Due Diligence Guidelines –
15. Sales and Marketing
15.1.1 The sponsor should gain an understanding of the extent to which sales are (or will be) conducted pursuant to long-term offtake arrangements, as opposed to shorter term arrangements or spot market sales.
15.1.2 To the extent reliance is placed upon the spot market, the sponsor should explore with the Mineral Company the extent of the Mineral Company’s sales capability.
In addition, sponsors should note that the Exchange would expect the listing document to disclose salient terms of the offtake arrangements, if any, and whether those terms are in line with industry standards.23
15.1.3 Sponsors should also follow the guidance set out in Chapter 9 “Due Diligence Guidelines – Interviews of Major Business Stakeholders”.
15.2 Recommended Steps
15.2.1 The sponsor should familiarise itself with the “standard” price discovery mechanisms for the particular Natural Resource being extracted or produced by the Mineral Company. It should explore the actual market for the products to be produced, particularly where the market for the product may have local variances – for example, where gas is being produced, on what terms does the local market purchase gas at that particular specification?
15.2.2 The sponsor, together with lawyers in relevant jurisdictions, should review the key terms of any long-term offtake agreements to identify any unusual or onerous provisions. The sponsor should also consider the pricing mechanism and the degree of customer reliance and counterparty risk where significant reliance is placed upon a small number of offtake agreements. The sponsor should also consider obtaining a legal opinion as to the validity and enforceability of any long-term offtake agreement on which the Mineral Company places significant reliance.
15.2.3 The sponsor should discuss with the Mineral Company its marketing strategy and the appropriateness of the assumptions underlying such strategy. The sponsor may also interview senior management in charge of sales and marketing with regard to their experience/qualifications in this area.
15.2.4 The sponsor should also conduct interviews with key offtakers and spot customers to verify identities and sales volumes.
23. Paragraph 3.20 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.