The British Columbia Securities Commission (the "BCSC") has released its 2012 Mining Report (the "Report"). The Report highlights the results of the BCSC's mining technical disclosure reviews and provides guidance with respect to a number of topical issues, including industry standards and best practices, metal pricing assumptions, mineral resource estimation, mining studies and relevant experience of QPs responsible for mineral resource estimation.
The Report is a reminder that mining disclosure made in required filings and voluntary disclosure (which includes third party documents such as analyst reports, newsletters and presentations that the company disseminates, links to its website or pays for, directly or indirectly) must comply with NI 43-101 Standards of Disclosure for Mineral Projects ("NI 43-101"). Non-compliant disclosure may result in the BCSC taking any number of actions, depending on the severity of the issue and potential risk to investors. Such actions may include requesting the company to amend the disclosure to comply with NI 43-101 to placing the company on the BCSC Defaulting Issuers List or issuing a cease trade order against the company's securities until the company corrects the disclosure or filing. Breaches of NI 43-101 that are sufficiently serious may result in the BCSC pursuing enforcement action, even if the corrected filings fix disclosure failures going forward.
The following is an overview of the deficiencies and guidance set out in the Report, the full text of which can be found at here.
Mining Technical Disclosure Reviews
The BCSC reviews mining disclosure made by companies for compliance with NI 43-101 as part of continuous disclosure, annual compliance, targeted and prospectus filing reviews.
Continuous Disclosure Reviews
The scope of the BCSC's continuous disclosure reviews can range from very limited issue-oriented reviews through to a complete examination of a company's disclosure record. The review process incorporates required filings, voluntary disclosure and third party documents (such as analyst reports, newsletters and presentations that the company disseminates, links to its website or pays for, directly or indirectly). Common deficiencies identified by the BCSC during continuous disclosure reviews include:
- failure to file a current or compliant technical report;
- non-compliant disclosure of mineral resources and mineral reserves ("MRMR");
- disclosure of preliminary economic assessments ("PEA"), exploration targets and historical estimates without the required cautionary language and context;
- disclosure that is not timely, factual, or balanced; and
- failure to name the qualified person ("QP") who is responsible for the disclosure.
Annual Compliance Reviews
Every year the BCSC reviews a sample of randomly selected mining companies to assess their overall level of compliance with specific NI 43-101 disclosure and to monitor any trends in non-compliant disclosure. The results of the 2012 review indicate that a company's voluntary disclosure is less likely to comply with the requirements of NI 43-101 than its required filings. This discrepancy was especially apparent in reporting the results of PEA, historical estimates, Quality Assurance/Quality Control ("QA/QC") results, laboratory procedures and naming the QP. Specific areas identified by the BCSC where overall level of compliance was relatively low include:
- disclosure of exploration targets and results of PEAs (usually due to companies not including required cautionary language);
- website disclosure of the results of PEAs; and
- disclosure of QA/AC, data verification, mineral resource/reserve estimates and mining studies.
Starting in February of 2011, the BCSC began targeting areas of mining disclosure that it identified as problematic during previous continuous disclosure and annual compliance reviews. These targeted areas include the proper disclosure of MRMR estimates, historical estimates and compliant disclosure of exploration targets and PEAs. Most of the problematic disclosure identified by the BCSC was on company websites, linked third-party sites and in corporate presentations. Additional common deficiencies identified by the BCSC during targeted reviews include:
- adding inferred mineral resources to other categories;
- not disclosing the appropriate resource category; and
- disclosing exploration targets that are not expressed as ranges or with no cautionary language.
Prospectus Filing Reviews
In its review of prospectus filings to assess a company's mining disclosure for compliance with NI 43-101 and other disclosure requirements, the BCSC found that most of the deficiencies were found in the supporting technical report. Common issues identified by the BCSC relating to technical reports include:
- missing or altered statements in certificates and consents of the QPs;
- not dated, signed, or addressed to the company;
- non-compliant disclaimers of responsibility or statements of reliance;
- failure to provide a summary of all material technical and scientific information for the entire property;
- non-compliant disclosure of historical estimates, exploration targets or MRMR; and
- failure to provide adequate or sufficiently transparent information on the key assumptions, parameters and methodologies used in mineral resource estimates.
Topical Issues And Guidance
The Report highlights the following technical disclosure areas that BCSC staff will question:
- disclosure that is not based on industry best practices;
- nomalous metal or commodity pricing assumptions and sensitivity analyses;
- technical reports that do not disclose the QP's assumptions regarding 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;
- disclosure of ongoing mining studies prior to establishing mineral resources; and
- relevant experience of QPs responsible for mineral resource estimation.
Industry Standards And Best Practices
The Report states that the BCSC may question a company's disclosure, including MRMR estimates and the results of PEAs, if it appears inconsistent with The Canadian Institute of Mining, Metallurgy and Petroleum Best Practice Guidelines. In these cases, the company and the QP may be required to explain the basis and circumstances that would justify deviation, and to provide examples of other credible sources that use similar approaches (e.g. technical reports prepared by well-known experts or major mining companies). The BCSC may also question the objectivity of the QP and ask the company to retain another QP to author or co-author the technical report, or to audit or verify the work of the first QP.
Metal Pricing Assumptions
NI 43-101 does not specify how a QP should determine metal or commodity pricing assumptions, which are used to establish cut-off grade and reasonable prospects of economic extraction, and for the financial analyses in PEAs and mining studies. However, the BCSC expects that any assumptions will be explained in the technical report and be consistent with what other QPs and companies are using at the time. Where a QP uses anomalous metal or commodity pricing assumptions, the BCSC may ask the QP to revise the assumptions or to explain the basis for the assumptions and provide examples of other technical reports prepared by credible sources that use similar assumptions. The BCSC recognized that using, as a maximum price allowed, the lesser of the three-year moving average and the current spot price has become a common industry standard.
In addition, the BCSC cautioned that, while it is common industry practice to show metal price sensitivities in PEAs and other economic analyses, disclosure of only positive price sensitivity could be misleading to investors because it does not reflect the risk of lower prices. Therefore, when companies disclose positive price sensitivity, a corresponding low price sensitivity should also be disclosed.
Reasonable Prospects of Economic Extraction
The Report emphasizes that a QP's assumptions regarding reasonable prospects of economic extraction, which are material information, must be included in written disclosure of mineral reserves or mineral resources, including a technical report. Typically, reasonable prospects of economic extraction are reflected in the cut-off grade selected based on metal pricing assumptions, potential mining scenarios and other relevant factors. However, the BCSC cautioned that in many cases reasonable prospects might require the QP to constrain the mineralization with a conceptual pit shell or mine model, and to exclude mineralization that falls outside these constraints.
Importance of Geological Model
The BCSC emphasized that estimating mineral resources without applying an appropriate geological model could produce estimates that are contrary to the definition of mineral resources and to industry best practices. The BCSC also emphasized that the geological model and constraints on mineralization are material information required to be included in a technical report. The BCSC may question the compliance of a technical report or the suitability of the mineral resources for public disclosure if the technical report fails to provide the details of a geological model that is consistent with the deposit type or does not apply reasonable constraints on mineralization.
The BCSC believes that, in the absence of a mineral resource, a company does not have sufficient information on which to base a mining study, and that a company cannot reasonably conclude that further exploration will result in the delineation of mineral resources suitable for inclusion in a mining study. The Report warns that disclosure of ongoing mining studies prior to establishing mineral resources could be misleading, contrary to established mineral exploration practices, and contrary to the definitions of mining studies as incorporated in NI 43-101. While a company may conduct studies and other work that it could later incorporate into a mining study, the BCSC cautions companies not to refer to this work as part of a mining study if they are doing this work prior to establishing a suitable mineral resource.
QP's Relevant Experience
The Report noted that mineral resource estimation is a highly specialized field that requires knowledge and experience in both mineral resource estimation and the mineral deposit type. QPs must be able to satisfy themselves (and their peers, if necessary) that they have sufficient relevant experience to prepare the estimates for the deposit type in question. QPs must summarize this relevant experience in their certificate of qualified person filed with the technical report.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
© Copyright 2013 McMillan LLP