Since National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101) came into effect in 2001, most market participants would agree that the quality of technical disclosure by mining companies has much improved. There are, however, still areas to which issuers and underwriters should continue to pay attention, both to avoid the need to correct or re-file technical reports and disclosure documents (with resulting expense and delay) and to ensure they are taking adequate steps to protect themselves from liability. The following selected points to watch are drawn from our recent experience and from recent commentary by securities regulators.
- Use of Terminology — Issuers are still sometimes running into problems when using the terms "feasibility study" and "preliminary (or pre-) feasibility study." Because the popular use of these terms can be imprecise, they are specifically defined in NI 43-101 and their usage in technical reports and disclosure documents must be consistent with these definitions. Technical reports that use these terms in reference to less comprehensive studies will need to be re-named and re-filed, and any disclosure made in reliance upon them similarly re-cast.
- Economic Analyses — To the extent a lesser study, such as a scoping study, results in IRRs, NPVs or other measures of economic viability, even if not a feasibility or pre-feasibility study for NI 43-101 purposes, such a study may be considered a "preliminary assessment" and its disclosure permitted, subject in certain cases to cautionary statements being included in the disclosure. However, an economic analysis of a pure exploration target, where not even inferred resources have been delineated, is not permitted.
- Use of Proceeds — Where a technical report is prepared in connection with a prospectus financing, and some or all of the proceeds are to be used to fund further exploration or development of a property, the "use of proceeds" section of the prospectus should be generally consistent with any recommendations for further work that are made by the qualified person (QP) in the technical report. Too often these two are not consistent (or inconsistencies are not adequately explained), with the result that Canadian regulators will require the prospectus and/or the technical report to be amended so the two can be reconciled.
- Websites/Presentations — Remember that NI 43-101 applies to all disclosure of scientific or technical information made by or on behalf of an issuer, and not just to disclosure in paper or printed form. Issuers, their underwriters and counsel are generally very careful in the preparation of prospectuses and offering memoranda, but sometimes the same rigour in ensuring compliance with NI 43-101 is not applied to issuers’ websites or investor presentations.
In all cases, the QP should be identified by name, and certain other disclosure (including required statements regarding verification of the information and underlying data by a QP, as well as those surrounding disclosure of exploration results or reserves and resources) must be included either directly or by reference to another document. Increasingly, regulators are scrutinizing issuer websites and presentations in connection with continuous disclosure reviews and cracking down on non-compliers. Such reviews, which can also involve scrutiny of issuers’ press releases, have resulted in cease trade orders among other penalties.
- Appropriate QP Sign-Off — If a QP is purporting to sign off on all technical information disclosed in a technical report or company disclosure, the issuer should ensure that the QP is appropriately qualified for all the information on which he or she is opining. Failure to comply with this requirement occurs more often in reports prepared by in-house QPs than in those prepared by consulting geologists. This sometimes arises because QPs who are opining about geology do not realize that disclosure of metallurgical results and conclusions also requires appropriate QP support. The Canadian securities commissions recently reiterated that NI 43-101 applies equally to metallurgical information as it does to drilling and reserve/resource information.
- Conflicts with Foreign Disclosure Rules — Sometimes inconsistencies between the disclosure rules in Canada and those in foreign jurisdictions can make compliance a challenge. One such conflict we have run into recently arises in the context of issuers applying for admission to AIM and doing a concurrent private placement in Canada. In order to keep disclosure to investors consistent in the different jurisdictions, it is often desirable for the issuer and its underwriters to use the AIM admission document (which incorporates a competent person’s report (CPR) prepared under AIM rules) together with a wrapper as an offering memorandum for the Canadian private placement. However, while it is a cardinal rule under NI 43-101 that inferred resources cannot be added to any other category of resources, AIM rules require the CPR in some places to combine inferred resources not only with other categories of resources, but with reserves as well. This results in a direct conflict between the requirements of the two jurisdictions. While we have pointed out this discrepancy to the Canadian securities commissions, there is no obvious remedy for it in NI 43-101. We have seen issuers and their underwriters approach this conflict in a number of ways, including obtaining exemptive relief from the commissions.
- Private Placements and QP Certificates — Where an offering memorandum containing technical information is being prepared in Canada but no NI 43-101 technical report is required (for example, in a private placement to accredited investors), it is good practice to provide the QP at the outset of work with a form of certificate similar to one that would be required to be signed and filed in connection with a formal technical report under securities laws for a prospectus financing. This tends to focus the individual’s mind on the rules in NI 43-101, including having the individual confirm that he or she is actually a QP and the basis for this conclusion. One can easily imagine a situation where only on the eve of a proposed financing does it come to light that a foreign geologist is not in fact a QP under Canadian rules, resulting in delay and cost in trying to locate an appropriately qualified person on short notice to support the issuer’s disclosure.