Due Diligence Guidelines –
6. Reporting Standards
6.1.1 For the purposes of paragraph 17.5(c) [of the Code of Conduct], the sponsor should assess whether the scope of the expert’s work:
(i) is appropriate to the opinion given by the expert; and
(ii) 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 expert. [Paragraph 17.7(b) of the Code of Conduct]
6.1.2 A Competent Person’s Report … must comply with a Reporting Standard … and must: … explain any departure from the relevant Reporting Standard [set out in the Competent Person’s Report]. [Listing Rule 18.24]
6.1.3 A Mineral Company must disclose information on:
(a) Mineral Resources, Reserves and/or exploration results either: – (1) under (a) the JORC Code; (b) NI 43-101; or (c) the SAMREC Code or (2) under other codes acceptable to the Exchange as communicated to the market from time to time, provided the Exchange is satisfied that they give a comparable standard of disclosure and sufficient assessment of the underlying assets. Note: The Exchange may allow presentation of Reserves under other reporting standards provided reconciliation to a Reporting Standard is provided. [Listing Rule 18.29]
(b) Petroleum Resources and Reserves either (1) under PRMS … or (2) under other codes acceptable to the Exchange if it is satisfied that they give a comparable standard of disclosure and sufficient assessment of the underlying assets. [Listing Rule 18.32]
6.2.1 The adoption of standard Reporting Standards/PRMS is a fundamental requirement of Chapter 18 of the Listing Rules and accordingly sponsors should diligence carefully any stated departure from a Reporting Standard. Where the Mineral Company wishes to use other standards which are comparable to approved Reporting Standards, the sponsor should understand how those comparable standards may differ from approved Reporting Standards in the context of the particular Mineral Company’s assets and how they have been reconciled to the Reporting Standard used.
6.2.2 Where Resources, Reserves and/or exploration results are presented or have historically been produced under non-approved reporting standards, and reconciliation to approved Reporting Standards/PRMS is included in the listing document, the sponsor should also understand how such reconciliation has been achieved and whether the reconciliation fulfils all the requirements of the approved Reporting Standards/PRMS themselves.
6.2.3 For example, the Exchange states in paragraph 83 of Part B of the Consultation Conclusions on New Listing Rules for Mineral Companies published in May 2010 that “[the] crucial difference between Chinese or Russian standards and the JORC-type Codes is that the former standards are based on in-situ estimates, while the latter are focused on commercial extractability, taking account of mining dilution and losses.”
6.3 Recommended Steps
6.3.1 Where a Mineral Company has a portfolio of “Reserves” or “Resources” which are not initially prepared or disclosed in accordance with the Reporting Standards/PRMS, the sponsor should discuss with the Mineral Company and the Competent Person the difference between the approved Reporting Standards and the standards previously used by the Mineral Company and confirm its understanding of these differences and whether a reconciliation to an approved Reporting Standard can be carried out.
6.3.2 In cases where the standards previously used have been reconciled to a Reporting Standard/PRMS, a sponsor should request that the Competent Person explains how such reconciliation has been achieved, whether the reconciliation fulfils all the requirements of the approved Reporting Standards/PRMS themselves and ensure that such information has been disclosed in the listing document.
6.3.3 Where a Mineral Company has a portfolio of “Reserves” or “Resources” which are not initially prepared or disclosed in accordance with the Reporting Standards/PRMS, the sponsor should also ensure that after reconciliation to an approved Reporting Standard/PRMS, the Mineral Company still fulfils the requirements of Listing Rule 18.03(2).
[For a Mineral Company exploring for and/or extracting mineral Resources and Reserves:]
(1) Indicated Resources and Measured Resources are only to be included in economic analyses if the basis on which they are considered to be economically extractable is explained and they are appropriately discounted for the probabilities of their conversion to Mineral Reserves. All assumptions must be clearly disclosed … [Listing Rule 18.30(3)]; and
(2) For commodity prices used in studies and valuations, the Mineral Company must ensure that the methods to determine those commodity prices, all material assumptions and the basis on which those prices represent reasonable views of future prices are explained clearly. [Listing Rule 18.30(4)]
Sponsors should understand the assumptions and bases, including assumptions relating to projected commodity prices, on which Resources are converted to mineral Reserves and the methodology behind estimates of Reserves. However, the application of appropriate assumptions and bases is core to the expertise offered by Competent Persons, so the sponsor’s role should be focussed on examining whether such assumptions are plausible and properly described.
6.6 Recommended Steps
6.6.1 The sponsor should review all economic models or valuations which include Indicated Resources and Measured Resources and which are included in the listing document. The sponsor should discuss with the Mineral Company and the Competent Person the approach taken of any discounting and what assumptions have been applied, and ensure that they have been disclosed in the listing document where appropriate.
6.6.2 The interview with the Competent Person should examine how the Reserves estimation was derived and what assumptions have been made for this purpose. Any assumptions which appear to the sponsor to be inconsistent with the Mineral Company’s particular circumstances should be adequately explained or amended.
6.6.3 Where commodity prices are used in any economic models or valuations (see Listing Rule 18.30(4)), the sponsor should discuss with the Mineral Company the assumptions on which such prices have been based, and in particular whether it is a reasonable assumption that the Mineral Company might be able to achieve such prices. For example, where the commodity price used is based upon a benchmark price but the Mineral Company would be unlikely to achieve the benchmark price in the prevailing market, this should be made clear. The sponsor should understand the actual end market (taking into account local conditions and the need for intermediate sales channels) for the products proposed to be produced by a pre-production project and the pricing dynamics in that end market.
6.6.4 The sponsor should also discuss commodity price assumptions and the basis of such assumptions during the due diligence interviews with the Competent Person and the industry expert. Consideration should also be given to any material deviations between adopted commodity price assumptions and other forecasts readily available in the public domain.
A Mineral Company [exploring for and/or extracting Petroleum Resources and Reserves] must ensure that: … (1) where estimates of Reserves are disclosed, the method and reason for choice of estimation are disclosed (i.e. deterministic or probabilistic methods, as defined in PRMS) … [and] … (3) Proved Reserves and Proved plus Probable Reserves are analysed separately and principal assumptions … and the basis of the methodology are clearly stated. [Listing Rule 18.33(1), (3)]
As set out in FAQ 20 of the Exchange’s Frequently Asked Questions Series 12, the Exchange accepts both “deterministic” and “probabilistic” methods of estimating Reserves and recognises that the choice of method is for the Competent Person and the Mineral Company to decide.
6.9 Recommended Steps
6.9.1 The sponsor should discuss with management and the Competent Person the differences between the two methods and understand the reasons for the choice of method of estimation used in the Competent Person’s Report. The sponsor should review the Competent Person’s Report to ensure such reasons are disclosed, and where the “probabilistic” method is used, the underlying confidence levels are disclosed.
6.9.2 The interview with the Competent Person should also examine how the Reserves estimation was derived and what assumptions have been made for this purpose. Any assumptions which appear to the sponsor to be inconsistent with the Mineral Company’s particular circumstances should be adequately explained or amended.
6.9.3 The sponsor should also discuss at an early stage with the Mineral Company whether the NPVs attributable to Reserves or Proved Reserves and Proved plus Probable Reserves are to be disclosed. If such NPVs are to be disclosed, the sponsor should obtain and review details of the methodology, the basis and assumptions and other internal analyses carried out in calculating the NPVs. The sponsor should also ensure that the NPVs are presented in the manner required by Listing Rule 18.33(2) and Listing Rule 18.33(4), as applicable.
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.