Hong Kong Exchanges and Clearing Limited (“HKEx”) published its Consultation Conclusions on New Listing Rules (the “New Rules”) for Mineral Companies (“MCs”) for both the Main Board and Growth Enterprise Market, and the New Rules for MCs under Chapter 18 of the Listing Rules. The New Rules for MCs will come into effect on June 3, 2010.
Amongst other things, the New Rules expand the eligibility requirements for MC listing 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. Capitalized terms used herein but not defined have the meanings set forth in the New Rules.

Mineral Company Defined
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].” 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 engaged in the resources sector would not be automatically treated as MCs unless they complete a “Relevant Notifiable Transaction involving the acquisition of Mineral or Petroleum Assets” after June 3, 2010. A Relevant Notifiable Transaction is a transaction that falls into one of the classifications set out in Rules 14.06(3) to (6), namely a major transaction, very substantial disposal, very substantial acquisition and reverse takeover.

New Provisions Requiring New Applicant MCs to Demonstrate Possession of Adequate Exploration and/or Extraction Rights
Rule 18.03 requires that new applicant MCs 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 Resources or Contingent Resources) satisfactory to HKEx. Under the first method, a new listing applicant MC 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 needs to demonstrate that it has adequate agreements with the third party possessing the relevant rights. For new listing applicant MCs 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 obtaining the rights must be prominently disclosed.

New Capitalization Requirements for New Applicant MCs
New applicant MCs 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. New applicant MCs must demonstrate that they have sufficient working capital for 125% of their budgeted working capital needs for the next twelve months. Estimates of cash operating costs include those of: (i) workforce employment; (ii) consumables; (iii) fuel, electricity, water and other services; (iv) on and off-site administration; (v) environmental protection and monitoring; (vi) transportation of workforce; (vii) product marketing and transport; (viii) non-income taxes, royalties, and other governmental charges; and (ix) contingency allowances. Rule 18.06 requires MCs that are already in production to disclose their operating cash cost per appropriate unit for the mineral(s) and/or oil and gas produced.

Alternative Eligibility Requirements for New Applicant MCs that Cannot Meet the Financial Track Record Requirements
Rule 18.04 provides a separate option for new applicant MCs that are unable to meet the financial track record requirements under Rule 8.05. Such companies may comply by demonstrating that their boards and senior management, taken together, have sufficient experience relevant to the exploration and/or extraction activity that the MC 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.

Relevant Notifiable Transactions
Under Rule 18.09, an MC proposing to acquire or dispose of assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction (i.e. transactions which are classed as “major” or above under Chapter 14 of the Listing Rules) must: (i) comply with Chapter 14 and Chapter 14A, if relevant; (ii) produce a CPR, which must form part of the relevant circular, on the Resources and/or Reserves being acquired or disposed of as part of the Relevant Notifiable Transaction; (iii) in the case of a major (or above) acquisition, produce a Valuation Report, which must form part of the relevant circular, on the Mineral or Petroleum Assets being acquired as part of the Relevant Notifiable Transaction; and (iv) comply with the disclosure requirements of Rules 18.05(2) to 18.05(6) in respect of the assets being acquired. (Note that HKEx may dispense with the requirement for a CPR on disposals where shareholders have sufficient information on the assets being disposed of).

The requirements of Rule 18.09 apply to listed issuers proposing to acquire assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction and the listed issuer will be treated as an MC upon the completion of a Relevant Notifiable Transaction, unless HKEx decides otherwise.

HKEx may dispense with the requirement to produce a new CPR or a Valuation Report if the issuer has available a previously published CPR or Valuation Report (or equivalent) which complies with the New Rules, provided the report is no more than six months old (the issuer must provide this document and a no material change statement in the listing document or circular for the Relevant Notifiable Transaction). Rule 18.12.

An issuer must obtain the prior written consent of a Competent Person or Competent Evaluator for their material to be included in the form and context in which it appears in a listing document or circular for the Relevant Notifiable Transaction, whether or not such person or firm is retained by the listing applicant or the issuer. Rule 18.13.

Requirements for Technical/Competent Persons’ Reports
Where technical reports or Competent Persons’ Reports (“CPRs”) are required under the New Rules, they must be prepared in accordance with Rules 18.21 and 18.22. 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 (as appropriate), and to the activity which the MC is undertaking. Rule 18.21. A Competent Person must be professionally qualified, and be a member in good standing of a relevant Recognized Professional Organization (“RPO”), in a jurisdiction where, in the opinion of HKEx, the statutory securities regulator has satisfactory arrangements (either by way of the IOSCO Multilateral MOU or other bi-lateral agreement acceptable to HKEx) with the Securities and Futures Commission of Hong Kong for mutual assistance and exchange of information for enforcing and securing compliance with the laws and regulations of that jurisdiction and Hong Kong. Id. Under Rule 18.01, an RPO is a self-regulatory organization of professional individuals in the mining or Petroleum industry which admits individuals on the basis of their academic qualifications and experience, requires compliance with professional standards of competence and ethics established by the organization and has disciplinary powers including the power to suspend or expel a member. Competent Persons must also be independent, which means that the expert retained must: (i) have no economic or beneficial interest (present or contingent) in any of the assets being reported on; (ii) not be remunerated with a fee dependent on the findings of the CPR; (iii) 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 (iv) in the case of a firm, not be a group, holding or associated company of the issuer (any of the firm’s partners or officers must not be officers or proposed officers of any group, holding or associated company of the issuer). Rule 18.22. To perform valuations of natural resources properties, a Competent Evaluator must be used that: (i) meets the requirements set out in Rules 18.21(2) and 18.22 described above; (ii) has at least ten years relevant and recent general mining or Petroleum experience (as appropriate); (iii) has at least five years relevant and recent experience in the assessment and/or valuation of Mineral or Petroleum Assets or securities (as appropriate); and (iv) holds all necessary licenses. An applicant’s sponsor must ensure that any Competent Person or Competent Evaluator meets the requirements of Chapter 18. Rule 18.27.

Under Rule 18.24, CPRs must be addressed to the MC or listed issuer, have an effective date (being the date when the contents of the CPR or Valuation Report are valid) less than six months before the date of publishing the listing document or circular relating to a Relevant Notifiable Transaction required under the Listing Rules, and set out what Reporting Standard has been used in preparing the CPR or Valuation Report, and explain any departure from the relevant Reporting Standard. Moreover, Rule 18.05(2) requires that the CPR must be updated before publication if further material data becomes available after the effective date (the CPR must therefore include an up to date no material change statement). A CPR for MCs involved in the exploration for and/or extraction of Petroleum Resources and Reserves must include the information set out in Appendix 25 to the New Rules. Rule 18.20.

A CPR or Valuation Report may contain disclaimers of sections or topics outside the Competent Person’s or Competent Evaluator’s scope of expertise in which they relied upon other experts’ opinions, but must not contain any disclaimers of the report in its entirety. Rule 18.25. The Competent Person or Competent Evaluator must prominently disclose in the CPR or Valuation Report the nature and details of all indemnities provided by the issuer (indemnities for reliance placed on information provided by issuers and third party experts (for information outside the Competent Person’s or Competent Evaluator’s expertise) are generally acceptable while indemnities for fraud and gross negligence are generally unacceptable). Rule 18.26.

MCs must disclose risk factors as part of each CPR under Rule 18.05(5), and present risk factors together with a risk analysis in the format outlined in Guidance Note 7 to the New Rules. Additionally, MCs must present data on reserves and resources in tables in a manner readily understandable to a non-technical person.

Under Rule 18.34, any valuation of an MC’s Mineral or Petroleum Assets by a Competent Evaluator must be prepared under the VALMIN Code, SAMVAL Code, CIMVAL or such other code approved by HKEx from time to time. The Competent Evaluator must clearly state the basis of valuation, relevant assumptions and the reason why a particular method of valuation is considered most appropriate, having regard to the nature of the valuation and the development status of the Mineral or Petroleum Asset. If more than one valuation method is used and different valuations result, the Competent Evaluator must comment on how the valuations compare and the reason for selecting the value adopted.

Mineral Disclosure Reporting Standard
An MC must disclose information on mineral Resources, Reserves and/or exploration results under (i) the three main JORC-type codes for the presentation of information on resources and reserves, namely the JORC Code, NI 43-101 and the SAMREC Code, or (ii) other codes acceptable to HKEx if it is satisfied that they give a comparable standard of disclosure and sufficient assessment of the underlying assets. Rule 18.29.

Under Rule 18.30, estimates of mineral reserves must be supported at a minimum by a pre-feasibility study (the definitions of pre-feasibility study and feasibility study are set out in Rule 18.01 and are based on the definitions set out under the SAMREC Code and NI 43-101). Information on mineral resources and mineral reserves may not be combined and mineral resources must only be included in economic analyses if they are appropriately discounted for the probabilities of their conversion to reserves. The basis on which resources are considered to be economically extractable must also be stated if they are included in economic analyses. Regarding disclosure of commodity prices for hard minerals, MCs must explain the methods used to determine commodity prices used in pre-feasibility and feasibility-level studies and valuations of reserves and resources, and state the basis on which such prices represent reasonable views of future prices. Where a contract for future prices exists, the contract price must be used. MCs must also provide sensitivity analyses to higher and lower prices.

Petroleum Disclosure Reporting Standard
An MC must disclose information on Petroleum Resources and Reserves under (i) the Petroleum Resources Management System (“PRMS”) as modified by Chapter 18, or (ii) other codes acceptable to HKEx if it is satisfied that they give a comparable standard of disclosure and sufficient assessment of the underlying assets. Rule 18.32.
Under Rule 18.33, where estimates of Reserves are disclosed, the method and reason for choice of estimation must be disclosed (i.e. deterministic or probabilistic methods, as defined in PRMS). Where the probabilistic method is used, the underlying confidence levels applied must be stated. If the Net Present Values (“NPVs”) attributable to Proved Reserves and Proved plus Probable Reserves are disclosed, they must be presented on a post-tax basis at varying discount rates (including a reflection of the weighted average cost of capital or minimum acceptable rate of return that applies to the entity at the time of evaluation) or a fixed discount rate of 10%. Proved Reserves and Proved plus Probable Reserves must be analyzed separately and principal assumptions (including prices, costs, exchange rates and effective date) and the basis of the methodology must be clearly stated. If the NPVs attributable to Reserves are disclosed, they must be presented using a forecast price as a base case or using a constant price as a base case. The bases for the forecast case must be disclosed. The constant price is defined as the unweighted arithmetic average of the closing price on the first day of each month within the twelve months before the end of the reporting period, unless prices are defined by contractual arrangements. The basis on which the forecast price is considered reasonable must be disclosed and MCs must provide sensitivity analyses under Rule 18.30(5) (note that in the forecast case under PRMS, the economic evaluation underlying the investment decision is based on the entity’s reasonable forecast of future conditions, including costs and prices, which will exist during the life of the project). If estimated volumes of Contingent Resources or Prospective Resources are disclosed, relevant risk factors must be clearly stated. (Note that under PRMS, wherever the volume of a Contingent Resource is stated, risk is expressed as the chance that the accumulation will be commercially developed and graduate to the reserves class. Wherever the volume of a Prospective Resource is stated, risk is expressed as the chance that a potential accumulation will result in a significant discovery of Petroleum). Economic values may not be attached to Possible Reserves, Contingent Resources or Prospective Resources. Where an estimate of future net revenue is disclosed, whether calculated without discount or using a discount rate, it must be prominently disclosed that the estimated values disclosed do not represent fair market value.

Continuing Obligations
Rule 18.14 requires an MC to 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 period under review. If there has been no exploration, development or production activity, that fact must be stated. A listed issuer that publicly discloses details of Resources and/or Reserves must 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 a Reporting Standard. Rule 18.15. An MC must include an update of its Resources and/or Reserves in its annual report in accordance with the Reporting Standard under which they were previously disclosed. Rule 18.16. (Note that annual updates are not required to be supported by a CPR and may take the form of a no material change statement). Annual updates of Resources and/or Reserves must comply with the following presentation requirements: (i) any data presented on Resources and/or Reserves by an MC in a listing document, CPR, Valuation Report or annual report, must be presented in tables in a manner readily understandable to a non-technical person; and (ii) all assumptions must be clearly disclosed and statements should include an estimate of volume, tonnage and grades. Rule 18.19 requires that all statements referring to Resources and/or Reserves (i) in any new applicant listing document or circular relating to a Relevant Notifiable Transaction, must be substantiated in a CPR which must form part of the document, and (ii) in all other cases, must at least be substantiated by the issuer’s internal experts.

Social and Environmental Standards
If relevant and material to the MC’s business operations, the MC must disclose the following information under Rule 18.05(6):
(i) project risks arising from environmental, social, and health and safety issues;
(ii) any non-governmental organization impact on sustainability of mineral and/or exploration projects;
(iii) compliance with host country laws, regulations and permits, and payments made to host country governments in respect of tax, royalties and other significant payments on a country by country basis;
(iv) sufficient funding plans for remediation, rehabilitation and, closure and removal of facilities in a sustainable manner;
(v) environmental liabilities of its projects or properties;
(vi) its historical experience of dealing with host country laws and practices, including management of differences between national and local practice;
(vii) its historical experience of dealing with concerns of local governments and communities on the sites of its mines, exploration properties, and relevant management arrangements; and
(viii) any claims that may exist over the land on which exploration or mining activity is being carried out, including any ancestral or native claims.

Conclusion
The New Rules represent a major expansion of the Listing Rules as they regard new applicant Mineral Companies. The New Rules add to existing rules to 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 impact new applicant Mineral Companies by providing an alternative for those unable to meet existing financial track record requirements.