CSA Updates Mining Disclosure Rules
The Canadian Securities Administrators (CSA) recently released for a 90-day comment period proposed changes to National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101). The proposed changes do not reflect any major policy shift. Instead, they streamline and clarify certain disclosure requirements to reflect experience with the instrument as well as developments in the industry and capital markets that have occurred since NI 43-101 was originally introduced. Overall, the proposed changes represent a commendable attempt to balance the cost of compliance with regulatory effectiveness.
While the volume of changes is substantial, and a detailed understanding of their full impact (intended and unintended) will only become apparent through practical application, the following is a brief summary of those changes that appear to be of most interest to a broad audience.
Broader Acceptance of Foreign Standards and Professionals
Currently, NI 43-101 permits foreign companies, as well as Canadian companies with mineral properties abroad, to disclose reserves and resources using any of the Joint Ore Reserves Committee (JORC), Securities and Exchange Commission (SEC), Institute of Materials, Minerals and Mining (IMMM), or South African Code for Reporting of Mineral Resources and Mineral Reserves (SAMREC) classifications as an alternative to the NI 43-101-mandated Canadian Institute of Mining (CIM) classifications, provided that such disclosure includes a reconciliation between the foreign and CIM classifications. The proposed changes will add the Chilean and Pan-European classifications to the list of specified international classification systems that are acceptable, and will also permit the use of any other international classification system that is "generally accepted in a foreign jurisdiction" and that defines resources and reserves in a manner consistent with the CIM classification. In addition, the reconciliation requirement will be removed.
In order for a foreign geologist or engineer to be recognized as a qualified person (QP), NI 43-101 currently requires that person to be a member of one of the foreign professional associations listed in a schedule to the instrument. The proposed changes will remove the schedule and instead require membership in a foreign association that "is generally accepted within the international mining community as a reputable professional association" and that has a membership designation with certain objective standards, including holding a university degree or equivalent.
These proposals for broader recognition of foreign standards and professionals reflect both the increasing globalization of the industry and an attempt to replace prescriptive lists with objective tests so as to provide flexibility to accommodate the continuing evolution of the industry.
Disclosure of Historical Estimates — Property Acquisitions
A particularly problematic area under the current NI 43-101 is the disclosure of historical resource estimates in the context of the acquisition of a mineral property. The acquiror generally wishes to disclose the historical resource information at the time it announces the acquisition, but may not have had sufficient time and resources to update this historical information to NI 43-101 standards. If the historical information is not NI 43-101-compliant, it can only be disclosed if it satisfies the definition of historical estimate, which requires that it have been prepared prior to February 1, 2001. Estimates made after February 1, 2001 that are not NI 43-101-compliant cannot be disclosed. Disclosure by the acquiror of post-February 1, 2001 estimates that are NI 43-101-compliant triggers a requirement for the acquiror to file a technical report within 45 days following the disclosure, a deadline that is frequently impossible to meet.
The proposed changes represent a practical compromise. First, the definition of "historical estimate" will be broadened to include any estimate prepared before the acquiror acquired, or entered into an agreement to acquire, the property, and that the acquiror has not verified. Second, if the historical estimate is supported by a technical report previously filed by the vendor, and if the acquiror is not aware of any new information that would make the historical information misleading, the acquiror will have six months (as opposed to the current 45 days) in which to file its own technical report verifying or updating the historical estimate.
Another awkward area of NI 43-101 has been the very limited exemption provided when a royalty holder is required to file a technical report. Typically, the technical report requirement is triggered when a royalty holder first becomes a reporting issuer in Canada or subsequently files a prospectus or annual information form. In many cases, the royalty holder will not have a right to access the property or the detailed information about the property required to be included in a technical report, and operators are generally reluctant to grant such access.
Currently, NI 43-101 provides relief to a royalty holder only with respect to those items of the technical report that require data verification, personal inspection or document review — and then only if the royalty holder has requested but has not received access to the site and data from the operating company. Recognizing that in most cases NI 43-101-compliant disclosure on the properties in question is already made by the operator, the proposed changes will exempt a royalty holder from having to file a technical report on a particular property in respect of scientific or technical information that has been disclosed by the operator if the operator is either subject to NI 43-101 or is a producing issuer listed on a specified foreign exchange and discloses its reserves and resources under an acceptable foreign code.
Technical Report for Short Form Prospectus
Currently, NI 43-101 requires that a technical report be filed concurrently with the filing of a preliminary short form prospectus that contains material technical information about a property material to the issuer unless that information is already contained in a previously filed technical report. Given the time necessary to prepare a technical report, this requirement can be a considerable impediment to an issuer benefitting from the short timeline under which short form prospectus offerings (particularly bought deals) can be carried out. Accordingly, the CSA is considering, but has not yet proposed, removing or limiting the current requirement to file a technical report with a short form prospectus, and is requesting specific comment from issuers and investors on this question.
The CSA requests comments on each of the following three scenarios, all of which assume the filing of a short form prospectus that includes material technical information about a project material to the issuer that is not supported by a previously filed technical report:
|Scenario 1:||The new information is not a material change in the affairs of the issuer.|
|Scenario 2:||The new information (such as disclosure of drilling results) is a material change but is not first-time disclosure of, or a material change to, mineral reserves or resources or a preliminary assessment.|
|Scenario 3:||The new information is a material change and is also first-time disclosure of, or a material change to, mineral reserves or resources or a preliminary assessment.|
In all three scenarios, NI 43-101 currently requires the issuer to file a technical report with its preliminary short form prospectus. The CSA is asking investors to comment on whether they rely on technical reports when making investment decisions in a short form prospectus offering and whether they favour keeping or eliminating the technical report in each of the three scenarios. Depending on the responses the CSA receives, and subject to its further deliberations, the final changes to NI 43-101 could eliminate the current requirement to file a technical report to support a short form prospectus altogether or restrict it to one or two of the three scenarios.
If the short form prospectus trigger is eliminated or restricted, the CSA proposes to include guidance for issuers in the revised Companion Policy to the effect that in order to ensure the issuer is complying with its obligations to make full, true and plain disclosure, the issuer should clearly identify the new material technical information as such in its prospectus and also state that this new information is not supported by previously filed technical reports.
Additional Exemptions for Producing Issuers
Producing issuers (i.e., those having revenue from mining operations of at least $30 million in the most recent year and aggregate revenue of $90 million over the most recent three years) currently are exempt from the requirement to file independent technical reports, except for a technical report filed on first becoming a reporting issuer in Canada or in connection with a long form prospectus or a formal valuation. The proposed changes will also exempt producing issuers from the independence requirement for long form prospectuses and valuations and, provided the shares of the producing issuer are listed on a specified foreign exchange, on becoming a reporting issuer. These additional exemptions will facilitate Canadian listings by foreign producing issuers that, by virtue of their foreign listing, already comply with disclosure obligations comparable to NI 43-101.
The proposed changes will also exempt producing issuers from the current requirement to include in a technical report an economic analysis for their producing properties.
Simplified Certification Requirements
One of the practical challenges in filing technical reports is obtaining on a timely basis the required certificates and consents of the QPs involved in the report. This can be a particular concern in the abridged timetable of a short form bought deal prospectus. Currently, where at the time of filing a short form prospectus there is no new material technical information since the most recently filed technical report, the issuer must still obtain and file an updated certificate and consent from each QP responsible for the most recent technical report. The proposed changes will remove this requirement.
In a related change, NI 44-101 Short Form Prospectus Distributions will be amended to allow an issuer that is required to obtain a consent from a QP in connection with a previously filed technical report to obtain that consent instead from the firm that employed the QP at the date of signing the technical report, rather than, as is now currently required, from the QP personally. This will alleviate the potential for delay where the individual QP is unavailable on short notice to sign a consent, or is no longer employed by that firm.
Changes to Contents of Technical Reports (Form 43-101F1)
Form 43-101F1, which prescribes the form and content of a technical report, has been substantially revised to make it less prescriptive and allow QPs more discretion regarding the amount of information and level of detail required in a technical report, depending on the stage of development of the property. Proposed changes to the Form include:
- requiring separate sections that focus on specific topics relating to advanced stage properties, i.e., mining and recovery methods, infrastructure, market studies and contracts, environmental studies, permitting and social or community impact, capital and operating costs and economic analysis, all of which in the current Form are part of a single section;
- considerably expanding the scope of the QP’s interpretations and conclusions by requiring a discussion of any significant risks and uncertainties that could reasonably be expected to affect the reliability of the exploration information, resource and reserve estimates and the projected economic outcomes, as well as any reasonably foreseeable impacts of these risks and uncertainties on the project’s economic viability; and
- modifying the extent to which a QP can rely on, and disclaim liability for, information in a technical report provided by others (such "disclaimable" information has been limited to that provided by other experts who were not QPs, but the proposed expansion includes information provided by the issuer) — however, while under the current policy the nature of the information that could be disclaimed includes legal, political, environmental "or other issues and factors" relevant to the technical report, the proposed changes will specifically restrict the disclaimer to information concerning legal, political, environmental or tax matters, the pricing of commodities for which pricing is not publicly available and information concerning gem stone valuations (i.e., the open-ended "other issues and factors" category has been removed).
Changes to Companion Policy (43–101CP)
The Companion Policy has been significantly revised, but unfortunately the CSA did not publish a blackline of the changes, so identifying and evaluating their significance is a bit of a time-consuming project.
One welcome user-friendly change is that the items in the proposed Companion Policy would now follow the order of the sections in the instrument itself, which greatly facilitates locating guidance in the policy relevant to specific sections of the instrument. Other improvements include more guidance on various defined terms used in the instrument and additional guidance on the difficult but critical issue of determining if a particular property is material to an issuer.
The CSA has requested that comments on the proposed changes be submitted by July 23, 2010.