On August 16, 2012, the Canadian Securities Administrators released Staff Notice 43-307 (the "Notice") to set out Staff's views on various issues relating to preliminary economic assessments ("PEAs"), as defined in National Instrument 43-101 Standards of Disclosure for Mineral Projects ("NI 43-101").
Under NI 43-101, a PEA is a study, other than a pre-feasibility study ("PFS") or feasibility study ("FS"), that includes an economic analysis of the potential viability of mineral resources. Amendments to NI 43-101 that came into force on June 30, 2011 expanded the former definition to provide that a PEA could be undertaken either before or after a PFS or FS – previously, a preliminary assessment could be undertaken only before completion of a PFS. As a result of the expansion, a PEA can be an important tool even for more senior issuers, for example, where the issuer is assessing the potential viability of a significant change to an existing or proposed operation that is materially different from the previous PFS or FS.
Unlike a PFS or FS, a PEA can include inferred resources. Where an issuer discloses the results of a PEA, among other things, the issuer must state, with equal prominence, that the PEA is preliminary in nature, that it includes inferred resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves, and that there is no certainty that the PEA will be realized.
In the Notice, Staff highlights a number of concerns relating to the use and disclosure of PEAs. The principal issues raised relate to blurring the boundary between a PEA and a PFS. Staff may challenge whether a PEA is, in fact, a PEA or a PFS in a variety of circumstances, including where the issuer:
- states that some or all of the components of the PEA are done at the level of a PFS, or otherwise compares the PEA to the standards of a PFS, if the PEA includes inferred resources;
- states or implies that the economic viability of the applicable mineral resources has been demonstrated (a PEA can only demonstrate the potential viability of mineral resources);
- fails to include the cautionary statement required to accompany disclosure of the results of a PEA;
- uses the PEA as a basis to justify going directly to a FS or a production decision;
- discloses mineable mineral resources or uses the term "ore", which is essentially treating mineral resources as mineral reserves; or
conducts a concurrent PFS or PS where the PEA:
- has the net effect of incorporating inferred resources into the PFS or FS (even as a sensitivity analysis);
- updates, adds to, or modifies the PFS or FS to include more optimistic assumptions or parameters; or
- is a PFS or FS in all respects except name.
If a PEA is, in fact, a PFS or FS, then the study cannot include inferred resources. Issuers may be required to correct their disclosure and/or prepare a new study that omits the inferred resources.
The Notice also addresses other issues that have arisen in connection with PEAs:
- Disclosure of potential economic outcomes for material mineral properties (for example, the results of a PEA) could trigger the requirement to file a technical report, depending on the materiality of the information to the issuer. This obligation can arise not only as a result of disclosure in documents filed with the securities commissions, but also disclosure on the issuer's website or in presentations, fact sheets or investor relations materials, or third party disclosure that is adopted and disseminated by the issuer.
- The assumptions upon which the PEA is based must have a reasonable basis in the context of the mineral project. Staff may challenge assumptions that are overly optimistic or aggressive. Where the PEA has been prepared using procedures and methods that diverge significantly from industry best practices, issuers should consider disclosing the nature and basis for the divergence.
- The PEA cannot include projected cash flows for by-product commodities that are not included in the mineral resource estimate. The PEA cannot contain cash flow projections for any commodity that has not been properly categorized as a measured, indicated or inferred resource.
- The qualified person taking responsibility for the technical report that supports a PEA must have experience relevant to the subject matter of the mineral project and the technical report, such as experience with the relevant commodity, type of deposit or situation under consideration.
In the Notice, Staff indicates that where material NI 43-101 disclosure deficiencies are identified, the issuer will generally be asked to correct the deficiency by restating and re-filing the document(s). Failure to comply could lead to noting the issuer in default, an order requiring compliance or a cease trade order. Furthermore, even where the disclosure is corrected, Staff may pursue enforcement or other regulatory action, depending on the breach.