In Staff Notice 43-307 (the Notice), the Canadian Securities Administrators (the CSA) identify a number of issues and deficiencies they have been seeing in relation to revised National Instrument 43-101 - Standards of Disclosure for Mineral Projects (NI 43-101), which came into force last year. In particular, the CSA has seen problems with the use of “preliminary economic assessment” reports (PEAs). The Notice discusses these issues, notes the CSA’s stance on each issue and describes the consequences for issuers found to have these deficiencies.
The CSA identifies a number of issues they have observed since the revisions to NI 43-101 came into effect:
- a PEA being used as a substitute for a pre-feasibility study (PFS);
- a PEA being done as an add-on or in conjunction with a PFS or a feasibility study (FS);
- PEAs containing content considered inappropriate by the CSA unless accompanied by further technical reports;
- potentially misleading PEA results;
- PEA disclosure that inappropriately includes cash flow projections for by-product commodities; and
- individuals who are not properly qualified taking responsibility for technical reports that support PEA findings.
The CSA describes the consequences for having the above deficiencies or errors. These include requesting that the issuer correct the deficiency and re-state and re-file the documents, placing the issuer on the reporting issuer default list, seeking a commission order requiring the issuer to re-file the documents or issuing a cease trade order until the deficiencies are rectified.
The CSA’s position
Issue: PEA as a substitute to a PFS
The CSA describes seeing issuers represent that their PEAs have been or will be done at or close to the level of a PFS. The CSA notes that a PEA cannot, by its very definition, be a PFS or an FS, as these studies analyze similar data but for very different purposes. The definition of a PEA permits the inclusion of inferred mineral resources and is intended to be accompanied by the appropriate cautionary language to indicate that the report speaks to potential viability of mineral resources. Characterizing a PEA as a PFS implies the study is more comprehensive than it is and may cause the market to give excessive weight to the results.
The CSA states that they look for the following indicators to determine that an issuer is inappropriately substituting a PEA for a PFS:
- the issuer does not include the cautionary statement prescribed by NI 43-101 with equal prominence each time it discloses the economic analysis;
- the issuer uses the PEA as justification to move directly to an FS or production decision;
- the issuer discloses mining or mineable mineral resources or uses the term “ore”; or
- the issuer implies that the economic viability of the mineral resources has been demonstrated.
Issue: PEA done too closely or in conjunction with a PFS or an FS
The revision to the PEA definition included industry consultation to accommodate the industry’s expressed desire to be able to take a step back and re-evaluate the scope or objectives of a project. However, the CSA takes the position that a PEA done virtually in concurrence with a PFS or an FS is not sufficiently distinct to stand alone as a PEA. The CSA will not consider tandem reports to include a PEA in the following situations:
- if the report has the net effect of incorporating inferred mineral resources into the PFS or FS, even as a sensitivity analysis;
- if the report adds to or modifies a PFS or an FS to give a more optimistic outcome; or
- if the report is a PFS or an FS in all respects except name.
Issue: PEAs containing content considered inappropriate by the CSA unless accompanied by further technical reports
The CSA notes that investors rely heavily on potential economic outcomes disclosed by an issuer about its material mineral properties in making investment decisions. In some cases, the CSA has seen issuers disclosing potential economic outcomes for their material mineral properties in a PEA that are not otherwise supported by a technical report. Because that information is significant, the CSA may require that issuers provide additional technical reports to back these claims if the issuer:
- includes the information on potential economic outcomes in corporate presentations or other investor relations materials or the issuer’s website; or
- posts or links to third-party documents containing the potential economic outcomes.
Issue: potentially misleading PEA results
The CSA notes seeing PEAs it considers aggressive or overly optimistic or that diverge significantly from professional standards and industry best practices. A PEA includes forward-looking information and, as such, the issuer must have a reasonable basis for stating the forward-looking information, in accordance with other provisions of securities regulations. The CSA may now challenge issuers to justify the assumptions being made in a PEA or ask them to revise the PEA.
Issue: PEA disclosure that inappropriately includes cash flow projections for by-product commodities
The CSA takes the position that inclusion of cash flow from by-product commodities in a PEA is misleading and contrary to the definition of a PEA. Only commodities that have been categorized as measured, indicated or inferred should be included in PEAs.
Issue: individuals who are not properly qualified taking responsibility for technical reports that support PEA findings
The CSA describes seeing individuals who are not properly qualified taking responsibility for technical aspects of reports. Individuals the CSA does not believe are properly qualified will now be asked to explain their qualifications, or a revised technical report from additional qualified individuals will be requested.
The CSA lists the actions it will now pursue in response to any of the above-noted deficiencies. These include:
- request the issuer to correct the deficiency by restating and re-filing the documents;
- place the issuer on the reporting issuer default list;
- seek a commission order requiring the issuer to re-file the documents;
- issue a cease trade order until the issuer corrects the deficiency; and
- other enforcement or regulatory action.
An issuer filing a prospectus may find that the issuance of a receipt is delayed by inclusion of any of the discussed deficiencies.