Hong Kong: Markets: Listing a Resources and Mining company - a comparison of Australia with Hong Kong

"Both the Australian Stock Exchange and the Stock Exchange of Hong Kong are actively courting foreign companies to list on their exchanges and both conduct annual international road shows to potential investor".

Not very long ago, companies generally listed on the stock exchange in the jurisdiction in which they were incorporated or where the major assets of the company were located. By comparison, today, the main drivers for the location of a listing include liquidity of the stock market, access to cornerstone investors, the listing process, corporate governance requirements and companies and securities legislation. There are increasingly a number of resources companies who are listing on foreign stock exchanges as either a primary or secondary listing.

This article explores the relative merits of a resources company listing in Australia, which has one of the oldest and most established exchanges for the listing of resources companies in Asia versus Hong Kong, which has not had the same history of listing resources companies. It looks at the issues from the perspective of a resources company that is either incorporated in Australia or Hong Kong or in neither of them.

With nearly 1800 listed companies, according to Austrade in their recent analysis of International Data Comparisons, the Australian stock market is currently the second largest liquid stock market (measured by floating stocks - which are the number of shares which are available to be traded on a stock exchange and generally excludes strategic stakes or "locked-up stakes") in the Asia Pacific region at US$789 billion.

The market capitalisation of floating stocks in Australia is more than double that in Hong Kong (its market capitalisation of floating stocks is approximately US$317 billion and ranks 6th in the Asia pacific region) and almost five times larger than in Singapore. Measured by total market capitalisation, the Hong Kong stock market is currently the 7th largest in the world (and 3rd largest in Asia behind Tokyo and Shanghai) with a total market capitalisation of approximately US$1.9 trillion while Australia is currently the 12th largest stock market in the world (and 5th largest in Asia) with a total market capitalisation of approximately US$1 trillion.

Both the Australian Stock Exchange Limited (ASX) and Stock Exchange of Hong Kong (HKEx) are actively courting foreign companies to list on their exchanges and both conduct annual international road shows to potential investors to persuade them of the merits of listing on their respective stock exchange.

As Australia is one of the world's leading resource nations, it goes without saying that ASX has one of the most well developed markets for the listing of resources companies. The resources sector of ASX includes companies involved in the exploration and production of minerals, oil and gas, gold and steel. ASX and its predecessors have been listing resources companies for over 150 years and there are currently approximately 800 resources companies listed on ASX making up nearly 25% of the Australian stock market by market capitalisation and 40% of listed companies on ASX. Included in this group are global resources companies who are listed on ASX as foreign exempt listings including Newmont Mining Corporation and AngloGold Ashanti Limited.

Companies can list on ASX as either an ASX Listing, ASX Debt Listing or, if the company is already listed on another stock exchange with a significant profit history or significant net tangible assets, may be eligible to apply to ASX for an ASX Foreign Exempt Listing.

The requirements for an ASX Foreign Exempt Listing are tailored for large international companies and recognise the extent of regulation and supervision already applying in that company's home market. This largely eliminates a dual regulation and compliance burden that might otherwise arise.

The key requirements that a company must meet to apply for a listing on ASX as an ASX Foreign Exempt Listing are as follows:

A company that is admitted on ASX as an ASX Foreign Exempt Listing is required to comply with the rules of its home exchange and to release information to ASX that it releases to its home exchange. Many of ASX's on-going listing rules do not usually apply to ASX Foreign Exempt Listings.

A foreign company can also list on ASX as an ASX Listing irrespective of whether it is already listed on another stock exchange. A foreign entity seeking an ASX Listing is subject to the same admission requirements and ASX's usual on-going listing rules that apply to an Australian entity, irrespective of whether it is listed on another stock exchange.

The key listing requirements include:

In addition to compliance with the listing requirements contained in the ASX Listing Rules, Appendix 1A (ASX Listing application and agreement) of the ASX Listing Rules requires a mining exploration company to include certain information about the ownership of interests in mining exploration areas, any work done in developing the areas, maps and schedules of the mining tenements prepared by a qualified person, a program of expenditure and a timetable for completion of an exploration program and a declaration of conformity for any reports on mineral reserves and ore reserves with the Australasian code for Reporting of Indentified Mineral resources and Ore Reserves.

Once a resources company has listed on ASX, it will be subject to ongoing reporting requirements for mining companies set out in Chapter 5 of the ASX Listing Rules. The ASX pioneered the development of minimum reporting standards and guidelines for the mining industry with the mining industry with the development of the Australasian Joint Ore Reserves Committee and the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore reserves (JORC Code). The JORC Code is found in Appendix 5A of the ASX Listing Rules.

The purpose of the JORC Code was to ensure that mining and exploration companies reported all the information that investors and stockbrokers would require in order to come to an understanding of the results and estimates of the company. The JORC Code has since become a blueprint for similar initiatives around the world and played a significant part in establishing Australia's reputation as a global centre of mining excellence.

Finally, the ASX, in conjunction with Standard & Poor's has developed the S&P/ASX 300 Metals and Mining Index and the S&P/ASX All Ordinaries Gold Index. These indices are based on standard industry classification, liquidity criteria for the S&P/ASX 300 Metals and Mining Index and the all ordinaries methodology for the S&P/ASX All Ordinaries Gold Index. The purpose of these classifications is to benchmark resources companies with like companies listed on ASX using methodology used for similar companies listed on other stock exchanges and allows listed companies and investors to compare performance of companies included in one of these indices with other international markets.

On the other hand, while there has been formal stock exchanges in Hong Kong since 1891 and HKEx has approximately 1,300 listed companies, its resources sector is relatively small compared with Australia. In addition, Hong Kong has only recently opened up the HKEx for foreign company listings (in addition to companies incorporated in Hong Kong, China, Bermuda and Cayman Islands).

While the HKEx is dominated by Hong Kong and mainland Chinese companies, the HKEx is keen to attract foreign companies to list and accordingly, announced a joint policy (with the Securities and Futures Commission in Hong Kong) on 7 March 2007 to actively attract foreign companies to Hong Kong (Hong Kong Listing of Overseas Company Policy).

The Hong Kong Listing of Overseas Company Policy is aimed at assisting the listing of foreign companies by clarifying the Listing Rule requirements that they must follow. One of the fastest growing sectors on the HKEx is the resources sector where resources companies now comprise approximately 15% of the total market capitalisation on HKEx.

On the release of the Hong Kong Listing of Overseas Company Policy, the Chief Executive Officer of the Securities and Futures Commission in Hong Kong, Martin Wheatley, said: "The policy statement provides clear guidance to companies seeking to list in Hong Kong which are incorporated outside Hong Kong, Bermuda, Cayman Islands and the PRC. It implements the Economic Summit Focus Group on Financial Services' recommendation to facilitate listing of overseas companies which have substantial operations in the Mainland, and further develops Hong Kong as an international listing platform for quality companies from around the world"

HKEx's then Chief Executive, Paul Chow, said: "This policy statement is intended to ensure listing in Hong Kong for overseas companies is not overly burdensome."

The roadmap is expected to facilitate and hopefully reduce the amount of work required for overseas companies seeking to list in Hong Kong. It will allow them to focus attention on fewer but more relevant issues, thereby streamlining the listing process for overseas issuers while maintaining the quality of our market for investors.

"With the continuing growth of Hong Kong's financial market, we believe more and more companies worldwide, especially those with business interests or other ties in Mainland and Hong Kong, will over time seek to raise funds and be traded here. HKEx is taking a long-term view and does not expect to receive a large number of applications from overseas companies in the near term."

Mr Chow added: "HKEx has explained the merits of listing in Hong Kong at events in several overseas markets over the last few years and those promotional efforts will continue."

Companies can list in Hong Kong on either the Main Board or the Growth Enterprises Market (GEM) board. There are currently quite a few foreign companies contemplating a listing in Hong Kong, principally on the Main Board. GEM is the second board in Hong Kong and can be a stepping stone towards the Main Board. Dual Listings with different requirements for primary and secondary listings are allowed on the Main Board while dual listings are allowed on the GEM Board but not secondary listings.

Since the publication of the Hong Kong Listing of Overseas Company Policy, the Listing Committee of HKEx has considered and accepted 8 new jurisdictions of incorporation for foreign companies seeking either a primary, secondary or dual listing on HKEx. These jurisdictions are Australia, Canada (British Columbia and Ontario), Cyprus, Germany, Luxembourg, Singapore and United Kingdom.

Unlike Australia, there is no foreign exempt listing category in Hong Kong. Chapter 19 of the Main Board Listing Rules and Chapter 24 of the GEM Listing Rules provide the general framework applicable to all overseas companies seeking a listing on HKEx.

Companies incorporated outside Hong Kong and the other recognised jurisdictions set out above, seeking a primary listing on Main Board and GEM are assessed on a case-by-case basis and have to demonstrate they are subject to appropriate standards of shareholder protection, which are at least equivalent to those required under Hong Kong law.

Click here for the key listing requirements for listing a company in Hong Kong on either the Main Board or GEM.

Mining companies wanting to list in Hong Kong generally opt to list on the Main Board. Chapter 8 of the Main Board Listing Rules sets out the qualifications for listing on the Main Board. Where the company's sole activities are exploration, it will not generally be able to meet the listing requirements unless it is able to establish the existence of adequate economically exploitable reserves of natural resources, provide an estimate of the capital cost of bringing the issuer into a productive position and estimate the time and working capital required to bring the issuer into a position to earn revenue. It must also disclose the additional information required in the Main Board Listing Rules.

Under current listing rules, HKEx will accept a shorter trading record period and/or may vary or waive the profit or other financial standards requirement for mineral companies if it 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. In addition, where the company's main activities include exploration activities to a material degree, it must have available to it the technical advice of an independent person and any statement made in any listing document as to the existence of natural resources must be substantiated by a professional adviser.

HKEx are in the process of reviewing the listing rules for mineral and exploration companies to bring them in line with international best practice and are currently considering submissions commenting on its consultation paper. The main thrust of the proposals is to include a definition of a mineral and exploration company, require that technical experts have required qualifications and experience and introduce international standards for the reporting of estimates or resources and reserves (including the introduction of some of the elements of the JORC Code). It is expected that HKEx will announce the proposed changes shortly.

Sino Gold Mining Limited from Australia was the first foreign company to list as a secondary listing on HKEx in 2007 although note that Sino Gold Mining is currently the subject of a merger with Eldorado Gold Corporation and will seek a delisting from HKEx on the completion of that merger. In addition, Resourcehouse Limited, a company controlled by Clive Palmer has announced that it will list in Hong Kong shortly and United Company Rusal, a Russian company and the worldslargest aluminium and alumina producer has also announced plans to list in Hong Kong in the near future.

The advantages of listing in Hong Kong include the fact that it is one of the biggest stock exchanges in the work by total market capitalisation. It provides companies with exposure to the Mainland Chinese market, deep sources of capital, higher premiums for resources companies and higher stock turnover.

In addition to listing in Australia and Hong Kong, Australian resources companies have started to look elsewhere to list. For example, in addition to Sino Gold Mining Limited, International Ferro Metals Limited and Centamin Egypt Limited which both have a primary listing and admission to the main market of the London Stock Exchange or dual listed on 2 exchanges like BHP Billiton Limited and Rio Tinto PLC.

In conclusion, resources companies now have more options when considering where to list. Australia has a more mature market and comprehensive listing requirements and specific index information specifically tailored to support the listing of a resources company whereas Hong Kong's requirements for listed resources companies are still developing. However, Hong Kong has a bigger stock exchange than Australia and gives resources companies greater access to capital and a bigger investor base, including investors from the PRC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.