Due Diligence Guidelines –
8. Title to Mineral Rights
8.1.1 Regarding the preparation of a listing document, a sponsor should perform, without limitation … assess the business performance, financial condition, development, prospects and any financial projection or profit forecast. [Paragraph 17.6(d)(vi) of the Code of Conduct]
8.1.2 A sponsor should conduct the following independent due diligence steps: … in relation to material matters, independently obtain information from sources outside the listing applicant, such as searches of public filings and databases, external confirmations, third-party data about competitors and the engagement of external agents to perform relevant checks. [Paragraph 17.6(e)(v) of the Code of Conduct]
8.1.3 [The listing document must include] the nature and extent of [a Mineral Company’s] prospecting, exploration, exploitation, land use and mining rights and a description of the properties to which those rights attach. [Listing Rule 18.05(3)]
8.2.1 The sponsor should ensure that lawyers in relevant jurisdictions have undertaken a review of, and opined on, the Mineral Company group’s title to any exploration and/or extraction rights (including the ownership of shares in holding companies as well as the ownership of the exploration and/or extraction rights themselves) and minerals legislation, rules or practices in the jurisdiction in which the Natural Resources are located.
8.2.2 It would be normal for the title to all such rights to be reviewed (i.e. this is not generally an area where diligence is conducted by a review of a sample of the rights).
8.2.3 Where approvals (from the government of the jurisdiction in which the mineral assets are located or other parties) are required for the listing of the assets of the Mineral Company or of the Mineral Company itself, and the failure to obtain such approval may lead to the loss of the assets, sponsors should be aware that such deficiency would not be able to be addressed by disclosure alone.18
8.2.4 The inter-relationship between land rights and mining rights varies between jurisdictions so an understanding of the particular framework in the relevant jurisdiction is necessary for a sponsor to understand if there are sufficient rights held by the listing applicant to allow, for example, access to the project.
8.2.5 Where exploration and/or extraction rights are contained in a contractual arrangement with government or other entities (such as production sharing agreements for oil fields) these agreements should also be reviewed and the subject of a legal opinion as to validity and enforceability.
8.3 Recommended Steps
8.3.1 The sponsor should review the scope of engagement of lawyers in relevant jurisdictions and the scope of the proposed due diligence report or legal opinion in respect of title to mineral rights. The sponsor should also discuss with relevant lawyers the sources of information and underlying documents to ensure, as far as possible, that they are obtained from independent sources (e.g., government registries).
8.3.2 The sponsor should review any legal opinion or due diligence report to examine whether there are any areas of material risk or uncertainty which should be disclosed in greater detail in the listing document. In particular, the sponsor should review any qualifications, assumptions or exceptions in the legal opinion or due diligence report to consider whether further investigation needs to be undertaken.
8.3.3 Unless any “red flags” are raised in the legal opinion, sponsors would not normally be expected to review source materials for the legal opinion.
8.3.4 The sponsor should review findings as to not only the geographic scope of the rights but also the minerals to which the rights relate and any restrictions on the type of extraction that can be conducted.
8.3.5 Where exploration licences are held, the sponsor should review what requirements would need to be satisfied in order to convert these to extraction licences. Where a project is in production, it may still be relevant to understand what exploration licences are held by the Mineral Company for the purposes of further exploration work. The sponsor should understand the impact on the Mineral Company of any material conditions or undertakings in the rights.
(a) The sponsor should also review findings on the ability of governmental authorities and other regulatory bodies to terminate or expropriate the mineral rights held by the Mineral Company. Where the rights may be terminated unilaterally by governmental authorities or other regulatory bodies, this should be disclosed in greater detail.
8.3.6 The sponsor should also discuss the impact of any minerals legislation, rules or practices in the jurisdiction in which the mineral Resources are situated and, in particular, whether any of these affect the title to the rights. Examples would include restrictions on foreign ownership, legislation imposing royalties or restrictions on production, and other conditions to the validity of mining rights.
If approvals (from the government of the jurisdiction in which the mineral assets are located or other parties) are required in order for the mineral assets or the Mineral Company to be listed, the sponsor should seek to understand from lawyers in the relevant jurisdictions and management whether such approvals have been obtained, or if not yet obtained, the likelihood/feasibility of obtaining such approval and the timing required.
8.3.7 The sponsor should discuss with the Mineral Company and the Competent Person whether the mineral rights held are consistent with the Reserves and Resources declared and whether the scope of mineral rights held give rise to any material restrictions or limitations in the manner in which the Mineral Company’s group can develop and exploit its stated Reserves and Resources. For example, do the rights enable the holder to carry out all necessary processes (such as fracking) to extract the resources?
8.3.8 The sponsor should also gain an understanding (from discussions with lawyers in relevant jurisdictions, the Competent Person and/or management) with respect to the need for land rights and surface rights in and around the project. These are likely to be more important in certain projects (open pit mining, shale gas/coal bed methane projects) than others (underground mining or offshore oil/gas projects) but should always be considered.
8.3.9 In relation to Petroleum projects involving unitisation arrangements or other forms of joint development, the sponsor should review unitisation arrangements and consider interviewing any joint development partners. The impact of the rule of capture should be understood in relation to neighbouring rights.
[The listing document must include] a statement of any legal claims or proceedings that may have an influence on its rights to explore or mine. [Listing Rule 18.05(4)]
8.5.1 The requirement of this statement is in addition to the requirement in paragraph 40 of Part A of Appendix 1 of the Listing Rules to include particulars of any litigation or claims of material importance pending or threatened against any member of the group.
8.5.2 It should be noted that the threshold for disclosure under Listing Rule 18.05(4) is lower than that required by paragraph 40 of Part A of Appendix 1 of the Listing Rules since Listing Rule 18.05(4) merely requires an “influence” over the rights to explore or mine regardless of monetary value of the claim as opposed to such claims or proceedings being of “material importance”, which is usually determined by setting a floor value of claims above which claims are deemed to be of material importance.
8.6 Recommended Steps
8.6.1 A sponsor should request lawyers in relevant jurisdictions to carry out appropriate court/public record searches in the jurisdictions in which the assets are situated and where the relevant companies in the ownership chain are incorporated. Searches should be carried out against the names of the relevant companies and, where possible, against the individual assets themselves. The timing of these searches should be discussed in advance and would normally be carried out prior to key milestone events in the listing timetable. The sponsor should also follow the guidance in and in respect of assessing the legality and compliance of business operations.
8.6.2 Where litigation searches cannot be systematically carried out, or the details are not a matter of public record, the sponsor should adopt a more thorough interview with the Mineral Company’s in-house legal staff and conduct media searches for any pending or threatened claims or proceedings against the Mineral Company and its relevant assets.
8.6.3 Any legal claims or proceedings which have been identified should be analysed in some detail, including the “worst-case” scenario of the claim for the Mineral Company. Where appropriate, legal opinions as to the likely success of the claim should be sought.
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.