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Pre-IPO Submission on Suitability for Listing

Charltons regularly prepares pre-IPO submissions to ascertain the view of the Hong Kong Stock Exchange (HKEX) on whether or not a mineral company is a suitable candidate for listing.

Pre-IPO submissions are our preferred method for commencing the listing process, particularly in relation to mineral companies which have not yet reached production and will be seeking to take advantage of the waiver from certain financial resources thresholds for listing under the HKEX Listing Rules. Under HKEX Listing Rule 18.04, a mineral company that is unable to satisfy either the profit test in HKEX Listing Rule 8.05(1), the market capitalisation/ revenue/ cash flow test in HKEX Listing Rule 8.05(2), or the market capitalisation/ revenue test in HKEX Listing Rule 8.05(3), may still apply to be listed if it can establish to the HKEX’s satisfaction that its directors and senior managers, taken together, have sufficient experience relevant to the exploration and/or extraction activity that the mineral company is pursuing. Individuals relied on must have a minimum of five years relevant industry experience and details of the relevant experience must be disclosed in the listing document. In its reply to the pre-submission, the HKEX is likely to give an initial opinion as to whether it is satisfied that the mineral company’s directors and senior managers, taken together, have the required sufficient experience. If the HKEX expresses doubts as to whether the requirement is satisfied, the mineral company can proactively commence the process of recruiting additional personal to join its board and/or senior management.

Pre-submissions can also help establish whether or not the HKEX has any concerns about the applicant’s “control” over underlying mineral assets. Pursuant to HKEX Listing Rule 18.03, a mineral company must establish to the HKEX’s satisfaction that it has the right to participate actively in the exploration and/or extraction of natural resources either through control over a majority of the assets in which it has invested together with adequate rights over the exploration for and/or extraction of natural resources, or through adequate rights (arising under arrangements acceptable to the HKEX) which give it sufficient influence in decisions over the exploration for and/or extraction of the natural resources. As mineral assets are frequently located in jurisdictions where the relevant national mining legislation contains restrictions on control over the assets including restrictions on foreign ownership, with which the HKEX could not be expected to be familiar, it is essential to clearly describe to the HKEX the structure and local licensing regime under which the assets are held. Although not required at the pre-submission stage, a legal opinion from counsel in the jurisdiction(s) where the underlying assets are located should be included with the submission if available. Other documentation containing information on local mining laws or describing how the mining assets are held (or extracts thereof) can also be provided as part of the submission.

In addition to the key issues relating to the required sufficient experience of the directors and senior managers and control over the underlying assets, a pre-submission can also be used to demonstrate to the HKEX:

  • that the applicant’s portfolio of indicated resources or contingent resources is identifiable under a recognised reporting standard acceptable to the HKEX (such as the JORC or SAMREC codes) and substantiated in a “Competent Person’s Report”, and that the portfolio is meaningful and of sufficient substance to justify a listing;
  • that the mineral company has available working capital for 125% of the group’s present requirements for at least the first 12 months after listing; and
  • that if it has not yet begun production, its plans to proceed to production with indicative dates and costs.

For both mineral companies and sponsors alike the HKEX’s reply to an initial submission can be very helpful. Typically it will either state that the HKEX is satisfied that the applicant is suitable for listing or else request further clarifications or explanations of certain points. The HKEX is usually willing to meet applicants who have filed pre-submissions with them. This is an opportunity for the company to present their “story” to the HKEX and for all parties to gain clarity on any outstanding matters or potential issues before proceeding to the listing process proper.

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