On August 16, 2012, the Canadian Securities Administrators (the CSA) published CSA Staff Notice 43-307 Mining Technical Reports – Preliminary Economic Assessments (the Notice). Staff has noted that some issuers have disclosed “preliminary economic assessments” (PEA) in circumstances and ways not always intended under the definition of PEA included in the amendments to National Instrument 43‑101 – Standards of Disclosure for Mineral Projects (NI 43‑101) that came into force in June 2011 (the 2011 Amendments). The Notice is intended to clarify Staff’s position on the use and disclosure of a PEA.
Prior to the 2011 Amendments, issuers were only permitted under NI 43-101 to disclose an economic analysis which included inferred mineral resources in an assessment undertaken at an early stage in a project and prior to undertaking a pre-feasibility study (PFS). The CSA adopted the definition of PEA in the 2011 Amendments so as to provide issuers with some flexibility in disclosing the results of early stage or conceptual economic studies (which could include inferred mineral resources) in broader circumstances, for example where alternative development options on advanced stage projects are being considered, or if the PFS or feasibility study (FS) on the project is no longer current or relevant.
However, the underlying principle that a PEA is intended to provide an initial indication as to potential economic viability of a project, but not to disclose information that should properly be part of a PFS or FS, did not change. Staff has noted that since adopting the broader concept of a PEA, some issuers have disclosed PEAs in circumstances and ways not intended or permitted under the new definition.
The Notice provides guidance on PEAs and avoiding misleading disclosure, and clarifies the following.
PEA AS A PROXY FOR A PFS - INCLUDING INFERRED MINERAL RESOURCES IN AN ECONOMIC ANALYSIS
Under NI 43-101, issuers may disclose the results of a PEA that includes inferred mineral resources if the issuer complies with certain mandated disclosure requirements. However, the disclosure of the results of an economic analysis that includes or is based on inferred mineral resources in a PFS or an FS is prohibited.
Staff has noted that some issuers are representing that their PEA, or components of it, have been or will be done at or close to the level of a PFS or appear to be treating the PEA as a substitute or proxy for a PFS. To avoid the risk of Staff challenging whether a study meets the definition of a PEA, the Notice recommends that issuers do not describe a study as a PEA unless it clearly falls into the definition, or compare their PEA or any components of it to the standards of a PFS if the study includes inferred mineral resources.
A PEA cannot be:
- used as a way to include inferred mineral resources in a PFS or an FS;
- a study prepared concurrently with or as part of a PFS or an FS; or
- used as a way to modify a PFS or an FS to include overly optimistic or highly aggressive assumptions than those included in the PFS or an FS.
In addition, the Notice provides specific examples of what Staff believes constitutes an issuer treating a PEA as a PFS. These include if the issuer:
- does not include a cautionary statement indicating that the economic viability of the mineral resources has not been demonstrated 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 an FS or a production decision,
- discloses mining or mineral resources or uses the term “ore”, which is essentially treating mineral resources as mineral reserves, or
- otherwise states or implies that economic viability of the mineral resources has been demonstrated.
PEA DONE IN CONJUNCTION WITH A PFS OR AN FS
The Notice highlights Staff’s concerns with situations where issuers prepare a PEA using inferred mineral resources, concurrently with, or as an add-on or update to, their PFS or FS, resulting in them indirectly including inferred mineral resources in their PFS or FS, contrary to NI 43-101.
The CSA clarified that it generally considers two parallel studies done concurrently or in close time proximity to each other to not be in substance separate studies, but components of the same study.
In particular, the Notice states that a study, including an economic analysis of the potential viability of mineral resources done concurrently with or part of a PFS or an 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 an FS to include more optimistic assumptions and parameters not supported by the original study, or
- is a PFS or an FS in all respects except name.
POTENTIALLY MISLEADING PEA RESULTS
Staff is also concerned that some issuers and qualified persons appear to use overly optimistic or highly aggressive assumptions in PEAs, or methodologies that diverge significantly from industry best practice guidelines and standards for exploration and mineral resources. The Notice confirms that PEAs are subject to the standards of disclosure for forward-looking information under National Instrument 51-102 – Continuous Disclosure Obligations which requires that there must be a reasonable basis for such information. As a result, the Notice states that Staff may ask the qualified person to explain or justify underlying assumptions or, in more extreme cases, require a restatement and re-filing of the PEA to take a more conservative or reasonable approach.
In the Notice, issuers are reminded that they could trigger the requirement to file a technical report to support disclosure of the results of PEAs if, for instance, potential economic outcomes for material mineral projects are disclosed in the issuer’s investor relations materials or website and are not supported by a technical report.
Staff has also seen situations where issuers are disclosing the results of a PEA that includes projected cash flows for by-product commodities that are not included in the mineral resource estimate. The Notice cautions issuers not to include cash flow projections for any commodity or part of a commodity that has not been properly categorized as a measured, indicated or inferred mineral resource in its PEA.
CONSEQUENCES OF DEFICIENCIES OR ERRORS
The identification of material NI 43-101 disclosure deficiencies will generally be dealt with through a request that the issuer correct the deficiency by restating and refiling the documents. The process of identification and remedying deficiencies in technical disclosure is typically accomplished through a detailed comment letter from Staff to the issuer and subsequent direct discussions. Where refiling is necessary, Staff will often require the issuer to issue a press release containing details about the deficiency and changes to the issuer’s technical disclosure. Depending on the degree and significance of the deficiency, and failure of an issuer to comply with a request to resolve it, the issuer may be placed on the CSA’s defaulting issuers lists and be subject to other administrative sanctions including a commission order to re-file the documents, or a cease trade order until the deficiency is remedied. In more serious circumstances, an enforcement or other regulatory action may be pursued in respect of the original breach.
CSA STAFF NOTICE 43-308 PROFESSIONAL ASSOCIATIONS
Concurrent with the publishing of CSA Staff Notice 43-307 described above, the CSA also published CSA Staff Notice 43-308 Professional Associations under NI 43-101 Standards of Disclosure for Mineral Projects, stating that the Chartered Professional Engineer (CPEng) membership designation of The Institution of Engineers Australia (Engineers Australia) can be added to the list in Appendix A of Companion Policy 43-101CP which sets out those foreign associations and membership designations which fall within the definition of “qualified person” under NI 43-101.