Mineral and petroleum companies seeking to list on the Stock Exchange of Hong Kong Limited (HKEx) are required to meet the basic eligibility criteria for listing set out in Chapters 8 and 11 of the Main Board Rules and GEM Rules, respectively, as well as additional requirements for Mineral Companies set out in Chapter 18 of the Main Board Rules or Chapter 18A of the GEM Rules. The following provides a summary of the relevant requirements. For the definitions of capitalised terms not otherwise defined, please see the glossary to this note.
The particular advantage of listing as a Mineral Company on the Main Board is the possibility of obtaining a waiver from the requirement to meet the financial tests of Main Board Rule 8.05.
1. MINERAL COMPANIES DEFINITION
The HKEx listing rules (“Rules”) apply to Mineral Companies which are:
- New listing applicants whose Major Activity (whether directly or through their subsidiaries) is the exploration for and/or extraction of natural resources (which include minerals or petroleum). A Major Activity is one representing 25% or more of the total assets, gross revenue or operating expenses of the applicant and its subsidiaries. Although the definition does not refer specifically to production activities (such as smelting), the Consultation Conclusions on New Listing Rules for Mineral Companies (“Conclusions”) published by the HKEx on 20 May 2010 note that other exchanges interpret the term “extraction” to include production and that companies engaged in extraction and production may qualify as Mineral Companies under the Rules. Companies involved solely in production or processing may however only be eligible for listing under Chapter 8 of the Main Board Rules or Chapter 11 of the GEM Rules; and
- Existing listed issuers that complete a major transaction (i.e. 25% or more of existing activities) or above involving the acquisition of mineral or petroleum assets.
2. LISTING ELIGIBILITY REQUIREMENTS
Mineral Companies seeking to list on HKEx need to satisfy the basic requirements for listing. A summary of the key listing criteria is included in the appendix to this note. The additional eligibility criteria for Mineral Companies under Chapter 18 (GEM Chapter 18A) are set out below.
2.1. Eligibility of Exploration Companies
A new applicant Mineral Company will be required to have at least a portfolio of Indicated Resources (in the case of minerals) or Contingent Resources (in the case of petroleum) that are identifiable under one of the accepted reporting standards and substantiated in the report of an independent expert (a Competent Person) (MB Rule 18.03(2)/GEM Rule 18A.03(2)). The definition of Indicated Resources is based on the definition of Indicated Mineral Resources in the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (2004 edition) (JORC Code) and that of Contingent Resources is based on the same definition in the Petroleum Resources Management System of September 2007 (PRMS). The portfolio is also required to be meaningful and of sufficient substance to justify a listing. We have been told informally that this requirement will be satisfied in the case of a Main Board listing applicant if the HK$200 million market capitalisation requirement will be met at the time of listing. Early stage exploration companies are thus not eligible for listing.
2.2. Rights of Active Participation
A new applicant Mineral Company must be able to demonstrate that it has the right to actively participate in the exploration for and/or extraction of resources either through:
- 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 resources. This will normally be interpreted as an interest of more than 50%. Companies must also disclose full details of their exploration and/or extraction rights; or
- adequate rights arising under arrangements acceptable to HKEx, which give it sufficient influence in decisions over the exploration for and/or extraction of the resources. Arrangements which may be acceptable include joint ventures, production sharing contracts or specific government mandates. HKEx has stated in the Conclusions that it will adopt a purposive approach to determining what is appropriate in specific circumstances and places the onus on applicants to demonstrate the adequacy of their rights and sufficiency of influence (Main Board Rule 18.03(1)/GEM Rule 18A.03(1)).
2.3. Working Capital Requirements
A new applicant Mineral Company will be required to demonstrate that it has sufficient working capital for 125% of the group’s requirements for the next 12 months including general, administrative and operating costs, property holding costs and the cost of any proposed exploration and/or development (Main Board Rule 18.03(4)/GEM Rule 18A.03(4)). A statement as to the sufficiency of working capital must be included in the listing document.
2.4. Waiver of Main Board Financial Tests/GEM 2-year Trading Record Period
A new applicant Mineral Company that cannot satisfy the profit test, the market capitalisation/revenue/cash flow test or the market capitalisation/revenue test of Main Board Rule 8.05, may be accepted for listing if it establishes to HKEx’s satisfaction that its directors and senior management, taken together, have a minimum of 5 years’ experience relevant to the exploration and/or extraction activity that the Mineral Company is pursuing (Main Board Rule 18.04). Details of such experience must be included in the applicant’s listing document. The Conclusions note that a pre-production stage company seeking a waiver under Main Board Hong Kong Listing Rule 18.04 will need to show a clear path to commercial production. HKEx expects most companies seeking a Rule 18.04 waiver to be at the development stage, although companies which are in production are not necessarily precluded as they may have junior assets which are yet to be developed. Companies that are in production will however need to be able to show a clear path to profitability in order to be accepted for listing under Rule 18.04.
There is no equivalent waiver from the GEM Rules’ requirement for cash flow from operating activities of at least HK$30 million over the 2 preceding years. HKEx may however waive the 2-year trading record requirement if satisfied that the directors and senior management have a minimum of 5 years’ relevant experience (GEM Rule 18A.04). The cash flow requirement must however be met for the shorter trading record period.
Conditions for grant of waivers from the Main Board Financial Requirements/GEM 2-year Trading Record Period
In order to qualify for a waiver from the requirement to meet the Main Board financial requirements or the GEM requirement for a trading record of at least two years, a listing applicant must be able to satisfy the following conditions set out in HKEx Guidance Letter GL22-10.
A. Inability to comply with financial requirements must be due to pre-production activities
The listing applicant must demonstrate that its inability to comply with the profit, revenue or cash flow tests of Rule 8.05 is due to the fact that throughout the track record period, the listing applicant has been in a pre-production, exploration and/or development phase. The listing applicant should also demonstrate a clear path to commercial production if that has not yet been started.
Waivers will not normally be available to listing applicants whose failure to meet the profit test is attributable to economic performance over the track record period. Waiver applications are unlikely to be considered favourably if –
- the listing applicant is already in production but unable to present a demonstrable path to profitability;
- the listing applicant is unable to meet the profit requirement with all of its mining assets in operation and no development activity on hand; or
- a clear path to commercial production cannot be demonstrated. For example, where the project payback period is subject to high risk in the opinion of the Competent Person; the funding to be raised by the IPO is insufficient to bring the project to the stage of commercial production and further fund raising exercises will be required; or it is uncertain whether the listing applicant will obtain necessary mining permits and licences.
On the other hand, listing applicants that still have assets under development are likely to receive favourable consideration. For example, a waiver application is likely to be considered favourably if the listing applicant is incurring expenditure on further exploration or development activities, which have contributed to its inability to meet the profit requirements.
B. Primary Activity in Rule 18.04 (GEM Rule 18A.04)
A company relying on Rule 18.04 (GEM Rule 18A.04) must demonstrate that its primary activity is exploration for and/or extraction of Natural Resources. This does not have to be its sole activity but should be its main business activity.