UK: ESMA’s Proposed Changes To Its Recommendations Relating To Mineral Companies Including The Assessment Of Materiality Of Mineral Companies And Endorsement Of The NAEN Code

Last Updated: 26 November 2012
Article by Tom Smitham and Mark Howard

On 1 October 2012, the European Securities and Markets Authority (ESMA) published a consultation paper setting out its proposed amendments to paragraphs 131 to 133 of the recommendations of The Committee of European Securities Regulators (the body that is now ESMA) on the consistent implementation of the European Commission's Regulation on Prospectuses (809/2004) in relation to mineral companies (the Recommendations).

Substantial amendments were made to the Recommendations by ESMA on 23 March 2011. However, following implementation of these amendments concerns were raised that a more precise method was required to determine how the materiality of mineral projects should be assessed. ESMA published a letter on 6 January 2012 to this effect and the consultation paper is a consequence of the issues raised in that letter. The consultation paper sets out ESMA's further proposed amendments to and clarifications of the Recommendations and invites feedback on and responses to the amended Recommendations from interested parties.

The main points from an equity capital markets perspective addressed in the consultation paper are:

  • The assessment of the materiality of mineral companies.
  • The endorsement of the NAEN Code (discussed below).
  • Other issues in need of clarification or amendment.

Materiality of mineral companies

There has been some debate concerning how the materiality of a mineral company is assessed. The changes made to the Recommendations by ESMA in March 2011 included a change to the definition of "mineral company" in that a company, which was previously considered to be a mineral company if its minerals activities represented its "principal activity", would fall within the scope of the recommendations if it was a company with "material mineral projects". This change led to speculation as to how the materiality of a mineral project should be assessed in such circumstances.

The general statement from the Recommendations that the materiality of an issuer's mineral projects should be assessed relative to the issuer and its group as a whole remains. However, ESMA acknowledges that the Recommendations could be clearer in respect of ascertaining the materiality of a mineral project and accordingly has clarified the issue by stating that materiality should be assessed, firstly, from the point of view of the investor and, secondly, by way of an evaluation of the resources that the projects seek to exploit to enable investors to make an informed assessment of the prospects of the issuer.

To clarify the point further, ESMA proposes to introduce a rebuttable presumption that evaluation of a projects materiality may be required where (i) the projects seek to extract materials for sale as commodities or (ii) the minerals are extracted to supply an input into an industrial process and there is uncertainty as to the quantities required or the feasibility of recovery.

The NAEN Code

The March 2011 update to the Recommendations endorsed six mining reporting codes as suitable for use in prospectuses. All of these codes were aligned to the international mining reporting body, CRIRSCO. ESMA acknowledged in March 2011 that its list of endorsed codes omitted both Chinese and Russian codes for the reason that they were not aligned to CRIRSCO's international standard. However, since then the Russian geologists' association, OERN, has been admitted as a member of CRIRSCO. OERN's English version of its reporting code, known as the NAEN Code, has therefore become aligned to CRIRSCO's other internationally accepted reporting codes and, consequently, ESMA has requested that the NAEN Code is added to the list of mining reporting codes that can be used in prospectuses.

Other issues requiring clarification

The consultation paper makes a number of other proposed amendments and clarifications to the Recommendations:

  • ESMA has clarified that adherence to Appendices II and III of the Recommendations, which set out the content requirements for Competent Persons Reports (CPR), is not compulsory. However, CPRs should be prepared "having regard" to the content of Appendices II and III of the Recommendations.
  • It has also been clarified that on-site inspections are not compulsory for the purposes of the CPR. Instead, ESMA has confirmed that it considers the question of whether an inspection is required to be a matter for the professional judgment of the competent person, guided by the applicable ESMA endorsed codes.
  • Finally, ESMA intends to align the content of the Recommendations with certain amendments made to the Prospectus Directive.

ESMA has invited comments on all aspects of the consultation paper and, in particular, in respect of the specific questions posed in Annex 1 of the consultation paper. All comments received by 21 December 2012 will be considered by ESMA in the first quarter of 2013 with the revised guidelines expected to be published at some stage in the second quarter of 2013.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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