Canada: TSX Staff Notice Guidance Impacts IPO Plans

Last Updated: November 19 2013
Article by Alan Hutchinson and Jessica Yee

On November 7, 2013, the Toronto Stock Exchange ("TSX") issued a Staff Notice to Applicants, Listed Issuers, Securities Lawyers and Participating Organizations ("Staff Notice") that provides guidance for companies considering a listing on the TSX.  In particular, the Staff Notice addresses listing requirements for mineral exploration and development stage companies as well as clarifies the position of the TSX on financial statement disclosure required for listing and stock options granted prior to an initial public offering.

Qualification of an advanced property for mineral exploration companies

The TSX requires that companies applying to list under the mineral exploration and development-stage category hold or have a right to earn and maintain at least a 50% interest in an advanced mineral property ("advanced property").  The TSX will generally consider a mineral property to be an advanced property if continuity of mineralization is demonstrated in three dimensions at "economically interesting grades" as detailed in a technical report prepared by a qualified person in accordance with National Instrument 43-101 – Standards of Disclosure for Mineral Projects ("NI 43-101").

From a practical standpoint, typically mineral exploration companies had to have at least a current resource estimate for a project to be accepted by the TSX as an advanced property.  However, the Staff Notice provides that infrastructure may now be an important consideration in the determination of "economically interesting grades".  Infrastructure is a particularly important consideration for a project that is located in a remote or isolated area that is not readily accessible, either by road, railway or port, or for bulk commodities such as coal, iron ore, all base and precious metal concentrates, and industrial minerals, such as sand and gravel, limestone, commercial clay and gypsum ("bulk commodities") which require adequate infrastructure for the delivery of large amounts of materials to the market.  Industrial mineral projects located in remote areas far away from their targeted markets may not be economical given their low intrinsic value.  Infrastructure will not be a material consideration for the TSX for commodities that can be produced on-site in relatively small quantities, which have a high value relative to their weight and can be transported to market by air, such as gold and diamonds.

Applicants with bulk commodity projects in remote areas with poor infrastructure should have a reasonable plan to develop or obtain access to the required infrastructure together with a cost estimate, which should ideally be outlined in a technical report and supported by a preliminary economic assessment, pre-feasibility study or feasibility study.  To assess the reasonableness of the plan, the TSX will consider (a) whether infrastructure has been built over similar terrain and circumstances in the past and the cost associated with building such infrastructure, (b) whether the infrastructure will be unconventional (e.g. using a pipeline for concentrate transportation), and (c) the assumptions in respect of the funding of the infrastructure, specifically whether the applicant will fund the infrastructure or rely on third parties to fund or develop the infrastructure.

The TSX Staff Notice provides that in order to satisfy the requirement of having "economically interesting grades" for projects in remote or isolated locations, the assumptions, plans and cost estimates for infrastructure should ideally be outlined in a NI 43-101 technical report under items 18 (project infrastructure) and 21 (capital and operating costs) of Form 43-101F1 – Technical Report and supported by a preliminary economic assessment, pre-feasibility study or feasibility study.

The TSX provides that a project with either a mineral reserve or mineral resource will qualify as an advanced property but for those projects located in a remote or isolated area, where infrastructure will be an important aspect of that determination.  However, especially when one considers the fact that most mineral deposit discoveries are in remote areas and will invariably require some new infrastructure as part of their development, it is not entirely clear how the TSX will assess mineral resource stage projects in the future.  Moreover, it may be necessary to complete a more advanced study like a preliminary economic assessment, pre-feasibility study or feasibility study to demonstrate that the lack of infrastructure or a remote location does not impede the viability of the project.

As a result, although the Staff Notice does not expressly raise the bar for mineral projects to support a listing in the TSX, the practical ramifications of the TSX's guidance may make it more difficult for mineral exploration companies to list on the TSX prior to completing at least a preliminary economic assessment.  For bulk commodity projects where there is no public market to set market prices, this will definitely limit earlier stage projects from supporting a TSX listing.  For such projects a company will typically not be able to assess the economic value of its deposit before it engages in offtake discussions with potential purchasers of the bulk commodity, and these discussions will not take place prior to the company demonstrating the extent and continuity of mineralization to support a potentially economic project.  This creates a catch-22 situation at the best of times, but especially so with limited access to a public market to facilitate raising additional capital.  The takeaway for all mineral exploration companies interested in listing on the TSX is that they should carefully review suitability for a TSX listing and engage in a pre-filing discussion with the TSX, especially where their mineral project is not yet at a preliminary economic assessment stage.

The TSX recommends in the Staff Notice that mining companies seeking listing pre-file their technical report prior to the submission of a listing application to obtain a preliminary opinion as to whether a particular project qualifies as an advanced property.  As a result, mining companies considering a listing on the TSX should ensure that they complete a technical report as early as possible in the initial public offering ("IPO") process, and that they allow in their timeline, time for the TSX to review the technical report and provide guidance as to whether or not the company's mineral project will constitute an advanced property.  Once the IPO process is underway it may be disruptive and costly (in time and costs) to consider a listing on another stock exchange should the TSX not accept a project as an advanced property.

Financial statements in support of an original listing application

The Staff Notice also provides guidance with respect to the use of audited forecast financial statements, pro forma financial statements and acceptable accounting standards in an application for listing.  

Companies applying to list on the TSX under the forecasting profitability category will generally require sponsorship if the audited forecast is not published in a prospectus or other disclosure document and is not subject to the requirements of future-oriented financial information provided in NI51-102 – Continuous Disclosure Obligations.  The sponsor must review and comment on the audited forecast and any other future-oriented financial information presented in the application.

In addition, upon review of an applicant's pro forma financial statements, the TSX may make some adjustments to the pro forma financial statements.  Where the TSX relies on pro forma financial statements not publicly available, the TSX may require the sponsor or auditor to comment or provide comfort on the adjustments.

The TSX will accept financial statements prepared in accordance with International Financial Reporting Standards or Generally Accepted Accounting Principles ("GAAP") in the United States for SEC issuers.  The TSX may accept financial statements prepared in accordance with GAAP of other jurisdictions depending on a variety of factors including whether the applicant is from a "designated foreign jurisdiction" or an "SEC foreign issuer" as defined in NI71-102 – Continuous Disclosure and Other Exemptions Relating to Foreign Issuers.

Pricing of stock options granted prior to an IPO

The Staff Notice also provides guidance that stock options granted within the three months immediately prior to the filing of a preliminary prospectus for an IPO are generally expected to be priced at or above the offering price.  Stock options granted within three months immediately prior to the filing of a preliminary prospectus which are priced below the offering price will likely be required to be cancelled, forfeited or re-priced to the offering price as a condition of listing.  The TSX may consider accepting options with an exercise price that is not lower than the price at which the relevant securities have been issued pursuant to a recent material financing to arm's length parties, notwithstanding that such price may be lower than the offering price.

Companies planning to complete an IPO and TSX listing should ensure that the terms of any stock options contain a price adjustment mechanism to ensure that all stock options will be compliant with TSX requirements.

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