The legislation that led to National Instrument 43-101 (NI 43-101) was intended to protect investors from unsubstantiated mineral project disclosures like
those experienced in the Bre-X scandal. (Bre-X Minerals collapsed in 1997 after its claim of an Indonesian gold find was discovered to be fraudulent.) What
was not contemplated in the formation of NI 43-101 – and its rules and guidelines for reporting and displaying scientific and technical information by
Canadian-exchange-listed companies – was a standard for reporting and displaying the relative project cost and schedule information used in delivering a
successful project. While it is unfair to hold companies accountable to deliver their capital projects exactly to the estimated costs, there has been a gap
between the estimated and actual costs of mining projects in recent years.
We have to consider NI 43-101 to be the first step in the evolution of more comprehensive project management in the mining industry and not solely a
guarantee that the resource identified in the ground may actually be there.
One source of this problem lies in Part 1, Section 1 of NI 43-101 entitled “Definitions.” Here it states that a Qualified Person (QP) must prepare the
capital and operating cost portion of an NI 43-101 filing. According to the document, the QP must have “experience relevant to the subject matter of the
mineral project and the technical report” and that it is the issuer’s responsibility to ensure that QPs meet this requirement. However, there is nothing
specifically about the qualifications of a QP to prepare the capital and operating cost portion of an NI 43-101 filing, or at the very least standardized
guidelines for the QP to follow to support proper project management.
This is problematic, as it can lead to poor project scope definition. An oversimplified example of this is where an early NI 43-101-compliant study
underestimates the amount of labour required for a project because the skills and availability of the workers are not well understood, while inappropriate
productivity factors and unrealistic escalation factors (inflation over time) are used. How could the QP who signed off on the report have accurately
assessed the cost of labour? Poor scope definition, at this stage, in turn is linked to shortcomings in concept development and strategic management of
standard project fundamentals such as scheduling, progress monitoring and forecasting.
Mining projects can take between seven and 10 years to go from the first identifiable resource (i.e. something a preliminary study can be built on) to
commissioning. Over that time period, one would hope that the scope and subsequently the cost accuracy improve at the same rate, but that is not the case.
One of the difficulties is that – on the way from that early concept to feasibility funding – there are multiple NI 43-101-compliant conceptual and
preliminary studies that omit the engineering and research needed to more clearly define the scope and cost because QPs have no guidelines in this regard.
There is already a wealth of data available on public record through the System for Electronic Document Analysis and Retrieval (SEDAR), SEC Edgar database
and company press releases to use as a reference to vet plans at the conceptual to preliminary stages. This data offers insight into what led to past
project cost overruns or surprises, and the Canadian mining industry must turn those lessons into practical guidelines to be incorporated in NI 43-101.
The lack of clarification in NI 43-101 on QPs’ cost expertise raises questions for industry professionals: Why are certified cost engineers not required to
sign off on NI 43-101s? If NI 43-101 is revised to require certified cost engineer sign-offs, who would be crazy enough to be liable for signing off on
costs? Why are the large EPCM firms not signing off on NI 43-101s if they have the most QPs and professional indemnity insurance? What recourse do
investors have with the QPs who are signing NI 43-101s? Is their professional indemnity insurance adequate? Why does the Securities Commission not keep a
list of QPs, at least those who are filing NI 43-101s?
Looking at the current NI 43-101 guidelines and the lack of rigour on cost and requirements for fundamental project management, we should not be surprised
that investors are looking for better returns elsewhere. As a global mining leader, Canada needs to do a better job in accurately estimating costs. Nobody
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