In Canaco Resources Inc., Andrew Lee Smith, Randy Smallwood, David Parsons, and Brian Lock, 2013 BCSECCOM 310 (“Canaco”) the British Columbia Securities Commission (the “BCSC”) concluded that where drilling results relate to infill drilling, do not alter the known boundaries of the deposit and “do nothing more than add to the understanding of the continuity of the deposit” such results will not constitute a material change or material fact for the purposes of section 85 of the Securities Act of British Columbia (the “Act”).
Canaco was a junior mining exploration issuer listed on the TSX Venture Exchange (the “Exchange”). Between September 2009 and September 2010, Canaco had drilled 82 holes and had issued the appropriate news releases. Canaco identified each drill hole by a consecutive number and the drillholes in question were numbered 84 to 98. Holes 84, 87, 88, 90, 93, 96, 97, and 98 were drilled in 2010, on a claim known as the Magambazi gold deposit in Tanzania. Smith was the president and chief executive officer of Canaco, and with over 25 years of experience in the mining industry was also Canaco’s “qualified person” pursuant to National Instrument 43-101.Although Smith knew the drill results for holes 84, 87, 88, 90, 93, 96, 97, and 98 by November 29, 2010, such results were not disclosed until December 6, 2010, and the relevant news releases were staggered so that the disclosure was only complete as of December 22, 2010.
The BCSC made the following allegations against Canaco:
- That Canaco contravened section 85 of the Act by failing to immediately disclose the results from eight mining drillholes and failing to file a material change report detailing the drilling results;
- That each of Smith, Smallwood, Parsons, and Lock contravened section 85 of the Act when they authorized, permitted, or acquiesced in the decision not to immediately disclose the drilling results; and
- The issuance of stock options by each of the directors to themselves prior to the disclosure of the drilling results constituted a failure to act in the best interests of Canaco.
The Exchange expressed concern over Canaco’s decision to stagger the news releases and ordered Canaco to announce the remaining drill results on December 22, 2010. The Exchange also required Canaco to re-price the stock options that were approved in the midst of the release of the positive drilling results. The BCSC did not view the Exchange’s order as evidence such drilling results were material and noted “that as a measure of depth of the Exchange’s concern, it required Canaco only to re-price the options, not cancel them, even though Canaco offered to do so” (at para 124).
If the Results Do Not Affect the Value of the Shares From a Geological Perspective, They Are Not Material
The BCSC reviewed recent case law principles and confirmed the test for materiality is an objective one and that the reasonableness of market impact is assessed from the point of view of the reasonable investor. They noted that “Information can be important to a reasonable investor without being “material” (at para 84) and cited Biovail Corporation (2010) 33 OSCB 8914, noting that:
If a statement would be reasonably expected to have a significant effect on the market price or value of a security, then that statement would clearly be important to an investor in making an investment decision. However, it does not necessarily follow that a statement that it is important to an investor in making an investment decision would reasonably be expected to have a significant effect on the market price or value of a security (at para 84 of Canaco).
The BCSC approached the assessment of value from a specifically geological perspective stating:
It is clear the evidence of these experts corroborates Smith’s opinion about the drill results: that the eight holes in question would not affect the value of the Canaco shares from a geological perspective. The holes were infill drilling. They did not alter the known boundaries of the deposit. To the extent the results contained high grades, these would not affect a mineral resource estimate because their impact would have been neutralized through top-cutting.
We find that a reasonable investor with this information would not conclude that the drill results would reasonably be expected to have a significant effect on the value of the Canaco shares (at paras 98 and 99).
In this instance, the drilling results were not material because “they did nothing more than add to the understanding of the continuity of the deposit” (at para 98). The BCSC however, was careful to note that where the issuer is a junior exploration issuer with no revenue, and the drilling results in question relate to the main property, the “information associated with drill results is more likely to be material than for a larger issuer with more properties and more diversity to its business” (at para 101).
The BCSC added that although facts or events may not appear to be material when viewed in isolation, it is open to the BCSC to look at the cumulative effect of each of the separate facts or events to determine whether there has been a material change. The BCSC observed that a material change may not always be a particular point in time and that “the cumulative results may form a part of the material facts about the issuer that is disclosed over time through periodic and continuous disclosure to establish a complete picture of progress of the drilling program” (at para 104).
The Directors Did Not Fail to Act in the Best Interests of the Corporation and Therefore Did Not Act Contrary to The Public Interest
The uncertain outcome of an upcoming meeting with the Minister of Mines together with the expiry of a hold period in connection with a recent private placement and the potentially material drilling results from another one of Canaco’s properties left little opportunity for the directors to issue stock options to optionees. At a duly called meeting of the board on November 29, 2010, the directors approved the issuance of stock options, although they did not vote on the price until later.
On December 4th, Smith sent around a draft of the news release with respect to the drilling results for the eight holes. Board members and management discussed whether the drilling results should be disclosed together in one news release, or whether they should stagger the news releases because:
- Smith was scheduled for a road show immediately after Christmas, and the Board felt it was important to maintain buzz about the company;
- Releasing such positive drilling results all at once might motivate the parties who had made a bogus claim in the heart of the Magambazi property to re-ignite their fight; and
- It would encourage those investors who were a part of the private placement to hold on to at least part of their stock, which would be free trading as of the date of the first news release, December 6, 2010.
The BCSC’s Conclusion
The BCSC concluded the drilling results for holes the eight holes did not constitute a material change for the following reasons:
- All of the holes were “infill holes” drilled in the spacing between previous drillholes;
- The results from such previous drillholes had been disclosed in prior news releases;
- The results were from the holes drilled within the known boundaries of the Magambazi deposit that had been announced in a May 2010 news release which defined the strike area;
- None of the eight holes extended the boundaries of mineralization previously established and disclosed;
- The individual results for holes 84 to 98 merely confirmed the continuity and consistency of the structure and grade of the mineralization;
- Specific mineralization had been previously disclosed in news releases in May 2010 and July 2010; and
- Where there were exceptions, i.e. where the results indicated very high grade mineralization, Smith, as the qualified person, considered it an anomalous result that would be eliminated through top-cutting. The process of top-cutting was detailed in the relevant news release.
It is interesting to note there are some who would not consider it appropriate to stagger news releases with such good news, notwithstanding the fact the subject was not material. The executive director of the BCSC alleged Canaco “kept prices high by staggering the disclosure of the drill results” (at para 113), but failed to produce any evidence.
In their decision, the BCSC concluded that the fact Canaco had staggered its news releases had no relevance to the allegations or to the question of materiality. The BCSC observed that if anything, the allegations “seem to imply some sort of market manipulation activity, of which there is no allegation and no evidence” (at para 120).
Following the recent settlement in Re Lambert, 2013 ABASC 338, where the Alberta Securities Commission argued Lambert had acted contrary to the public interest by purchasing securities of Daylight Energy Ltd. with the knowledge of an undisclosed material fact, it is curious that the BCSC did not allege that staggering the news releases was contrary to the public interest. It is possible that framing the allegation with respect to section 85 of the Act in the context of the public interest may have succeeded.
In summary, where drilling results merely confirm the continuity of geological data already disclosed, drilling results will not automatically constitute a material change requiring an immediate news release. Even though some of the results were described in the news release as “spectacular new drill results”, the BCSC found that the language was irrelevant as it did not alter the fact of whether or not a particular fact was material or not.