Due Diligence Guidelines –
5. Competent Person’s Report
5.1 In performing its due diligence of the Competent Person’s Report, sponsors should note that the guidance set out in Chapter 18 “Due Diligence Guidelines – Interaction with Third Parties including Expert Advisers” will also apply. The standard of due diligence expected to be performed in respect of the information in the Competent Person’s Report is that of a sponsor which is not itself expert in the matters dealt with in the Competent Person’s Report.11
Unlike other industry sectors, the Listing Rules require Mineral Companies to commission and include in the listing document technical reports from an expert, and include provisions governing the identity of that expert, the content of the report and the standards to which the report is prepared. This is because of the highly technical nature of the information required by investors in the natural resources sector and the fact that there is a degree of international standardisation of how such information is presented. Accordingly, it is reasonable to expect sponsors to place a greater deal of reliance on the professional judgements made by Competent Persons than may be applicable to other industry sectors where the requirements for the identity of experts and the content of their reports are less prescribed. In particular, in assessing the scope of the work of the Competent Person, the bases and assumptions used for the purposes of the Competent Person’s Report and the accuracy of the information contained therein, the sponsor would be entitled to take into account (i) the expertise of the Competent Person in making these assessments itself; and (ii) the professional standards governing such aspects (for example, the standards set out in the JORC Code and SAMREC).
[The listing document must include] a statement that no material changes have occurred since the effective date of the Competent Person’s Report. [Listing Rule 18.05(2)]
5.3 Guidance and Recommended Steps
5.3.1 The sponsor should conduct a “bring-down” interview with the Competent Person close to the time of the issue of the listing document, and understand what continued involvement the Competent Person has had with the listing applicant since the date of its report and the Competent Person’s awareness of any changes since the date of the report.
5.3.2 The CEO should also be asked about material changes in a “bring-down” interview.
5.3.3 Sponsors should be aware that material changes could relate to assumptions on which the report is based (such as commodity prices or costs) as well as factors specific to the project itself.
5.4.1 Any data presented on Resources and/or Reserves in a listing document or Competent Person’s Report … must be presented in tables in a manner readily understandable to a non-technical person and all assumptions must be clearly disclosed and statements should include an estimate of volume, tonnage and grades. [Listing Rule 18.18]
5.4.2 A Mineral Company must ensure that: … estimates of mineral Reserves and mineral Resources are disclosed separately. [Listing Rule 18.30(2)]
5.4.3 For the purposes of [P]aragraph 17.5(c) [of the Code of Conduct], the sponsor should: … assess whether material bases and assumptions… on which the expert report is founded are fair, reasonable and complete. [Paragraph 17.7(c) of the Code of Conduct]
5.5.1 The data presented in a Competent Person’s Report (particularly in early drafts) is sometimes based upon unstated assumptions that, whilst they might be obvious to industry professionals, are not necessarily obvious to investors. Sponsors should be aware of this and work with the Competent Person to clarify and present assumptions and data in a clear and understandable way.
5.5.2 In addition, for mines, sponsors should note that the Exchange would expect the information set out in Exchange Guidance Letter GL52-13 (as summarised below) to be disclosed:
(a) The cut-off grade and other technical or economic assumptions/parameters.
(b) Any divergence of views.
(c) Analysis of harmful and deleterious elements identified.
(d) Scale diagrams of the location of the applicant’s principal Mineral or Petroleum Assets.
(e) The procedures used in relation to proving of Reserves and other data in respect of Reserves over the mine.
(f) Details relating to calculation of net present values (“NPV”).12
5.6 Recommended Steps
5.6.1 The sponsor should review the key data presented to ensure it fulfils the content requirements, and ensure that there is adequate disclosure in the Competent Person’s Report of the basis of the data. It should also be explicitly stated whether mineral Resources are being stated inclusive or exclusive of deposits that are classified as mineral Reserves. (For Petroleum Resources and Reserves, also see paragraph 6.7)
5.6.2 The sponsor may wish to suggest that the Competent Person inserts additional footnotes/assumptions into tables of information, where necessary. Where this information is reproduced in the non-expert sections of the listing document, the sponsor should ensure that appropriate assumptions are also included.
5.6.3 In determining the reasonableness of key technical assumptions which are core to the role of a Competent Person (such as cut-off grade and implications to be drawn from exploration data) sponsors are expected to understand the Competent Person’s methodology in broad terms, but would not be expected to second-guess the expert determination of the Competent Person.
A Competent Person’s Report for Mineral Companies involved in the exploration for and/or extraction of Petroleum Resources and Reserves must include the information set out in Appendix 25. [Listing Rule 18.20]
5.8 Guidance and Recommended Steps
5.8.1 The sponsor should work with the Mineral Company and Competent Person on agreeing the scope of the Competent Person’s Report and the nature of the work to be carried out by the Competent Person for the Competent Person’s Report. For Mineral Companies involved in the exploration for and/or extraction of Petroleum Resources and Reserves, this scope should be compared against the information required as set out in Appendix 25 of the Listing Rules. The scope of work should also be compared against other similar precedents.
5.8.2 The sponsor should discuss with the Mineral Company and the Competent Person, at an early stage, the method that will be used to estimate Reserves and whether NPVs will be disclosed. (See section 6 “Reporting Standards”, in particular paragraphs 6.7 to 6.9.)
5.8.3 The sponsor should review the Competent Person’s Report to ensure all required information has been included.
5.9.1 A Competent Person must … take overall responsibility for the Competent Person’s Report. The Competent Person’s Report … may contain disclaimers of sections or topics outside [its] scope of expertise in which the Competent Person … relied upon other experts’ opinions, but must not contain any disclaimers of the report in its entirety. [Listing Rule 18.21(3), Listing Rule 18.25]
5.9.2 At the time of issue of a listing document, a sponsor as a non-expert, after performing the due diligence set out in paragraph 17.7 [of the Code of Conduct], should have no reasonable grounds to believe and should not believe that the information in the expert reports is untrue, misleading or contains any material omissions. [Paragraph 17.5 of the Code of Conduct]
5.9.3 The sponsor should: … assess whether the scope of the expert’s work is appropriate to the opinion given by the expert, and adequately covers the reliability of information provided to the expert; if not, the sponsor should: (A) request that the scope of the expert’s work be expanded; (B) seek the assistance of a third party; or (C) extend its due diligence having regard to the procedures set out in paragraph 17.6 of the Code of Conduct, to cover the information provided to the [Competent Person]. [Paragraph 17.7(b)(i) and (ii) of the Code of Conduct]
5.9.4 If an expert relies on information prepared by a third party, … the sponsor should follow the procedures set out in paragraph 17.6(g). If an expert who relies on information prepared by a third party also follows standards which are at least equivalent to those required under paragraph 17.6(g) [of the Code of Conduct], the sponsor may rely on the work performed by the expert in that respect. [Note 2 to Paragraph 17.7(b)(ii) of the Code of Conduct]
5.9.5 The sponsor should [also]:
(i) critically review the expert’s opinion and the rest of the information in the report against the totality of all other information known to the sponsor about the listing applicant (including the business model, track record, operations, forecasts, sector performance and any relevant information publicly available) through due diligence and the sponsor’s knowledge and experience of the listing applicant, the market in which the listing applicant operates and of comparable companies;
(ii) corroborate the information in the expert report with the information disclosed in non-expert sections and the sponsor’s knowledge and experience of the listing applicant to ascertain whether the information throughout is consistent and coherent; and
(iii) conduct follow up work to resolve any material discrepancies, irregularities or inconsistencies. [Paragraph 17.7(d) of the Code of Conduct]
5.10.1 The information contained in the Competent Person’s Report will, to a large extent, be the work product of the Competent Person. In some cases, however, the Competent Person relies on data produced by other persons (e.g., drilling data, transportation data, technical analysis etc.) in the preparation of the Competent Person’s Report and includes “disclaimer” language in respect of some aspects of this data. Such information may have been prepared by third party consultants although it is also quite common for certain types of information to be prepared by the Mineral Company itself. As a matter of practice, it is common for Mineral Companies to use different consultants for the preparation of data, and for a Competent Person to be required to produce a Competent Person’s Report based upon previous studies and reports by other competent persons.
5.10.2 The sponsor should seek to understand what procedures have been undertaken (if any) by the Competent Person to verify any such underlying data or to diligence the work processes of the providers of such information. If the Competent Person has not performed a site visit and verified information provided to it by the Mineral Company, the listing document must include, in its main text, the bases on which the Reserves/Resources, cost forecasts and other data relating to the assets of the Mineral Company as disclosed in the Competent Person’s Report are arrived at, how the lack of a site visit would affect the reliability of the information and an appropriate risk factor.13 The sponsor would also be expected to submit to the Exchange the basis on which the Competent Person considers it unnecessary to perform any facility or on-site investigation and no verification work is required.14
5.10.3 In its capacity as a person which is not itself expert in the matters dealt with in the data produced by such consultants or in the Competent Person’s Report, the sponsor should also explore the sources of any such data and the extent to which it is reasonable for the Competent Person to rely on such data.
5.10.4 Where the Competent Person has complied with the guidelines/guidance applicable to the relevant Reporting Standard in preparing the Competent Person’s Report, it would not generally be necessary for a sponsor to interview the consultants whose data underlies the Competent Person’s Report or to verify or diligence the underlying data itself unless the sponsor had reason to believe that there is some material uncertainty about the reliability of the data on which the Competent Person has placed reliance.
5.11 Recommended Steps
5.11.1 The sponsor should request information on the Competent Person’s site visit(s) and the extent of its reliance on information provided by other parties in the preparation of the Competent Person’s Report.
5.11.2 The sponsor should request that the Competent Person’s Report indicates the source of material data and discuss with the Competent Person the reasonableness of reliance and the verification procedures or due diligence carried out by the Competent Person on that data. The sponsor should also discuss with the Competent Person whether, in the course of obtaining the underlying data or reviewing data for inclusion in the Competent Person’s Report, there were any types of information or sources of information which the Competent Person considered unreliable or inconsistent with its understanding of the Mineral Company or its business and assets.
5.11.3 The selection and use of appropriate data prepared by third parties in a Competent Person’s Report is a core part of the competencies of the Competent Person and therefore the sponsor may place significant weight upon the Competent Person’s own expertise in determining the reliability of such third party data. The sponsor should discuss with the Competent Person the extent of any procedures with the Competent Person has undergone to validate third party data, with a view to confirming that the Competent Person itself is satisfied that these procedures were sufficient in the circumstances and in accordance with industry practice. In the absence of “red flags”, a sponsor would not normally be expected to make any additional enquiries of third parties in respect of technical data included in the Competent Person’s Report which the Competent Person considers it to be appropriate to rely on.
5.11.4 Where the data has been provided by the Mineral Company, the sponsor should discuss with management how such information has been obtained and prepared and the reasonableness of any assumptions in preparing the data provided to the Competent Person. In such cases, such information should not be considered “expertised” and the sponsor should carry out due diligence on the information in the normal manner and in accordance with other relevant due diligence guidelines.
5.11.5 If the Competent Person has not performed a site visit or verified information provided to it by the Mineral Company, the sponsor should discuss with the Competent Person and understand why the Competent Person considers it unnecessary to perform any facility or on-site investigation and no verification work is required.
5.11.6 Where the Competent Person has reproduced management estimates without undergoing further verification, it may not be unreasonable for such information to have come solely from the Mineral Company. However, the sponsor should ensure that these data are not presented in the listing document as having been “expertised” although the Competent Person may provide an opinion on the veracity or reliability of such data. In particular, where any forward-looking technical economic models are included, these should not be described as deriving from the Competent Person itself if the data has merely been reproduced in the Competent Person’s Report from management estimates, or if the data is merely an “input” assumption to the technical economic model.
5.11.7 The sponsor should review the Competent Person’s engagement letter and confirm the existence of any indemnities of the type described in Listing Rule 18.26. The sponsor should ensure that appropriate disclosure is included in the Competent Person’s Report in respect of these.
11. Paragraph 17.7(e) of the Code of Conduct.
12. Paragraphs 3.8 to 3.10 of Exchange Guidance Letter GL52-13.
13. Paragraph 3.14 of Exchange Guidance Letter GL52-13.
14. Paragraph 3.14 of Exchange Guidance Letter GL52-13.
HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.