Listing of mineral companies on the Hong Kong Stock Exchange

by David Richardson
Dorsey & Whitney
Hong Kong
Telephone: +852 2105 0234
Email: richardson.david@dorsey.com

Introduction

David Richardson is with the Hong Kong office of the law firm of Dorsey & Whitney, which have a strong mineral resources practice.

David advised in a secondary listing on the Hong Kong Stock Exchange (“Exchange”) of Sino Gold Mining Limited which raised approximately US$120 million. The Company is the only mineral resource explorer and producer presently listed on the Exchange. The Company was, at the time of listing, the largest foreign producer of gold in the PRC. David had previously acted in the listing of Zijin Mining, one of the largest domestic producer of gold in the PRC. David is presently acting for a number of overseas mineral companies in their listings on the Exchange.

The Exchange is characterized by great liquidity. Part of this liquidity is as a result of the qualified domestic institutional investor scheme to channel China's foreign reserves into the Exchange and to alleviate the liquidity glut in the economy. Despite the global financial crises, the Exchange will therefore be a relatively safe haven.

While the Exchange is dominated by Hong Kong and mainland Chinese companies, to alleviate this dependence, the Exchange implemented a policy in 2007 to attract foreign companies to list on it. Sino Gold Mining Limited from Australia was the first foreign company to list on the Exchange under this policy. Foreign companies are increasingly looking to list on the Exchange. The premiums for resource companies on the Exchange remain strong. Given China's huge demand for minerals and resources, the lack of mineral and resources companies on the Exchange and the premiums involved, foreign mineral and resources companies are especially looking to list on the Exchange.

Listing Requirements

Main Board

GEM

A Main Board new applicant must fulfill one of three financial criteria:

Financial requirement

1. Profit Test

2. Market Cap/ Revenue Test

3. Market Cap/ Revenue/ Cashflow Test

A GEM new applicant must fulfill the following financial criteria

Profit Attributable to Shareholders

Profits of HK$50 million (US$6.4 million) in the last 3 years (with HK$20 million (US$2.6 million) in the most recent year and an aggregate of HK$30 million (US$3.8 million) in the two preceding years)

N/A

N/A

N/A

Market Cap

At least HK$200 million (US$26 million) at the time of listing

At least HK$4 billion (US$513 million) at the time of listing

At least HK$2 billion (US$256 million) at the time of listing

At least HK$100 million (US$13 million)

Revenue

N/A

At least HK$500 million (US$64 million) for the most recent audited financial year

At least HK$500 million (US$64 million) for the most recent audited financial year

N/A

Cashflow

N/A

N/A

Positive cashflow from operating activities of at least HK$100 million (US$13 million) in aggregate for the three preceding financial years

Positive cashflow from operating activities of at least HK$20 million (US$2.6 million) in aggregate for the two preceding financial years

Operating history and management

New applicants must have a trading record of at least 3 financial years with:

· management continuity for at least the 3 preceding financial years; and

· ownership continuity and control for at least the most recent audited financial year.

New applicants must have a trading record of at least 2 financial years with:

· management continuity throughout the 2 preceding financial years; and

· ownership continuity and control throughout the preceding full financial year.

Relaxation of operating history and management requirement

The Exchange may accept a shorter trading record and/ or waive or vary the operating history and management requirement for mineral companies.

The Exchange may accept a shorter trading record period and/or waive or vary the ownership and management requirements for natural resources exploitation companies.

Mineral companies

Activities include exploration for or production of natural resources.

Application for listing from a company whose current activities consist solely of exploration not normally considered unless the issuer is able to establish:

· existence of adequate economically exploitable reserves of natural resources;

· estimate of the capital cost of bringing the issuer into a productive position; and

· estimate of the time and working capital required to bring the issuer into a position to earn revenue.

These qualifications are in addition to the basic conditions for listing set out in Chapter 8. However, financial requirements may not apply if the Exchange is satisfied that the directors and management of the issuer have sufficient and satisfactory experience of at least three years in mining and/or exploration activities.

Issuer whose activities include exploration for natural resources to a material degree must have available to it the technical advice of an independent person.

Statement made in any listing document as to the existence of natural resources must be substantiated by professional adviser.

In the case of a new applicant whose activities include to a material extent exploration for natural resources, the listing document must contain at least the following information:

· estimate of the capital cost of bringing the issuer into a particulars of the technical adviser;

· statement of the interests of each promoter or technical adviser in the share capital of the issuer;

· general nature of the business of the issuer;

· issuer’s rights of exploration and exploitation and a description of the properties to which such rights attach;

· in the case of proposed exploitation of mineral bodies, the issuer’s rights and the properties to which such rights attach;

· report by the technical adviser to the issuer with respect to the estimated reserves and the evidence on which the estimate is based;

· statement setting out additional information where it is necessary for a proper appraisal of any special factors affecting the exploration business of the issuer;

· in addition to the statement as to the sufficiency of working capital which is required to be given by the directors:

− estimate of the requirements of the issuer for funds for at least two years following the issue of the listing document;

− where the issuer already has income, or expects to receive income during the period covered by this statement, particulars of the estimated cash flow for at least the two years following the issue of the listing document; and

− estimate of the further finance required to enable the issuer to exploit its proven reserves and commence recoveries on a commercial scale, together with an estimate of the time needed to achieve this;

· particulars of the interest, of every director, technical adviser or promoter named in the listing document, in the promotion of, or in any assets which have been within the two years immediately preceding the issue of the listing document; and

· statement of claims in relation to exploration rights by third parties against the issuer or vice versa.

Statement of business objectives

No such specific requirement but a new applicant is expected to include a general statement of future plans and prospects.

A new applicant must state its overall business objectives and explain how it proposes to achieve them over the period covering the remaining financial year during which listing occurs and the 2 financial years thereafter.

Minimum market capitalisation

Shares and Depositary Receipts

Market capitalisation of a new applicant of at least HK$200 million (US$26 million) at the time of listing.

Market capitalisation at the time of listing is determined by multiplying the number of issued shares by the expected issue price. In the case of depositary receipts, the depositary receipts and the underlying shares will be taken into account when calculating the market capitalisation, provided that such depositary receipts and the underlying shares are fungible.

Shares

Market capitalisation of a new applicant of at least HK$100 million (US$13 million) at the time of listing.

Market capitalisation at the time of listing is determined by multiplying the number of issued shares by the expected issue price.

Options, warrants or similar rights

Market capitalisation of HK$10 million (US$1.3 million) at the time of listing.

Options, warrants or similar rights

Market capitalisation of HK$6 million (US$0.8 million) at the time of listing.

Minimum public float

At least 25% of the issuer's total issued share capital subject to a minimum of HK$50 million (US$6.4 million) must at all times be held by the public.

In the case of depositary receipts, where the depositary receipts are fungible with the underlying shares, the total shares and shares represented by depositary receipts held by the public on both the Exchange and any overseas market(s) will count towards the 25%.

At least 25% of the issuer's total issued share capital subject to a minimum of HK$30 million (US$3.8 million) must at all times be held by the public.

For issuers with an expected market capitalisation of over HK$10 billion (US$1.3 billion) at the time of listing, the Exchange may accept a lower percentage of between 15% and 25%.

Minimum public float as determined above must be maintained at all times.

Spread of shareholders

The equity securities in the hands of the public should be held among at least 300 holders (if qualifying under the Profit test or Market Cap/Revenue/Cashflow test) and 1,000 holders (if qualifying under the Market Cap/Revenue test).

The equity securities in the hands of the public should be held among at least 100 persons.

No more than 50% of the securities in public hands at the time of listing can be beneficially owned by the 3 largest public shareholders.

Underwriting arrangement

Public tranche must be fully underwritten.

Underwriting is not compulsory. However, if new capital is to be raised by the issuer in an amount not fully underwritten, a listing may only proceed if the minimum subscription amount set out in the prospectus has been raised.

Offering mechanism

There are specific restrictions on the basis of allocation within the public subscription tranche and the claw back mechanism between the placing tranche and the public subscription tranche in the event of over-subscription. A new applicant may not list only by way of placing if there is likely to be significant public demand for its securities.

A new applicant is free to decide its offering mechanism as long as full disclosure is made.

Appointment of sponsor

A new applicant must appoint a sponsor to assist with its listing application