Securities Regulators Publish Guidance on the Use of Preliminary Economic Assessments
On August 16, 2012, the Canadian Securities Administrators (CSA) published CSA Staff Notice 43-307 Mining Technical Reports — Preliminary Economic Assessments (Staff Notice 43-307), which addresses certain concerns of CSA staff that have recently arisen around the use of preliminary economic assessments (PEAs) by mining issuers.
Following amendments to National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101) in 2011, which included an amendment to the definition of a PEA so that PEAs are no longer restricted to early-stage projects, the CSA became concerned that issuers were misinterpreting the amendments or inappropriately using PEAs in certain circumstances.
The CSA have clarified their position on certain aspects of the use of PEAs, including the following key highlights:
- Under the current definition of a PEA in NI 43-101, a PEA is any study that includes an economic analysis of the potential viability of mineral resources other than a pre-feasibility study (PFS) or feasibility study (FS) and, therefore, a PEA cannot also be a PFS or FS and is not adequate to demonstrate the technical and economic viability of a mineral project.
- Issuers are cautioned not to compare a PEA or any of its components to the standards of a PFS if the PEA includes inferred resources. Because a PEA may include inferred resources under NI 43-101 but a PFS cannot, the CSA has observed that some issuers have disclosed studies that they describe as a PEA for the purpose of including inferred resources in the economic analysis, but have represented that other components of the project have been studied to a PFS level, in order to suggest that the project and its estimated resources have greater certainty as to economic viability, in some cases going so far as to define estimated reserves on the basis of PFS level study within the PEA. The CSA warns issuers that they may challenge the classification of a study as a PEA if it does not clearly fall within the definition of a PEA or purports to include components at a PFS level standard.
- The CSA advises issuers that they may take the view that an issuer is treating a PEA as a PFS if:
- the required cautionary language regarding the inclusion of inferred resources is not included with equal prominence each time the economic analysis is disclosed;
- the PEA is used as the basis for proceeding to an FS or production decision;
- the PEA treats mineral resources as mineral reserves by disclosing "mining" or "mineable mineral resources" or uses the term "ore," or otherwise states or implies that the economic viability of the mineral resources has been demonstrated.
To the extent that the CSA determines that a PEA is being treated as a PFS by an issuer, it will mean that inferred resources cannot be included in the economic analysis within that study.
- Although the 2011 amendment to the definition of a PEA in NI 43-101 removed the previous restriction by which a PEA could only be completed for an early-stage project and prior to the completion of a PFS, the CSA have raised concerns with PEAs that are done concurrently with, or as an add-on or update to, a PFS or FS. The CSA advises that the purpose of the amendment to the definition of a PEA was to allow issuers more flexibility to step back and re-scope advanced-stage projects on the basis of significant changes to existing or proposed operations (e.g., higher or lower throughput, higher or lower grades, the inclusion of different types of mineralization or the use of alternative mining methods). However, certain issuers have interpreted the amendment as permitting a PEA to be completed concurrently with, or as an add-on to, a PFS or FS. The CSA are of the view that two parallel studies completed concurrently or in close time proximity are not separate studies, but components of the same study. On that basis, a study that includes an economic analysis of the potential viability of mineral resources that is completed concurrently with or as part of a PFS or FS is not a PEA if it:
- has the net effect of incorporating inferred resources into a PFS or FS, even as a sensitivity analysis;
- updates or modifies a PFS or FS to include more optimistic assumptions and parameters not supported by the original study; or
- is a PFS or FS in all respects except name.
In the foregoing circumstances, the CSA takes the view that such a study should not be categorized as a PEA and, therefore, cannot include inferred resources in an economic analysis.
- The CSA raises a concern that overly optimistic or aggressive assumptions in a PEA or the use of methodologies that significantly diverge from industry best practices and standards may be misleading and reminds issuers that PEAs are subject to an issuer’s overriding continuous disclosure obligation that forward-looking information, such as an economic analysis or projected production results, may only be disclosed if there is a reasonable basis for such information in the context of the specific mineral project. If the CSA believes that any assumptions in a PEA are not reasonable, they may ask the qualified person to explain or justify the assumptions and, if not satisfied with such explanation, require the qualified person to revise the PEA to take a more conservative or reasonable approach.
- The CSA considers that disclosing the results of a PEA that includes projected cash flows for by-product commodities that are not included in the mineral resource estimate to be contrary to NI 43-101. Issuers are cautioned against including cash flow projections for any commodity that has not been properly categorized as a measured, indicated or inferred mineral resource.
- The CSA reminds issuers that if they identify material NI 43-101 deficiencies in required documents, they will request that the issuer correct such deficiency and re-file such documents or, failing that, may place the issuer on default or seek a securities commission order requiring the re-filing of such documents or issuing a cease trade order against the issuer until the deficiency is remedied.
Staff Notice 43-307 contains helpful guidance for issuers contemplating the use of a PEA. Issuers should be aware that the Canadian securities commissions will continue to carefully scrutinize the use of PEAs, in particular where a PEA includes inferred resources or where a mineral project has already or concurrently advanced to PFS or FS stage.
From a practical perspective, Staff Notice 43-307 also leaves unanswered certain questions for issuers with advanced-stage projects on which they continue to conduct exploration work as to when, and in what circumstances, if any, it will be permissible to disclose the results of a PEA that includes inferred resources concurrently with a PFS or as a supplement to an existing PFS outside of circumstances where a significant change in operations, as described above, is anticipated.
For more information, please contact any member of the Mining Group at McCarthy Tétrault LLP or your regular McCarthy Tétrault LLP lawyer.