In this alert, Special Counsel Peter Burge and Senior Associate Luke Dawson comment on the changes to ASIC Information Sheet 214 “Mining and resources – Forward-looking statements” (INFO 214).
While the re-released INFO 214 still reflects the fundamental position that issuers must have a reasonable basis for making any forward looking statements as to production targets, forecast financial information or income-based valuations, the re-released INFO 214 also has some notable differences from the first iteration of INFO 214.
Mineral resource estimations
The re-leased INFO 214 clarifies that an issuer may make a forward-looking statement on the basis of mineral resources estimates if it has a reasonable basis for making them. An important aspect of this is the issuer’s consideration of the JORC ‘modifying factors’.
Previously, INFO 214 stated that:
“The estimation of a mineral resource is not sufficient. This is because the definition of a mineral resource under the JORC Code is not sufficiently rigorous to constitute reasonable grounds for forward-looking statements. Also, the period allowed for the economic extraction of a mineral resource can be very long – in some cases, over 50 years.”
This paragraph has been deleted from the latest iteration of INFO 214. Instead, INFO 214 now states that:
“For a production target, or forecast financial information or income-based valuation based on a production target, to have legitimacy, you need to have given proper consideration to the ‘modifying factors’ in the JORC Code.”
INFO 214 further provides that:
“A forward-looking statement based on mineral resources must disclose the extent to which the modifying factors have been analysed and progressed. Where they have not been fully analysed and progressed, you must disclose any material assumptions that have been made about the modifying factors. For the forward-looking statement not to be misleading, there must be objectively reasonable grounds for these assumptions.
Section 4 of Table 1 of the JORC Code provides a useful framework that you can use to disclose this information.”
ASIC notes that:
“ASX FAQ 24 states, among other things, that 'Even where disclosure of a production target or forecast financial information derived from a production target is made in accordance with these listing rules, […] it must still be based on reasonable grounds existing as at the date of the disclosure or else it will be taken to be misleading under the Corporations Act. Reasonable grounds extend not only to the mineralisation underpinning the production target or forecast financial information but also to any assumptions regarding the "modifying factors" in Table 1 of the JORC Code'.”
Secured funding is not necessarily required to show reasonable grounds for production targets
The re-released INFO 214 clarifies the position as regards making forward-looking statements in the absence of secured funding, provided that the issuer has a reasonable basis for believing that such funding will be available. In particular INFO 214 provides that:
“Secured funding is not necessarily required to show reasonable grounds for production targets
You do not necessarily need to have secured funding to show reasonable grounds for production targets, but you must have (and disclose) reasonable grounds for any assumptions that you make about your funding sources.
Irrespective of where the funding comes from, all start-up projects, including mineral projects, will only go into operation or production and become income producing if they have adequate capital and operational finance as and when required by development and production schedules.
Any assumptions you make about the scheduling of development and production – or about the availability of project finance underpinning a production target, or forecast financial information or income-based valuation based on a production target – are material assumptions that must be disclosed under ASX Listing Rules 5.16.1 and 5.17.1.
For the production target, forecast financial information or income-based valuation not to be misleading, there must be objectively reasonable grounds for these assumptions.
There is flexibility about how to establish reasonable grounds for forward-looking statements. However, ASIC will be concerned, and consider regulatory options, if no objectively reasonable grounds have been disclosed that support the assumptions made about funding.
When you disclose a production target for a mining project, or forecast financial information or income-based valuation based on a production target, you need to be careful that you do not mislead investors about your financial capacity to deliver those results. If project finance (debt or equity) will be required to achieve the stated outcomes, this should be clearly disclosed, together with an estimation of the amount needed. It will also be appropriate to warn investors if this requirement for project finance is likely to result in a dilution of the value of their existing shares, if this is the case.”
In our view, this addition provides an important clarification following the publication of the original INFO 214. The original iteration of INFO 214 caused consternation amongst the ranks of junior explorers who were caught in something of a catch-22: they need to inform the market about the prospectivity of their projects in order to attract funding, but were apparently unable to a make such statements as they had no such funding in place. ASIC has now clarified that where an issuer has a reasonable basis for forward looking statements as to, for example, production targets, then the fact that it has not yet got funding in place is not an impediment to making those forward looking statements. This is provided that it has a reasonable basis for assuming that it will have the financial capacity to deliver those results.