Canada: OSC Finds Small Mining Issuers’ MD&A Falls Short

The Ontario Securities Commission (OSC) has found that many small mining issuers fail to provide complete and meaningful disclosure in their management's discussion and analysis (MD&A). The OSC's findings are set out in OSC Staff Notice 51-722 Report on a Review of Mining Issuers' Management's Discussion and Analysis and Guidance (the OSC Staff Notice) released by the OSC on February 6, 2014. Mining issuers should carefully review the OSC's guidance when preparing their annual and quarterly MD&A.

The OSC recognizes that the challenging economic environment can limit available financial resources for small mining issuers, which in turn can make it difficult for such issuers to comply with their MD&A and other reporting requirements. Recognizing these challenges, the OSC undertook a review focussed on 100 Ontario based mining issuers with a market capitalization of less than $100 million. The sample set included venture and non-venture issuers across all stages of development. The OSC Staff Notice identifies specific areas for improvement, and offers detailed guidance, with examples intended to assist issuers in preparing their MD&A.

The OSC Staff Notice follows the OSC's technical report guidance issued in July of 2013 (summarized by BLG here) and the guidance provided in the British Columbia Securities Commission's 2012 Mining Report (summarized by BLG here). While all of these regulatory reports provide suggestions and "guidance" to issuers, the fact that the regulators have produced multiple reports regarding disclosure by mining issuers suggests that the regulators are not satisfied with current disclosure by such issuers.

Further, the OSC has stressed that issuers who  fail to address deficiencies identified in the OSC Staff Notice may be required to take corrective action which can be costly and time consuming. This is particularly true if deficiencies are identified in the course of a short-form prospectus offering, where significant deficiencies in MD&A can cause serious delay to an offering.

For all of the reasons noted above, we strongly recommend that mining issuers carefully review and consider the guidance issued by the OSC when preparing their MD&A.

Summary Of The OSC's Review

In general, the OSC found that many smaller mining issuers continue to struggle to provide complete and meaningful disclosure in their MD&A, and in particular, the OSC found that exploration stage issuers were generally less likely to provide sufficient entity specific disclosure when compared to development and production stage companies.

The OSC's review focussed on the following areas and identified the following deficiencies:

Venture Issuer Disclosure – A significant number of venture issuers without significant revenues from operations failed to disclose a breakdown of the material components of exploration and evaluation (E&E) assets and expenditures, general & administrative (G&A) expenses and other material costs. Many of these issuers also did not present E&E assets and expenditures on a property-by-property basis or include a qualitative discussion of these expenditures.

Discussion of Operations (Issuers without producing mines) – 70% of issuers without a producing mine provided limited disclosure about the plans or milestones for significant exploration and development projects and 44% of issuers with exploration projects did not discuss and itemize exploration expenditures. Issuers with significant projects that have not yet generated revenue were cautioned that they must disclose useful information for each material property that is not at the development or production stage, including a description of the project, work completed and expenditures made during the period, the current status of the project plans  and budgets, and how expenditures relate to anticipated timing and cost to take the project to the next stage of the project plan.

Discussion of Operations (Issuers with producing mines) – The OSC is concerned that issuers with producing mines are not providing sufficient information, on a property- by-property basis, about development and production milestones, mineral resources and mineral reserves and operating and production information.

Liquidity and Capital Resources – The OSC found that issuers, particularly issuers with working capital deficiencies, are not providing a sufficiently meaningful and detailed qualitative and quantitative discussion of future cash requirements of an operating or capital nature or of how they will be funded. It is not sufficient to simply disclose that management believes it has sufficient resources to fund currently planned exploration or development.

Transactions between Related Parties – The OSC is concerned that investors are not receiving sufficient disclosure regarding related party transactions. The OSC found that while 95% of the issuers had disclosed some form of related party transaction in their financial statements and MD&A, only 48% of such issuers appropriately disclosed the identity of the related party involved in the transaction, and just 14% adequately described the economic substance of the related party transaction.

Risk Factors and Uncertainties – The OSC cautioned issuers to avoid boilerplate disclosure, and instead to provide detailed disclosure on the potential consequences of risks to the issuer, including a quantification of these risks where possible. The common practice of simply stating that a risk "could have a material adverse impact on the Company", without stating what the impact may actually be is not sufficient disclosure.

Use of Financing Proceeds – While the OSC's review only identified four issuers that raised capital through a prospectus offering in the  past fiscal year, the OSC nonetheless expressed concern that investors are not receiving sufficient information updating investors on how money raised through a prospectus offering has been spent.

Throughout the OSC Staff Notice, the OSC has offered concrete examples of insufficient boilerplate discussion followed by examples of detailed and specific disclosure. The level of detail and granularity included in the OSC's examples often goes beyond what issuers may consider to be "market" or what is required by applicable form requirements, which, in our view, can be read as a signal that the OSC is looking for much more detailed and specific disclosure than what is currently being produced by small mining issuers.

The complete OSC Staff Notice is available on its website.

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