Canada's two largest mining industry groups, the Mining Association of Canada ("MAC") and the Prospectors and Developers Association of Canada ("PDAC"), joined by two civil society transparency groups (together, the "Working Group") released their final report (the "Report") yesterday calling for mandatory disclosure by mining companies that are reporting issuers of their payments to host governments for developing mineral resources. Support for this disclosure among the mining industry in Canada began shortly after the passage of the Dodd-Frank Act in the United States, which requires similar disclosure for mining and oil and gas companies listed on a stock exchange in the United States. Last June, Prime Minister Harper publicly endorsed these efforts and pledged that Canada would adopt comparable mandatory reporting rules for all extractive companies (mining, oil and gas) in the near future.
With the release of the Report yesterday, which can be viewed here, momentum is building for Canadian legislation to be introduced in this area. However, how this will happen and what form it will take remain somewhat open questions. This bulletin briefly reviews highlights of the Report and suggests where this process looks to be heading in 2014. For additional analysis of these issues, please consult our bulletin from November, written shortly after the release of the Working Group's draft report.
Key Mining Industry Recommendations
While the Report contains a number of detailed recommendations, we believe the following four recommendations are most important to how a mandatory disclosure regime for these payments will be developed in Canada:
1. Full Reliance on Provincial Securities Regulators
Despite the federal government's professed enthusiasm to legislate in this area, the mining sector continues to believe provincial securities regulators should be the drivers for this disclosure, preferably in a new or amended National Instrument from the Canadian Securities Administrators ("CSA"). The Working Group identified a number of benefits to this approach, including reporting issuers' familiarity with filing disclosure on the CSA's SEDAR online database, as well as the ability of the provincial securities commissions to impose penalties for failures to report accurate information and to set appropriate safeguards to verify and audit the information that is disclosed. In the United States, the Securities and Exchange Commission ("SEC") is responsible for the regulation of this disclosure, which the Working Group believes will also create better opportunities for equivalent regulations with provincial securities regulators.
2. Broad Definitions of Payments, Project and Commercial Development
The basis of the Working Group's recommendations is that all payments that are made for the commercial development of a mineral resource should be disclosed on a disaggregated, project-level basis. While this appears to be a broad disclosure requirement, the breadth of this recommendation becomes clear in the proposed definitions of these terms in the Report. For payments, the Working Group recommends capturing the full revenue stream, including taxes, royalties, fees, production entitlements, bonuses, dividends (i.e. withholding tax), infrastructure payments required by law or contract (such as building a road or railway), and even transportation and terminal operations fees when paid to public bodies. For the meaning of 'project', the Working Group adopted the SEC's approach of looking to the legal agreements that give rise to payment liabilities, rather than using a materiality, reporting unit, country-level or geological basis (all of which have been favoured at one point or another.) These disclosure requirements will arise from the very start of the project life cycle at exploration, through to the eventual relinquishment and sale of the mineral property, as well as throughout the entirety of the value chain from development through production, transportation and export.
3. Dual Payment Reporting Thresholds
Perhaps the most debated recommendation of the Working Group is to adopt two separate proposed reporting thresholds. Companies listed on the Toronto Stock Exchange ("TSX") would be required to report any payments over $100,000, which is aligned with the U.S. rules and the equivalent rules in Europe. However, smaller issuers on the TSX Venture Exchange will have to report any payments over $10,000, which the Working Group believes will prevent instances where no revenue is reported as paid and will allow smaller companies to better communicate the flow of revenues clearly and credibly.
4. No Exemptions Permitted
Lastly, the Canadian mining industry's call for no exemptions from mandatory reporting implicitly rejects the American Petroleum Institute's ("API") previous challenge to the U.S. rules. Last August, the API successfully challenged the SEC's rules, largely on the basis of the lack of exemptions for countries that prohibit such disclosure (Angola, Cameroon, China, and Qatar were all cited). While the SEC has gone back to draft new rules that comply with this ruling, the Working Group has rejected this approach in Canada claiming to allow such exemptions "would run counter to the spirit of improving transparency...and result in uneven reporting and differential treatment of companies." Given the Working Group's desire for consistency with the U.S. rules, it will be interesting to follow the fate of these last two recommendations.
The Implications of Legislative Uncertainty
What may be most interesting about the Report is not just the recommendations but also what the Working Group doesn't say, namely what, if any, role the federal government will have in this area. Even after last year's announcement by Prime Minister Harper that Canada will introduce legislation in this area, the mining sector has remained focused on provincial securities legislation and has not addressed two of the federal government's key objectives: payments to Aboriginal governments and payments by private companies. On Aboriginal payments, the Working Group chose not to take a position on whether or not it should be included in a reporting framework. On the question of private companies, the Working Group recognizes that the desire for provincial securities regulation will exclude private companies, but believes that the benefits of this approach outweigh this exclusion, especially since it will include foreign companies who seek to raise capital in Canadian markets or want to be listed on the TSX or the TSX Venture Exchange. The Report reiterates that over 60% of the world's mining companies are listed on Canadian stock exchanges and the TSX alone has handled over 75% of global public mine financings in recent years.
This appears to be not just the usual Canadian federal versus provincial debate, although this is particularly sensitive in the securities area given the Supreme Court's previous rejection of the proposed national securities regulator. Rather there seems to be divergence growing between the mining industry, which has tried to be ahead of any regulation in this area, and the oil and gas industry, which has taken a much more cautious approach. It may be notable that the Canadian Petroleum Producers Association ("CAPP") chose not to join the Working Group despite being invited, though it maintained its public support of the Working Group's objectives. With the federal government's apparent interest in entering the fray, there is apparent concern in the mining industry that CAPP may favour a weaker framework (and some of CAPP's concerns about implementation of this regime have already been reported). In addition, CAPP has continued to publicly favour extending the rules to cover privately-owned and state-owned companies, which is a key element of the federal framework that provincial securities regulators would have a difficult time regulating. It is therefore worth noting that MAC and PDAC have launched a lobbying effort to persuade the Ontario and British Columbia Securities Commissions to adopt new rules based on the Report and do not appear content to wait for federal legislation in this area.
There is accordingly a strong possibility of a patch-work approach to resource payment disclosure provincially and federally and, potentially, even across industries. Whichever level of government is able to pass rules first may get the jumpstart in framing this regime, but not necessarily the last word. This uncertainty does not bode well for Canadian companies wanting to plan effectively for their compliance with this reporting. However, our recommendations to the Canadian mining industry remain the same: stay informed of this process, check confidentiality clauses in contracts that give rise to any payment liabilities for mineral resources, and start keeping track of any such payments.
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