As discussed last week, I recently attended the 2012 Mine Accounting & Reporting Update conference in Toronto. Of the range of topics covered at the conference, staff of the Ontario Securities Commission also had occasion to highlight issues arising in connection with the use of preliminary economic assessments (PEAs).
Prior to the implementation of the amendments to National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101) last June (we discussed the amendments in an earlier blog post), a “preliminary assessment” was defined to be an assessment as to economic viability undertaken at an early stage in a project, “prior to the completion of any preliminary feasibility study”. The principle was, as it has always been, that an issuer would use a scoping study or PEA to provide initial indications as to economic viability, but not to tack on extra information that should be included within a preliminary feasibility study (PFS) or feasibility study (FS). The issue is that disclosure of PEA results is not meant to be a means to provide extra economic information beyond the information provided in the issuer’s PFS or FS at some lesser standard of detail or more relaxed level of analysis than required in a PFS or FS.
The definition of PEA was changed with the NI 43-101 amendments last year and is now simply defined as an economic analysis other than a preliminary feasibility study or a feasibility study. The change was meant to allow issuers some flexibility in certain contexts, for example: to step back and reassess alternative development options; to take a fresh look at a project where a PFS or FS is no longer current or relevant; or to facilitate the disclosure of material information about new zones or production scenarios at operating mines (this last situation can become more problematic in the context of a project that is already operating, having a PFS or FS).
However, the underlying principle has not changed. Companion Policy 43-101 (NI 43-101CP, as amended last June) is clear that where an issuer discloses a PEA that follows a PFS or a FS, the issuer will be required to disclose the impact on the PFS or FS, and to disclose the impact on the issuer’s stated mineral reserves. Specifically, 43-101CP states that if the PEA significantly modifies any of the key variables in a PFS or a FS, including commodity prices, mine plan, or costs, the PFS/FS and mineral reserves for the project may no longer be current.
Since the amendment of NI 43-101 last year, staff of various securities commissions have been focusing on issuers that have made any disclosure that indicates or implies mineral project economics other than PFS or FS disclosure, because such disclosure (if not supported by a PFS or FS) will constitute a PEA and can trigger a technical report filing requirement under s. 4.2(1)(j) of in NI 43-101. For example, if an issuer discloses future production estimates, future revenue estimates, IRR, expanded mine life or capital and operating costs beyond those set out in a PFS/FS, such disclosure will constitute a disclosure of a PEA.
Staff of the CSA are reportedly in the process of formulating a new staff notice on PEAs which, we are advised, will be issued relatively soon. Based upon both the underlying principles and also recent public statements by CSA Staff we believe the notice will provide guidance on PEAs and avoiding misleading disclosure, and will likely clarify, among other things, that a PEA cannot be (i) a study carried out concurrently with or as part of a PFS or FS; (ii) used as a way to include inferred resources in a PFS or FS; or (iii) used as a way to modify a PFS or FS to include more optimistic assumptions than those included in the PFS or FS.