The OSC recently published a Report setting out OSC Staff's findings of their compliance review of technical reports filed by mining issuers. In reviewing the findings outlined in the Report, it is clear to me that Staff is troubled by the frequency of non-compliance with Form 43-101F1. The Report should consequently be considered fair warning of the types of issues that Staff may raise when reviewing technical reports. The following highlights relevant considerations for issuers based on Staff’s observations, followed by a summary of the findings of the Report.
The Rubber Hits the Road…
Given the tone of the Report, issuers must recognize that compliance with the requirements of NI 43-101 and Form 43-101F1 are a priority for OSC Staff. The Report is intended to clarify existing disclosure requirements relating to technical reports and not to create or modify any new legal requirements or modify existing ones. That said, it is clear that Staff is of the view that the current legal requirements are not being satisfied, to varying degrees, in the majority of reports that were reviewed. For the purposes of their review, the OSC chose a representative sample of reports filed from June 2011 to June 2012. Specifically, the Report identified a non-compliance rate of 80% and sets out guidelines to assist issuers in complying with technical disclosure requirements.
NI 43-101 was first implemented in 2001, and sets out disclosure standards and requirements for disclosure of scientific or technical information made by an issuer, including disclosure of mineral resources and mineral reserves, and includes the requirement to file a technical report on a material mineral property in certain circumstances. Technical reports filed under NI 43-101 are not subject to securities regulatory review when filed, although they do form part of the issuer’s continuous disclosure record and consequently may attract statutory and common law liability.
Given the results of the Report, it may reasonably be expected that technical report reviews by the OSC in the normal course will increase and may result in refilings, additional disclosure or other actions where appropriate, which presumably may include regulatory enforcement action in severe circumstances.
The content and scope of technical report disclosure comes with its own challenges and has often been influenced by prevailing market practice. Going forward, it is unlikely that the OSC will be willing to entertain the argument that “others do it this way” given the blunt nature of Staff’s findings regarding compliance with Form 43-101F1. Consequently, Staff is cautioning issuers to review form requirements carefully each time a technical report is prepared, and appears to be pre-emptively reject the argument that the issuer relied on precedent or market practice.
In the context of a transaction, it should be anticipated that Staff will review technical reports in more detail and will be more determined to ensure that technical disclosure requirements are satisfied prior to, for example, receipting a prospectus. As we have observed in the past, the OSC may refuse to receipt prospectuses and/or require significant revisions to technical disclosure in order to allow financings to move forward. Even where regulatory concerns are ultimately addressed, as we have discussed in the past, issuers would be well-served by ensuring compliance well in advance of a proposed offering to avoid the significant time delays that may result.
Governance - Issuer Responsible for Technical Reports
Although a technical report must be prepared by or under the supervision of a qualified person or, alternatively, approved by a qualified person, Staff reiterated that the issuer and its directors and officers are primarily responsible for the disclosure in technical reports, as well as the proper use of the scientific and technical information provided by a qualified person. Staff set out that while there is no expectation that directors will review technical reports in full, issuers must satisfy section 2.1 of the Companion Policy to NI 43-101, which describes the disclosure responsibility resting with the issuer and its directors and officers.
The Report - Findings
Based on a representative sample of 50 technical reports, the OSC found that 80% had some form of non-compliance with the requirements with Form 43-101F1 and 40% had at least one major non-compliance concern. Identified concerns included disclosure deficiencies with respect to (i) mineral resource estimates; (ii) environmental studies, permitting and social or community impact; (iii) capital and operating costs; (iv) economic analysis; (v) interpretation and conclusions; and (vi) disclosure related to historical estimates. The Report also identified concerns with the content of the summary section and qualified person certificates in a number of reviewed technical reports.
Summary of Findings
The following is a summary of the most common deficiencies identified in the Report:
- Mineral Resource Estimates - Assumptions regarding “reasonable prospects for economic extraction” must be disclosed. Staff found that a large number of technical reports did not adequately disclose how “reasonable prospects for economic extraction” were established or what cut-off grade was used to estimate the mineral resource. Other deficiencies in this area included unclear disclosure of assumed metal prices and recovery rates.
- Environmental studies, permitting and social or community impact - Staff found that a number of technical reports on advanced properties did not adequately disclose environmental dangers, the social ramifications of developing the mineral project or the project’s potential impact on the surrounding community. The report emphasized that such community or social impact-related shortcomings have prevented recent projects from advancing.
- Capital and Operating Costs - Staff noted that in some cases the main components of the capital cost estimate were not provided. The Report set out that technical report disclosure was inadequate on advanced properties and emphasized that compliance under this category will not be satisfied by a “single bottom line number.” Rather, estimates for capital and operating cost expenses must be placed in context and accompanied by justification.
- Economic Analysis - A technical report for an “advanced property” must contain an economic analysis of the mineral project. In general terms, the report must clearly state and justify the cash flow forecasts that can be expected, as well as a discussion of the net present value, internal rate of return, and payback period of capital with imputed or actual interest. Specifically, Item 22(d) of Form 43-101F1 requires that a summary of taxes and governmental levies to which the project will be subject; Item 22(e) of Form 43-101F1 requires a sensitivity analysis using variants in commodity price, grade, and capital and operating costs. The Report found that a number of the reviewed technical reports did not satisfy these disclosure requirements. Further, the Report commented that the reporting of only pre-tax cash flows is potentially misleading and does not provide investors with adequate information to assess a mineral project.
- Interpretation and conclusions in the Technical Report - There is a relatively new requirement to identify and discuss any significant risks or uncertainties that could affect the reliability of the information contained in the technical report or the viability, economic or otherwise, of the project. The Report specifically identifies risks that could impact “the exploration information, mineral resource, or mineral reserve estimates or projected economic outcomes.” The Report found that many of the reviewed technical reports failed to disclose potential risks, such as the use of a new mineral processing technology or the potential impact of civil war in close proximity to the project.
- Historical Estimates - The Report identified a number of technical reports that did not satisfy the disclosure requirements in respect of the use of historical estimates. Staff noted that it is not sufficient to simply state that the historical estimate does not comply with NI 43-101 and that the cautionary language related to historical estimates must be included at every instance that a historical estimate is disclosed.
- Other Observations - The Report also identified deficiencies in the summary section and the certificates provided by qualified persons. Interestingly, in relation to the summary section, Staff suggests using the form requirements set out in section 5.4 of Form 51-102F2 Annual Information Form as a template for what to include in the summary of a technical report. Form requirements for certificates of qualified persons are set out in NI 43-101 and should be adhered to in the prescribed form.
For details of the full review see OSC Staff Notice 43-705.