Staff of the Ontario Securities Commission recently conducted a review of Technical Reports filed in Ontario by mining issuers under National Instrument 43-101 Standards of Disclosure for Mineral Projects and Form 43-101F1 Technical Reports. OSC Staff Notice 43-705 Report on Staff’s Review of Technical Reports by Ontario Mining Issuers was published on June 27, 2013 to summarize the results of the review, highlight common compliance issues and provide guidance to mining issuers on how to better comply with the rules regarding Technical Reports.
Out of the 50 Technical Reports reviewed, 40 (or 80%) were found to be non-compliant with the requirements in some way. Based on their review, OSC Staff concluded that “Although significant efforts have been made to comply with the requirements of Form 43-101F1, issuers and qualified persons need to further improve their disclosure.”
In particular, OSC Staff highlighted the following areas of concern:
Mineral Resource Estimates
When disclosing mineral resources, issuers must provide, among other things, sufficient discussion of the key assumptions, parameters and methods used to estimate the mineral resources so that a reasonably informed reader can understand the basis for the estimate and how it was generated. Notable mistakes which OSC Staff identified include (a) failing to disclose how reasonable prospects for economic extraction were established or what cut-off grade was used to estimate the mineral resource; (b) failing to clearly disclose the assumed metal price or factors related to the mining scenario or mineral processing recovery; and (c) failing to include the required statement about the extent, if any, to which mineral reserves are included in total mineral resources.
Environmental Studies, Permitting and Social or Community Impact
A Technical Report for an “advanced property” must discuss reasonably available information on environmental permits and social or community factors related to the mineral project, and OSC Staff identified significant deficiencies in this regard. Proper disclosure would include any potential social or community related requirements and plans for the project, as well as the status of any negotiations or agreements with local communities (e.g., impact benefit agreements with First Nations), remediation and reclamation requirements and costs.
Capital and Operating Costs
The summary of capital and operating cost estimates for an advanced property “should not be a single bottom-line number”. Context and justification for capital and operating cost estimates must be included.
The Technical Report for an advanced property must include an economic analysis for the mineral project. There are various specific requirements in Item 22 of Form 43-101F1 which must be followed with regard to this requirement. In addition, OSC Staff noted that disclosing only (a) pre-tax cash flows and economic outcomes; (b) positive metal price changes; or (c) up-side sensitivity analysis is potentially misleading.
Interpretations and Conclusions
In the “interpretations and conclusions” section of a Technical Report, the issuer is required to include a discussion on any significant risks and uncertainties that could reasonably be expected to affect the reliability or confidence in the exploration information, mineral resource or reserve estimates or projected economic outcomes, and any related reasonably foreseeable impacts of these risks and uncertainties. OSC Staff suggested that qualified persons should consider including a table that sets out significant project specific risks, potential outcomes and mitigating factors, along with a supplementary discussion.
Other Common Deficiencies
OSC Staff also noted areas of concern in the summary section (Item 1 of Form 43-101F1) and the history section (Item 6 of Form 43-101F1) of Technical Reports. A Technical Report needs to include a summary of important information and “key findings”. As well, specific cautionary language is required to be used every time a historical resource or reserve estimate is disclosed.
Also noted were various problems with the qualified person’s certificate of qualifications (for example, certain required items or statements were missing from the certificate). OSC Staff commented that the qualified person’s certificate is one of the first things that is checked by regulators when reviewing a Technical Report.
Implications for Corporate Governance – Board and Management Oversight
OSC Staff points out that although a qualified person is responsible for preparing and supervising the Technical Report as well as providing the appropriate technical and scientific advice, the ultimate responsibility under securities law belongs to the issuer and its directors and officers. OSC Staff notes that while there is no statutory requirement that directors review the Technical Report in full, each issuer should consider how it meets expectations and requirements related to Technical Reports. As part of fulfilling their oversight function, a board of directors should consider the composition and technical skill set of the board of directors, its committees, officers and managers.
OSC Staff stated in their report that they will continue to actively review Technical Reports filed in Ontario by mining issuers. Furthermore, when an issuer has not met the requirements of Form 43-101F1, the issuer should anticipate requests for refilings, additional disclosure or other staff action.
There is no question that a number of the deficiencies noted by OSC Staff could have been detected in advance, if issuers (either directly or through their professional advisors) had carried out a more rigorous review of the Technical Report prior to it being filed on SEDAR. The additional time and expense involved in any such internal review also have to be weighed against the far greater time, expense and other adverse consequences arising from an issuer being noted in default, being cease-traded or having a financing delayed or cancelled, all because of Technical Report deficiencies being discovered by OSC Staff or staff of other Canadian securities regulators.