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PN4 Suggested Risk Assessment for Mineral Companies

The Stock Exchange of Hong Kong Limited

Practice Note 4

to the Rules Governing the Listing of Securities on the GEM of The Stock Exchange of Hong Kong Limited (the "GEM Listing Rules")

Issued under rule 1.07 of the GEM Listing Rules

SUGGESTED RISK ASSESSMENT FOR MINERAL COMPANIES

Risk Assessment

Although other jurisdictions do not have a specific risk factor requirement, a listing of significant risk factors provides investors with a summary of significant risks to the company and its properties. A risk factor section is often included in reports filed in jurisdictions without a specific requirement for their inclusion. This can be particularly important for investors looking to invest in the mineral resource sector.

In their technical reports, most consulting firms include risk analysis tables that address common areas of risk along with an assessment of the degree of risk for the particular project. These assessments are necessarily subjective and qualitative. Risk has been classified from minor to major, which can be further clarified as:

•   Major Risk: the factor poses an immediate danger of a failure, which if uncorrected, will have a material effect (>15% to 20%) on the project cash flow and performance and could potentially lead to project failure.
•   Moderate Risk: the factor, if uncorrected, could have a significant effect (10% to 15% or 20%) on the project cash flow and performance unless mitigated by some corrective action.
•   Minor Risk: the factor, if uncorrected, will have little or no effect (
The likelihood of a risk must also be considered. Likelihood within a 7-year time frame can be considered as:
•   Likely: will probably occur
•   Possible: may occur
•   Unlikely: unlikely to occur

The degree or consequence of a risk and its likelihood are combined into an overall risk assessment as presented in Table 1.1.

Table 1.1
Overall Risk Assessment

Likelihood of Risk   Consequence of Risk  
(within 7 years) Minor Moderate Major
Likely Medium High High
Possible Low Medium High
Unlikely Low Low Medium

Table 1.2 presents an example of a risk assessment for a coal project and shows how the likelihood and consequences of a risk are combined into an overall rating. Note that the detailed items considered are project specific.

Table 1.2
Project Risk Assessment Table Before Mitigation

    Consequence  
Hazard/Risk Issue Likelihood Rating Risk
Geological      
Lack of Significant Resource Unlikely Minor Low
Loss of Significant Reserve Possible Major High
Significant Unexpected Faulting Likely Major High
Significant Subsidence Possible Moderate Medium
Poor Geological Roof Likely Moderate Medium
Unexpected Groundwater Ingress Possible Moderate Medium
Unexpected Seam Gas Outburst Unlikely Moderate Low
Mining      
Significant Production Shortfalls Possible Major High
Production Pumping System Adequacy Unlikely Major Medium
Adverse Pre-Mining Stress Possible Moderate Medium
Excessive Gas Possible Moderate Medium
Spontaneous Combustion Unlikely Major Medium
Significant Geological Structures Likely Moderate High
Poor Development Roof/Rib Conditions Possible Minor Low
Poor Development Floor Conditions Unlikely Moderate Low
Poor Production Roof Unlikely Major Medium
Excess Surface Subsidence Possible Major High
Outbursts Unlikely Major Medium
Windblasts Unlikely Moderate Low
Processing/Handling      
Lower Yields Possible Minor Low
Lower Plant Production Levels Possible Moderate Medium
Higher Plant Production Costs Possible Moderate Medium
Plant Reliability Possible Moderate Medium
Handling System Unlikely Moderate Low
Environmental      
Water Discharge Non-Compliance Possible Minor Low
Significant Unpredicted Subsidence Possible Moderate Medium
Regulatory Consent/Variation Delays Possible Minor Low
Capital and Operating Costs      
Project Timing Delays Possible Moderate Medium
Mine Management — Plan Unlikely Minor Low
Capital Cost Increases — Start-Up Possible Moderate Medium
Capital Costs — Ongoing Unlikely Minor Low
Operating Costs Underestimated Possible Moderate Medium
Project Implementation      
Critical Path Delays Possible Moderate Medium

There are five high risk areas identified in Table 1.2. While this approach is necessarily subjective and a number of issues are related, the areas with high risk rating may be summarized as follows:

•   loss of significant reserve,
•   significant production shortfalls,
•   significant unexpected faulting,
•   significant geological structures, and
•   excess surface subsidence.

The areas of high risk, ranked by their importance, should be an important part of technical and valuation reports. Although general areas such as geology, reserve estimation, production, processing, financial issues, social and environmental issues, etc. are common major topics in risk assessments, the specific risks appropriate to each property and each company will differ from property to property and company to company. For a particular property or company, the number and order of risk factors will vary from year to year. In periods of low commodity prices, a risk factor relating to commodity prices will be far more important than during periods when commodity prices are high. Availability of needed equipment (drill rigs, trucks, shovels, etc.) also varies from year to year. The issuer is responsible for ensuring that appropriate risk factor disclosures are made.