How many checklists does it take before we have a checklist approach to disclosure?

ASX today released its interim guidance on reporting scoping studies. This has proven to be a thorny issue for miners who have sought to provide the market with guidance on the outcome of such studies, which are often conducted internally, based on limited geological understanding on the underlying resource and within a wide range of accuracy (typically +/- 50%) regarding economic outcomes.

ASX seeks to augment the guidance provided in ASIC’s revised IS 214 and, in an approach which seems at odds with a stated desire to avoid a “checklist approach” to compliance, adds a checklist for listed companies to follow in preparing scoping study announcements.

There are a number of key takeaways:

  • ASIC’s guidance: After the confusion and rancour following ASIC’s April Information Sheet 214 – Mining and Resources – Forward Looking Statements (IS 214), which was interpreted to prohibit publication of scoping studies without present evidence of project finance, ASIC revised IS 214 in October 2016. The revision confirmed secured funding is not necessarily required in order to establish that reasonable grounds exist for a production target, but stopped short of giving guidance as to at what point an assessment of a company’s relative market capitalisation, financial position, financing track record and support, relevant metrics and the state of relevant economies might provide a “reasonable basis” for a finance assumption.
  • Reasonable grounds for assumptions: Both ASIC and ASX clearly state they are looking for reasonable grounds for the disclosed assumptions made as to finance, not definitive statements as to financing capacity.

ASX notes, in an apparent attempt to reassure the average compliant explorer: “resource entities at early stages of the project assessment process will often not be in a position to make definitive statements about the availability of funding needed for development…” ASX also suggests that, where there are no reasonable grounds to think any entity can raise project finance on its own, the entity might disclose what the options are, such as a sale of project equity, and what reasonable basis there is for thinking those options might be available…. but is that a lifeline, or another can of worms?

  • A proximate warning: Both regulators want to see a clear statement of current financial capacity and expected finance requirements to achieve outcomes stated in a scoping study, with warnings as to a lack of certainty of funding, and the potential dilution impacts of any equity raising. ASX has provided an indicative five paragraph cautionary statement for companies’ assistance, which should be used when reminding investors that the company might not be able to raise project finance when needed. The statement augments the JORC code requirement for an appropriate cautionary statement.
  • Other disclosure points: ASX also reminds companies of the basics:

    • Follow Chapter 5 of the Listing Rules
    • Use JORC terminology
    • Be fair and balanced
    • Don’t put forward looking statements in the headline
    • Don’t describe results as a per share value without reasonable grounds
    • Use an approximate rounded range for targets
    • Disclose assumptions about modifying factors, and a sensitivity analysis
    • Your material assumptions include Section 4 of Table 1 of JORC
    • Be careful with assumed timeframes and sequencing of categories of resources for production and development
  • A checklist: The guidance annexes a checklist which ASX is encouraging entities to complete to verify compliance. It takes directors through the disclosure points above and Chapter 5 of the Listing Rules. Although companies aren’t required to complete the checklist, in cases where ASX has concerns over a scoping study announcement, it may request the company to complete and return the checklist under Listing Rule 18.7, whereupon it will presumably find its way onto the company announcements platform.

No-one denies ASX and ASIC’s work will encourage an improvement of the standard of reporting on scoping studies. However, we are now moving into a potentially uncomfortable combining of “hard” and “fuzzy” regulation of disclosure. This will increase the compliance burden for listed resource companies, and doesn’t help with some big questions which a checklist approach is ill-suited to answer. For example – what constitutes reasonable grounds for an assumption that a company can obtain project finance?

We expect that, like the much lamented Corporate Governance Statement in Appendix 4G, ASX is inexorably moving towards a checklist approach to disclosure in this field. But we still don’t have any comfort that a combination of warning statements and a checklist approach will be enough for ASIC.