The impact of ASIC Information Sheet 214 on the Disclosure of Scoping Studies

As indicated in our article Looking beyond ASIC Information Sheet 214 by Patrick Tydde and Danielle Lukic, there has been considerable backlash amongst the Australian mining industry against ASIC Information Sheet 214 (ASIC Statement).

Since the ASIC Statement has been released, ASX (the disclosure regulator) has required a number of junior mining companies to limit their disclosures regarding scoping studies to statements that the studies are positive and justify the company’s decision to advance the project or proceed to the next stage, such as progressing a feasibility study. In other cases, ASX has required junior mining companies to retract previous disclosures regarding scoping study results which contain forward-looking statements including production targets, forecast financial information and income based cash flow valuations. The reason given for the retraction is the company’s inability to establish a reasonable basis for securing funding as and when required by the project’s development or production schedules, as required by the ASIC Statement. Investors have been advised that there is no certainty that sufficient project development funding will be secured for the project and that the economic viability of the project has not been established despite the encouraging results of the scoping study.

While ASIC has publicly stated that it has always been the case that the assumptions underlying forward-looking statements must be based on reasonable grounds and there is nothing new in the ASIC Statement, ASX’s approach to enforcement of disclosures of forward-looking statements by junior mining companies has changed since the ASIC Statement was released. This is because the current interpretation and guidance by ASIC and/or ASX as to what will constitute reasonable grounds for assumptions underlying production targets, forecast financial information, income based cash flow statements and other forward-looking statements goes further than previously stated in any guidance note published by ASIC or ASX.

In particular, ASIC comments that unless an entity has reasonable grounds for making statements about scoping studies or preliminary results these should not be disclosed. ASIC’s interpretation appears to be that to establish reasonable grounds to support a forward-looking statement as to a project’s potential viability in a scoping study, an entity must have and disclose objectively reasonable grounds that support the conclusion that funding will become available as and when required by the project’s development or production schedules. ASIC comments that this concept is covered by the JORC Code’s ‘economic’ modifying factor.

A scoping study is by its nature an order of magnitude technical and economic study of the potential viability of mineral resources. It is commonly the first economic evaluation of a project and may be based on a combination of directly gathered project data together with assumptions borrowed from similar deposits or operations. The JORC Code already requires an entity to include appropriate cautionary statements when making a disclosure regarding a scoping study to warn investors that the results are based on low-level technical and economic assessments which are insufficient to support estimation of an economically mineable ore reserve or to provide assurance of an economic development case or to provide certainty that the conclusions of the scoping study will be realised, and other appropriate warnings which are generally understood by investors. In addition, Chapter 5 of the ASX Listing Rules contain additional requirements which must be satisfied when reporting on production targets and forecast financial information in any disclosure.

Industry is concerned about the ramifications of the ASIC Statement, including in relation to the level of uncertainty surrounding “secure funding”, the potential impact on future capital raisings by the Australian resources sector and the broader economic impact this may have. AMEC has raised these concerns with ASIC, and ASIC has agreed to participate in an industry roundtable with industry at the end of June.

For more information please click here to listen to Julie Athanasoff (Partner in Corporate Advisory of Gilbert + Tobin) speak about the ASIC Statement or click here to read our article on ASIC’s Information Sheet 214).

ASX and proposed changes to the admission requirements

The ASX has released its consultation paper proposing to change the admission requirements for entities seeking admission to the official list (click here to see our full article detailing the proposed changes to the ASX Listing Rules). The changes, if progressed, are likely to impact small cap IPO candidates and back-door listings.

In the context of backdoor listings, ASX has already begun to enforce bringing forward the date of suspension of trading to immediately after the transaction announcement. Previously, the suspension would occur from the date of the shareholder meeting, providing the opportunity to gauge the market reaction after the transaction was announced which can in turn assist with the pricing of any capital raising to be undertaken by the entity.

ASX has also commenced restricting entities from accessing a waiver from the '20 cent rule' if that entity’s shares last traded at a price less than 2 cents (a proposed addition to the ASX Guidance Note 12's criteria to access the waiver). Those entities will need to consolidate their share capital in a backdoor listing.

Further, ASX proposes to:

  • increase the threshold of the ‘assets test’ to net tangible assets of at least $5 million (after deducting the costs of fundraising), or a market capitalisation of $20 million (currently $3 million and $10 million respectively);
  • introduce a requirement for entities seeking admission under the assets test to produce audited accounts for the last 3 full financial years,in line with entities seeking admission under the profits test;
  • introduce a 20% minimum free float requirement, with free float to be defined by ASX as those securities which are not restricted securities or subject to voluntary escrow and held by non-affiliated shareholders (currently 10%);
  • increase the profits test to consolidated profits of $500,000 for the 12 months prior to admission (currently $400,000); and
  • standardise admission requirements for all entities admitted under the assets test by requiring them to have at least $1.5 million in working capital after taking into account the entity’s first full financial year’s budgeted revenue, administration costs and the cost of acquiring any assets referred to in the prospectus (to the extent that those costs will be met out of working capital). Currently this requirement only applies to oil and gas exploration entities.

The proposed increase of the net tangible asset threshold from $3 to $5 million under the ‘assets test’ is likely to have a significant impact on the ability of junior mining companies to proceed with a listing. Most junior mining companies seek to be admitted to the official list of ASX on the basis of their net tangible assets given that they are unlikely to have generated any substantial profits. As acknowledged in the consultation paper, admission under the ‘assets test’ test has provided a pathway for resources entities in the exploration phase of their life cycle and other entities in the early stage of their life cycle to list and raise funds when other sources of funds may not be available. If implemented, the amendments to the net tangible asset threshold have the potential to further contribute to the decline in Australian mineral exploration we have witnessed in recent years.

Submissions are due to ASX by 24 June 2016. It is expected that final changes to the Listing Rules will be released in early August 2016, and will come into effect on 1 September 2016.