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Source: Reuters

ANALYSIS-Listing rules cloud HK's mining IPO hopes

Published: 13 May 2010 01:09:05 PST

* HKEx's ambition to become a mining IPO centre to take years

* HK needs more infrastructure for small-cap miners

* Some miners support lifting ban on pure exploration firms

* Disclosure more important than restrictions

HONG KONG, May 13 - Hong Kong's ambition to turn its stock exchange into a major destination for mining IPOs may be a slow burn given its existing ban on pure exploration companies and the bourse's fuzzy record on disclosure.

The Hong Kong Stock Exchange -- heavy with property and financial companies -- is courting miners from Russia and across Central Asia in a bid to capitalize on the commodity price boom and China's insatiable appetite for natural resources.

Yet unlike major mining-focused indexes in Sydney and Toronto, HKEx does not permit exploration companies to list unless they prove the existence of exploitable natural resource reserves, and lay out a clear production plan.

For HKEx, that measure protects investors who lack experience investing in mining companies. But such experience is a long way off given that few small miners are listing here, analysts say.

"In Hong Kong, among advisers and investors there is a growing skill base, growing expertise -- they're becoming increasingly educated and better understand the mining sector," said Andrew Driscoll, head of resources research at CLSA.

"We do have some way to go," Driscoll added. "We don't have nearly the broker or shareholder support or infrastructure for the small cap mining sector in Hong Kong yet. But I think it makes sense for that to get developed over time."

Hong Kong's pitch to IPO-hungry mining firms is simple: China is the world's dominant source of commodity demand, and Hong Kong is China's international gateway. It is the only Chinese market that operates under international trading standards, and has ample liquidity for both institutional and retail investors.

CHAPTER 18

HKEx's ability to realise its mining IPO ambitions depends on how it deals with the controversial regulation Chapter 18 -- the exchange's ban on pure exploration companies.

In September, HKEx launched a formal consultation with industry experts about Chapter 18 in a bid to make the city's bourse more miner friendly.

The results are pending, but some executives oppose the rule, claiming it would bar a number of exploration firms already listed in Sydney, Toronto and London from listing in Hong Kong.

"This would disallow a significant portion of the ASX/TSX/AIM listed juniors," an executive from G-Resources, which owns the Martabe gold-silver project in North Sumatra, Indonesia, wrote to the exchange. "A strong disincentive to exploration."

HKEX is scheduled to release consultation results soon, but a change in the ban on pure exploration companies looks unlikely in the near future.

"Under our proposals ... pure exploration companies are not eligible for listing, as we believe our market may not be ready for the geological risk and speculative nature of early stage exploration ventures at this juncture," HKEx spokeswoman Lorraine Chan said in an email to Reuters.

DISCLOSURE VS. RESTRICTIONS

Also at issue is the exchange's record of allowing exceptions to the rules, or overlooking loopholes, which sends mixed messages to the market, analysts say. Some miners have been able to skirt the rules through backdoor listings.

In 2007, coal miner Mongolia Energy Corporation listed when its assets were bought by New World Cyberbase, a tech company, which renamed itself Mongolia Energy. The miner has yet to turn a profit from its coal operations.

"The only way for MEC to list was by selling all its projects to a company that was already listed," Mongolia-based Frontier Securities said in a report.

Hong Kong needs to stick to a disclosure based approach to avoid loopholes and other rule-bending exceptions, such as the ban on retail investor participation in UC RUSAL's IPO in January, due to the aluminium giant's debt burden.

"There needs to be a move toward a disclosure based approach, and we're only part way there," said Hong Kong-based shareholder activist David Webb.

"The exchange always claims to be a disclosure based market, but when it comes down to it, they also have some qualitative criteria as well ... They should either say this company has met all the disclosure criteria and it can list, or it hasn't."

Still, even without major reform, some mining executives continue to pump up HKEx's potential.

In March, Ivanhoe Mines' colourful chairman Robert Friedland, told a conference: "Hong Kong will become the largest mining finance market in the world."

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