As we noted in May, Staff of the Canadian Securities Administrators have been formulating new guidance on the issue of preliminary economic assessments (PEAs).  Last week they issued CSA Staff Notice 43-307 with Staff’s positions on a number of issues relating to PEAs.

As anticipated, four key Staff positions really stand out in this notice: (i) a PEA is not to be used as if it was a preliminaryfeasibility study (PFS); (ii) a PEA that is done concurrently with a PFS or a feasibility study (FS) will in most cases not be a PEA; (iii) disclosure of potential economic outcomes may trigger a requirement to file a technical report and (iv) assumptions and methodologies in PEAs should not be more optimistic or aggressive than industry best practice guidelines and standards.

On the first point, the essence of the concern is that a PEA is not a study that demonstrates economic viability.  Rather, a PEA, as defined in NI 43-101, is a study that “includes an economic analysis of the potential viability of mineral resources.”  A PEA will be less detailed or precise than a PFS, and will produce results at a lower level of confidence than a PFS.  The Notice clarifies that Staff may take the view that a PEA is being used as a PFS if the issuer discloses mining, “mineable” mineral resources, or uses the word “ore”, all of which have the effect of treating resources as if they had demonstrated economic viability.  Similarly, Staff may consider an issuer to be using a PEA as a PFS if the issuer uses the PEA as a basis for any next step other than a PFS, such as going directly to a FS or a production decision, or if an issuer otherwise states or implies that economic viability of the mineral resources has been demonstrated.  On this same issue Staff note that the usual cautionary statement from NI 43-101 s.3.4(e) must be included together with any disclosure of PEA results (proximate to such disclosure, each time economic analysis of resources is discussed, presented with equal prominence) and that any failure to do this may lead Staff to conclude that a PEA is being used as a PFS.

The second key point addresses an issue that we have seen in various situations.  Staff are concerned that the broadening of the definition of PEA in the amendments to NI 43-101 last June has led issuers to use a PEA to update a PFS or FS, or as an add-on to a PFS.  This comes back to the discussion in our post in May, where we noted that a PEA being used, for example, to reassess a project with an existing PFS or FS could be based upon significantly modified key variables and have a significant impact on the existing PFS or FS.  In addition, Staff are concerned that issuers could in effect use a PEA to include inferred resources in their PFS or FS, in contravention of the restriction in NI 43-101 s.2.3(1)(b).  As a result of these concerns, Staff have clarified their view that a study that is done concurrently with or as part of a PFS or a FS will not be considered to be a PEA if it (i) has the net effect of incorporating inferred mineral resources into the PFS or FS, even as a sensitivity analysis; (ii) updates, adds to or modifies a PFS or FS to include more optimistic assumptions and parameters not supported by the original study; or (iii) is a PFS or FS in all respects except name.

The technical report issue is another one that can arise in various situations.  An issuer disclosing potential economic outcomes for a material mineral project where such disclosure is not supported by a technical report may trigger the technical report in NI 43-101 s.4.2(1)(j).  Staff are of the view this requirement could be triggered by disclosure of PEA results (being economic analysis of the potential viability of a mineral project) in corporate presentations, fact sheets, investor relations materials, any disclosure on an issuer’s website, or any such disclosure posted or linked from any third party documents, reports or articles or otherwise adopted and disseminated by the issuer.

The fourth key issue focuses on Staff’s concern about the use of overly optimistic assumptions and methodologies in PEAs, diverging from industry best practice guidelines and standard and potentially resulting in misleading disclosure.  The Notice reminds issuers that the NI 51-102 provisions in respect of forward-looking information require that an issuer must have a reasonable basis for the forward looking information and highlights that in the context of PEAs, any assumption must have a reasonable basis in the context of the given mineral project.  Staff state that where they have concerns that some assumptions are overly optimistic or aggressive, they may challenge the qualified person to explain or justify the assumptions, or, failing a satisfactory justification they may ask them to revise the PEA to take a more conservative or reasonable approach.  This dovetails with the general guidance provisions of Companion Policy 43-101CP, which indicates the regulators’ expectation that qualified persons will generally use procedures and methods that are consistent with industry best practices and standards.  We believe there will be a general increase in focus on industry best practices and standards over the next while.

In addition to these key issues, the Notice addresses Staff’s views about PEA disclosure that includes by-products, the relevant experience requirement for qualified persons and the consequences of material deficiencies or errors, which is another area of regulatory focus  we believe we’re going to be seeing more often.