On January 24, 2013, the British Columbia Securities Commission ("BCSC") released its 2012 Mining Report (the "Report"). The Report summarizes the BCSC's findings from the mining disclosure compliance reviews it conducted during 2012, and includes commentary on commonly identified deficiencies and BCSC areas of focus. This is the first time that the BCSC has produced such a report. Its purpose is to promote high quality mining disclosure by creating greater awareness of the BCSC's current views on compliance with, and interpretation of, National Instrument 43-101 and related securities reporting requirements (the "Mining Disclosure Rules").
Mining Disclosure Reviews
The Report is a compendium of mining disclosure issues and deficiencies that the BCSC has identified during its reviews of compliance by public mining companies with the Mining Disclosure Rules. These compliance reviews fall into four categories:
- continuous disclosure reviews, in which the BCSC selects issuers for a review of their continuous disclosure reporting to ensure substantive compliance;
- annual compliance reviews, in which a sample of randomly selected mining companies are reviewed at a high level at year end to assess their overall level of compliance with specific disclosure requirements and to monitor any trends in industry practice;
- targeted reviews, in which the BCSC performs specific reviews of areas of mining disclosure identified as being problematic in continuous disclosure and annual compliance reviews. In most cases these reviews are conducted on issuers for which evidence of poor disclosure practice has come to the attention of the BCSC; and
- prospectus reviews, in which the BCSC reviews the disclosure of an issuer in connection with a prospectus filing.
Topical Issues and Guidance
The Report summarizes a number of areas identified by the BCSC where there is common and recurring non-compliance with the Mining Disclosure Rules.
General observations:
- voluntary disclosure made on websites and in investor relations materials, email promotions and corporate presentations is less likely to comply with the Mining Disclosure Rules than mandatory disclosure required to be made in news releases, technical reports, annual information forms and other continuous disclosure filings.
- there are certain types of disclosure in which the overall level of compliance is relatively low for both required filings and voluntary disclosure. These areas include: disclosure of exploration targets; results of preliminary economic assessments ("PEAs") (usually due to failure to include required cautionary language); restricted or misleading reference to mining studies and failure to name a qualified person ("QP").
Website disclosure of PEA results is identified as being particularly problematic with only 10% of those companies reviewed having made disclosure of a PEA on a website in a manner that complies with the Mining Disclosure Rules.
The Report highlights five key topics identified by the BCSC as the source of significant and recurring deficiencies in mining disclosure:
1. Technical Report Deficiencies
Common deficiencies in technical reports identified by the BCSC and highlighted in the Report include:
- missing or altered statements in qualification certificates and consents of QPs;
- technical reports that are not dated, signed, or addressed to the issuer;
- non‐compliant disclaimers of responsibility or statements of reliance;
- technical reports that do not provide a summary of all material technical and scientific information for the entire property;
- non‐compliant disclosure of historical estimates, exploration targets, or resources and reserves; and
- technical reports that do not provide adequate or sufficiently transparent information on the key assumptions, parameters, and methodologies used in mineral resource estimates.
2. Industry Standards and Best Practices
The BCSC expects QPs to use procedures and methodologies that are consistent with industry best practices as established by the Canadian Institute of Mining, Metallurgy and Petroleum and other similar organizations in other jurisdictions, and to produce scientific and technical disclosure comparable to disclosure adopted by other issuers who follow industry best practices.
Where disclosure appears inconsistent with industry standards and best practices, the BCSC may invite the company and its QP to explain the inconsistency and provide examples of other credible sources that use similar approaches. The BCSC may also use technical reports from credible industry sources, such as international consulting firms and major mining companies, as a reference for industry consensus or approach to particular issues. If an issuer fails to meet industry standards and best practices with respect to a particular disclosure document, the BCSC may request that the issuer retain another QP, acceptable to the BCSC, to author or co-author the technical disclosure or to audit or verify the work of the first QP.
3. Metal Pricing Assumptions
The Report identifies metal pricing assumptions as a key disclosure issue. While there is no prescribed methodology in the Mining Disclosure Rules for the formulation of pricing assumptions, the BCSC expects such assumptions to be consistent with industry norms. Outlying metal pricing assumptions may call into question the reliability of the economic estimates that use those assumptions.
The BCSC notes in the Report that the United States Securities and Exchange Commission accepts, as the maximum metal price assumption allowed, the lesser of the three-year moving average and the current spot price and that this method has become a common industry standard.
The BCSC is also concerned about sensitivity analyses in PEAs that only disclose sensitivities to rising metal prices rather than sensitivities to both rising and declining metal prices.
4. Mineral Resource Estimation
The Report identifies three areas of concern with respect to mineral resource reporting:
- Mineral resources, by definition, must have a reasonable prospect of economic extraction. This may require the QP to constrain the mineralization within a conceptual pit shell or mine model and might require exclusion of mineralization that falls outside these constraints. The BCSC believes that some technical reports do not adequately discuss how the QP has established a reasonable prospect of economic extraction.
- Some QPs appear to be estimating mineral resources without the application of an appropriate geological model or consideration of geological and grade continuity between data points. The omission of these key considerations could produce estimates that do not comply with the definition of mineral resources under National Instrument 43-101 and industry best practices. The BCSC may question the compliance or the suitability of a mineral resource estimate that is based on a technical report that lacks the details of a geographical model that is consistent with the deposit type or does not apply reasonable constraints on mineralization.
- QPs must have the relevant knowledge and experience in both mineral estimation and mineral deposit type for a particular resource estimate. With the wide availability of computer based modeling comes the risk that estimates are being made by QPs without sufficient knowledge or expertise. The QP must be satisfied that he or she has enough experience, which is relevant to the style of mineralisation, to the type of deposit that is being considered and the type of activity being carried out.
5. Mining Studies prior to mineral resource estimate
Finally, the Report addresses the issue of premature disclosure of mining studies. The BCSC believes that the disclosure of ongoing mining studies on a particular property prior to the definition of mineral resources on the property could be misleading, inconsistent with established mining industry practices and contrary to the definition of mining studies under Mineral Disclosure Rules. The BCSC's position is that an issuer's disclosure of a mining study implies that the issuer has identified a mineral resource when in fact it is only conducting exploration to establish mineral resources. An issuer on whose property a mineral resource has yet to be identified can conduct studies that may later be incorporated in a mining study but the issuer should not disclose that such studies are part of a mining study until a mineral resource has been established on the property.
It is important for mining companies to be cognizant of, and responsive to, these issues in their public disclosure about mineral exploration and development and mining activities. Issuers that fail to comply with the Mining Disclosure Rules run the risk that a regulatory review of their disclosure will identify deficiencies and instances of non-compliance.
Although non-material deficiencies may be rectified through remedial disclosure in future filings, if the identified non-compliance is regarded by the regulator as sufficiently material, the regulator may issue a cease trade order or require the issuer to take more immediate remedial measures. This may include issuing a news release to clarify, retract or update previously disclosed but non-compliant mining disclosure, which is potentially embarrassing and deleterious to the issuer's reputation.
In an equity financing scenario, a prospectus review in which material non-compliant mining disclosure is identified could have disastrous consequences and there are numerous instances in which an equity financing was delayed or abandoned because of materially non-compliant mining disclosure.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.