Chapter 23

Due Diligence Guidelines –

Mineral Companies

2. Qualifications for Listing

2.1 Standards

2.1.1 Before submitting an application on behalf of a listing applicant to the Stock Exchange a sponsor should come to a reasonable opinion that the listing applicant is in compliance with all relevant listing qualifications under Chapter 8 of the Listing Rules (except to the extent that waivers from compliance with those requirements have been applied for to the Stock Exchange in writing). [Paragraph 17.4(c)(i) of the Code of Conduct]

2.1.2 A Mineral Company must:- establish … that it has the right to participate in the exploration for and/or extraction of Natural Resources, either:-

(a) 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 Natural Resources; or

Note: ‘control over a majority’ means an interest of greater than 50%.

(b) through adequate rights (arising under arrangements acceptable to the Exchange), which give it sufficient influence in decisions over the exploration for and/or extraction of the Natural Resources. [Listing Rule 18.03(1)]

2.2 Guidance

2.2.1 For the purposes of Listing Rule 18.03(1)(a), “control” is generally reflected by an interest in a majority (by value) of assets, which will normally be interpreted as an interest greater than 50%. However, that control should be supported by exploration and mining rights necessary to operations.2

2.2.2 For the purposes of Listing Rule 18.03(1)(b), which applies where the listing applicant has no control, the Exchange also accepts enforceable arrangements that will give listing applicants a right to participate in the exploration for and/or extraction of Natural Resources if they can demonstrate the agreements give them sufficient influence over the exploration for and extraction of Resources and Reserves. Examples of these agreements include joint ventures, production sharing contracts or specific government mandates where the listing applicant actively operates the mining project.3,4

2.3 Recommended Steps

Listing Rule 18.03(1)(a)

2.3.1 The sponsor should examine both the legal rights and practical decision-making abilities of a listing applicant in determining whether it has control over a majority of its assets for the purposes of satisfying Listing Rule 18.03(1)(a). Sponsors should pay particular attention to voting rights in the entities which hold such assets and whether any third parties have rights of veto or co-decision which are potentially significant enough to prevent active participation by the majority owner.

2.3.2 The sponsor should ensure that a review of the relevant title or licence has been conducted by lawyers in relevant jurisdictions which should include an assessment of any conditions required to be satisfied in order to commence and carry on exploration/extraction activity. Where exploration licences are held, sponsors should understand the requirements necessary to convert such licences to extraction licences. For Mineral Companies engaged in the exploration and/or extraction of mineral Resources and Reserves, the relationship between mining licences, surface rights and title to real estate should also be understood (see also section 8 “Title to Mineral Rights”).

2.3.3 The sponsor should review contractual arrangements (with the benefit of legal advice) and conduct management interviews to determine the de facto level of management control over assets. The sponsor should also review whether there are any regulatory, governmental, commercial or practical impediments to the proposed exploration/extraction activities – these might include an inability to access infrastructure or transportation, restrictions on the export, processing or sale of Natural Resources, or additional consents required.

Listing Rule 18.03(1)(b)

2.3.4 If the applicant is seeking to rely on the provision under Listing Rule 18.03(1)(b) which enables it to demonstrate the right to active participation based upon “sufficient influence” rather than “control”, the sponsor should, together with lawyers, review the contractual and legal arrangements between the parties particularly carefully.

2.3.5 A sponsor should understand both the legal rights and practical decision-making abilities of a listing applicant in determining whether it has influence in decisions over the exploration for and/or extraction of Natural Resources. Sponsors should pay particular attention to any joint management or decision-making arrangements, including the manner in which decisions are made and whether there are any rights of veto by the listing applicant or the other party(ies).

2.3.6 A sponsor should also undertake the reviews set out in paragraphs 2.3.2 and 2.3.3 above in respect of the operating company and the underlying assets.

2.3.7 A sponsor should also confirm with the Exchange that the arrangements are acceptable and ensure full disclosure in the listing document of all material details of such arrangements.

2.4 Standards

A Mineral Company must: … establish to the Exchange’s satisfaction that it has at least a portfolio of Indicated Resources or Contingent Resources identifiable under a Reporting Standard and substantiated in a Competent Person’s Report which is meaningful and of sufficient substance to justify a listing. [Listing Rule 18.03(2)]

2.5 Guidance

The requirements of Listing Rule 18.03(2) reflect the Exchange’s view that early stage exploration companies are not suitable to be listed given the significantly higher investment risks. However, the Exchange has not made any determination of a minimum size for the portfolio to be considered “meaningful and of sufficient substance”; sponsors’ assessments of this should be focussed on the economic viability of the project rather than the absolute values stated in the resource or reserve estimates. A sponsor would be expected to test critically the assumptions around the viability of the project with a view to ensuring such economic viability is reasonably plausible and credible, rather than guaranteed.

2.6 Recommended Steps

2.6.1 The sponsor should request and review copies of technical reports containing estimates of Reserves and Resources and other internal analyses carried out by the Mineral Company to gain an understanding of the Reserves and Resources estimates of the Mineral Company. The sponsor should discuss with management how the internal analysis has been performed and the reasonableness and appropriateness of the assumptions underlying the analysis, such as cut-off grades resource estimation, methodology and extraction methods.

2.6.2 The sponsor should also discuss with the Competent Person its estimates of the Mineral Company’s Reserves and Resources and, if there are material differences between the Competent Person’s estimates and those in the other technical reports and internal analysis, the reasons for the difference.

2.6.3 The sponsor should review the Competent Person’s Report to ensure that the portfolio relied upon constitutes at least Indicated Resources (for minerals) or Contingent Resources (for petroleum), as appropriate, under one of the Reporting Standards. To the extent that a non-approved reporting standard is used by the Mineral Company, the sponsor should understand the way in which such standard has been reconciled to an approved Reporting Standard, and that this is accurately reflected in the Competent Person’s Report. (See also section 6 “Reporting Standards” below.)

2.6.4 Since there is no fixed meaning as to whether a portfolio is “meaningful and of sufficient substance”, sponsors should review the Mineral Company’s business and development plans and feasibility studies and consider, among other things, the scale of production, life of the mine/project and likely timing of development to understand the economic viability of the project.

Endnotes

2. Paragraph 8, Part B of Consultation Conclusions on New Listing Rules for Mineral Companies published in May 2010.

3. Paragraph 9, Part B of Consultation Conclusions on New Listing Rules for Mineral Companies published in May 2010.

4. FAQ 3 of the Exchange’s Frequently Asked Questions Series 12.