On October 31, 2018, the U.S. Securities and Exchange Commission (SEC) adopted a final rule (available here) that overhauls its existing disclosure requirements for mining company issuers, including royalty companies. The new disclosure requirements replace the SEC’s existing Industry Guide 7 (Guide 7), which had not been updated in over 30 years. The new rules are intended to harmonize the SEC’s mining property disclosure requirements with current industry and global regulatory practices and standards, reflecting an acknowledgement of the significant globalization that has occurred in the industry since Guide 7 was adopted. Since then, a number of key mining jurisdictions outside the United States have adopted mining disclosure standards based on the Committee for Mineral Reserves International Reporting Standards (CRIRSCO), which differ in significant respects from Guide 7.
The key changes include:
- clarifying that the mining property disclosure requirements are triggered where a company’s mining operations are material to its business or financial condition,
- requiring the disclosure of mineral resources (currently prohibited under SEC rules except in limited circumstances) in addition to mineral reserves, and
- requiring that every disclosure of mineral resources, mineral reserves and material exploration results reported in a company’s registration statements and periodic reports be based on, and accurately reflect, information and supporting documentation prepared by a “qualified person.”
SEC-registered mining companies (other than Canadian companies using Form 40-F) must comply with the new rules for their first fiscal year beginning on or after January 1, 2021, although early voluntary compliance will be permitted.
The final rule adopted by the SEC will eliminate the overlapping disclosure requirements and policies of Regulation S-K and Guide 7 by amending Item 102 of Regulation S-K, rescinding Guide 7 and creating a new Subpart 1300 of Regulation S-K, which will contain all of the mining property disclosure requirements for reporting companies. Subpart 1300 of Regulation S-K will also apply to registration statements and annual reports of foreign private issuers on Form 20-F (although not to Canadian filers using Form 40-F).
New Materiality Standard
Guide 7 currently requires mining companies to provide information on “significant” mining operations. The SEC’s staff has historically used 10% of a company’s total assets as a benchmark for what constitutes “significant.” The new rule seeks to clarify this standard by requiring disclosure if a company’s mining operations are “material” to its business or financial condition. The final rules do not prescribe any particular threshold for determining materiality but rather refer to the meaning of “material” under U.S. securities laws, which focuses on the likelihood that a reasonable investor would attach importance to it in determining whether to buy or sell the securities of the company.
In determining whether a company’s mining operations are material, the company must:
- consider both quantitative and qualitative factors, assessed in the context of the company’s overall business and financial condition;
- aggregate mining operations on all of its mining properties, regardless of the stage of the mining property, and size or type of commodity produced; and
- include, for each property, as applicable, all related activities from exploration through extraction to the first point of material external sale, including processing, transportation, and warehousing.
We expect that companies and their advisors may continue to use 10% of total assets as a guide in making materiality determinations, but should take into account all relevant quantitative and qualitative factors.
If a company owns multiple mining properties where no single property is individually material, summary disclosure will be required in respect of the company’s combined mining activities if they are collectively material. See “Specific Disclosure Requirements—Summary Disclosure” below.
Vertically Integrated Companies
The new rule clarifies that the mining property disclosure rules apply to vertically integrated companies. The assessment of whether mining operations of vertically integrated manufacturers are material, and therefore require disclosure, must be made on the same basis as for a company whose primary business is mining. Factors to be considered in making the materiality determination include whether the manufacturer derives a competitive advantage from, or substantially relies upon, its ability to source a particular mineral from its mining operations.
The rule also clarifies that royalty and streaming companies are subject to the mining property disclosure rules if the mining operations that generate the royalty are material to the company’s operations as a whole, to the extent the required information is known or generally available to the company.
Similar to a producing company, a royalty company will need to assess both quantitative and qualitative factors in determining the materiality of the underlying property. Royalty companies will need to provide the same type and amount of disclosure as companies with mining operations, but only for those underlying properties, or portions of those underlying properties, that generate the company’s royalties, and only for the reserves and production that generated its payments in the reporting period.
Royalty companies will also be required to submit a technical report for each property that is not covered by a technical report filed by the producing mine company. In this case, the royalty company may refer to the producing company’s previously filed technical report, and such a reference will not be deemed to incorporate the technical report by reference into the royalty company’s filings (meaning that the royalty company will not have liability for the technical report).
Royalty or streaming companies that do not have the access to the information regarding the underlying properties to provide the required summary or individual property disclosures or to prepare a technical report may omit this information. In this circumstance the company would be required to disclose the information to which it does have access, identify the information to which it does not have access and explain the reason why it does not have access.
The new rules require that disclosure of mineral reserves, mineral resources and material exploration results included in a company’s registration statements and reports filed with the SEC be based on the findings of a “qualified person.” While this requirement aligns with CRIRSCO-based codes, the definition of a qualified person under the new SEC rules is more flexible than the CRIRSCO standards.
A “qualified person” must be an individual who is:
- a mineral industry professional with at least five years’ experience in the type of mineralization and type of deposit under consideration and in the specific type of activity that person is undertaking and
- a member of a recognized professional organization.
The qualified person does not have to be independent from the reporting company, but the company will need to disclose whether the qualified person is employed by the reporting company. The company is ultimately responsible for determining whether a qualified person actually meets the prescribed qualifications.
Unlike CRIRSCO, the new SEC rules do not list “approved” organizations. To constitute “a recognized professional organization,” the organization must, among other things, be either recognized within the mining industry as a reputable professional organization or be a board authorized by U.S. federal, state or foreign statute to regulate professionals in the mining, geoscience or related field.
The rules also prescribe specific requirements for recognized professional organizations, including that the professional organization maintain standards of competence and ethics and have and apply disciplinary powers against members. No minimum education requirement is prescribed for qualified persons. We expect that, at least initially, most companies will look to the CRIRSCO list of organizations when assessing whether the membership in a professional organization qualifies.
Companies with material mining properties will be required to obtain a dated and signed technical report summary from the qualified person, which must be filed as an exhibit to the relevant SEC filing when the company is disclosing for the first time mineral reserves, mineral resources or material exploration results or when there has been a material change from the last technical report filed for the property. The requirement to obtain a technical report summary does not apply to exploration results.
The new rules clarify that a third-party firm that employs qualified persons may sign a technical report without naming the individuals who prepared the summary.
The SEC filing must identify the qualified person(s) or third-party firm who prepared the technical report summary. If a technical report summary is filed as an exhibit to either a Securities Act registration statement or an Exchange Act report that is incorporated by reference into a Securities Act registration statement, the qualified person or third-party firm would be deemed an “expert” who must provide his or her written consent as an exhibit to the filing. In such situations, the qualified person or third-party firm would be liable as an expert for any untrue statement or omission of a material fact contained in the technical report summary under Section 11 of the Securities Act.
To further align SEC standards with CRIRSCO standards, the new rules permit disclosure of exploration results, and require such disclosure of exploration results only to the extent it is material for investors. In assessing whether exploration results and related exploration activity are material, a company should consider all facts and circumstances, such as the importance of the results in assessing the value of a material property or in deciding whether to develop a property, and the particular stage of the property. If any disclosure of exploration results is made, the company must provide the disclosure specified by the rules.
Under the new rules, companies may disclose exploration targets in their SEC filings but, if a company chooses to do so, such disclosure must include certain specified cautionary and explanatory statements.
“Exploration results” are defined as data and information generated by sampling, drilling, trenching, analytical testing and other similar activities undertaken to investigate a mineral prospect that is not part of mineral resources or mineral reserves.
Disclosure of Mineral Resources Now Mandated
Guide 7 has historically prohibited disclosure of mineral resources in SEC filings unless foreign or state law requires disclosure or if the information has been provided to an acquiror in the context of an acquisition, merger or business combination. In an attempt to align SEC disclosure requirements with standards in other key jurisdictions, including Canada, the new rules reverse this position and require companies with material mining operations to provide summary disclosure detailing the mineral resources for each of the company’s material properties.
The final rule defines “mineral resources” as a concentration or occurrence of material of economic interest in or on the earth’s crust in such form, grade or quality and quantity that there are reasonable prospects for its economic extraction, which is consistent with the requirement of other CRIRSCO-based codes. Mineral resources need only be disclosed if the company’s qualified person has made the determination that a mineral deposit constitutes a mineral resource.
Classification of Mineral Resources
Under the new rules and consistent with CRIRSCO standards, companies will be required to classify their mineral resources as “inferred,” “indicated” or “measured” and disclose the classification. Each company’s qualified person will be required to disclose the criteria used to classify a resource as inferred, indicated or measured and to justify the classification.
- The rule defines “inferred mineral resource” as that part of a mineral resource for which quantity and grade or quality are estimated on the basis of limited geological evidence and sampling.
- The rule defines “indicated mineral resource” as that part of a mineral resource for which quantity and grade or quality are estimated on the basis of adequate geological evidence and sampling.
- The rule defines “measured mineral resource” as that part of a mineral resource for which quantity and grade or quality are estimated on the basis of conclusive geological evidence and sampling.
Under the new rules, inferred mineral resources will not be permitted to be used as a basis to determine mineral reserves, and a qualified person would first need to obtain new evidence that justifies converting the inferred mineral resource to an indicated or measured mineral resource.
Under the new rules, disclosure of mineral resources must be based upon a qualified person’s initial assessment supporting the determination of mineral resources. “Initial assessment” is defined as a preliminary technical and economic study of the economic potential of all or parts of mineralization to support the disclosure of mineral resources. At a minimum, the qualified person’s initial assessment must include a qualitative evaluation of relevant technical and economic factors likely to influence the prospect of economic extraction to establish the economic potential of the mining property or project. Instructions to the rule provide that the initial assessment must include an estimation of the cut-off grade. The cut-off grade distinguishes between material that is going to the waste dump and material that is going to the processing plant (in surface mining) or material that is mined and material that is mined and processed (in underground mining).
The technical and economic factors to be considered by the qualified person in preparing the initial assessment include, but are not limited to, the following (to the extent material):
- site infrastructure,
- mine design and planning,
- processing plant,
- environmental compliance and permitting, and
- any other reasonably assumed technical and economic factors, including plans, negotiations or agreements with local individuals or groups, which are necessary to demonstrate reasonable prospects for economic extraction.
The qualified person would be required to use prices for each commodity that provide a reasonable basis for establishing the prospects of economic extraction for mineral resources. The qualified person must disclose the price used and explain, with particularity, their reasons, including any material assumptions. This is a notable departure from the proposed rule, which would have required the use of a commodity price that is no higher than the average spot price during the 24-month period prior to the end of the last fiscal year, unless prices are defined by contractual arrangements.
Reliance on USGS Circulars
The SEC has affirmed that use of United States Geological Survey Circular 831 and Circular 891 for resource classification is not permitted under the new rules, as the USGS classification is inconsistent with CRIRSCO-based mineral resource classification schemes.
Treatment of Mineral Reserves
The final rule adopts the CRIRSCO framework of applying modifying factors to indicated or measured mineral resources in order to convert them to mineral reserves and permits either a pre-feasibility study or a feasibility study to provide the basis for determining and reporting mineral reserves.
Framework for Determining Mineral Reserves
The final rule establishes the framework for mineral reserves determination based on the following definitions:
- “Mineral reserves” means an estimate of tonnage and grade or quality of indicated and measured mineral resources that, in the opinion of the qualified person, can be the basis of an economically viable project.
- “Economically viable” means that a qualified person has determined, using a discounted cash flow analysis, or has otherwise analytically determined, that extraction of the mineral reserve is economically viable under reasonable investment and market assumptions.
- “Probable mineral reserves” means the economically mineable part of an indicated and, in some cases, a measured mineral resource.
- “Proven mineral reserves” means the economically mineable part of a measured mineral resource.
- “Modifying factors” means the factors that a qualified person must apply to indicated and measured mineral resources and then evaluate in order to establish the economic viability of mineral reserves.
In a departure from the proposed rule, the final rule aligns the definition of mineral reserves to be consistent with the CRIRSCO standards, which includes diluting materials in reserves estimates.
In addition to these definitions, the new rules include a series of accompanying instructions regarding the conversion of mineral resources to mineral reserves.
Type of Study Required to Support a Reserve Determination
The new rules require either a preliminary feasibility study or a feasibility study in support of a determination of mineral reserves. Definitions of both “preliminary feasibility study” and “feasibility study” are substantially similar to the equivalent CRIRSCO-based definitions.
A “preliminary feasibility study” (or “pre-feasibility study”) is defined as a comprehensive study of a range of options for the technical and economic viability of a mineral project that has advanced to a stage where a qualified person has determined (in the case of underground mining) a preferred mining method, or (in the case of surface mining) a pit configuration, and in all cases has determined an effective method of mineral processing and an effective plan to sell the product. The preliminary feasibility study must include an economic analysis that demonstrates the economic viability of the project. While a pre-feasibility study is less comprehensive and results in a lower confidence level than a feasibility study, a pre-feasibility study is more comprehensive and results in a higher confidence level than an initial assessment. The rules include a set of instructions intended to reduce the degree of uncertainty involved in using a pre-feasibility study.
A “feasibility study” means a comprehensive technical and economic study of the selected development option for a mineral project, which includes detailed assessments of all applicable modifying factors together with any other relevant operational factors and detailed financial analysis that are necessary to demonstrate, at the time of reporting, that extraction is economically viable. A feasibility study may serve as the basis for a final decision by a proponent or financial institution to proceed with, or finance, the development of the project. Unlike a preliminary feasibility study, a feasibility study focuses on one particular development option instead of focusing on a range of options and includes a more detailed financial analysis.
The final rule adopts a principles-based approach in requiring companies with material mining operations that own two or more mining properties to provide summary disclosure of their mining operations.
Summary disclosure must describe the company’s mineral resources and mineral reserves at the end of its most recently completed fiscal year, by commodity and geographic area, and each property containing 10% or more of the company’s mineral reserves or 10% or more of the registrant’s combined measured and indicated mineral resources. The disclosure must also include annual production on an aggregate basis for the registrant’s mining properties during each of the three most recently completed fiscal years and certain other specified information for the company’s mining properties—such as the type and amount of ownership interests and titles, mineral rights, leases or options and acreage—in the aggregate and only as relevant. An issuer must include the amount and type of disclosure concerning its mining properties that is material to an investor’s understanding of such issuer’s properties and mining operations in the aggregate and may be presented in either narrative or tabular format. The summary disclosure must also include maps showing the location of all mining properties.
Individual Property Disclosure
Each reporting issuer will be required to provide more detailed information for each of its individual properties that is material to its business or financial condition. Among other things, this must include a detailed description of the property, history of previous operations, encumbrances on the property and the present condition of the property. These items are similar to the items required under the current rules, but the new rule will also require companies to disclose material royalty interests in properties and a comparison of its mineral resources and reserves as of the end of the last fiscal year and as of the previous fiscal year. In addition, instructions to the rule require companies to disclose material assumptions and criteria used to determine mineral reserves and mineral resources estimates.
Technical Report Summaries
The new rules will require companies to file a technical report summary as an exhibit instead of including it within the narrative disclosure. The technical report summary must be used to support the disclosure of mineral resources, mineral reserves or material exploration results for each material property. The technical report summary must include, along with extensive descriptive information about the property, the scientific and technical information that forms the basis for the disclosure.
Internal Controls Disclosure
Under the new rules, companies will also be required to describe the internal controls used to ensure that their exploration and mineral resource and reserve estimates are reliable, such as quality control and quality assurance measures, verification of analytical procedures and a discussion of comprehensive risk inherent in the estimation. The new requirements are consistent with disclosure requirements in foreign jurisdictions and CRIRSCO requirements.
Form 20-F and Form 40-F
The new rules apply equally to domestic companies and foreign private issuers. Accordingly, Item 4.D of Form 20-F will be removed, and foreign private issuers will be required to comply with the new mining property disclosure rules contained in Subpart 1300 of Regulation S-K.
However, the rules will not affect Canadian foreign private issuers that are eligible to file annual reports on Form 40-F. These Canadian issuers are not subject to the SEC’s mining disclosure requirements.
The new mining disclosure rules have a two-year phase-in period. Public issuers engaged in mining operations must comply with the final rule amendments for their first fiscal year beginning on or after January 1, 2021, although voluntary compliance with the new rules will be permitted prior to the compliance date.