In this issue:
- BCSC Mining Report Provides Helpful Reminders of Common Disclosure Deficiencies
- Toronto Stock Exchange and TSX Venture Exchange Release Consultation Paper on Emerging Market Issuers
- Mining Operations at Risk
BCSC Mining Report Provides Helpful Reminders of Common Disclosure Deficiencies
The British Columbia Securities Commission recently released its 2012 Mining Report that discusses the most common deficiencies in mining issuer disclosure. The report is the first of its kind for the BCSC, and provides an overview of the types of mining disclosure reviews undertaken by the BCSC, and summarizes their main findings over the past several years. Issuers should keep in mind that the securities commissions, including the BCSC, do not review all publicly filed documents available on SEDAR, and therefore issuers should not assume that examples of disclosure they find online are compliant with regulatory requirements or have been otherwise blessed by the regulators.
The report provides helpful guidance so that mining issuers can improve their disclosure and understand the BCSC's approach to interpretative issues.
Some of the most common deficiencies noted by the BCSC were:
- Failure to file a current technical report
- Failure to file technical reports that fully comply with the requirements of National Instrument 43-101 Standards of Disclosure for Mineral Projects, including:
- Missing or altered statements in certificates or consents of qualified persons and
- Prohibited disclaimers or statements of reliance on other experts
- Failure to include the required cautionary statements for preliminary economic assessments, historical estimates and exploration targets
- Disclosure of mineral resources and mineral reserves that do not fully comply with NI 43-101
- Misleading references to mining studies (preliminary economic assessments, pre-feasibility studies and feasibility studies)
- Failure to name the qualified person responsible for the scientific and technical disclosure
Another area of concern for the BCSC was its finding that disclosure was generally less NI 43-101 compliant on an issuer's website, investor relations materials and corporate presentations when compared with required filings such as news releases, technical reports, management's discussion and analyses and annual information forms. Reporting issuers are reminded that the requirements of NI 43-101 apply equally to all forms (oral and written) of scientific and technical disclosure, not just to disclosure contained in documentation required to be filed on SEDAR.
The report also provides guidance on some of the items that will cause the BCSC to look more closely at a reporting issuer's disclosure, including:
- Disclosure that is not based on industry best practices
- Canadian securities regulators have stated that they expect the qualified person (QP), acting in its professional capacity, to follow industry best practices adopted by CIM or similar organizations. Failure to follow best practices may cause the BCSC to question the objectivity of the QP.
- Anomalous metal or commodity pricing assumptions and sensitivity analyses
- The BCSC recognizes the lesser of the three-year moving average and current spot price as acceptable as per SEC practice.
- Issuers are also reminded that if they include positive metal price sensitivities in their economic analyses, they should also include negative sensitivities to avoid misleading disclosure.
- Technical reports that do not disclose the QP's assumptions regarding a project's reasonable prospects of economic extraction typically reflected by the cut-off grade
- Mineral resources, by definition, must have reasonable prospects of economic extraction.
- Mineral resource estimates that are not based on an appropriate geological model or do not apply reasonable constraints on mineralization
- The definition of "mineral resources" and industry best practices require the application of a geological model.
- Disclosure of ongoing mining studies prior to establishing mineral resources
- Mining studies (preliminary economic assessments, pre-feasibility studies and feasibility studies) apply economic analyses to mineral resources and therefore investors may be misled into inferring the presence of a resource that does not exist.
The report does not go into extensive detail regarding the requirements of NI 43-101, as an understanding of the NI 43-101 requirements by the reader is assumed by the BCSC.
Toronto Stock Exchange and TSX Venture Exchange Release Consultation Paper on Emerging Market Issuers
By: Alexander Lalka
On December 17, 2012, the Toronto Stock Exchange (the "TSX") and the TSX Venture Exchange (the "TSXV" and together with the TSX, the "Exchanges") released a joint consultation paper in connection with the review of the listing requirements applicable to emerging market issuers (the "Consultation Paper"). The Consultation Paper is a response to the Ontario Securities Commission's Emerging Markets Issuer Review (Staff Notice 51-719) which raised concerns with the listing approval process for emerging market issuers.
The Consultation Paper defines emerging market issuers as those with a significant connection to an emerging market jurisdiction, being any jurisdiction outside of Canada, the United States, Western Europe, Australia and New Zealand. The Consultation Paper has a significant impact on the exploration and mining industry given the large and growing number of projects located in emerging markets. The purpose of the Consultation Paper is to (i) identify the risks with emerging market issuers, (ii) present potential new listing requirements for emerging market issuers and (iii) solicit comments from market participants on matters relating to emerging market issuers including the proposed new listing requirements. The Consultation Paper and the trend towards stronger listing requirements for emerging market issuers will lead to better safeguards and greater transparency for investors which should help prevent cases such as Bre-X and Sino-Forest in the future.
Risks Associated with Emerging Market Issuers
Given the recent trend towards globalization and the increased focus on new and emerging markets (especially in China, Africa and South America), the Exchanges have outlined certain risks that may disproportionally affect emerging market issuers. These risks were identified through a review of emerging market issuers which included consultations with market participants such as the Canadian Securities Administrators, the Canadian Public Accounting Board and the Investment Industry Regulatory Organization of Canada. The Consultation Paper provides that emerging market issuers may have members of management with limited knowledge of Canadian securities law requirements and stock exchange policies which may indicate an increased risk of insufficient corporate governance standards and inadequate compliance with continuous and timely disclosure obligations. It also provides that the management, board and committees of emerging market issuers may face difficulties in carrying out their duties in cases where they are not all able to communicate in a common language. Further, the Consultation Paper describes how an emerging market issuer may carry increased risk relating to proper financial reporting and internal controls given differences in business practices and banking systems and considering the possible lack of expertise of its auditors, chief financial officer and audit committee members. Finally, the Consultation Paper notes that emerging market issuers have a higher risk in demonstrating title to its key assets and the ability to validly operate its business due to specific requirements placed on foreign companies operating in emerging markets. Title issues can become even more complicated if a foreign jurisdiction requires the issuer to hold its assets indirectly through a foreign-domiciled entity by way of a contractual arrangement or otherwise. These non-conventional corporate structures can invite risks to ownership of the issuer's assets, depending on the laws and political climate in the particular jurisdiction.
Questions for Public Consultation from the TSX
The TSX plans to use this consultation process in order to determine the necessity to strengthen its listing requirements for emerging market issuers so that the risks relating to these issuers can be mitigated in the future. The Consultation Paper focuses on the following principal areas for public comment and consideration as they relate to an emerging market issuer applying for listing on the TSX:
- What factors should be used to determine what constitutes an "emerging market issuer"?
- Should there be a minimum level of knowledge and experience required of management (in particular the chief financial officer), the board and audit committee members with respect to the emerging market jurisdiction?
- Should there be a minimum level of knowledge and experience required of the auditors with respect to the emerging market jurisdiction?
- Should the Exchanges require additional comfort from management and/or auditors with respect to the emerging market issuer's internal controls?
- Should there be an expanded view of "related party transactions"?
- Should emerging market issuers with non-conventional corporate structures be denied listing or undergo additional scrutiny such as a legal opinion to support the validity of the corporate structure?
- Should sponsorship be required in all cases, whether or not the emerging market issuer is eligible for an exemption from sponsorship?
Proposed TSXV Appendix 2B – Listing of Emerging Market Issuers
The TSXV has included in the Consultation Paper a draft policy titled Appendix 2B – Listing of Emerging Market Issuers ("Appendix 2B") which outlines new listing requirements for emerging market issuers. It defines an "emerging market issuer" as one with its principal business operations or operating assets located in an emerging market jurisdiction. Certain exemptions from the proposed requirements in Appendix 2B are available for a mining and oil and gas issuer whose majority of senior officers or board members have not been resident in an emerging market jurisdiction for the majority of the past 10 years prior to the listing application. The TSXV has asked for comment from market participants on Appendix 2B and has also posed questions relating to its proposed new listing policy. If implemented, Appendix 2B would impact all new listings on the TSXV, however, the TSXV may (and likely would) also apply these new listing requirements to any transaction that will result in a listed issuer becoming an emerging market issuer, such as in the case of a reverse-takeover or qualifying transaction. Appendix 2B includes the following key new requirements for emerging market issuers applying for listing on the TSXV:
- The proposed chief executive officer and chief financial officer and collectively, the board, must have Canadian public company knowledge/experience.
- In the event that some or all of the issuer's senior officers and board members are not fluent in either English or French and the primary language of the relevant emerging market jurisdiction, the issuer must show how the language barrier will be overcome. The TSXV may require that the issuer develop a formal communication plan.
- The TSXV will require enhanced requirements for the proposed chief financial officer, such as (i) a strong understanding of the business environment in the emerging market jurisdiction and (ii) the ability to design and apply effective internal controls over financial reporting relating to all transactions in the emerging market jurisdiction. Further, the issuer will be required to confirm the frequency with which the proposed chief financial officer will travel to the emerging market jurisdiction to fully discharge his or her duties. These requirements will be enforced at the time of listing and on an on-going basis.
- Every member of the audit committee must be independent and at least one member must have (i) Canadian financial reporting skills and (ii) experience with audit engagements for public companies. Currently, the TSXV requires that only a majority of audit committee members be independent.
- The TSXV will require the issuer to adopt a written policy specific to "Related Party Transactions" and transactions with non-arms length parties that addresses independent director approval procedures and compliance with securities law and regulatory requirements.
- Auditors for the issuer must be pre-cleared by the TSXV and must demonstrate sufficient expertise in the emerging market jurisdiction. This also applies to any change of auditors that may occur post-listing.
- Auditors are required to perform reviews of the issuer's interim financial statements for each interim period in the two years following listing.
- The issuer's internal controls must be reviewed and evaluated by its auditors prior to listing and the issuer must confirm in writing that its internal controls are sufficient for its financial reporting. For the first two fiscal years after listing, the issuer will be required to file the full chief executive officer and chief financial officer certifications under National Instrument 52-109 – Certification of Disclosure in Issuer's Annual and Interim Filings which includes disclosure relating to internal controls. Generally, these requirements will not be applicable to emerging market issuers whose business operations are not revenue generating.
- The issuer will need to justify any non-conventional corporate structure, and the TSXV may require a legal opinion on its validity. The TSXV may deny listing if it considers that the issuer's corporate structure is unnecessary.
- A legal opinion will generally be required to confirm title of principal assets and properties and that the issuer holds the required permits, licences and other approvals to carry out its operations in the emerging market jurisdiction. A corporate opinion will generally be required to confirm the issuer's ownership of any direct or indirect affiliated entities which own the principal assets and properties.
- General exemptions from sponsorship will not be available in cases where the issuer is effecting an initial public offering or a brokered financing. The TSXV will require an enhanced sponsor report addressing listing matters specific to emerging market issuers.
The release of the Consultation Paper signals a major shift in listing requirements for emerging market issuers. It is important to note that the TSXV has already begun imposing some of the requirements set out in Appendix 2B and it is a matter of time until the Exchanges formally implement new and more onerous listing requirements for emerging market issuers. It is important for those involved in the potential listing of an emerging market issuer to contact their legal advisors for guidance on the significance and applicability of the proposed listing requirements provided in the Consultation Paper.
A copy of the Consultation Paper containing the full list of questions posed by the Exchanges to market participants including the proposed Appendix 2B can be found on the Exchanges' website. The Exchanges have requested submission of comments from market participants by February 28, 2013.
Mining Operations at Risk
Compliance to the Occupational Health and Safety Act and Regulations for Mines and Mining Plants in Ontario and similar legislation across the country is critical to reducing legal risk. In Ontario, Ministry of Labour inspectors conduct field visits to inspect, investigate and consult a company with regards to legal compliance. Not being aware of legal responsibilities and duties is not a defence if found in contravention of the Act or the Regulations. Having a strong Internal Responsibility System is a key element for determining competency. An Internal Responsibility System is the joint participation of workers and employers with equal powers to act on health and safety matters. It is the core concept of Occupational Health and Safety legislation.
During the first half of 2013 an inspection blitz by the Ministry of Labour for the mining sector will focus on underground mining (ventilation hazards). This campaign will focus on the recent amendments to part 8 of the Regulations for Mines and Mining Plants.... are you ready?
In 2011, the Ministry of Labour Inspectors conducted a total of 2,883 field visits to mines in Ontario. Of that figure, 2,399 were proactive field visits monitoring compliance with legislation and promotion of the Internal Responsibility System. Workplaces with a history of poor health and safety performance are normally targeted.
During 2011, 3,767 orders were issued to mining companies. An order is issued when an inspector finds an instance of non-compliance with legislation or regulations. A written order is issued sometimes identifying a specific time frame in which an organization is to become compliant. If the hazard is imminent, an inspector may issue a stop work order. Work must be stopped until the hazard is eliminated or significantly reduced. Work stoppages may result in substantial lost production hours, lost revenue and additional costs for an organization.
The basis for many of the orders given to mining companies in the past have been:
- Non-compliant equipment
- Non-compliant operator
- Non-compliant workplace
Examples of fines to mining companies in the past include:
- $75,000 fine to the employer for a critical injury a worker sustained when becoming pinned between to rail cars. The employer failed to establish procedures to ensure that the operator and other workers are in a safe location when the equipment is being operated or moved.
- $200,000 fine to the employer and $20,000 fine to a supervisor when a worker was found asphyxiated by nepheline syenite at a chute at the bottom of an ore bin.
- $100,000 fine to employer for two instances; first instance the employer failed to supervise the implementation of its procedures when a train met another on a single track, and the second instance for not stabilizing rock excavations as prescribed by the mine plan.
A very effective tool that assists workplaces ensure compliance with legislation, regulations as well as internal policies and procedures is an Occupational Health and Safety Management System. One excellent example of a thorough, systematic system is OHSAS 18001. OHSAS 18001 is a globally accepted safety standard that may be applied any type of workplace. A growing number of international mining companies have introduced OHSAS 18001 as their system to manage workplace risk. An organization establishes, documents, implements, maintains and continually improves their health and safety management system in accordance with the requirements of the OHSAS 18001 standard.
The following amendments to the Ontario Regulations for Mines and Mining Plants came into force on January 1, 2012, and include1:
- Updating training requirements to reflect changes in the training program and clarifying the time limits for completing training;
- Introducing occupational noise limits consistent with those found in other regulations in under OHSA;
- Updating diesel exhaust exposure limits to position Ontario as a leader in protecting underground miners from exposure to carbon monoxide;
- Updating air volume requirements to protect underground miners from exposure to diesel particulate matter;
- Strengthening hoisting requirements;
- Improving worker safety in shaft sinking work;
- Strengthening protections related to work on wheel and tire assemblies; and
- Modernizing provisions to reflect the current administration of the mine rescue program.
Beginning November 1, 2012 new rules under Ontario's Mining Act came into effect. Changes identified in the Act must be implemented by April 1, 2013. One example of a new regulation is the Mining Act Awareness Program. The program provides basic information on the mining sequence, staking claims, early exploration and Aboriginal consultation requirements at various stages of the process that have been made to the regulations. Effective November 1, 2012 anyone wishing to apply or renew a prospector's license must complete the online program. By November 1, 2014 every current holder of a prospector's license will be required to have completed the program.
1. Safe at Work Ontario, Mining Sector Plan 2012-2013, Ministry of Labour, ISSN 1923-6255 (Online), June 2012, Page 4.
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.