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Chapter 18

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Question:

In calculating the 25% size test for Major Activity, are costs incurred for processing, refining and marketing activities allowed to be included as operating costs?

Answer:

Yes, if a Mineral Company conducts exploration, extraction, subsequent processing and refining of its Reserves and Resources as part of its ordinary course of business. Companies that are only engaged in refining activities will not be regarded as Mineral Companies.

GL52-13 Appendix 1, FAQ No. 1
LR reference: Main Board Rule 18.01(3) / GEM Rule 18A.01(3)
Released on 26/5/2010 (Updated in February 2020)

Question:

Does the term "extraction" in Chapter 18 encompass "production"?

Answer:

Yes. We follow the practice of the other international exchanges, the terms "extraction" and "production" can be used interchangeably.

GL52-13 Appendix 1, FAQ No. 2
LR reference: Main Board Rules 18.01(3) / GEM Rules 18A.01(3)
Released on 26/5/2010 (Updated in February 2020)

Question:

If the acquisition target reports its Reserve and Resource information using a different mineral report code, (e.g. NI 43-101), whilst the Mineral Company reports using the JORC Code, would the Exchange accept both Reporting Standards?

Answer:

Yes, if the presentation of Reserves and Resources under the codes are very similar. For comparability, we will require the issuer to (i) disclose a reconciliation to one of the accepted Reporting Standards; and (ii) highlight any material differences in these Reporting Standards.

GL52-13 Appendix 1, FAQ No. 18
LR reference: Main Board Rules 18.01(3), 18.28 to 18.33 / GEM Rules 18A.01(3), 18A.28 to 18A.33
Released on 26/5/2010 (Updated in February 2020)

Question:

How an applicant demonstrates it has "adequate rights " under Rule 18.03(1)(b)?

Answer:

Companies can demonstrate it has adequate rights if they (i) participate in mineral and/ or exploration activity under joint ventures, product/ profit sharing agreements or other valid arrangements; and (ii) can demonstrate such agreements give them sufficient influence over the exploration for and extraction of Resources and Reserves, which we ordinarily would expect to be at least 30% interest in the exploration for and/ or extraction of Natural Resources. This corresponds with the level of "controlling" interest under the Listing Rules.

The Exchange may consider other arrangements where an applicant has interests lower than 30% but actively operate mining projects depending on facts and circumstances in each individual case. For example, (i) exploration/ extraction rights granted under specific government mandates ; and (ii) the ability of an applicant to veto resolutions can also demonstrate the applicant has adequate rights to give sufficient influence.

GL52-13 Appendix 1, FAQ No. 3
LR reference: Main Board Rules 18.03(1)(b), 18.07 / GEM Rules 18A.03(1)(b), 18A.07
Released on 26/5/2010 (Updated in February 2020)

Question:

What does "control of over a majority of assets in which it has invested" in Rule 18.03(1)(a) mean?

Answer:

It means the Mineral Company must have an interest greater than 50% (by value) in its total assets (which shall have the same meaning as defined in Rule 14.04(12)).

GL52-13 Appendix 1, FAQ No. 4
LR reference: Main Board Rules 18.03(1)(a), 14.04(12) / GEM Rules 18A.03(1)(a), 19.04(12)
Released on 26/5/2010 (Updated in February 2020)

Question:

Please provide examples of "material cost items" in the note to Rule 18.03(3) that should be highlighted to investors.

Answer:

They include items such as (i) favourable tax treatment for a limited period of time or may be subject to challenge; and (ii) a temporary disruption to transport routes which led to increased costs for a limited time.

GL52-13 Appendix 1, FAQ No. 5
LR reference: Main Board Rules 18.03(3) / GEM Rules 18A.03(3)
Released on 26/5/2010 (Updated in February 2020)

Question:

Clarify, when determining whether a new applicant meets the 125% working capital requirement, (i) what do "cost of any proposed exploration and/ or development" under Rule 18.03(4)(c) and "capital expenditure" in the note to Rule 18.03(4) include; and (ii) how are refinancing of loan repayments accounted for?

Answer:

The cost of proposed exploration and/ or development under Rule 18.03(4)(c) relates to new applicants' daily operation (i.e. working capital) such as contracting fees for excavating the minerals and transportation fees for delivering the minerals.

Capital expenditures mentioned in the note to Rule 18.03(4) relate to expenditures associated with development of infrastructure of the mines and expansion of the processing facilities, etc. We noted that new applicants have normally included capital expenditures to demonstrate compliance with the 125% working capital requirement for prudence sake, which is not required.

If loan repayment is required during the 12-month period, new applicants should include the repayment in its 125% working capital analysis.

Below is a simplified illustration of the 125% working capital analysis, assuming that the borrowings will be drawn down and repaid within the 12-month period, and the proceeds from the borrowings will be fully used to finance the capital expenditures in the case with external financing:

  Without external financing With external financing
Cash at the beginning of the period 300 300
Operating cash inflow2 1,300 1,300
Proceeds from borrowings - 500
Total working capital available (A) 1,600 2,100
Operating cash outflow3 1,000 1,000
Repayment of borrowings - 500
Interest payments - 40
Total working capital required (B) 1,000 1,540
Sufficiency of working capital (A/B) 160% 136%

Notes:

1. Operating cash inflow mainly represents receipt from sales.
2. Operating cash outflow includes payment for mining, transportation and utility expenses, and workforce.

GL52-13 Appendix 1, FAQ No. 6
LR reference: Main Board Rules 18.03(4), 18.03(5) / GEM Rules 18A.03(4), 18A.03(5)
Released on 4/2/2013 (Updated in February 2020)

Question:

What does "primary activity" in the note to Rule 18.04 mean?

Answer:

It means Mineral Companies relying on the exemption under Rule 18.04 from the R8.05 Requirements must mainly focus on Natural Resource exploration and/or extraction, although this does not have to be their sole activity.

GL52-13 Appendix 1, FAQ No. 7
LR reference: Main Board Rules 18.04, 18.01(3) / GEM Rules 18A.04, 18A.01(3)
Released on 26/5/2010 (Updated in February 2020)

Question:

When are CPRs required?

Answer:

A CPR is required for:

(i) new applicant Mineral Companies (Rule 18.05);
(ii) Mineral Companies that propose to acquire or dispose of assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction (Rule 18.09); and
(iii) listed issuers that propose to acquire assets which are solely or mainly Mineral or Petroleum Assets as part of a Relevant Notifiable Transaction (Rule 18.10).

Although not required under the Rules, listed issuers' internal experts (who are likely to be qualified geologists and Competent Persons) may prepare estimates of Reserves at other times, such as updates of details of Reserves and Resources in annual reports. Updates on exploration, mining production and development activities in interim and annual reports may also include statements of Reserves and Resources.

GL52-13 Appendix 1, FAQ No. 17
LR reference: Main Board Rules 18.05, 18.09, 18.10 / GEM Rules 18A.05, 18A.09, 18A.10
Released on 26/5/2010 (Updated in February 2020)

Question:

How should Mineral Companies disclose their specific risks and general risks in the listing document as required under Rule 18.05(5)?

Answer:

Mineral Companies should follow Guidance Note 7 to the Main Board Rule (GEM: Practice Note 4) on risks disclosure to the extent applicable, or ensure the risks disclosed in the listing document is no less than those set out in the Guidance/ Practice Note.

GL52-13 Appendix 1, FAQ No. 8
LR reference: Main Board Rules 18.05(5), Guidance Note 7 / GEM Rules 18A.05(5), Practice Note 4
Released on 26/5/2010 (Updated in February 2020)

Question:

A Scoping Study is required to be substantiated by an opinion of a Competent Person under Rule 18.07. What is a Scoping Study and must it be included in a CPR?

Answer:

A Scoping Study is a preliminary evaluation of a mining project to assess the economic viability of mineral Resources and whether or not a Mineral Company shall pursue the project. If a project survives a Scoping Study, it provides an indication that it is appropriate to proceed with further work and commission a Pre-feasibility Study. As such, Scoping Studies are only required for Mining Companies which have not yet begun production.

Where a Scoping Study is required under Chapter 18, it should, and it can either form part of the CPR or be supported by the independent opinion of a Competent Person.

GL52-13 Appendix 1, FAQ No. 9
LR reference: Main Board Rules 18.07 / GEM Rules 18A.07
Released on 26/5/2010 (Updated in February 2020)

Question:

Does Chapter 18 cover all connected transactions involving the acquisition or disposal of Mineral or Petroleum Assets which require shareholder approval?

Answer:

No. Chapter 18 only covers Relevant Notifiable Transaction (as defined under Rule 18.01(3)) involving the acquisition or disposal of assets which are solely or mainly Mineral or Petroleum Assets by a Mineral Company or a listed issuer. Some connected transactions below the major (i.e. 25%) threshold are not covered by Chapter 18 (and therefore not required to be supported by a CPR) but still require shareholder approval under Chapter 14A.

GL52-13 Appendix 1, FAQ No. 15
LR reference: Main Board Rules 18.09, 18.10, Chapter 14A / GEM Rules 18A.09, 18A.10, Chapter 20
Released on 26/5/2010 (Updated in February 2020)

Question:

Under what circumstances is the Exchange likely to waive the requirement for a CPR on a disposal which is also a Relevant Notifiable Transaction?

Answer:

The factor to consider is whether there is sufficient alternative information on the Mineral or Petroleum Assets being disposed of. For example, the Exchange may waive this requirement where a Mineral Company has Mineral or Petroleum Assets that had been the subject of a CPR in the past which were accounted for on the company's balance sheet.

GL52-13 Appendix 1, FAQ No. 13
LR reference: Main Board Rule 18.09(2) / GEM Rule 18A.09(2)
Released on 26/5/2010 (Updated in February 2020)

Question:

Rule 18.15 requires a listed issuer that publicly discloses details of Resources and/or Reserves to give an annual update of those Resources and/or Reserves once a year in its annual report. Does the annual update need to comply with Rule 18.18?

Answer:

Yes.

Rule 18.17 states that annual updates of Resources and/or Resources must comply with Rule 18.18. This applies to listed issuers that publicly disclose details of Resources and/or Reserves (Rule 18.15) and Mineral Companies (Rule 18.16).

GL52-13 Appendix 1, FAQ No. 21
LR reference: Main Board Rules 18.15, 18.17, 18.18 / GEM Rules 18A.15, 18A.17, 18A.18
Released on 28/2/2013 (Updated in February 2020)

Question:

What information does the Exchange require when assessing whether a person has the relevant experience to act as the Competent Person for a Relevant Notifiable Transaction involving acquisition or disposal of mineral or petroleum assets?

Answer:

The person should ensure there are sufficient details to demonstrate that the experience is relevant to the mineral or petroleum assets being acquired or disposed of. In general, the person is expected to provide a list of engagements showing his relevant experience with the following information:

•   the period of each engagement;
•   a description of each project undertaken, including the location and the type of resources involved, and the relevance to the resources being acquired or disposed of;
•   details of any technical reports on the resources of the project, including the reporting standards and the use of the reports;
•   details of his role and responsibilities in the project and the preparation of any technical reports.

GL52-13 Appendix 1, FAQ No. 11
LR reference: Main Board Rules 18.21(1) / GEM Rules 18A.21(1)
Released on 28/2/2013 (Updated in February 2020)

Question:

Rule 18.24 provides that a CPR or Valuation Report must have an effective date (being the date when the contents of the CPR or Valuation Report are valid) less than six months before the date of publishing the listing document. When is this effective date?

Answer:

The effective date of a CPR or Valuation Report should be the date of appraisal (i.e. the date when Resources and Reserves are estimated or valued). It should not be the date when the CPR or Valuation Report is signed.

GL52-13 Appendix 1, FAQ No. 12
LR reference: Main Board Rules 18.24(2) / GEM Rules 18A.24(2)
Released on 4/2/2013 (Updated in February 2020)

Question:

Does a new applicant or listed issuer need to ensure disclosures in Reserves and Resources in the listing document (including circular for the Relevant Notifiable Transaction) consistent with the related CPR?

Answer:

Yes. In particular, the directors should ensure there is no mismatch between statements about Reserves and Resources in the listing document and in the CPR. Descriptions of Reserves and Resources in the listing document and in the CPR must also correspond to the specific categories in the Reporting Standards.

GL52-13 Appendix 1, FAQ No. 10
LR reference: Main Board Rules 18.28 to 18.33 / GEM Rules 18A.28 to 18A.33
Released on 26/5/2010 (Updated in February 2020)

Question:

Does the Exchange accept both "deterministic" and "probabilistic" methods of estimating Reserves?

Answer:

Yes, Competent Persons and issuers may decide whether to estimate Reserves under the deterministic or probabilistic method. The rationale should be disclosed. Under Rule 18.33(1), where estimates of Reserves are disclosed using the probabilistic method, the Competent Person must state the underlying confidence levels applied.

GL52-13 Appendix 1, FAQ No. 19
LR reference: Main Board Rule 18.33(1) / GEM Rule 18A.33(1)
Released on 26/5/2010 (Updated in February 2020)

Question:

Will valuations of Natural Resource assets (i.e. Reserves) based on discounted cash flows ("DCF") be regarded as profit forecasts under Rule 14.61 which is required to be reviewed by the reporting accountants?

Answer:

No. However, issuers must disclose all relevant assumptions and the reason DCF was chosen as a valuation method.

GL52-13 Appendix 1, FAQ No. 20
LR reference: Main Board Rules 11.17, 14.61, 18.34, Appendix 1A(34)(2), Appendix 1B(29)(2) / GEM Rules 14.29, 19.61, 18A.34, Appendix 1A(34)(2), Appendix 1B(29)(2)
Released on 26/5/2010 (Updated in February 2020)