The media has recently reported considerable backlash to the ASIC Information Sheet 214 (ASIC Statement) issued in April 2016 relating to forward-looking statements made by mining companies. The ASIC Statement provides guidance on what information can be included in forward-looking statements. Industry bodies have criticised what they perceive to be overly onerous disclosure requirements, which limit the information that can be released to the market by mining companies and are said to impinge on a company’s ability to raise funds.
However, mining companies need to be aware that, notwithstanding the ASIC Statement, any forward-looking statements made by it, whether predictive or aspirational in nature, must be based on reasonable grounds. Otherwise the making of that statement may amount to misleading or deceptive conduct in contravention of the Australian Consumer Law (ACL) or the Corporations Act 2001 (Cth) and expose the company to shareholder class actions.
The ASIC Statement concerns forward-looking statements made by mining or exploration companies. Those statements include production targets (i.e. forecasts of future mineral extraction), forecast financial information or discounted cash flow valuations. The ASIC Statement was intended to give guidance on, among other things, the legal requirement that any forward-looking statement be based on reasonable grounds. For a further discussion of the ASIC Statement, please see the article in this Newsletter entitled Regulator rumble: ASIC and ASX to clamp down on juniors.
The ASIC Statement comments that the question of whether a mining company has reasonable grounds for making forward-looking statements of the nature set out above is informed by the relevant professional and industry standards, such as the JORC and VALMIN codes.
ASIC has stated that an up-to-date and correctly estimated ore reserve estimate is sufficient to establish reasonable grounds for a forward-looking statement. However, a mineral resource estimate is not sufficient because the JORC definition of mineral resource was not sufficiently rigorous. Further, the disclosure of production targets and forecast financial information based solely on exploration targets, or solely or partly on 'historical' or 'foreign' estimates of mineralisation would not amount to reasonable grounds as the information was too conceptual, speculative and unreliable.
In the context of project valuations, the material assumptions underlying the forward-looking statement must be specific, not speculative or hypothetical. That is, a hypothetical net present valuation of a project’s worth based on an assumption that funding would be provided by a third party was likely to be misleading.
There has recently been considerable criticism of the ASIC Statement by industry bodies who assert that it has the effect of limiting the ability of mining companies to encourage investment to fund further exploration and development. In particular, AMEC has stated that broad ramifications arose from the ASIC Statement as it (i) “created a greater level of uncertainty surrounding ‘secure funding’, and will therefore undermine market integrity and confidence”; (ii) “could starve the industry of future capital and send companies offshore for capital”; and (iii) could put at risk "significant future economic, financial and social dividends provided by the resources sector”.
However, it is important to remember that the ASIC Statement does not alter the law concerning misleading or deceptive statements. That is, any statement as to a future matter that is made without reasonable grounds will be taken to be misleading in contravention of the ACL and the Corporations Act.
That extends to what ASIC refers to as an “aspirational statement” (described as a statement about a company’s present intention for the future with no predictive nature) which must also be based on reasonable grounds, notwithstanding the fact that ASIC has suggested otherwise in the ASIC Statement. For example (using an example of an “aspirational statement” from the ASIC Statement) a statement that an entity would not consider a project with less than a specified mineral resource will be misleading if the specified mineral resource was in fact lower than the resource threshold required by the company.
The potential for a claim of misleading or deceptive conduct now takes on an increased significance following the recent NSW Supreme Court judgment in the case of Re HIH Insurance Ltd (in liq)  NSWSC 428 which may open the floodgates to shareholder class actions relating to misleading company statements. That decision confirmed that it is no longer necessary for shareholders in Australia to prove that they actually relied on a company’s misleading statement to establish a claim for misleading or deceptive conduct. Instead, the Court decided that it was enough for a plaintiff shareholder to prove that the company’s share price was distorted by the misleading statement at the time the shares were purchased by the shareholder.
Accordingly, even if ASIC does retract from the position taken in the ASIC Statement, as has been urged by some commentators, the potential to be on the receiving end of a shareholder class action for misleading or deceptive conduct ought to be enough to convince mining companies to exercise great caution before making any forward-looking statements, to ensure there are reasonable grounds for those statements which can be objectively substantiated.