Exploration companies without income often look to the equity capital markets to fund on-going exploration. The ramp-up to commercial production is challenging and capital intensive. Smaller companies may look for an exit at this stage in the form of a disposal of the project. Some may seek a development partner who has the necessary capital, expertise and resources to develop and commercialise the project. Others may seek project development capital through the equity and debt capital markets.
A. CAPITAL MARKETS IN CANADA
Canada is a recognized world leader in resource finance and offers a favourable climate for public listings and capital raising for Canadian and foreign mining businesses. Listing and ongoing compliance costs in Canada may be less than other financial centres, including major centres such as London and New York. Listing in Canada allows mining issuers easy access to the North American markets and a broad investor base.
1. Regulatory landscape
Each of Canada's 13 Provinces and Territories has its own securities commission or equivalent authority which oversees the regulation of securities within its jurisdiction.
Notwithstanding this multi-jurisdictional framework, the Provincial and territorial regulators work closely together to coordinate and harmonize regulation of the Canadian capital markets through their umbrella organization, the Canadian Securities Administrators. The past decade has seen significant convergence in the rules and policies applicable to securities market participants and the introduction of a passport system for regulatory approvals. The passport system is built on a foundation of harmonized rules. Each public company deals with a principal regulator. A decision of the principal regulator to receipt a prospectus or grant a discretionary exemption generally applies automatically in each non principal passport jurisdiction where the approval has been sought. In addition, the rules related to reporting and disclosure obligations are largely harmonized across the country.
2. Canadian stock exchanges
Stock exchanges in Canada include the TMX Group and the Canadian National Stock Exchange (CNSX).
The TMX Group has two equity exchanges, the Toronto Stock Exchange (TSX) and the TSX Venture exchange (TSX-V). The TMX Group, itself a publicly listed company on the TSX, is the largest stock exchange in Canada, the third largest stock exchange in North America and the eighth largest in the world (based on market capitalization) with over 3,750 listed entities. The TSX and TSX-V together represent one of the world's largest capital pools, giving listed companies access to North American capital markets, a broad investor base and substantial liquidity. The TMX Group provides both established and growth oriented resource companies, Canadian or foreign, with a range of capital market opportunities through listing on an exchange with demonstrated success in the resource sector. The TMX Group has more public mining companies listed than any other exchange and is the leading international exchange for mining financing.
The TMX Group offers S&P/TMX indices which provide an international benchmark for tracking certain leading mining companies. These indices are the S&P/TSX Global Gold Index, Global Base Metals Index, Global Mining Index and the Capped Diversified Metals and Mining index.
Currently over 500 TSX or TSXV listed issuers are cross listed on international exchanges, including the New York Stock Exchange, the NASDAQ, the Australian Securities Exchange, the Alternative Investment Market, the London Stock Exchange and the Johannesburg Stock Exchange. Dual or interlisting on a TMX exchange is a popular option for international companies seeking to access North American capital markets, to increase liquidity or to expand their investor base and analyst coverage. In addition to the nearly 200 American companies interlisted on a TMX exchange, there are also several listings from companies based in Australia, China and the United Kingdom, particularly in the mining sector.
Since 2001, the Canadian Securities Administrators have permitted alternative marketplaces in Canada for the trading of securities. Prominent alternative exchanges include the Canadian National Stock Exchange (CNSX), Omega ATS, Chi-X Canada, Alpha and Pure Trading markets, however additional exchanges continue to emerge in Canada. These alternative Canadian markets help cater to the wide variety of companies seeking to list in Canada, offering unique characteristics such as high-frequency trading, algorithmic trading or dark pools where participants are permitted to trade anonymously. These alternative markets seek to break down the barrier to listing and trading securities that might otherwise exist for a junior company due to the high costs and large capitalization requirements of listing on the TSX, TSX-V or other traditional stock exchanges.
CNSX, for example, is a privately owned stock exchange with comparatively less expensive listing fees and a simplified listing and disclosure process for junior and emerging companies. CNSX does not require sponsorship for a listing (unlike the TSX-V) and does not impose regulatory approval of transactions entered into by listed entities (unlike the TSX and TSX-V). The majority of CNSX's approximately 200 listed entities are in the mining and natural resources sector.
3. Public offerings and private placements
Listing on the TSX, TSX-V or an alternative Canadian marketplace can be accomplished by several methods, including by way of an initial public offering of an issuer's securities to the public (IPO). An IPO generally requires the engagement of an underwriter or agent and the clearing of a prospectus with the relevant Canadian securities regulatory authority. A concurrent application is made to list the securities on the applicable stock exchange. After an IPO, an issuer can issue further equity through secondary offerings.
In addition to completing an IPO, a stock exchange listing may be obtained through a number of other mechanisms. These mechanisms include obtaining (i) a listing by way of a reverse take-over of an existing listed entity (also called a reverse merger or back door listing); (ii) a secondary or additional listing for issuers already listed on another stock exchange; or (iii) a listing of a special purpose acquisition corporation or capital pool company and the completion of a subsequent acquisition (the latter of which is specific to the TMX Group).
A particular feature of the Canadian regulatory regime is that all issuers have access to the "short form" system provided they annually file a comprehensive disclosure document called an "annual information form" or "AIF" and satisfy certain other qualification criteria. This simplified system allows issuers to access Canadian capital markets on an expedited basis through clearing a short form prospectus or shelf prospectus with the relevant securities regulatory authority. Issuers using this system are permitted to incorporate by reference most of their financial information and previous public disclosure. The combination of a shorter disclosure document, quicker regulatory review period and the potential availability of "bought deal" financings (whereby an underwriter or syndicate commit upfront to purchase the entire offering) help to both stimulate and facilitate broad access to the Canadian capital markets.
Securities laws in Canada generally require that entities wishing to sell their securities to the public provide investors with a prospectus that describes the entity and the securities being offered, and to sell their securities through a registered dealer. However, securities regulators recognize that certain sophisticated investors and those with pre-existing relationships with the issuer do not require the level of disclosure required in a prospectus to make an investment decision. Both private and public issuers are permitted to raise money by way of a private sale (a private placement) of their securities to such investors without incurring the cost and time to prepare and clear a prospectus.
Although numerous types of prospectus exemptions are available depending on the context, one of the most common exemptions is in connection with sales to "accredited investors", which include, among others, Canadian financial institutions, governments and pension funds, registered securities advisers/dealers, and individuals with certain prescribed and significant assets or income.
In recent years, a new method of raising capital called "crowdfunding" has emerged (funding a project or business by pooling small contributions from a large number of individuals through an internet website). Although at the time of this writing it is not possible to use a crowdfunding model without a prospectus to sell equity securities in Canada, the Ontario Securities Commission and other Canadian securities regulators are examining the possibility of allowing such a process in the future.
4. Capital market products
Issuers typically choose to issue either equity or debt securities through a public offering or private placement.
Equity securities include common and preferred shares. In addition, mining and resource companies with a Canadian project(s) may also issue "flow-through shares". These flow-through shares, in a nutshell, are treasury issued common shares that allow investors to claim certain Canadian tax deductions or credits in respect of the issuer's eligible expenditures made on its Canadian project(s) and within a specified period. Flow-through shares, often issued at a higher price than regular common shares on account of their associated tax benefits, are particularly suited for issue by capital dependant mining and resource companies in respect of their Canadian projects because they essentially allow the issuer to transfer certain tax deductible eligible expenditures to investors where the issuer may not otherwise be able to utilize those deductions in the short to medium term.
Other types of equity securities include warrants, which give the holder the right to subscribe for shares at a specified exercise price. Warrants are rarely used as a stand-alone method of financing, but rather as a sweetener to stimulate interest in an offering alongside other securities.
Bonds, debentures and notes are all common forms of securities issued in the Canadian debt markets. The form and features of each may vary and it may or may not be listed on a stock exchange. Convertible bonds, for example, which are popular with mining and resource issuers in Canada, are a hybrid debt-equity security that give investors the right to convert their bonds into shares of the issuer (or sometimes into shares of another entity) during a specified period and at a specified conversion price.
5. Disclosure and reporting
Broadly speaking disclosure is a tool regulators use to protect investors and foster fair and efficient capital markets. Public companies in Canada (including all companies listed on a stock exchange in Canada) are required to comply with comprehensive continuous and periodic reporting obligations under Canadian securities laws. Listed issuers are also subject to the continued listing requirements of the stock exchange upon which they are listed.
Periodic reporting requirements include the obligation to file quarterly and annual financial statements, management's discussion and analysis, and related CEO and CFO officer certificates. Continuous disclosure requirements include the obligation to file news releases and timely reports disclosing material changes in the affairs of the company. As well, insiders are required to file insider reports with respect to acquisitions and dispositions of securities.
6. Special disclosure rules for exploration and mining companies – NI 43-101
Public mining companies in Canada, including those that that are listed on a stock exchange in Canada, are required to meet the requirements of National Instrument 43-101 - Standards for Disclosure for Mineral Projects adopted by the Canadian Securities Administrators (NI 43-101). This rule governs how mining companies disclose to the public scientific and technical information about their mineral projects.
The requirements of NI 43-101 apply to all written and oral disclosure made by public companies, including in prescribed public reports, news releases, websites and investor presentations.
NI 43-101 requires all disclosure of technical or scientific information (including mineral reserves and resources) relating to a mineral project on a property that is material to the company to be based on information prepared by or under the supervision of, or approved by, a qualified person (a QP). Written disclosure of technical or scientific information must include certain information prescribed by NI 43-101 including, for example, the name and relationship to the company of the applicable QP, whether the QP has verified the data disclosed and, if so, how such data was verified. To qualify as a QP, an individual must:
- be an engineer or a geoscientist with a university degree, or equivalent accreditation, in an area of geoscience, or engineering, relating to mineral exploration or mining;
- have at least five years of experience in mineral exploration, mine development or operation, or mineral project assessment, or any combination of these, that is relevant to his or her professional degree or area of practice;
- have experience relevant to the subject matter of the mineral project and the technical report;
- be in good standing with a professional association; and
- in the case of a professional association in a foreign jurisdiction, have a membership designation that (i) requires attainment of a position of responsibility in their profession that requires the exercise of independent judgment; and (ii) requires (A) a favourable confidential peer evaluation of the individual's character, professional judgment, experience, and ethical fitness; or (B) a recommendation for membership by at least two peers, and demonstrated prominence or expertise in the field of mineral exploration or mining.
Mineral reserves and mineral resources reported by a public company are required to meet standards prescribed by the Canadian Institute of Mining, Metallurgy and Petroleum (CIM) and to be reported as specified in NI 43-101. For example:
- in public disclosure, a company must not add inferred resources to other categories of mineral resources;
- the quality, grade, or mineral content of a deposit that has not been categorized as an inferred, indicated or measured mineral resource or as a probable or proven mineral reserve must not be disclosed; and
- the terms "preliminary feasibility study", pre-feasibility study" or "feasibility study" may not be used in public disclosure unless the study meets standards adopted by CIM.
Where a mining company is incorporated or organized in a foreign jurisdiction or its properties are located in a foreign jurisdiction, certain foreign codes may be used to disclose reserves and resources as an alternative to the CIM code. Acceptable foreign codes include, among others:
- the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC);
- the Pan-European Code for Reporting of Exploration Results, Mineral Resources and Reserves (PERC);
- the South African Code for the Reporting of Exploration Results, Mineral Resources and Mineral Reserves (SAMREC); and
- the mining industry guide entitled "Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations" contained in the Securities Act Industry Guides published by the U.S. Securities and Exchange Commission (SEC Industry Guide 7).
The use of any other code that is "generally accepted in a foreign jurisdiction" and that defines resources and reserves in a manner consistent with the CIM classification will also be accepted. If an acceptable foreign code is used instead of CIM, the company must reconcile any material differences between the foreign mineral resources and mineral reserve categories used and the CIM categories.
NI 43-101 requires public companies with mineral properties or projects to file with Canadian securities regulators and make available to the public technical reports prepared by QPs who, in certain cases, must be independent of the company. A technical report must be filed upon a company becoming a reporting issuer in Canada (i.e., upon the company becoming a public company in Canada as a result of an IPO or a stock exchange listing in Canada or in certain other cases) and upon the happening of certain other events (e.g., in connection with a public offering or take-over bid involving the company) and must be prepared in accordance with form requirements prescribed by NI 43-101. The objective of a technical report is to provide a summary of scientific and technical information concerning mineral exploration, development and production activities on a mineral property that is material to a public company. Technical reports must be certified by each QP responsible for preparing or supervising the preparation of all or any part of the technical report. As well, QPs must consent to the public disclosure of any technical report for which they are responsible.
One important distinction in the Canadian securities regulatory framework is the "made in Canada" response to the U.S. corporate governance reforms set out in the Sarbanes Oxley legislation. The Canadian approach to regulating governance practices is less prescriptive than the U.S. rules and is largely principle based. As a result, the Canadian regime provides more flexibility to issuers, especially smaller early stage issuers, and is generally considered to be less costly to comply with.
Director independence requirements comprise one element of the Canadian governance landscape. For example, securities legislation generally requires publicly listed entities in Canada to have a fully independent audit committee (subject to certain exceptions for smaller issuers) comprised of at least three members who must be financially literate. To ensure the independence of an issuer's external auditors from management, the audit committee must undertake certain functions including oversight of the external auditor. In addition to other mandatory governance requirements (including CEO and CFO disclosure certifications and certain governance disclosure rules), the securities regulators provide "guidance" on governance practices for public companies in Canada, which include suggested practices concerning overall board independence, board interaction with management, board assessment, and compensation of directors and senior officers. While such guidelines are not mandatory, annual disclosure of a company's governance practices in light of such guidance is required.
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