On August 16, 2012, the Canadian Securities Administrators (the "CSA") published CSA Staff Notice 43-307 Mining Technical Reports – Preliminary Economic Assessments to clarify its position on several issues regarding the use and disclosure of “preliminary economic assessments” (“PEAs”) as defined in National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”). The CSA advises that the definition of PEA, which was revised in 2011 to allow issuers greater flexibility in disclosing the results of PEAs, has resulted in such studies being used and disclosed by issuers in a manner, and/or in circumstances, not intended or permitted under NI 43-101. The notice is intended to help issuers better understand the appropriate use and disclosure of PEAs.
PEA as Substitute or Proxy for PFS
NI 43-101 defines a PEA as a study, other than a pre-feasibility study (“PFS”) or a feasibility study (“FS”), which includes an economic analysis of the potential viability of mineral resources. Although each of these studies generally analyse and assess the same geological, engineering and economic factors, the level of detail and confidence in outcomes differs significantly for each. A PEA is a conceptual study of the potential viability of mineral resources while PFSs and FSs are more comprehensive studies which are sufficient to demonstrate the technical and economic viability of a mineral project. As such, issuers are permitted under NI 43-101 to include inferred mineral resources in a PEA, provided that certain cautionary language is included, but not in a PFS-level economic analysis.
As a result of some issuers blurring the boundaries between a PEA and a PFS or FS, the notice emphasizes that PEAs should be treated as separate and distinct from PFSs and FSs. The CSA cautions that it may challenge an issuer’s disclosure if the issuer:
- describes the study as a PEA when it does not clearly fall into the definition of a PEA;
- compares the PEA or any components of it to the standards of a PFS if the study includes inferred mineral resources;
- states that some or all of the components of the PEA are done at the level of a PFS;
- does not include the cautionary statement required by section 3.4(e) of NI 43-101 with equal prominence each time it discloses the economic analysis of the mineral resources;
- uses the PEA as a basis to justify going directly to a FS or a production decision;
- discloses mining or mineable mineral resources or uses the term “ore”, which is essentially treating the mineral resources as mineral reserves; or
- otherwise states or implies the economic or technical viability of the mineral resources has been demonstrated.
Issuers are also cautioned to ensure that any disclosure of the results of a PEA is not misleading by providing appropriate context, cautionary statements and sufficient discussion of risk in order for the public to understand the limitations of the results of the PEA.
PEA in Conjunction with PFS or FS
The definition of PEA was revised in 2011 due to industry concerns that issuers need the ability to re-scope advanced stage projects based on new information or alternative production scenarios. As such, the amended definition is based on the premise that the issuer is contemplating a significant change in the existing or proposed operation that is materially different from the previous mining study.
The CSA is concerned that in some cases, issuers are preparing PEAs in conjunction with a PFS or FS as a means of indirectly including inferred mineral resources in their PFS or FS and has indicated that it will generally consider two parallel studies done concurrently or in close time proximity to be components of the same study. Therefore, in the CSA’s view, a study that includes an economic analysis of the potential viability of mineral resources that is done concurrently with or as part of a PFS or FS is not a PEA if it:
- has the net effect of incorporating inferred mineral resources into the PFS or FS, even as a sensitivity analysis;
- updates, adds to or modifies a PFS or FS to include more optimistic assumptions and parameters not supported by the original study; or
- is a PFS or FS in all respects except name.
Additional Guidance for Compliance
The notice also sets out some additional comments from the CSA regarding compliance issues with respect to PEAs:
- PEA Disclosure and Technical Report Triggers. In some cases, issuers are disclosing potential economic results for their material mineral properties that are not supported by a technical report.
- Unreasonable Assumptions and Potentially Misleading PEA Results. In some cases, issuers and qualified persons appear to be using overly optimistic or highly aggressive assumptions in the PEA or methodologies that diverge significantly from industry best practices and standards which could result in misleading disclosure. As forward-looking information must not be disclosed unless the issuer has a reasonable basis for the forward-looking information, issuers are cautioned by the CSA that any assumption under the PEA must have a reasonable basis.
- Improper Inclusion of By-Products. In some cases, issuers are disclosing the results of a PEA that include projected cash flows for by-product commodities that are not included in the mineral resource estimate which the CSA considers to be misleading and contrary to the definition of PEA. Issuers are cautioned against including cash flow projections for any commodity that has not been properly categorised as a measured, indicated or inferred mineral resource.
- Lack of Relevant Experience. In some cases, qualified persons are taking responsibility for technical reports that support the results of a PEA without having experience relevant to the subject matter of the mineral project and the technical report.
Consequences of Material Deficiencies or Errors
The CSA advises that in the event that material NI 43-101 disclosure deficiencies are identified in required documents, it will generally request that the issuer correct the deficiency by restating and re-filing the documents. Failure to comply with such request could result in the issuer being placed on the reporting issuer default list, the issuance of a commission order requiring the issuer to re-file the documents, and/or a cease trade order being issued until the issuer corrects the deficiency. Even in cases where the deficiency has been corrected, enforcement or other regulatory action for the original breach could be pursued, depending on the circumstances.
For issuers considering a prospectus offering, the CSA also notes that any of the above-noted issues could result in delayed or prolonged review of the prospectus filing and, in the case of material deficiencies, could result in a recommendation against the issuance of a final receipt for the prospectus being made.