Last August 16, the Canadian Securities Administrators ("CSA") published CSA Staff Notice 43-307, Mining Technical Reports – Preliminary Economic Assessments ("Notice 43-307″) to clarify various issues surrounding the use and disclosure of a "preliminary economic assessment" as defined in Regulation 43-101 respecting Standards of Disclosure for Mineral Projects ("Regulation 43-101″).
In June 2011, the CSA amended Regulation 43-101 to protect investors from uncorroborated assertions about mineral resources and with a view to balancing compliance costs and regulatory efficiency.
At that time, the CSA amended the definition of the expression "preliminary economic assessment" so that issuers could announce the results of conceptual or preliminary economic studies in a broader range of situations. One year later, the CSA noticed that some issuers were disclosing preliminary economic assessments in situations and using terms and conditions that were neither contemplated in nor permitted by the new regulation.
As always, with a view to helping our clients stay ahead of the game in developing their mining projects, below is a brief overview of the CSA staff's position, as set out in Notice 43-307, that will certainly help issuers to better understand the application and limits of this type of study.
Notice 43-107 can be consulted on the websites of CSA members and the Autorité des marchés financiers (press here for a direct link).
A preliminary economic assessment is not a pre-feasibility study
CSA staff note that a preliminary economic assessment cannot be a pre-feasibility or feasibility study and that it cannot therefore be prepared using the same criteria. A preliminary study is a study that contains an economic analysis of the potential viability of the mineral resources. On the other hand, pre-feasibility and feasibility studies are more exhaustive studies showing the technical and economic viability of a mining project.
To ensure that a preliminary assessment is not equated with a pre-feasibility study, CSA staff recommend that issuers ensure the results of their assessment include the cautionary language required by section 3.4 of Regulation 43-101, indicating that the economic viability of the mineral resources has not been demonstrated. Also, it would be prudent to include a detailed description of the risks associated with the project in the assessment so that the public is able to understand the importance and limits of its results.
Importance of not including inferred mineral resources in a pre-feasibility or feasibility study
CSA staff consider that a preliminary economic assessment is, by definition, a study other than a pre-feasibility or feasibility study. Two parallel studies done at, or nearly at, the same time are not in substance separate studies, but components of the same study. Thus, the staff indicate that a preliminary economic assessment done concurrently with a pre-feasibility or feasibility study will likely be treated as a pre-feasibility or feasibility study if it:
- has the effect of incorporating inferred mineral resources into the pre-feasibility or feasibility study;
- updates a pre-feasibility or feasibility study to include more optimistic or even more aggressive assumptions and parameters than the initial study;
- is essentially a pre-feasibility or feasibility study in all respects but name.
Disclosure of preliminary economic assessment — factors triggering requirement to file a technical report
Notice 43-307 points out that issuers are in some cases disclosing potential economic outcomes relating to their material mining properties which are not supported by a technical report,in accordance with paragraph 4.2(1)(j) of Regulation 43-101.
An issuer may trigger the obligation to file a technical report if the information disclosed in its economic assessment is:
- contained in the issuer's corporate presentations, fact sheets, investor relations materials or any statement on the issuer's website;
- posted or linked from third party documents, reports or articles or otherwise adopted and disseminated by the issuer.
Overly optimistic or aggressive results of preliminary economic assessment
According to Part 4A of Regulation 51-102 respecting Continuous Disclosure Obligations, an issuer may not disclose forward-looking information unless it has a reasonable basis for such information. The notice states that some issuers and qualified persons seem to be using overly optimistic or highly aggressive assumptions in their preliminary economic assessments. CSA staff therefore highlight the importance of ensuring there is a reasonable basis for any assumption made in a preliminary assessment in the context of the mining project.
The staff reserves the right, at their discretion, to challenge certain assumptions that could be misleading and to ask the qualified person to explain or justify them.
Preliminary economic assessment and disclosure of by-products
CSA staff consider that including projected cash flows for by-product commodities in a preliminary economic assessment that are not included in the mineral resource estimate is misleading and contrary to the definition of preliminary economic assessment because these commodities are not part of the mineral resource.
Relevant experience of qualified persons
Notice 43-307 reminds us that individuals who take responsibility for drafting part or all of the technical report supporting the results of a preliminary economic assessment are required to have experience relevant to the subject matter of the mining project and the technical report.
Issuers must ensure that they comply with the requirements under Regulation 43-101 when preparing their assessments and studies. Where the regulatory authorities identify material deficiencies or errors and the issuer fails to comply with the request to remedy the situation, CSA staff may:
- seek an order from a securities regulator requiring the issuer to file new documents;
- issue a cease trade order against the issuer until it corrects the deficiency;
- if the issuer is considering making a prospectus offering and the deficiencies are material, recommend not issuing a receipt for the prospectus.
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.