Over the course of the last year or so, we have seen a number of examples of issues regarding disclosure by mining companies result-ing in some pretty adverse consequences, ranging from companies having to correct or retract public disclosure all the way to failed public financings.
These show an increased focus by regulators on technical disclosure review, which has found problems with disclosure, including technical reports, websites (including analysts’ reports) and/or investor presentations not complying with the requirements of NI 43-101 – Standards for Disclosure for Mineral Properties.
A particular issue is confusion about the use of preliminary economic assessments (PEAs), which include an economic analysis of the potential viability of mineral resources that can include, or be based on, inferred resources, which are, by their nature, geologically speculative.
Changes to NI 43-101 made effective June 30, 2011, included an amendment regarding the use of preliminary economic assessments.
Prior to the amendment, a PEA could be used only for early stage projects, prior to the completion of a pre-feasibility study (PFS). The amendment removed this restriction, to allow PEAs for advanced mining properties, after the completion of a PFS or even a feasibility study (FS).
The purpose of this amendment was to allow greater flexibility for mining companies – a welcome development given the real-world use of PEAs at different stages of mine development, for example, to assess alternative development options or if there is a rescoping of a project.
But there have been a number of examples of confusion about how the PEA rule works.
Black Tusk Minerals Inc. and Goldsource Mines Inc. are two examples of companies that had to retract public disclosure as a result of running afoul of the rules around PEAs, as well as other disclosure issues. In Goldsource, this was following the imposition of a cease-trade order.
A well-known example of a failed public financing is Extorre Gold Mines, which lost a $50 million bought deal offering in February 2012 due to problems with its technical disclosure, including its preliminary economic assessment for one of its projects.
In August 2012, Canadian Securities Administrators published a notice regarding use and disclosure of PEAs, identifying a number of issues and providing clarification and guidance. The two main issues that were identified were using a PEA as a proxy for a PFS, and how to use a PEA in conjunction with a PFS or FS.
The proxy problem is a problem with issuers “blurring the lines” between a preliminary economic assessment and a pre-feasibility study by stating that some or all of the components of the PEA are done at the level of a PFS.
The effective result is the production of a PFS but with inferred resources. This is a problem because a PEA is of a far more preliminary nature than a PFS, especially if it includes inferred resources.
Key points here are not to compare a preliminary economic assessment or any components of it to the standards of a PFS if the PEA includes inferred resources, and to always include required cautionary language.
Secondly, a preliminary economic assessment can be done on an advanced project where there is a significant change in an existing or proposed operation that will involve considerably different economic parameters and capital investment, such as a different scale of operation (higher or lower throughput), different scope of operation (higher or lower grade), an alternative mining method (open pit vs. underground) or an alternative processing technology.
However, if two studies are done in parallel or in close time proximity they may be viewed as components of one study. So if a study includes an economic analysis of the potential viability of resources and is done concurrently with or as part of a PFS or FS, it will not be accepted as a PEA if it incorporates inferred resources into the PFS or FPS, even as a sensitivity analysis.
The above is provided as an illustration of two points: securities regulators are looking critically at scientific and technical disclosure generally, and the use of PEAs and inclusion of inferred resources in economic analyses specifically.
They will not accept a PEA that includes inferred resources if in fact the project is at a stage where they consider it not to be appropriate.
Secondly, they will not hesitate to derail a financing or require public retractions and rewriting of previous disclosure if they find that the rules around scientific and technical disclosure and PEAs have not been observed. •