As legal advisors with extensive experience in cross-border securities transactions, we are asked by Canadian mining companies contemplating a U.S. listing about the mineral reserve and resource estimate reporting requirements that would govern their disclosure obligations in the United States. This article outlines the market practices utilized by substantially all Canadian mining companies that have already dual-listed their securities and provides guidance to those Canadian mining companies contemplating such an undertaking.
Canadian and U.S. Standards
In Canada, disclosure of mineral reserve and mineral resource estimates is governed by National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101). The equivalent reporting regime in the United States is the U.S. Securities and Exchange Commission’s (SEC) Industry Guide 7 (Guide 7). While many of the terms and concepts used by these two instruments are similar, these regimes are not harmonized and contain a number of substantive differences. Guide 7 is generally more conservative than NI 43-101 in what is permitted to be disclosed in a company’s annual reports, registration statements and other public documents. For example, under Guide 7 mineralization is not permitted to be classified as “proven” or “probable” reserves until a “final” or “bankable” feasibility study has been conducted and all necessary permits, including environmental permits, are in hand (or their issuance is imminent). In contrast, under NI 43-101, mineral reserves are the economically mineable part of a measured or indicated mineral resource demonstrated by at least a preliminary feasibility study and at least a reasonable expectation that governmental approvals will be provided. NI 43-101 also provides for the disclosure of “measured,” “indicated” or “inferred” mineral resources. In general terms, measured and indicated mineral resources are categories of mineralization that have reasonable prospects for economic extraction but have not been demonstrated to be economically mineable as is required to constitute a mineral reserve under NI 43-101 or reserves under Guide 7. Inferred mineral resources have less certainty as to quantity and grade than measured and indicated mineral resources. Disclosure of these types of mineral resources is generally prohibited by U.S. rules, though in limited circumstances Guide 7, as applied by the SEC, does allow the disclosure of “mineralized material,” which generally includes any mineralization of existing or potential economic significance that does not qualify as a proven or probable reserve.
These differences may lead Canadian mining companies to believe that compliance with applicable reporting requirements is complicated, and that listing their securities on a U.S. exchange is therefore overly burdensome. In practice, under the Multi-Jurisdictional Disclosure System (MJDS) Canadian mining companies can publicly sell their securities in the United States and list them on a U.S. exchange without complying with the Guide 7 requirements.
Securities Offering Materials
When conducting a securities offering into the United States under MJDS, Canadian companies are required to file a registration statement with the SEC on Forms F-7 through F-10 or Form F-80. Guide 7 does not apply to registration statements filed on the appropriate MJDS forms, and mineral reserve and mineral resource estimates can be disclosed in accordance with NI 43-101.
Companies that are conducting an offer concurrently in Canada and the United States should, however, alert readers that the disclosure in the Prospectus and any Prospectus Supplement regarding mineral reserve and mineral resource estimates is being made in accordance with NI 43-101, and not Guide 7, to avoid any claims under the antifraud provisions of the U.S. federal securities laws alleging confusion about which standard governed the disclosure. Our experience and research demonstrates that this practice is almost universally applied. This disclosure, typically phrased as a “Note to U.S. Investors Regarding the Presentation of Mineral Reserves and Mineral Resources,” essentially:
- outlines that the mineral reserve and mineral resource estimates disclosed in the offering materials were prepared in accordance with NI 43-101, which differs from Guide 7;
- explains the main differences between NI 43-101 and Guide 7; and
- provides certain warnings associated with the uncertainty around “measured,” “indicated” and “inferred” mineral resources, given that Guide 7 generally prohibits disclosure of estimates that are not reserves as defined in Guide 7.
In addition to the “Note to U.S. Investors Regarding the Presentation of Mineral Reserves and Mineral Resources,” Canadian mining companies may wish to include disclosure in the “Risk Factor” portion of the Prospectus and any Prospectus Supplement regarding the material differences between NI 43-101 and Guide 7. This can be accomplished by including such disclosure in a risk factor dealing with the inherent risk associated with imprecision of mineral reserve and mineral resource estimation or by setting out a separate risk factor addressing the material differences between U.S. and Canadian reporting standards.
Some Canadian mining companies have chosen to report their mineral reserve and mineral resource estimates in accordance with both NI 43-101 and Guide 7 to the extent possible. While there is no requirement under the U.S. federal securities laws to reconcile their NI 43-101 disclosure with the requirements of Guide 7, we believe these companies are motivated by a desire to provide research analysts and investors in the United States with information comparable to that disclosed by U.S. mining companies. In some instances, we believe these companies may have a significant number of U.S. shareholders. To comply with NI 43-101, if they disclose “reserves” as defined in Guide 7, they must reconcile to NI 43-101 “mineral reserves.”
Annual Reports and Continuous Disclosure Obligations
MJDS also permits eligible Canadian companies to satisfy their U.S. continuous disclosure obligations after they have publicly sold their securities in the United States by using Canadian disclosure documents prepared in accordance with Canadian securities laws. For mining companies, this means that disclosures of mineral reserve and mineral resource estimates prepared in accordance with NI 43-101 can be used to satisfy such U.S. obligations in lieu of Guide 7 requirements.
Under MJDS, Canadian mining companies can combine their Canadian annual information form (AIF), audited annual financial statements and management’s discussion and analysis (MD&A) of financial condition and results of operations under the cover of Form 40-F to meet their annual reporting obligations under the U.S. Securities Exchange Act of 1934.
As with securities offerings into the U.S. capital markets, it is the practice of Canadian mining companies to include in their AIF a cautionary note that alerts readers that the disclosure regarding mineral reserve and mineral resource estimates is being made in accordance with NI 43-101 and not Guide 7.
Canadian mining companies also include in the “Risk Factor” section of their AIF similar disclosure addressing the risks regarding the material differences between NI 43-101 and Guide 7. Again, the disclosure can be included in a risk factor dealing with the imprecision of mineral reserve and mineral resource estimates or set out in a separate risk factor addressing the material differences between U.S. and Canadian reporting standards.
While the language and content of the disclosure is reasonably consistent across the Canadian mining industry, the treatment of where the disclosure is located in the AIF is less consistent. Many companies elect to place this language near the “Introduction” section of the AIF, others place it at the beginning of the “Mineral Reserves and Resources” section and still others place it in the definitions found in the “Glossary of Terms.” As there is no form requirement governing where this disclosure must appear in the AIF, companies are free to place it in the document where they believe it is most appropriate.
Some companies also elect to reiterate this information in Form 40-F. While it is not technically “wrong” to do so, the AIF is incorporated by reference into Form 40-F, so it is not necessary to separately restate this disclosure in Form 40-F. As a practical matter, investors will turn to the AIF because it is in this document that the annual mineral reserve and mineral resource estimates will be found.
In addition to disclosure in the AIF, many companies address the material differences between NI 43-101 and Guide 7 in their MD&A. The type and location of language found in the MD&A tend to reflect the AIF, with companies choosing to include either abbreviated or expansive forms of cautionary notes at various places throughout the MD&A. As cautionary notes aim to alert investors to the material differences and implications between NI 43-101 and Guide 7-based estimates, best practice suggests setting out cautionary language near the introduction of the document to inform investors at the outset. Some companies may prefer also to repeat this cautionary language throughout the body of the MD&A where mineral reserve and mineral resource estimates are discussed. As noted above, pursuant to NI 43-101, issuers are required to reconcile reserve estimates under Guide 7 to mineral reserves under NI 43-101.
As cautionary notes directed at U.S. investors are strongly tied to references to mineral reserve and mineral resource estimates, it is not surprising that very few companies include cautionary language in their audited financial statements, as very little is typically said about mineral reserve and resource estimates in the financial statements.
Finally, Canadian mining companies should be aware that all disclosure of scientific and technical information, both written and oral, must comply with NI 43-101. This obligation extends, for example, to all public presentations including investor presentations, and therefore must also contain the relevant cautionary language.
Press Releases and Websites
Dual-listed Canadian mining companies should also review their websites and press releases to ensure they contain appropriate disclosure regarding material differences between NI 43-101 and Guide 7. Cautionary language is normally included in proximity to discussions of mineral reserve and mineral resource estimates, whether on the company’s website itself or in their press releases. A number of companies have relegated this cautionary language to inconspicuous “Disclaimer” or “Legal” hyperlinks located at the bottom of the homepage. However, this practice should be discouraged in favour of incorporating conspicuous cautionary language directly on the web pages referencing mineral reserves and mineral resources to effectively bring this information to investors’ attention. We believe this is the best practice for disclosing cautionary language of this type, as investors are more likely alerted to cautionary notes when included with (or near) the information to which such notes relate.
Mining companies listed in both Canadian and U.S. markets should consider including a Cautionary Note to U.S. Investors similar in form and content to the disclosures in annual reporting, and offering documents, on all web pages and in all press releases referencing mineral reserves and mineral resources.
For Canadian mining companies contemplating the public sale of their securities in the United States and a listing on a U.S. exchange, compliance with industry best practices for mineral reserve and mineral resource estimates is straightforward. The basic requirement is to ensure that securities offering materials, AIFs, press releases and websites alert readers that the disclosure regarding mineral reserve and mineral resource estimates is being made in accordance with NI 43-101 and not Guide 7.