In the late nineties, the Bre‐X scandal caused the worldwide reputation of Canada's mining industry to suffer a huge blow as information disclosed in press releases by Bre‐X Minerals Ltd. ("Bre‐X"), a Calgary‐based company, regarding its discovery in Indonesia of the world's largest gold deposit was revealed to be untrue. It is said that investors lost an estimated six billion dollars in this scheme. Nevertheless, investors continued to invest in Canadian mining companies and more interest was recently generated when the Quebec government unveiled its Plan Nord.
Although the Canadian Securities Administrators (the "CSA") created a new set of rules for mining disclosure and looked more closely at the disclosure documents filed by mining companies after the Bre‐X scandal, the review process has never been as rigorous as it has been in the last few months for mineral exploration companies.
One of the first signs of this increased scrutiny was seen in Alberta in November of 2011, when Karnalyte Resources Inc. ("Karnalyte") announced a $115 million bought deal financing by way of a short form prospectus. Karnalyte was unable to proceed with the financing because comments generated by the CSA on the 43‐101 technical report did not allow Karnalyte to file a final short form prospectus in the required timeframe. Karnalyte later filed an amended and restated technical report but has not, to this day, concluded the previously announced financing.
Around the same time, Clifton Star Resources Inc. ("Clifton") issued a technical report for its Quebec‐based Duparquet project but the British Columbia Securities Commission indicated that Clifton had failed to file the proper paperwork. The company's stock was under a cease trade order and trading resumption was announced only after an updated technical report was filed.
These cases gave way to numerous other reviews of technical report disclosure by the CSA in the first quarter of 2012. Orbite Aluminae Inc. ("Orbite"), a Montreal‐based company, was hit by a cease trade order imposed for several weeks by Quebec's Autorité des marchés financiers (the "AMF") because of several deficiencies in its technical report, namely a lack of clarity around the company's claims regarding its rare earth resources in the province. The AMF stated that Orbite's preliminary economic assessment technical report did not comply with the requirement of National Instrument 43‐101 respecting standards of disclosure for mineral projects ("NI 43‐101"). The cease trade order was later lifted after an independent audit was performed on certain sections of the technical report, to the satisfaction of the AMF.
Soon after, Extorre Gold Mines Ltd. ("Extorre"), a Vancouver‐based company, announced a $50 million bought deal equity financing. The CSA indicated that the preliminary economic assessment filed on December 16, 2011 in connection with a gold property called Cerro Moro in Argentina had characterized some aspects of the document as being at the level of a pre‐feasibility study. Extorre had to withdraw its prospectus because of the time involved in responding to the comments from the CSA. After Extorre clarified the disclosure in its technical report, it was able to conlude a $25 million bought deal placement financing.
Rio Novo Gold Inc. ("Rio Novo") announced a $20 million bought deal offering a few days later. It later had to terminate its offering based on delays required by Rio Novo to clear comments with securities regulatory authorities. The offering previously announced no longer seems to be in the cards.
Canaco Resources Inc. ("Canaco") was the most recent publicized case. The notice of hearing received from the CSA on April 24, 2012 (the "Notice of Hearing") involved four current and former directors who were suspected to have breached applicable securities laws in connection with the disclosure of drill results from Canaco's Magambazi gold exploration project in Tanzania, and in connection with certain stock options grants around the same time. The CSA's allegations were that (i) Canaco failed to disclose all assay results immediately upon receipt as it made the announcement of the drill results in three news releases over a two week period and did not file a material change report after any of the news releases and (ii) that the directors of Canaco acted inappropriately by granting stock options when in possession of material undisclosed information as the grant of options to directors, officers and consultants was made between the time the management and board of Canaco became aware of the assay results and the date that the first news release was announced. Canaco had discussions regarding the options with the TSX Venture Exchange (the "TSX‐V") and the CSA and both treated the matter very differently. The TSX‐V required a re‐pricing of the options but did not challenge the conduct of the directors of Canaco. The CSA is however challenging such conduct.
Although the judgment has not yet been rendered, there are valuable lessons to be learned from such Notice of Hearing and from the cases previously discussed. Here are a few lessons to keep in mind for mining companies:
- They must strictly follow the practices set in NI 43‐101 in order (i) to ensure that they get the required qualified experts to approve and sign off on their data and (ii) to prevent confusion about mineral deposits which may often result from misclassification of resources, inappropriate use of historical drilling data and misinterpretation of technical studies;
- They must announce the assay results immediately upon receipt and if analysis and context cannot be provided at that time, they should be provided in subsequent news releases;
- Prior to the completion of a mineral resource estimate, which typically resets materiality for a mineral project, they should consider that all drill results are material;
- They should avoid granting stock options or other share based compensation to insiders when in possession of undisclosed assay results;
- They should not overlook the requirement to file material change reports upon the occurrence of a material change;
- Securities regulators may treat matters very differently following an investigation and may resolve it in a different manner; and
- The CSA will generally take a closer look at the disclosure documents of a mining company that is filing a prospectus, which may cause tremendous damage to the mining company if comments generated by the CSA will not permit it to obtain the required financing as inappropriate disclosure takes a long time to fix.
- By halting the trading of stocks or by preventing financings from closing, the CSA is clearly sending a message to mining companies that they must strictly follow the disclosure rules set forth in NI 43‐101 or there will be consequences. It is therefore better to be safe than sorry.
Bibliography
"Junior minors feel heat as regulators crack down over disclosures" by Peter Koven, Financial Post dated May 4, 2012.
BCSC action reinforces lessons for continuous disclosure" by Alan J. Hutchison, posted on May 31, 2012 on the FMC Securities Mining Law site.
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Avoiding Deal Killers – Understanding Technical Report Triggers Under NI 43-101 
