September 2013

Deficient disclosure

Securities commissions take companies to task for non-compliance

By Anna Reitman

In June, the Ontario Securities Commission (OSC) published its compliance review of technical reports filed by the province’s mining issuers. The regulator found an “unacceptable” level of non-compliance and sent a strong message to issuers and Qualified Persons that they need to further improve their disclosures.

OSC oversees some 460 mining issuers in Ontario, accounting for about 40 per cent of all the publicly listed companies in the province. Of the 50 technical reports reviewed, 80 per cent had some form of non-­compliance and 40 per cent had at least one major concern. The report outlined that non-compliant issuers should anticipate requests for refilings, additional disclosure or other actions if they have not fully met the conditions of the technical report and disclosures under National Instrument 43-101.

NI 43-101 came into force in early 2001 in the wake of the $6-billion Bre-X gold mining fraud. Though the regulation was initially viewed as ­­heavy-handed, it has since become a global quality standard.

Craig Waldie, senior geologist at OSC, said the regulator’s compliance review was intended to provide issuers with some guidance. “We were aware when doing reviews on prospectuses that there were some areas of non-compliance,” he said. The most significant areas had to do with transparency around mining resource estimates, permitting and social or community impact, capital and operating costs and economic analysis. Waldie said more problems were noted when the technical report was completed by sole proprietors, particularly those based outside of Canada.

Deborah McCombe, one of CIM’s representatives on CRIRSCO (Committee for Mineral Reserves International Reporting Standards), said that regulators’ educational efforts are predominantly focused on report authors based in Canada, so international authors may not be aware of changes to NI 43-101 that came into effect in 2011. Those changes included the reporting of calculations for contained metal, the conditions under which historical estimates can be used, and the definition of a Qualified Person, among others.

NI 43-101 is a prescriptive report, and foreign jurisdictions that do not have such rigid standards might not be as conscious of the consequences of non-compliance, noted Garth ­Kirk­ham, consulting geoscientist and chair of CIM’s Best Practices Committee. “There is a significant liability to errors and omissions, or making false or misleading statements,” he said. “Practitioners overseas might not see it that way because it is different in their country.”

CRIRSCO has members of National Reporting Organizations from Australasia, Chile, Canada, the U.S., the U.K. and western Europe, Russia and South Africa. It has developed an international template for the reporting of mineral resources and mineral reserves, and encourages more jurisdictions to adopt a CRIRSCO-style reporting standard. “The goal is to standardize the reporting definitions internationally so investors can have confidence in the information and make informed investment decisions wherever the mineral property is located,” said McCombe.

The British Columbia Securities Commission (BCSC), which oversees 1,150 mining companies, conducted its own review that was published in 2012. Robert Holland, BCSC’s chief mining advisor, said the most common deficiencies related to consents, certificates and disclaimers of responsibility. “It happens enough that we think it is not accidental,” he said. Holland said the issues identified in the OSC review are broadly consistent with BCSC findings, though he pointed out that a higher proportion of juniors are represented in the BCSC report.

Typically, companies found in breach of NI 43-101 will get a comment letter or request to refile a corrected technical report. If there are disclosure issues, a news release is required to notify investors. Where there are significant public interest concerns, a cease trade order (CTO) could be issued. CTOs are used sparingly. Of 300 companies reviewed in British Columbia last year, only six were ordered to stop trading; still, it is a figure that is high compared to previous years, said Holland. OSC did not provide a comparable statistic.

Lengthy CTOs are not common, said Kirkham, and the securities commission is open to discussion throughout the process. “It is not a one-way street,” he explained. “If you feel you have a case, there is the option of phoning and straightening it out.” But there are cautionary tales. Barkerville Gold Mines, for example, was halted by BCSC for nearly a year after the company claimed one of its projects may hold the geological potential for between 65 and 90 million ounces of gold.

Kirkham’s advice to technical report writers is to have reports peer reviewed, take a yearly refresher course on NI 43-101, and to re-read the form before and after filling it out: “Adhering to industry leading practices is a practitioner’s best defence if there is a potential problem.”

Feedback from consulting firms, legal professionals and individual Qualified Persons has been positive, said OSC’s Waldie. “They appreciate the guidance.” For investors, he added, it is important they have access to full, complete and transparent information. “I wouldn’t say there are alarmist issues identified from our review, but it is a wake-up call because the issuers are ultimately responsible for the disclosure,” he said.

Kirkham said what he has taken from the OSC review is that there is room for improvement, but he added that the level and quality of work in Canada is the best in the world. “The one thing that NI 43-101 has done that we will never know about is all the scandals that it prevented,” he said.

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