Mining exploration, development and production are all costly endeavours that require access to enormous amounts of capital. In order to access Canadian capital markets, mining companies need to convince investors that their mineral projects have economic potential by highlighting the results of their exploration/mining activities.
When they are telling their story, however, companies need to be extremely careful to comply with Canada's complex rules and regulations regarding the oral and written disclosure of scientific and technical details about their mineral projects. Mining companies can run into tremendous difficulties if they are not diligent about meeting their disclosure obligations. For this reason, they should regularly consult with experienced legal advisors who are highly knowledgeable about the rules and regulations concerning mineral disclosure in Canada.
In Canada, disclosure of scientific and technical details related to mineral projects is governed by National Instrument 43-101 ("NI 43-101"), including the Technical Report Form ("43-101F1") and Companion Policy ("43-101CP", collectively with NI 43-101 and 43-101F1, the "National Instrument") as well as the regulations of the Toronto Stock Exchange ("TSX") or TSX Venture Exchange ("TSXV"), depending on where the company is listed. Disclosure obligations in Canada are also guided by the standards set out by the Canadian Institute of Mining, Metallurgy and Petroleum ("CIM"). This paper will focus on the disclosure obligations outlined in NI 43-101.
How 43-101 came about
Canada is home to the most active and efficient capital markets serving the global mining sector. In fact, in 2011, Canadian markets were ranked first in listed mining companies worldwide, with over 90% of all global mining equity financings being completed on the TSX and TSXV. Moreover, 43% of companies listed on the TSX and TSXV are in the mining sector and 39% of the equity capital raised globally for mining in 2011 was raised on TSX and TSXV. In order to ensure the integrity of the Canadian capital markets, it became apparent to regulators that there was a need to harmonize disclosure practices and prevent the promotion of unsubstantiated exploration data to investors.
The need for more efficient regulation was demonstrated clearly by the highly publicized Bre-X scandal that made headlines around the world. Bre-X was a Canadian mining company that owned a "gold" property in Borneo. After the company reported that the deposit contained as much as 200 million ounces of gold, independent tests revealed that Bre-X's reports were false: the deposit only contained minor traces of gold. The company's shares, which once traded on the TSX at $200, soon became worthless.
In response to the Bre-X scandal and other reports of unsubstantiated mineral exploration projects, the Ontario Securities Commission and TSX formed a joint task force to examine the need for higher and more uniform disclosure standards. The task force produced a report containing 66 recommendations that formed the basis of NI 43-101. The disclosure guidelines under NI 43-101 were also broadly based on the Joint Ore Reserves Committee Code (the JORC Code) that regulates the publication of mineral exploration reports on the Australian Stock Exchange as well as the South African Code for the Reporting of Mineral Resources and Mineral Reserves.
In February of 2001, the National Instrument was first put into effect by the provincial securities regulators and has since undergone several amendments and changes, most recently in June 2011. The National Instrument established a series of disclosure requirements that applied to companies in mineral exploration, development or production. The National Instrument applies to all oral statements and written disclosure of scientific or technical information, including disclosure of a mineral resource or mineral reserve, made by or on behalf of a company regarding a mineral project of that company.
The National Instrument has certain key provisions that, considered together, enhance the accuracy and integrity of disclosure in the mining sector. It is very important that companies operating in Canada are aware of the National Instrument, how it will impact their disclosure, and the implications of noncompliance. Cassels Brock has been actively involved with reviewing and commenting on proposed changes to the National Instrument since its inception.
The philosophy that governed the creation and implementation of the National Instrument is simple: by creating and enforcing a system of disclosure that is uniform and transparent across the board, regulators would encourage greater investor confidence in mining investment, which would in turn strengthen Canada's capital markets both directly and indirectly.
The three pillars of the National Instrument that support this philosophy are: (i) making disclosure of technical/scientific information on mineral projects the responsibility of an expert, the 'qualified person'; (ii) making such disclosure subject to a comprehensive technical report prepared and signed by qualified persons; and (iii) the standardization of definitions with respect to mineral resources and mineral reserves.
The first pillar of the National Instrument is the requirement of a 'qualified person' to oversee and take responsibility for technical/scientific mineral disclosure and technical reports. According to the National Instrument, a 'qualified person' is an individual who:
- is an engineer or geoscientist with a university degree, or equivalent accreditation, in an area of geoscience, or engineering, relating to mineral exploration or mining;
- has at least five years of experience in mineral exploration, mine development or operation, or mineral project assessment, or any combination of these, that is relevant to his or her professional degree or area of practice;
- has experience relevant to the subject matter of the mineral project and the technical report;
- is in good standing with a professional association, and, in the case of a professional association in a foreign jurisdiction, has a membership designation that requires attainment of a position of responsibility in their profession that requires the exercise of independent judgment; and
- either a favourable confidential peer evaluation of the individual's character, professional judgement, experience, and ethical fitness, or a recommendation for membership by at least two peers, and demonstrated prominence or expertise in the field of mineral exploration or mining.
All disclosure of scientific or technical information made by a company must either be based upon information prepared by, or under the supervision of, a qualified person, or be approved by a qualified person. For this reason, qualified persons need to be involved in some capacity in the preparation of such disclosure and/or in technical reports, which are discussed below in more detail.
Additionally, in most cases, in Canada the qualified person needs to be independent of the company with respect to the preparation of technical reports. This is unlike requirements of the Australasian Joint Ore Reserves Committee ("JORC"), which does not require a qualified person (termed 'competent person' by JORC) to be independent.
A qualified person is considered independent if there is no circumstance that, in the opinion of a reasonable person aware of all relevant facts, could interfere with the qualified person's judgment regarding the preparation of the technical report. Taken together, the provisions regarding qualified persons ensure that the technical reports supporting the information that companies disclose about mining operations is coming from individuals with enough background and independence to accurately assess and endorse such information.
The second pillar of the National Instrument deals with requirements for technical reports. Upon becoming a public company in Canada, the company must file a technical report for each mineral property that is material to the company. The National Instrument lays out the requirements necessary for such reports. It defines the report as one that is prepared and filed in accordance with NI 43-101 and 43-101F1, and includes, in summary form, all material scientific and technical information in respect of the subject property as of the effective date of the report.
The company must also file a technical report to support scientific information that is contained in certain documents filed or available to the public, including but not limited to: a prospectus; an information circular; an offering memorandum; an annual information form; or any other written disclosure made to the public that discloses mineral resources or reserves for the first time, or that discloses a related material change. Technical reports are not necessary when the mineral property is not material to the company or there has been no material change to a previously filed report.
Standards and definitions
The third pillar is concerned with standards and definitions. To ensure uniformity across the industry, the National Instrument has adopted certain definitions that have been established by CIM. By creating distinctions between certain kinds of resources, reserves and studies, the National Instrument increases reporting accuracy and decreases the chances of investors relying on misleading technical information.
Also of importance in meeting the disclosure requirements for mineral projects is 43-101CP. The companion policy sets out the views of the Canadian securities regulatory authorities as to how certain provisions of NI 43-101 should be interpreted and applied. Included in the companion policy are items such as how a company can assess materiality, how Canadian securities regulators assess the independence of a qualified person, and the basis on which Canadian securities regulators will grant exemptions from certain requirements of NI 43-101.
While the National Instrument does not specifically require qualified persons to follow the CIM guidelines that are referenced in the companion policy, the release to the public of any scientific and technical information that does not conform to industry standard practices could be considered distribution of misleading information, which is an offense under securities regulations.
The lesson here is: just because the distribution of certain information is not specifically required or prohibited by the National Instrument does not mean it is appropriate, acceptable or not misleading. It is imperative that companies familiarize themselves with the National Instrument in its entirety to avoid taking actions that lead them to unwittingly expose themselves to legal and regulatory problems.
What does this mean for Chinese investors?
Canada's leading role in the mining sector makes it a very attractive place to invest. Much of this has to do with the implementation of tighter controls, such as the National Instrument, which have provided investors with confidence in providing capital to mining companies that are listed on the TSX or TSXV.
International investors in the mining sector will find that there are great benefits to conforming with Canadian disclosure standards. For example, if a foreign company complies with Canadian disclosure standards, then it will also likely be in full compliance with the disclosure requirements of most other countries. For instance, the listing requirements of the Hong Kong Stock Exchange recognize compliance with NI 43-101 as an approved standard. Also, the Instrument goes beyond the JORC and Australian Stock Exchange (ASX) rules.
This means that a company that is compliant with Canadian disclosure standards should not have any difficulty being listed in Australia for disclosure reasons; the same cannot be said for a company that has met Australian disclosure standards and wants to come to Canada.
In addition, in Canada, natural resource companies are entitled to disclose mineral reserve and resource estimates, whereas in the US, natural resource companies are only allowed to disclose estimates under mineral reserves. Another distinction is that the Canadian system allows for mineral reserves estimates to be based on pre-feasibility studies rather than on full bankable feasibility studies as required under the U.S. regime. As a result, mining operations that are compliant with the more flexible Canadian disclosure requirements are better able to gain in stature on the international stage.
That being said, international investors need to be aware of, and compliant with, mining regulations in Canada. These include both the requirements of Canadian securities regulators as well as those of the stock exchanges. The responsibility to follow these regulations falls onto the Board of Directors, whose members have the responsibility of ensuring that the disclosure items required by the Instrument are prepared and disseminated properly and that the guidelines are followed.
Disclosure that is conducted in accordance with Canadian regulations will be based on reliable information that reflects professional advice in full compliance with standard practices and definitions. To meet this requirement, for its own protection the Board of Directors should work with qualified advisors, such as Cassels Brock, to ensure that its members fully comply with their responsibilities under the regulations.
What can go wrong?
Companies can run into major difficulties when they are not diligent about complying with their disclosure obligations: deadlines may be missed, financings can fall through, and stock prices can tumble.
Consider the following examples:
In March of 2011, Ur-Energy, a company listed on the TSX and NYSE, had to withdraw a previously announced $30 million bought deal short form prospectus offering of common shares. The company was required to update its continuous disclosure record and prepare an updated technical report in accordance with the National Instrument.
In December of 2011, Karnalyte Resources, a company listed on the TSX, announced that it could not proceed with a $115 million bought deal. The company had to withdraw its short form prospectus after receiving comments from the securities regulators in respect of one of its technical reports. Ultimately, it could not meet its filing deadlines.
In February of 2012, Extorre Gold Mines, a company listed on the TSX and NYSE, announced that it had to withdraw from a $50 million bought deal. The company received comments from the securities regulators about one of its technical reports. It also needed to clarify its continuous disclosure record, including the preparation of an updated preliminary economic assessment in accordance with the National Instrument.
Cassels Brock can aid companies to avoid these types of issues by assisting with companies' public disclosure, websites, investor presentations, and other written and oral disclosure of technical or scientific information in order to ensure compliance with the National Instrument and Canadian disclosure requirements for mineral properties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.