Since National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101) came into effect in 2001, most market participants would agree that the quality of technical disclosure by mining companies has much improved. There are, however, still areas to which issuers and underwriters should continue to pay attention, both to avoid the need to correct or re-file technical reports and disclosure documents (with resulting expense and delay) and to ensure they are taking adequate steps to protect themselves from liability. The following selected points to watch are drawn from our recent experience and from recent commentary by securities regulators.
- Use of Terminology. Issuers are still sometimes running
into problems when using the terms "feasibility
study" and "preliminary (or pre-) feasibility
study." Because the popular use of these terms can be
imprecise, they are specifically defined in NI 43-101 and
their usage in technical reports and disclosure documents
must be consistent with these definitions.1
Technical reports that use these terms in reference to less
comprehensive studies will need to be re-named and re-filed,
and any disclosure made in reliance upon them similarly
re-cast.
- Economic Analyses. To the extent a lesser study, such as
a scoping study, results in IRRs, NPVs or other measures of
economic viability, even if not a feasibility or
pre-feasibility study for NI 43-101 purposes, such a study
may be considered a "preliminary assessment" and
its disclosure permitted, subject in certain cases to
cautionary statements being included in the disclosure.
However, an economic analysis of a pure exploration target,
where not even inferred resources have been delineated, is
not permitted.
- Use of Proceeds. Where a technical report is prepared in
connection with a prospectus financing, and some or all of
the proceeds are to be used to fund further exploration or
development of a property, the "use of proceeds"
section of the prospectus should be generally consistent with
any recommendations for further work that are made by the
qualified person (QP) in the technical report. Too often
these two are not consistent (or inconsistencies are not
adequately explained), with the result that Canadian
regulators will require the prospectus and/or the technical
report to be amended so the two can be reconciled.
- Websites/Presentations. Remember that NI 43-101 applies
to all disclosure of scientific or technical information made
by or on behalf of an issuer, and not just to disclosure in
paper or printed form. Issuers, their underwriters and
counsel are generally very careful in the preparation of
prospectuses and offering memoranda, but sometimes the same
rigour in ensuring compliance with NI 43-101 is not applied
to issuers' websites or investor presentations. In
all cases, the QP should be identified by name, and certain
other disclosure (including required statements regarding
verification of the information and underlying data by a QP,
as well as those surrounding disclosure of exploration
results or reserves and resources) must be included either
directly or by reference to another document. Increasingly,
regulators are scrutinizing issuer websites and presentations
in connection with continuous disclosure reviews and cracking
down on non-compliers. Such reviews, which can also involve
scrutiny of issuers' press releases, have resulted in
cease trade orders among other penalties.
- Appropriate QP Sign-off. If a QP is purporting to sign
off on all technical information disclosed in a technical
report or company disclosure, the issuer should ensure that
the QP is appropriately qualified for all the information on
which he or she is opining. Failure to comply with this
requirement occurs more often in reports prepared by in-house
QPs than in those prepared by consulting geologists. This
sometimes arises because QPs who are opining about geology do
not realize that disclosure of metallurgical results and
conclusions also requires appropriate QP support. The
Canadian securities commissions recently reiterated that NI
43-101 applies equally to metallurgical information as it
does to drilling and reserve/resource information.
- Conflicts with Foreign Disclosure Rules. Sometimes
inconsistencies between the disclosure rules in Canada and
those in foreign jurisdictions can make compliance a
challenge. One such conflict we have run into recently arises
in the context of issuers applying for admission to AIM and
doing a concurrent private placement in Canada. In order to
keep disclosure to investors consistent in the different
jurisdictions, it is often desirable for the issuer and its
underwriters to use the AIM admission document (which
incorporates a competent person's report (CPR)
prepared under AIM rules) together with a wrapper as an
offering memorandum for the Canadian private placement.
However, while it is a cardinal rule under NI 43-101 that
inferred resources cannot be added to any other category of
resources, AIM rules require the CPR in some places to
combine inferred resources not only with other categories of
resources, but with reserves as well. This results in a
direct conflict between the requirements of the two
jurisdictions. While we have pointed out this discrepancy to
the Canadian securities commissions, there is no obvious
remedy for it in NI 43-101. We have seen issuers and their
underwriters approach this conflict in a number of ways,
including obtaining exemptive relief from the
commissions.
- Private Placements and QP Certificates. Where an offering
memorandum containing technical information is being prepared
in Canada but no NI 43-101 technical report is required (for
example, in a private placement to accredited investors), it
is good practice to provide the QP at the outset of work with
a form of certificate similar to one that would be required
to be signed and filed in connection with a formal technical
report under securities laws for a prospectus financing. This
tends to focus the individual's mind on the rules in
NI 43-101, including having the individual confirm that he or
she is actually a QP and the basis for this conclusion. One
can easily imagine a situation where only on the eve of a
proposed financing does it come to light that a foreign
geologist is not in fact a QP under Canadian rules, resulting
in delay and cost in trying to locate an appropriately
qualified person on short notice to support the
issuer's disclosure.
Footnotes:
1 A "feasibility study" refers to a comprehensive study of a mineral deposit in which all geological, engineering, legal, operating, economic, social, environmental and other relevant factors are considered in such sufficient detail that the study could reasonably serve as the basis for a final decision by a financial institution to finance the development of the deposit for mineral production. In popular usage, this is sometimes referred to as a "bankable feasibility study." A "preliminary (or pre-) feasibility study" means a study of project viability in which the mining method or pit configuration, and an effective method of mineral processing, have both been determined and which includes a financial analysis based on reasonable assumptions about each of the foregoing factors that are sufficient for a qualified person, acting reasonably, to determine if all or part of the mineral resource may be classified as a mineral reserve.
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