Canada: CSA Releases Guidance On The Use And Disclosure Of Preliminary Economic Assessments

The Canadian Securities Administrators (CSA) has published CSA Staff Notice 43-307 Mining Technical Reports – Preliminary Economic Assessments in order to clarify its position on several issues regarding the use and disclosure of preliminary economic assessments – also known as "PEA"s.

Under National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101), a PEA is defined as a study, other than a prefeasibility study or feasibility study, which includes an economic analysis of the potential viability (as opposed to economic or technical viability) of mineral resources. In addition, unlike a pre-feasibility study or feasibility study, NI 43-101 allows issuers to include inferred mineral resources in a PEA, provided specific cautionary language is also disclosed.

In June 2011, the CSA amended the definition of a PEA in NI 43-101 to allow issuers greater flexibility in disclosing the results of these early stage or conceptual economic studies in broader circumstances. In monitoring the change, however, the CSA has found that some issuers were employing, and making disclosure in respect of, PEAs in circumstances and ways not intended or allowed under the new definition. In a number of recent instances, these concerns have led to issuers having to restate their continuous disclosure record and in some extreme instances have contributed to the delay or withdrawal of prospectus offerings.

The CSA recognizes that the amended PEA definition has caused some confusion among mining issuers. The notice is intended to help mining issuers better understand the application and limitations of these studies.

PEAs being used as a proxy for pre-feasibility studies

The notice emphasizes the importance of keeping a PEA separate and distinct from more comprehensive pre-feasibility and feasibility studies. Issuer's may be viewed as inappropriately treating a PEA as a pre-feasibility study if the issuer:

  • Blurs the boundary between a PEA and a prefeasibility study by comparing some or all of the components of the PEA to the standards of a pre-feasibility study if the study includes inferred mineral resources;
  • Does not include the cautionary statement required by section 3.4(e) of NI 43-101 with equal prominence each time it discloses the economic analysis of the mineral resources;
  • Uses the PEA as a basis to justify going directly to a feasibility study or a production decision;
  • Discloses "mining" or "mineable" mineral resources or uses the term "ore", which are essentially treating mineral resources as mineral reserves; or
  • Otherwise states or implies that economic or technical viability of the mineral resources has been demonstrated.

PEAs being prepared in conjunction with pre-feasibility studies or feasibility studies

The CSA broadened the definition of PEA in June 2011 in response to industry concerns that issuers needed to be able to take a step back and re-scope advanced stage projects based on new information or alternative production scenarios. In these cases, the issuer generally will be contemplating a significant change in an existing or proposed operation that is materially different from a previous mining study. Often this will also involve considerably different economic parameters and capital investments. Examples of a significant change are a different scale of proposed operation (higher or lower throughput), a different scope of operation (higher or lower grade), the inclusion of other types of mineralization (oxide vs. sulphide), the use of alternative mining methods (open pit vs. underground), or the use of alternative processing technology.

The CSA has expressed concerns, however, where a PEA is prepared concurrently with, or as an addon or update to, an issuer's pre-feasibility study or feasibility study rather than as a step-back or a re-scope. The CSA will generally consider that two parallel studies done concurrently or in close time proximity to each other are not in substance separate studies, but components of the same study. The CSA cautions that a study that includes an economic analysis of the potential viability of mineral resources that is done concurrently with or as part of a pre-feasibility or feasibility study is not, in its view, a PEA if it:

  • Has the net effect of incorporating inferred mineral resources into the pre-feasibility or feasibility study, even as a sensitivity analysis;
  • Updates, adds to or modifies a pre-feasibility or feasibility study to include more optimistic assumptions and parameters not supported by the original study; or
  • Is a pre-feasibility or feasibility study in all respects except name.

PEA preparation and disclosure issues

The CSA also took the opportunity to comment on the following aspects of PEA preparation and disclosure where potential compliance problems have been observed:

  • Technical Report Triggers. The CSA notes that some issuers are disclosing results of potential economic outcomes for material properties that are not supported by a technical report. Such disclosure can occur in the issuer's corporate presentations, fact sheets, investor relations materials or any statement on the issuer's website or disclosure posted or linked from third party documents, reports or articles or otherwise adopted and disseminated by the issuer. Such PEA-style disclosure may trigger the requirement for an issuer to file a technical report.
  • Inappropriate Assumptions. The CSA is seeing situations where issuers are using overly optimistic or highly aggressive assumptions in a PEA, resulting in misleading disclosure. The CSA notes that an issuer must not disclose forward-looking information unless the issuer has a reasonable basis for the forward-looking information. Hence, any assumption under a PEA must have a reasonable basis in the context of the mineral project.
  • By-product Disclosure. In some cases, issuers are disclosing the results of a PEA that includes projected cash flows for by-product commodities that are not included in the mineral resource estimate. The CSA considers such disclosure misleading and contrary to the PEA requirements in NI 43-101.
  • Relevant QP Experience. The CSA is aware of circumstances where individual qualified persons are taking responsibility for technical reports or parts of reports that support the results of a PEA, while not fully complying with the requirement to have experience relevant to the subject matter of the mineral project or the technical report. Where the CSA has concerns that a qualified person does not have relevant experience, it will challenge the qualified person to explain or justify their relevant experience, or failing that, ask for a revised technical report from additional qualified persons.

Consequences of material deficiencies or errors

Finally, the notice describes the consequences of material deficiencies or errors when securities regulatory authorities identify material NI 43-101 disclosure deficiencies in relation to PEAs, which can include the issuer being placed on the reporting issuer default list, an order requiring the issuer to re-file the relevant documents, or the issuance of a cease trade order until the deficiency has been corrected. Even where the deficiency has been corrected, regulators may still pursue enforcement or other regulatory action.

Of particular importance for issuers considering a prospectus offering, the notice emphasizes that the review of a prospectus filing may be delayed if issues such as those discussed in the notice are present, and material deficiencies may prevent the issuance of a final receipt.

CSA Staff Notice 43-307 is available on various CSA members' websites.

We encourage mining issuers and capital market participants to familiarize themselves with the CSA's recent guidance by contacting one of the authors of this Bulletin or your usual lawyer in BLG's Mining Group or BLG's Securities & Capital Markets Group.

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