Market report - Hong Kong Exchange opens door to mineral companies

There’s no doubt that investment activity is continuing to intensify off the back of positive economic signs, with demand for resource stocks leading the way. Most of you would have read about the Foreign Investment Review Board being swamped with applications, many from Chinese investors looking to shore up controlling stakes in Australian mineral assets. As flagged in an earlier Market Report article, urbanisation rates in countries such as China and India are driving, and will continue to drive, demand for core commodities with export capability.

As further evidence of the vast appetite of Asian markets for resource investment opportunities, the Securities Exchange of Hong Kong (SEHK) has moved to further open its doors to mineral and exploration companies. SEHK has proposed a series of changes designed to better facilitate the entry of these companies onto the exchange. While the SEHK was always willing to consider applications on an ad hoc basis, the changes will create a more certain path for applicants and will raise the integrity of investment offerings and the flow of information to investors.

Specifically, the proposed changes will provide an alternative to the financial requirements to be met on admission. The current tests, based around combinations of profit, market capitalisation and revenue often prove impossible for mineral companies to meet, with many of them heavily reliant on equity funding and yet to achieve positive cash flow. Instead companies must have a minimum market cap of US$26 million and will need to demonstrate an appropriate level of managerial experience relevant to the company’s activities, with individuals to have a minimum of five years experience.

The SEHK also proposes to introduce a JORC type reporting regime to improve the credibility of listings and better satisfy the information requirements of savvy and sophisticated investors. They will also move to articulate criteria to increase the quality and tenure requirements of suitable mineral assets.

All of this is good news for Australian resource companies. Not only are they well positioned to meet the new requirements due to stringent criteria of the domestic regulatory environment, but they now have another means to tap into the Chinese investment market. The reality is that the Shanghai Exchange is closed to Australian companies and Chinese investors face a gauntlet of Chinese government departments in order to get the approval required to invest abroad. With blanket approval being available for Chinese investors to invest in companies listed on the SEHK without the need for case-by-case approval, the SEHK represents an exciting opportunity as a gateway to the broader Asian markets.

Our information is that Asian appetite is strong, and there will be a first mover advantage for mineral companies looking to take advantage of the new rules.