ASIC’s release of Information Sheet 214 (IS 214) regarding the publication of forward-looking statements by mining and resources companies has created significant controversy. Clearly there is a disconnect between what some resources industry participants believe they should or need to be able to do in publishing forward-looking statements based on mineralogical information and what ASIC says they can do under Australian law.
Although ASIC has been singing from the same hymn sheet on the issue for some time, the 2016 “re-mix” of ASIC’s policy poses challenges for companies that find themselves in the ‘twilight zone’ – those that have JORC-compliant mineral resources predominantly in the measured or indicated categories but no certainty of project funding.
For the sake of the industry, being one of economic significance to Australia, it is time for reform.
ASIC's position and IS 214
Under Australian law, a public statement about future matters by any entity in any industry (for instance, financial forecasts, production targets or sales estimates) must be based on ‘reasonable grounds’ or the statement will be misleading. ASIC’s position is that no amount of cautionary language, qualifications or disclaimers can overcome this.
ASIC’s approach to the use of forward-looking statements in the mining and resources industry has been essentially settled for some time. That is, reasonable grounds for production targets will be demonstrated where a company has ore reserves, but a production target based on inferred resources and/or exploration targets risks a misinformed market. ASIC recognises that as the level of certainty decreases from ore reserves to measured and indicated mineral resources to inferred mineral resources and then to exploration targets, the ability to use that mineralogical information as a basis for statements about future matters that imply economic viability becomes more tenuous.
Some of the key points of ASIC’s policy as outlined in IS 214 and which are important to ground an understanding of the issues are set out below.
- An up-to-date and correctly estimated ore reserve is sufficient to establish reasonable grounds for a forward-looking statement, but ore reserves are not a prerequisite for such a statement.
- Mineral resources may support the establishment of reasonable grounds for forward-looking financial information, provided the estimates are based on a sufficient level of geological knowledge and confidence and all JORC Code ‘modifying factors’ (including the economic modifying factor) are sufficiently progressed.
- The economic modifying factor can be sufficiently progressed such that reasonable grounds are established where project funding is not yet secured but ASIC will be concerned if no objectively reasonable grounds have been disclosed that support the conclusion that funding will become available as and when required by the company’s development or production schedule. ASIC sets out several factors as examples of what ought be considered, including: the company’s size and capitalisation relative, in particular, to the up-front capital expenditure requirement; how dilutive any financing would be to existing shareholders; and the company’s support from substantial holders or other large offtake or joint venture partners, including under any heads of agreement.
- Where there is no reasonable basis for a production target or financial forecast (in the form of, say, an NPV) in a scoping study or preliminary results, ASIC’s position is that the target or forecast should not be released to the market. ASIC’s view is that the publication of a project NPV based on a mere assumption that the project will be fully funded is an example of a forward-looking statement that is likely to be misleading.
The challenges resulting from ASIC’s approach
Let us be clear about a few things:
- notwithstanding assertions to the contrary, IS 214 does not represent a change in ASIC’s position. It does, however, publicly and explicitly confirm ASIC’s previously internal attitude in a way that produces a high degree of angst amongst those looking to develop early stage resource projects.
- ASIC’s approach has a sound legal footing - it is appropriate to assert that a reasonable basis for forward-looking information is required. The criticism of ASIC is that its approach to what constitutes reasonable grounds is not flexible enough to take into account the resources industry’s unique circumstances and challenges.
- ASIC’s stated objective of aggregating existing regulatory guidance and material with a view to alleviating the compliance burden is commendable.
For a number of companies in the mining and resources industry, ASIC’s approach does not pose any insurmountable difficulties. For instance, those with ore reserves are able to confidently publish production targets and financial forecasts (at least to the extent supported by those reserves).
For those with only exploration results or inferred mineral resources, we do not think they have a legitimate cause for concern with ASIC’s approach – the release of forward-looking financial information based exclusively or predominantly on mineralogy in those highly uncertain categories would rarely (if ever) be appropriate.
For companies in between, however, with no defined ore reserves and mineralogy that is exclusively or predominantly in the indicated and/or measured resource categories, ASIC’s approach (even accepting its legal logic) places them in an unfortunate and frustrating “twilight zone”. This is particularly the case for those that are yet to secure funding, where ASIC’s approach presents a classic “catch 22” scenario. To progress their projects they need funding; in order to raise funds they need to give investors some guidance or encouragement by way of indicative production and / or valuation metrics, but they are not allowed to provide those metrics without having sufficient certainty of funding.
ASIC suggests that companies say: ‘the results of the preliminary study were positive and that the results justify the entity to commit to the next stage of exploration and development’. But the practical result is that this won’t help secure real world dollars and nor does it deal with the legal challenges that flow from ASIC’s approach.
Significantly, ASIC’s position is not just a matter of capital raising inconvenience. It carries with it the potential for very real legal consequences that can be difficult to navigate effectively or cost-efficiently.
ASIC considers information without a reasonable basis may be too speculative to require disclosure as a reasonable person would not expect it to have a material effect on the price or value of an entity’s securities. With respect, this is not always the case and there is legitimate concern amongst market participants that an NPV or other forward-looking financial information emanating from a scoping study can constitute price sensitive information notwithstanding that the economic modifying factors are not appropriately progressed.
As a result, legal issues arise in the context of continuous disclosure obligations and the insider trading prohibitions:
- In terms of continuous disclosure, whilst ASIC’s position may be intellectually difficult, it is less of a practical issue in light of ASX’s stated attitude. ASX tacitly accepts the non-disclosure of what could be considered material information in the form of production targets or forecast financial information on the basis that the information is kept confidential. However, maintaining the confidentiality of the information presents its own set of challenges.
- Given the potential criminal consequences, insider trading is a more acute concern. Trading by management or investors that have become privy to non-disclosed scoping study or NPV information risks an allegation of insider trading (either trading or tipping). Those people would be forgiven for taking little or no comfort from ASIC saying the information may not be material when ASIC has intentionally stopped short of saying it would not be ‘inside information’.
Not being able to publish ostensibly material information also has several consequences in a fundraising context. Institutional investors are unlikely to provide funding without seeing such information. While it can be provided to them without public disclosure, this creates an information imbalance between institutional and retail investors and will essentially disenfranchise existing retail shareholders (and be damaging to the very people ASIC is seeking to protect). In addition, if a cleansing notice is to be issued allowing investors to trade in a placement context, the company is placed in the difficult position of choosing between disclosure (and potentially incurring ASIC’s wrath) and non-disclosure and the creation of an environment with a heightened insider trading risk.
At a minimum, even if ASIC’s view of materiality is accepted, a two-tiered information outcome is likely to arise – those that are aware of the information and those that are not. It is difficult to think that ASIC would regard this as a desirable outcome.
A reform proposal for the ‘twilight zone’
For ‘twilight zone’ companies, what to do with a scoping study that contains production targets and/or financial forecasts is now a significant challenge and one that creates real legal concerns.
The time has come for industry and regulators to collaborate on a solution to the impasse, recognising that our disclosure regime is fundamentally based on making information available to the market so reasonably informed decisions can be made. This is appropriate in the context of the resources industry, given its economic significance to Australia and its prosperity.
We think there should be a new regime - one that allows ‘twilight zone’ mining and resources companies to publish their JORC-compliant scoping studies containing production targets or financial forecasts even where funding has not been secured and they are not necessarily comfortable that they satisfy all of the factors set out by ASIC in IS 214. This could extend even where, on a strict view, the ‘twilight zone’ company could be said to lack a reasonable basis for expecting it can develop the project, be it because of funding or otherwise.
Such a proposal requires some safeguards. First, cautionary statements making it clear to resources company investors to take care and second, a requirement for rigorous and transparent analysis and explanation.
We suggest that prominent, proximate, cautionary language, coupled with a transparent and thorough explanation and analysis of the primary factors and key assumptions under-pinning the prospects of monetising the mineral resource (in the manner or to the extent suggested by the forward looking information), should be an adequate safeguard for potential investors. This information could come in the form of an explanation of the key assumptions and include an explanation of the likelihood of satisfaction and the risks to the assumptions ultimately being satisfied. The assumptions can’t be so unrealistic or merely hypothetical that no reasonable person could expect them to be satisfied in a relevant time period. The company should also genuinely believe the assumptions are capable of satisfaction.
ASX already accepts the utility of proximate “health warnings” – Listing Rules 5.16.4 and 5.16.5 are examples. It also accepts and promotes the use of a prescriptive disclosure regime (in the form of Table 1). What we are suggesting borrows from the approach adopted there.
Provided a production target or financial forecast is not misleading, taken in the context of the accompanying assumptions and qualifying language, this would give ‘twilight zone’ companies the ability to release the results of scoping or other early stage studies and put them on a level playing field in the market for scarce capital. This would also assist these companies in making difficult continuous disclosure decisions, comfortable knowing that they can err on the side of caution and disclose their scoping study with appropriate cautionary language.
If considered necessary, other safeguards could be imposed:
- a requirement that information be prepared or reviewed by an independent expert, be they a technical expert (in the nature of a JORC competent person) or perhaps even a finance qualified expert where the forward looking information has a financial element; and
- an obligation that no one, be it a company or anyone else such as a broker, be permitted to publish the “naked” production target or forward looking information without complying with the requirements imposed on the initial publication of the information (or at least referencing back to the original publication).
Armed with this information, potential investors should be in a position to make a sufficiently educated investment decision. In that environment investors can form a view – to deprive them of that opportunity does not promote an efficient market and takes consumer protection too far.
If ASIC disagrees with this reform proposal by relying upon its views that disclaimers are not sufficient to prevent the relevant kind of forward looking statements from being misleading, legislative reform may ultimately be required to establish a lasting solution, though it is open to ASIC to alleviate the situation in the meantime.