On August 16, 2012, the Canadian Securities Administrators (“CSA”) published CSA Staff Notice 43-307 Mining Technical Reports – Preliminary Economic Assessments (the “Notice”). The Notice highlights a number of issues relating to the use and disclosure of a preliminary economic assessment (“PEA”), as defined in National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”):
1. Use of a PEA as proxy for a pre-feasibility study (“PFS”)
The CSA identifies three situations that give reasons for concern: (1) where an issuer represents that a PEA, or a component of it, is or will be done at the level of a pre-feasibility study (“PFS”); (2) where a PEA is represented to be a PFS but for the inclusion of inferred mineral resources; and (3) where a PEA is treated as a substitute or proxy for a PFS. These situations are problematic because while a PEA can only demonstrate the potential viability of mineral resources, a PFS or feasibility study (“FS”) is more comprehensive study and, therefore sufficient to demonstrate the technical and economic viability of a mineral project. Issuers who blur the boundary between a PEA and PFS run the risk of being challenged by the CSA as to whether the study meets the definition of a PEA. The CSA recommends that issuers do not:
- describe a study as a PEA unless it clearly falls into the definition of a PEA; or
- compare their PEA or any component of it to the standards of a PFS if the study includes inferred mineral resources.
- The CSA may take the position that an issuer is treating the PEA as a PFS if the issuer:
- does not include a cautionary statement with equal prominence each time it discloses the economic analysis of the mineral resources;
- uses the PEA as a basis to justify going directly to a FS or a production decision;
- discloses mining or mineable mineral resources or uses the term “ore”, which is essentially treating mineral resources as mineral reserves; or
- otherwise states or implies that economic viability of the mineral resources has been demonstrated.
2. Preparing a PEA in conjunction with PFS or FS
The CSA indicates that issuers are preparing PEAs using inferred mineral resources concurrently with, as an add-on, or update to their PFS or FS. The CSA is concerned that this practice will indirectly allow issuers to include inferred mineral resources in their PFS, which contravenes NI 43-101 restriction on indirectly inferred mineral resources in an economic analysis. The CSA takes the position that a study is not a PEA if it includes an economic analysis of the potential viability of mineral resources and if the study is done concurrently with or as part of a PFS or FS. This is the case if the study:
- has the net effect of incorporating inferred mineral resources into the PFS or FS, even as a sensitivity analysis;
- updates, adds to, or modifies a PFS or FS to include more optimistic assumptions and parameters not supported by the original study; or
- is a PFS or FS in all respects, except name.
3. Technical Report Triggers: Disclosing economic outcomes for material mineral properties without support by a technical report
The CSA notes that issuers are disclosing results of potential economic outcomes for material mineral properties which are not supported by a technical report. Considering that investors may significantly rely on this information and make investment decisions based on it, this could trigger the requirement to file a technical report under NI 43-101. This is the case if the disclosure is:
- contained in the issuer’s corporate presentations, fact sheets, investor relations materials, or any statement on the issuer’s website; or
- posted or linked from third party documents, reports, articles, or otherwise adopted and disseminated by the issuer.
4. Misleading PEA results: Overly optimistic or highly aggressive assumptions & diverging methodologies
The CSA also points out as an issue of concern the use by issuers and qualified persons of overly optimistic or highly aggressive assumptions in the PEA, and the use of using methodologies that diverge significantly from industry best practices and standards. As the results of a PEA include, or are based on, forward looking information that is subject to National Instrument 51-102 Continuous Disclosure Obligations, an issuer must not disclose forward-looking information unless the issuer has a reasonable basis for doing so. In the case of overly optimistic or highly aggressive assumptions, the CSA may challenge the qualified person to explain or justify the assumptions, or failing that, ask them to revise the PEA to take a more conservative or reasonable approach.
5. PEA Disclosure that Includes By-products
The CSA notes that issuers are disclosing PEA results that include projected cash flows for by-product commodities that are not included in the mineral resource estimate. The CSA considers the inclusion in a PEA of such by-product commodities to be misleading and contrary to the definition of PEA because these commodities are not part of the mineral resource. The CSA cautions issuers not to include cash flow projections for any commodity or part of a commodity that has not been properly categorised as a measured, indicated, or inferred mineral resource.
6. Material deficiencies or errors
Finally, the Notice addresses the consequences associated with material deficiencies or errors in NI 43-101 required documents. Where the CSA identifies a deficiency or error, it will first request that the issuer correct it by restating and re-filling the document. If the issuer fails to comply with the request, the CSA may either:
- place the issuer on the reporting issuer default list;
- seek a commission order requiring the issuer to re-file the documents; or
- issue a cease trade order until the issuer corrects the deficiency.
If an issuer is considering a prospectus offering, the review of the prospectus filing could take more time if issues such as those noted above are present. Where there are material deficiencies, the CSA may recommend against issuing a receipt for the prospectus.
For more details, please refer to the Notice, which can be found here.
Shamarkay Hersi, articling student, assisted in the preparation of this article.