On 18 September 2012 the ASX released for public comment proposed changes to the ASX Listing Rules and Guidance Notes relating to Reserve and Resource Disclosure Rules for Mining and Oil & Gas Companies. These changes follow extensive consultation with industry and other key stakeholders and have been released in conjunction with revisions to the JORC Code. For our summary of ASX’s proposed changes click here and our coverage of the ASX’s stakeholder consultation click here.
Given the importance of reserves and resources estimates to valuing resources companies, the proposed changes could have a significant impact on company valuations and the manner and extent to which those companies can raise funds in a challenging financial environment.
This note highlights the possible ramifications of the proposed changes for ASX listed mining and oil & gas companies.
Higher compliance costs
Although stopping short of requiring Canadian style reporting, the proposed requirement to report exploration results for material mining projects in accordance with sections 1 (sampling techniques and data) and 2 (reporting of exploration results) of Table 1 of the JORC Code are likely to create higher compliance costs. This is particularly the case for junior explorers who will be required to provide more detailed reporting on drilling programmes.
Additional disclosure of technical information
While the proposed revisions to the JORC Code will not prohibit the disclosure of exploration targets, the “headlining” of exploration targets will be prohibited. Additional disclosures of technical information will be required to allow investors to assess disclosed exploration targets. These changes were not supported by industry during the consultation process due to the close link between exploration targets and a company’s strategic expenditure and investment priorities. Industry proposed that disclosures in relation to exploration targets be accompanied by a ‘cautionary statement’, however the ASX has not adopted this proposal.
Similarly when reporting estimates of mineral resources or ore reserves for material mining projects for the first time (or when previously reported estimates materially change), mining companies will be required to disclose additional technical information. It is unclear whether the additional disclosure will increase investors’ understanding of the exploration targets, mineral resources and ore reserves given the specialised knowledge and experience required to interpret and evaluate this information. Companies may prefer not to disclosure such information and thus limit the circumstances under which exploration targets, resources and reserves are disclosed.
Higher burden on competent persons
In order to report historical and foreign estimates of mineralisation that are not prepared in accordance with the JORC Code, mining companies will be required to provide supporting information including an assessment by a competent person of the relevance and reliability of such estimates and the work required to verify those estimates as mineral resources or ore reserves in accordance with the JORC Code. This places a high burden on the responsible competent person.
The inclusion of cautionary statements warning investors that the estimates are not reported in accordance with the JORC Code are unlikely to give competent persons comfort when seeking to evaluate historical and foreign estimates of mineralisation for these purposes.
Prohibition on including historical or foreign estimates in economic studies or production targets may impact valuation
The prohibition on including historical or foreign estimates in economic studies or using these estimates in production targets appears to be arbitrary. This is because historical and foreign estimates of mineralisation will need to be assessed for relevance and reliability when they are disclosed and mining companies will be able to base production targets on inferred mineral resources and an exploration target. Not being able to include these estimates could impact projects and/or company valuations.
Annual statements may mislead some investors
Disaggregated annual reporting of mineral resources and ore reserves by commodity, project, region, and any other relevant classification has not proceeded from the consultation phase to the proposed changes. Reporting of year-on-year changes in mineral resources and ore reserves is likely to be adopted. Without clear links to exploration and production activities and any acquisitions, divestments and joint venture transactions during the year, the information has the potential to mislead investors.
Additional transparency for competent persons
The “competence” of competent persons was a key concern raised by the ASX. The proposal for the ASX to form its own “panel of experts” to advise the ASX on the adequacy of the disclosure of key technical information supporting exploration results, mineral resources and ore reserves estimates has not been proposed. To address these concerns, amendments have been proposed to the competent persons provisions of the JORC Code. These amendments include:
- enhancing the transparency of the relationship between the competent person and the company (in particular, reporting potential conflicts of interest);
- requiring the competent person to identify in any disclosures the material issues that could potentially impact the public perception or value of the mineral occurrence; and
- requiring the competent person to provide details of the basis for the “reasonable prospects” assumptions made in any disclosure and written justification where untested practices are used in determining those “reasonable prospects”.
Oil and gas companies
Increased investor confidence in disclosure regime
The proposal that all petroleum resources be classified and reported in accordance with the Petroleum Resources Management System (SPE-PRMS) is not surprising (and perhaps overdue), particularly given the majority of ASX listed oil & gas companies already report using SPE-PRMS and the global acceptance of these standards. This proposal received broad support from industry during the consultation process.
Detailed changes and clarifications are also proposed in relation to the way reserve estimates are calculated and reported. It is clear that the ASX has referred to international disclosure practices in formulating the proposed changes.
While the adoption of internationally consistent reporting standards will require more detailed disclosure and increased compliance costs, it is likely to increase investor confidence. This should enhance ASX listed oil & gas companies access to capital markets.
More effective reporting of exploration and drilling information
Another change proposed by the ASX is the removal of mandatory monthly drilling reports. During consultation this proposal was widely supported by industry, and should result in more efficient and effective exploration reporting.
Removing the monthly reporting requirement will also bring with it the additional benefit of reducing frustrations within joint ventures between ASX listed companies and those listed on other exchanges (i.e. where the ASX listed company is required to make a disclosure in circumstances in which its joint venture partner is not also required to make a similar disclosure on its exchange).
Potential disclosure of commercially sensitive information
ASX has proposed the disclosure of additional technical information when reporting exploration and drilling information, reserves, contingent and prospective resource. Examples include:
- the disclosure of the types of drilling tests conducted and the hydrocarbon phases recovered in the tests;
- the disclosure of the basis for commercial producibility, the analytical procedures used to estimate the reserves, the proposed extraction techniques and the details of any specialised processing required; and
- if the resource is contingent, the disclosure of information relating to technology under development (including if that technology has been demonstrated to be commercially viable).
The reporting of this technical information may result in the disclosure of commercially sensitive and confidential information. In addition, specialised knowledge and expertise will be required to interpret and analyse this technical information. Thus it is unclear whether the disclosure of such information will assist most investors.
Companies will be required to disclose material economic assumptions used to calculate estimates of reserves. This proposal was strongly opposed by industry during consultation on the basis that it may require the disclosure of commercially sensitive and confidential information (for example, long term commodity price assumptions or commodity pricing under long term sale contracts) and places ASX listed companies at a competitive disadvantage to global peers.
If the economic assumptions are commercially sensitive, ASX has proposed an exception, requiring an explanation of the methodology used to determine the assumptions. This exception is unlikely to provide the comfort sought by industry as disclosure of the methodology or basis of assumptions is also likely to be commercially sensitive. Indeed, it is possible that a company may consider a methodology or basis of an assumption to be more commercially sensitive than the actual assumption itself.
Prospective resource disclosures may be more conservative
It is proposed that companies will be required to disclose the basis of the estimated prospective resources and provide an assessment (supported by a qualified petroleum reserves and resources evaluator) of the chance of discovery and associated development from the reported prospective resources. This requirement will place significant pressure on the qualified petroleum reserves and resources evaluator, and will set a low water mark for future development expectations. Under such a regime it is likely that more conservative prospective resource estimates will be disclosed.
Improved integrity of reserves reporting
Similar to the proposed requirement applicable to mining companies, it is proposed that oil & gas companies include an annual reserves statement in their annual report and that the reserves statement reconciles reserves from year to year. However, unlike the proposed changes in relation to mining companies, oil & gas companies will be required to include in their annual reserve statement details of the frequency and scope of any reviews or audits undertaken with respect to the estimates of petroleum reserves disclosed and the estimation process.
The rationale behind this change is likely to be to improve the ongoing integrity of reserves reporting by Australian oil and gas companies (particularly by those companies engaged in promotion and fund raising). As reserves underpin oil and gas company valuations, particularly for smaller to mid-sized companies, this measure will essentially help to provide a check-and-balance for the basis of those valuations (against which more day-to-day continuous disclosure will need to be reconciled).
Potential impact on value of companies with unconventional resources
It remains to be seen how SPE-PRMS for reporting of all petroleum resources will affect the market price of companies who currently report unconventional resources in accordance with the JORC Code. The adoption of SPE-PRMS by these companies will not be without transitional (and perhaps additional ongoing) costs.
The proposed changes to the ASX Listing Rules and the JORC Code provide a more prescriptive approach to the reporting requirements for Australian resources companies, reflecting a move towards internationally accepted best practice. This should promote increased capital flows to ASX listed resource companies. However, the enhanced disclosure requirements will need to be balanced against increased regulatory compliance, the cost burden for junior resource companies and requiring the disclosure of commercially sensitive and confidential information.