On March 23, 2011, the European Securities and Markets Authority (ESMA), the successor entity to the Committee of European Securities Regulators (CESR), published an update of the CESR's Recommendations (Recommandations) for the consistent implementation of the European Commission's Regulation on Prospectuses, with revised guidance as to the content requirements of prospectuses issued by resource companies, including, for the first time, recommendations as to content requirements of a competent person's report (CPR). The UK Listing Authority (UKLA) will take the Recommendations into account when deciding whether to approve a prospectus, the publication of which is required for listing on the main market of the London Stock Exchange.
The Recommendations were originally published in February 2005 to enable issuers and their advisors to make judgments about prospectus disclosure in a consistent manner across Europe. Issuers are obliged to prepare prospectuses according to the Recommendations (as revised from time to time) unless they are unsuitable in a particular case.
To ensure appropriate levels of transparency and assurance over reserves and resources figures reported to the market, the Recommendations contain a framework, at paragraphs 131-133, for additional disclosure by mineral companies of reserves and resources information.
In April 2010, following concerns that the original Recommendations lacked clarity compared to regulatory standards in other markets, did not reflect market practice and were not effective in standardizing resource company prospectus disclosure across the European Union (EU), the CESR published a consultation document on a new framework for disclosure. The below considers some of the key provisions of the updated Recommendations.
Mineral companies are now defined as "companies with material mineral projects." Accordingly, companies performing only exploration now fall within the Recommendations, which previously referred to companies whose principal activity is the extraction of mineral resources. The materiality of projects will be assessed having regard to all the company's mineral projects relative to the issuer and its group as a whole. However, mineral companies that are only issuing wholesale debt will be exempt from these provisions.
Basic Disclosure Requirements for all Prospectuses
The updated Recommendations continue to set out basic disclosure requirements for all prospectuses and issuers must explain any inconsistencies between these disclosures and information already in the public domain.
CPR: New Appendices to the Recommendations
A CPR is now required when an issuer is first admitted to trading (regardless of how long it has been a mineral company; a CPR was previously only required under the Recommendations where the issuer had been a mineral company for less than three years). However, a CPR is not required, in normal circumstances, thereafter. The issuer must have continued to report and publish details of its resources, reserves and results/prospects annually in accordance with one of the specified reporting standards for this exemption to apply. The CESR noted that market practice expects a CPR at float but not generally thereafter and the updated Recommendations are consistent with this practice.
In addition, there are now detailed requirements for the preparation of the CPR, including requirements as to the qualifications of the competent person and the acceptable reporting and valuation standards.
New appendices to the Recommendations set out recommended, rather than compulsory, CPR minimum content. This allows a degree of flexibility in preparing a CPR, which, in particular, addressed concerns that the compulsory inclusion of a valuation of reserves and resources is excessive.
The ESMA decided not to implement the proposed requirement to provide CPRs in three instances: on new assets being acquired where the acquisition is a significant gross change (although basic prospectus disclosure will be required on target assets); where there has been a (material) first-time declaration of new reserves; or where there has been a significant change in reserves levels. However, a CPR will continue to be necessary under the UKLA Listing Rules on a Class 1 acquisition or disposal of mineral resources.
Reporting and Valuation Standards
A list of reserves and reporting codes has been compiled; it includes only oil and gas codes derived from the Society of Petroleum Engineers' PRMS system and mining codes aligned with the Committee for Mineral Reserves International Reporting Standards. The ESMA removed the proposed U.S. mining reporting standards (SEC Industry Guide 7) from the list and Russian and Chinese standards are also excluded.
Cash-Flow Projection and Funding Forecast
Under the original Recommendations, mineral companies without a three-year trading history were required to include a two-year cash-flow projection validated by accountants as well as a two-year funding forecast. In the consultation, CESR proposed to abolish these requirements, and to replace them with a new requirement to include an 18-month forward-looking management-prepared projection where the fundraising proceeds are to be applied towards exploration or development projects.
The ESMA decided to proceed with the proposal to remove the requirement for a cash-flow projection and funding forecast, but not to implement the replacement provision. On reflection, the ESMA considered that general disclosure obligations as to use of proceeds are adequate.
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