent Person’s Report (CPR) (2) 26

  27. Mineral Reporting (Modifications) • For CPR on mineral reserves and/or resources, issuers must also satisfy the modifications under MLR 18.30 / GLR 18A.30: • Estimates of mineral reserves are supported, at a minimum, by a pre-feasibility study. • Estimates of mineral reserves and resources must be disclosed separately. • Indicated and measured resources can be included in economic analyses but basis on which they are economically extractable and the discount for conversion to mineral Reserves must be disclosed. • Valuations for inferred resources are not permitted • For profit forecasts and forward looking valuations, the basis for commodity prices and material assumptions must be included, as well as sensitivity analyses on price.

  28. Petroleum Reporting (Modifications) • For CPR on petroleum reserves and/or resources, issuers must also satisfy the modifications under MLR 18.33 / GLR 18A.33: • Method and reason for choice of estimation of petroleum reserves must be disclosed (i.e. deterministic or probabilistic). • If NPVs attributable to proved and proved plus probable reserves are disclosed, they are presented: - on a post-tax basis at varying discount rates or a fixed discount rate of 10% - using a forecast price or a constant price as base case • Economic values must not be attached to possible reserves, contingent resources or prospective resources

  29. Valuation Report (1) Valuation is a mandatory requirement for acquisition cases under the new Rules (MLR 18.34 and GLR 18A.34) Note: Only VALMIN Code is applicable to petroleum assets. • Disclosure of basis of valuation, assumptions and reasons for the selection of valuation method • If more than one valuation method is used and different valuations result, commentary on how the valuations compare and the reason for selecting the value adopted

  30. Yes, but only for those connected transactions with size ≥ 25% (i.e. the transactions are also certified as major transactions or above). Valuation Report (2) 30

  31. No. We will not regard the DCF as a profit forecast under MLR 14.61 / GLR 19.61. However, issuers must disclose all relevant assumptions and the reason why a particular valuation method is chosen. (FAQ series 12, No. 21) Valuation Report (3) 31

  32. Competent Person/ Competent Evaluator (1) • MLR 18.21-18.23 / GLR 18A.21-18A.23 • Experience • Must be professionally qualified • Must be a member of a Recognised Professional Organisation • Must be independent 32

  33. Our requirement largely follows the requirements under the VALMIN Code. The CIMVAL and SAMVAL Codes are not as specific as the VALMIN Code but require that extensive experience should be obtained to value mineral assets. We adopt a bright line experience requirement for clarity. Competent Person/ Competent Evaluator (2) 33

  34. Continuing obligations

  35. Annual update of reserves / resources (1) • Listed issuers that publicly disclose details of reserves and/or resources must give updates of such information in their annual reports, under consistent reporting standards (MLR 18.15 / GLR 18A.15) • Mineral Companies must include updates of reserves and resources in their annual reports in accordance with the required reporting standard under which they were previously disclosed (MLR 18.16 / GLR 18A.16) • Any data on reserves and resources must be presented in tables which can be understood by a non-technical person. Statements should include estimates of volume, tonnage and grades (MLR 18.17 / GLR 18A.17)

  36. * Annual updates may take the form of a no material change statement. Annual update of reserves / resources (2) 36

  37. Annual updates are not required to be supported by Competent Persons. However, the information must at least be substantiated by the issuer’s internal expert. Annual update of reserves / resources (3) 37

  38. Half-Yearly disclosure • MLR 18.14 / GLR 18A.14 • Only Mineral Companies are subject to this requirement • They must disclose in their interim and annual report: • details of their exploration, development and mining production activities; and • a summary of expenditure incurred on these activities during the review period. 38

  39. Recap of requirements for Mineral Companies and other listed issuers

  40. Thank you 40

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