On June 27, 2013, Staff of the Ontario Securities Commission released a report summarizing the results of its review of a sampling of 50 Technical Reports filed between June 30, 2011, and June 29, 2012, by Ontario mining issuers of varying sizes and stages of development, representing approximately 10% of the Technical Reports filed on SEDAR by Ontario mining issuers over that period. Of the 50 Technical Reports that were reviewed, 19 related to advanced properties (i.e., properties that either have a mineral reserve or mineral resources the potential economic viability of which is supported by a preliminary economic assessment, pre-feasibility study or feasibility study).
The Staff report, published as OSC Staff Notice 43-705 (the "Staff Report"), found that 80% of the Technical Reports reviewed were not in compliance with the requirements of National Instrument 43-101 and that 40% of the Technical Reports in the sample had at least one major non-compliance concern. The Staff Report has been issued to assist mining issuers and qualified persons in complying with the disclosure requirements in Form 43-101F1 and NI 43-101 and to alert mining issuers to anticipate staff requests for refilings, additional disclosure or other staff action if deficient Technical Reports are discovered. The Staff Report also cautions issuers that unresolved deficiencies may delay the issuance of a prospectus receipt, particularly for short form prospectus filings.
Among the more common deficiencies identified in the Staff Report were the following:
- Mineral Resource Estimates: Staff found that 25% of the Technical Reports failed to adequately disclose the key assumptions, parameters and methods used to estimate the mineral resource. Notably, some Technical Reports failed to properly disclose (i) how reasonable prospects for economic extraction were established, (ii) the cut-off grade used to estimate the resource estimate or (iii) other key assumptions underlying the estimate, such as assumed metal prices or recovery rates.
- Environmental Studies, Permitting and Community Impact: Approximately one-third of the Technical Reports relating to advanced properties failed to adequately disclose information related to environmental permits or the social or community impact of developing the mineral project covered by the Technical Report. Staff noted that where material contracts are entered into with First Nation communities, consideration should also be given as to whether the agreement constitutes a material contract that would trigger other filing requirements for the issuer. Staff also noted that when negotiating these contracts and agreements, issuers should be mindful of their filing requirements, including with respect to any confidentiality obligations in such contracts.
- Economic Analysis: Staff found that 40% of the Technical Reports at the preliminary economic assessment stage failed to properly address the impact of taxation in the economic analysis of the mineral project and that 37% of the Technical Reports on advanced properties failed to adequately disclose the economic analysis required by NI 43-101. Notably, some Technical Reports did not provide cash flow forecasts on an annual basis or included sensitivity analyses which were either too limited in scope or only provided up-side scenarios. The Staff Report cautions that "it is potentially misleading for a Technical Report on an advanced property to disclose only pre-tax cash flows and economic outcomes or to disclose only positive metal price changes or only up-side sensitivity analyses".
- Capital and Operating Costs: The Staff Report noted that 26% of the Technical Reports that related to an advanced property failed to provide the required summary of capital and operating cost estimates, with the major components set out in tabular form, as required by NI 43-101. In some cases, the main components of the capital cost estimate were not provided and in others the Technical Report failed to disclose the underlying basis upon which the cost estimates were established.
- Interpretation and Conclusion: NI 43-101 requires that a Technical Report contain a section that summarizes the results and interpretations of the information and analysis being reported on. This section must also include discussion of any significant risks and uncertainties that could reasonably be expected to affect the reliability or confidence in the exploration information, mineral resource or mineral reserve estimates, or projected economic outcomes. The Staff Report identified 36% of the Technical Reports as not properly identifying project-specific risks and uncertainties.
- Inadequate Disclaimer of Historical Information: Where a historical estimate is included in a Technical Report, NI 43-101 requires that the Technical Report include a statement that a qualified person has not done sufficient work to classify the historical estimate as a current resource estimate and that the issuer is not treating the historical estimate as a current resource estimate. The Staff Report states that 28% of the Technical Reports sampled failed to include the required cautionary language. The mere inclusion of a statement that a historical estimate is not compliant with NI 43-101 does not satisfy the regulatory requirements.
- Other Observations: The Staff Report also identifies the failure of 24% of Technical Reports to include a proper summary section and notes that 24% of qualified person certificates that were reviewed were found to be deficient.
This Staff Report builds upon the review that was undertaken by the B.C. Securities Commission in its 2012 Mining Report and underscores the importance of mining issuers to the Canadian capital markets. Given the significance of this sector and the degree of non-compliance identified by Staff, we expect increased regulatory scrutiny of Technical Reports filed in the future by Canadian reporting issuers. A failure to properly comply with NI 43-101 could result in Staff requests for refilings or, in severe circumstances, regulatory enforcement action. As noted above, Staff also warns that deficient technical disclosure can delay the issuance of prospectus receipts.
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