The European Securities and Markets Authority (ESMA) successor to the Committee of European Securities Regulators (CESR) has published an update of the CESR recommendations for the consistent implementation of the Prospectus Directive, with revised recommendations as to the content requirements of prospectuses issued by mineral companies. The CESR recommendations contain various recommendations as to the content of prospectuses, and are taken into account by the UK Listing Authority (UKLA) in deciding whether a prospectus should be approved.
Mineral companies are distinct from other companies in that a key factor in the assessment of their value is their reserves and resources. A key challenge for regulators is to ensure appropriate levels of transparency and assurance over the reserves and resources figures reported to the market. The CESR recommendations set out a framework for additional disclosure of reserves and resources information. Following concerns that this framework lacked clarity compared to regulatory standards in other markets, in April 2010 the CESR launched a consultation on a new framework for disclosure.
ESMA became CESR’s successor at the start of 2011. On March 23, 2011, ESMA published a feedback statement on the April 2010 consultation, together with ESMA’s update of the CESR recommendations. The ESMA update largely follows the amendments proposed in the April 2010 consultation.This article considers some of the key provisions of the updated recommendations.
Which Companies Are Subject to the Updated Recommendations?
“Mineral companies” now means companies with material mineral projects, not just those whose principal activity is the extraction of mineral resources. The materiality of projects will be assessed in regard to all the company’s mineral projects relative to the issuer and its group as a whole. Companies performing only exploration are no longer exempt from the recommendations. However, mineral companies that are only issuing wholesale debt will be exempt from the recommendations (historically, the recommendations applied to all prospectuses issued by a mineral company).
Competent Persons Report
A competent persons report (CPR) will be required for all initial public offering prospectuses regardless of how long the issuer has been a mineral company, and not just where the issuer has been a mineral company for less than three years. A CPR may also be required for further issues, but not where the issuer has previously published a CPR and has continued to update the market regarding its resources, reserves, results and prospects in accordance with one of the recognised reporting standards. In its April 2010 consultation, CESR noted that market practice expects a CPR at float but not generally after float and the updated recommendations are consistent with this practice.
The updated recommendations include recommended content for the CPR. The recommended content varies depending on whether the CPR relates to a company with oil and gas projects or a company with mining projects.
The proposal to include a CPR in a prospectus where there have been significant changes (either through acquisition or organic development) has not been adopted—instead, an overview of the new assets will be required. However, a mineral experts report will continue to be necessary under the UKLA Listing Rules on a Class 1 acquisition or disposal of mineral resources.
Basic Disclosure Requirements
The updated recommendations continue to set out basic disclosure requirements for all prospectuses.
Reporting and Valuation Standards
A new list of acceptable internationally recognised reporting and valuation standards has been drawn up. The oil and gas reporting codes are derived from the Society of Petroleum Engineers’ Petroleum Resources Management System. The mining reporting codes are aligned with the Committee for Mineral Reserves International Reporting Standards (and do not include US SEC Industry Guide 7 on mining, or the Russian or Chinese standards).
Cash Flow Projections
Historically, mineral companies without a three-year trading history were also required to include a two-year cash flow projection validated by accountants. In its April 2010 consultation, CESR proposed to abolish this requirement and to replace it with a new requirement to expand the use of proceeds section of the prospectus where new funds are being raised to finance exploration or development. While the requirement for a cash flow projection has been abolished as proposed, the new requirement in relation to use of proceeds has not been implemented.
Conflict with Third Country Securities Laws
The updated recommendations include a provision allowing an issuer to omit an item required by those updated recommendations where third country securities laws prohibit disclosure of that item.
This is a sensible move back to a more prescriptive regime, along the lines of the old Chapter 19 Listing Rule requirements. While these were replaced in 2005, many companies, advisers and even the UKLA still take note of them.