Douglas Bryce, Jeremy Fraiberg, James R. Brown
On June 27, 2013, Staff of the Ontario Securities Commission (Staff) released OSC Staff Notice 43-705 – Report on Staff’s Review of Technical Reports by Ontario Mining Issuers (the Notice). The Notice provides an overview of the results of Staff’s review of a sample of 50 technical reports filed by Ontario mining issuers during the twelve month period ending on June 29, 2012. Of the 50 sample technical reports reviewed, which represent approximately 10% of the technical reports filed on SEDAR by Ontario mining issuers over that period, Staff found that 80% had “some form of non-compliance” with the requirements with Form 43-101F1 and 40% had at least one “major non-compliance concern” – a level of compliance that they label “unacceptable.”
The Notice comes on the heels of an earlier report from the British Columbia Securities Commission also identifying deficiencies in mineral disclosure. The BCSC’s 2012 Mining Report similarly concluded that many issuers are not in compliance with the applicable disclosure requirements for mineral projects set out in NI 43-101. As noted in our Osler Update dated March 27, 2012, there have also been a number of recent attempted prospectus financings by Canadian mining issuers that have been derailed or significantly delayed due to a refusal by Canadian securities regulators to issue prospectus receipts in the face of alleged faulty technical disclosure. The Notice can therefore be understood as the latest development in a concerted effort by the Canadian securities regulators to monitor and enforce improved technical disclosure standards, in the wake of the revised version of National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101) in June, 2011.
While the Notice focuses in large part on the identification of deficiencies, it also provides some helpful guidance and recommendations to mining issuers and qualified persons regarding the preparation of technical reports and common deficiencies that should be avoided.
Scope of Review
Staff reviewed 50 of the 460 technical reports filed pursuant to NI 43-101 during the 12 month period ending June 29, 2012 – this was the 12 month period that immediately followed the coming into force of the revised version of NI 43-101 on June 30, 2011. The sampled technical reports represented a range of issuers at various stages of development and included issuers listed on each of the TSX, TSX-V and CDNX, issuers at various stages of development (with almost 60% being at the mineral resource stage), issuers with mineral properties located in North America and around the world and issuers invested in a variety of commodities, with gold representing the most common subject commodity.
Of the 50 technical reports reviewed, only 19 represented “advanced properties,” being properties that have either a mineral reserve or mineral resource with a preliminary economic assessment, pre-feasibility study or feasibility study to support the potential economic viability of the project.
80% of the technical reports reviewed were judged to have some form of non-compliance, with only 20% of the reviewed reports being identified as “compliant.” Of the non-compliant reports, fully one-half, or 40%, were identified as having some form of “major” non-compliance.
The Notice provides some descriptions of the more common problem areas, with some accompanying guidance for issuers to assist in future compliance. The highlighted problem areas include:
- Mineral Resource Estimates: Staff concluded that 25% of the technical reports did not adequately disclose the key assumptions, parameters and methods used to estimate the mineral resource. In particular, some of the technical reports did not in their view properly disclose how “reasonable prospects for economic extraction” were established, the cut-off grade used to estimate the resource estimate, or other key assumptions underlying the mineral resource estimate, including a failure to disclose assumed metal prices of processing recovery rates.
- Guidance: The Notice notes that the Canadian Institute of Mining, Metallurgy and Petroleum’s Best Practice Guidelines for Estimation of Mineral Resources and Mineral Reserves provides guidance on the constraints that should be considered in resource estimation and disclosed as part of a statement of mineral resources, and then proceeds to state that “We expect qualified persons to use procedures and methodologies that are consistent with industry best practices.”
- Environmental Studies, Permitting and Community Impact: The Notice states that 32% of the 19 technical reports on advanced properties did not adequately disclose information related to environmental permits or the social or community impacts of developing the mineral project. In addition, Staff noted that some technical reports did not disclose how surface rights issues would be addressed or whether there was an exploration agreement in place or under negotiation with local First Nation communities. This is accompanied by a note to the effect that an inability to advance project has been related in a number of recent cases to surface and community issues rather than geological or technical issues.
- Guidance: The Notice reminds qualified persons to include a discussion of any potential social or community related requirements and plans for the project and the status of any negotiations or agreements with local communities and a discussion of mine closure (remediation and reclamation) requirements and costs in technical reports on an “advanced property.”
- Capital and Operating Costs: 26% of the 19 technical reports on advanced properties did not in the view of Staff adequately disclose the required summary of capital and operating cost estimates, with the major components set out in tabular form, as required by NI 43-101. In some cases, the main components of the capital cost estimate were not provided. In other cases, the technical report did not provide justification for how the operating cost estimate was determined or why certain costs were assumed.
- Guidance: The Notice states that cost estimates should not be a single bottom-line number, and reminds qualified persons to provide more context and justification for capital and operating cost estimates included in technical reports for an “advanced property.”
- Economic Analysis: 37% of the 19 technical reports on advanced properties did not in the view of Staff sufficiently disclose the economic analysis information required by Form 43-101F1. In particular, some technical reports did not provide cash flows on an annual basis or provide an appropriate sensitivity analysis with related impacts on the economic analysis. In addition, 40% of the technical reports on mineral projects at a preliminary economic assessment stage did not adequately address the issue of taxes applicable to the mineral project. The Notice reminds issuers that NI 43-101 requires that the economic analysis must include a clear statement of and justification for the principal assumptions and cash flow forecasts on an annual basis, using mineral reserves or mineral resources and an annual production schedule for the life of the project. It must also include a discussion of net present value, internal rate of return and payback period of capital with imputed or actual interest, including a summary of the taxes, royalties and other governmental levies or interests applicable to the mineral project or to production and to revenue or income from the mineral project. The economic analysis must also include sensitivity or other analysis using variants in commodity price, grade, capital and operating costs or other significant parameters as appropriate, and a discussion of the impact of the results.
- Guidance: It is potentially misleading for a technical report on an “advanced property” to disclose only pre-tax cash flows and economic outcomes or to disclose only positive metal price changes or only up-side sensitivity analysis.
- Interpretation and Conclusion: The June 2011 amendments to NI 43-101 included a requirement for a technical report to summarize the relevant results and interpretations of the information and analysis being reported on, specifically including a requirement to discuss any significant risks and uncertainties that could reasonably be expected to affect the reliability or confidence in the exploration information, mineral resource or mineral reserve estimates or projected economic outcomes, and a discussion of any reasonably foreseeable impacts of these risks and uncertainties to the project’s potential economic viability or continued viability. Staff concluded in their review that 36% of technical reports reviewed did not disclose project specific risks and uncertainties such as the availability of water rights, use of a novel mineral processing technology or the potential impact of a civil war in the region.
- Guidance: Qualified persons should consider including in the technical report a table showing the significant project specific risks, potential outcomes and mitigating factors along with supplementary discussions. Possible opportunities may also be included, if reasonable.
Other Areas of Concern
The Notice also concludes that the summary section (with 24% of the technical reports reviewed being found to be non-compliant) and the qualified person certificates (with a similar 24% non-compliance rate) are also areas of frequent deficiency in technical reports. Historical estimates were another problem area, with 28% of the technical reports reviewed having been found to not include the full cautionary statements required by NI 43-101 for such estimates.
Impact of the Review
The Notice concludes by reiterating the importance of compliant technical disclosure in order that investors have accurate and meaningful information about mineral properties material to an issuer, and stating the intention of Staff to continue the review of technical reports as part of the overall continuous disclosure program.
Given the fact that the two most active securities regulators in Canada in the mining space have now issued separate regulatory reviews identifying significant levels of non-compliance with NI 43-101, and the various recent high-profile regulatory interventions involving alleged breaches of technical disclosure by mining issuers, we fully expect that mining issuers will continue to face enhanced scrutiny for the foreseeable future, including periodic continuous disclosure reviews, selected issue reviews and enhanced regulatory oversight for prospectus offerings. Issuers are strongly advised to take note of the Notice, including its guidance, to ensure that their continuous disclosure documents (including, in particular, technical reports) fully comply with the requirements of NI 43-101.
The Notice is available here.
Part of the July 2013 - Mining Review