Mining Standards Task Force calls for licensure, tighter rules

The Mining Standards Task Force of the Toronto Stock Exchange (TSE) and the Ontario Securities Commission (OSC) has proposed the strictest disclosure rules for mining companies of any jurisdiction in the world.

The task force’s interim report, tabled June 8, is a response to the plunge in investor confidence that followed the Bre-X Minerals scandal in 1997. The implosion of Bre-X’s share price followed revelations that estimates of the gold resource at the company’s Busang gold property in Indonesia were false, and that samples had been systematically salted with gold from other sources.

The task force was charged with examining how mineral exploration programs were carried out and how results of the programs were reported and disclosed. Led jointly by John Carson of the TSE and Morley Carscallen of the OSC, it included nine other representatives from the financial and mining industries, the TSE and the OSC.

In its report, the task force tried to tread the line between having toothless regulations and having so stringent a regime that companies might desert the TSE for others which required less paperwork. “We tried to take a balanced approach,” Carson said, “with a view to ensuring that junior exploration activity continued to be viable in Canada. The report’s recommendations bring some added discipline necessary to bring greater confidence into the system.”

“We didn’t want to end up with companies being in the reporting business instead of the mining business,” agreed the OSC’s Morley Carscallen, who shared the chairmanship with Carson.

Many of the task force’s recommendations are intended to become part of a new securities policy, National Instrument 43-101, now being developed by the provincial securities commissions for adoption across the country. They include the requirement that all disclosures made by mining companies be backed by an opinion from a “Qualified Person.” The QP would be a licensed geologist or engineer with a minimum of five years of experience.

The task force also recommended the development of a code of practice for mineral exploration, more stringent disclosure rules, and greater ability for exchanges, securities commissions and police to respond to suspicions of fraud and malpractice.

Conspicuously absent from the recommendations was a requirement for independent drilling at some stage of exploration. Twin holes drilled by Freeport McMoRan Copper & Gold (FCX-N) at the Busang property were the first public indication that something was wrong with Bre-X’s “gold deposit,” and independent drilling has sunk a number of other salting scams in recent years.

Carscallen defended the task force’s position, saying that the proposals would encourage Qualified Persons to verify any data. “Twinning a hole is a way of verifying the data that is being reported; it’s not the only way. . .

if the Qualified Person believes that drilling a couple of holes is necessary, then [he or she] will insist that they be drilled. If [the QP] can be satisfied otherwise, they won’t be. It’s a matter that professionals have to deal with.”

Kenneth Grace of Micon International, technical consultants to the task force, echoed Carscallen’s view. “The QP would have both the right and the duty, if he or she thought it was necessary, to twin a hole to verify the data,” he said.

It is generally agreed that these proposals will not eliminate fraud perpetrated by genuinely dishonest operators. “If you could regulate against crime, then society would be crime-free, and it is not,” said Carscallen, a view echoed by a president of a junior company who said “You can have all the rules you want, but if someone wants to be a crook, they’ll do it. Locks are made to keep honest people out.”

The task force made a series of proposals to develop the principle that a QP must take direct responsibility for all disclosures made by mining companies. Arguing that persons reporting on mineral exploration should be clearly qualified and accountable for their work, the task force recommended that the QP be given responsibility for the management of every mineral exploration program, for resource and reserve estimates, and for “all reports and disclosure.”

This role for the QP is a substantial expansion of the duties of a “Competent Person” in the Australian code, on which much of the task force’s proposal is modelled. Under Australian rules, a Competent Person must sign off on any resource or reserve estimate, but need not back up announcements of exploration results.

“We require the strongest support for data that’s disclosed of any jurisdiction in the world,” said Carscallen. “We go beyond any other jurisdiction in the detail that’s required to be reported as we go along.” The task force also said that in a number of instances the QP should be independent of the company. It suggested that an independent opinion would be warranted for the first publication of a resource or reserve estimate, for the announcement of a doubling of a property’s resource inventory and for valuations, market listings and first filings as a reporting issuer of securities. Those reports will be available to the public.

“The regulated content of [feasibility studies and other technical reports] will be spelled out in much more detail than currently,” said Carson, “and the reports will be on the public file.”

Accountability of the QP would be assured because his or her recognized professional organization would have the power to discipline and expel its members. “For QP responsibility to be meaningful,” said the report, “the spectre of discipline must be real.”

In that respect, the task force recommended that provincial governments amend the acts governing the engineering profession to include licensing of geoscientists by the province’s engineering body. The associations of professional engineers in Alberta, British Columbia, Newfoundland, Saskatchewan, the Northwest Territories and the Yukon already admit geoscientists as members, and legislation with the same effect is pending in New Brunswick, Nova Scotia, and Manitoba. On the other hand, the Professional Engineers of Ontario (PEO) recently rejected proposals to do the same in Ontario, following a campaign by a group calling itself Engineers for Engineering.

It was the task force’s clear second choice to have a separate act to license geoscientists in Ontario. That model, currently being followed in Quebec, may be forced on the Ontario government by the attitude of the current PEO council. David Fletcher, the PEO’s director of public affairs, said the association supported the geoscientists “in getting their own legislation and their own regulatory body. . . .but our position is that it is in the best interests of the engineering profession and the public that they do have their own separate legislation and regulatory body.” The Association of Geoscientists of Ontario (AGO), a body representing about 1,000 geoscientists in the province, welcomed the report’s conclusions and came out strongly in favor of licensure. Its president, William Pearson, said the organization was “pleased to see that both the TSE and OSC have recognized the benefit to the public of licensing geoscientists.” AGO councillor Richard Puntis suggested that licensure was the surest way to keep practitioners with poor records out of the industry.

Ontario’s Ministry of the Attorney General did not have any immediate comment on the report’s recommendations, but has been in discussions with the AGO and PEO over the licensing issue. Carscallen said his organization was in favor of the report’s recommendation: “We want to see the geoscientists accepted as professionals [and] that requires them getting into the PEO or setting up their own organization. We can explain to the government that we’ve got a problem.”

The task force also touched on another aspect of professional discipline, the nature of confidentiality agreements. It recommended that professional codes of ethics be amended to prevent licensed members from entering into agreements that conflict with the duty to report situations that could affect the pub
lic interest.

This recommendation appears to be a direct response to the incidence, during the Bre-X scandal, of companies that had approached Bre-X for a property deal being kept from disclosing their information about the Busang property by agreements they had entered into with Bre-X. One such company, Barrick Gold (ABX-T), repeatedly offered to cooperate with regulatory agencies investigating Bre-X but the offer was not taken up.

The task force suggested that the QP should be responsible for ensuring that mineral exploration projects followed accepted industry practices, and encouraged the professional engineers’ and geoscientists’ associations to develop procedural codes incorporating the industry’s “best practices.” It recommended a guideline developed by its technical consultants, Micon International, as an interim rubric for the profession.

Micon’s guideline proposes that sampling should follow standard practices, which include retaining at least a quarter of the core from drill holes, keeping splits of other samples, having secure enclosures for core logging and sampling, using accredited laboratories, and maintaining a program of data verification. The guideline did not specify the kind of verification program that would meet industry standards.

The Vancouver Stock Exchange has developed a code of standards for reporting by junior companies, mandating that check programs be reported at several stages of the exploration process. It demands that details of sampling and chemical analyses be reported, and discourages non-standard practices.

Laboratories are not licensed or accredited in Canada, except in British Columbia, where individual assayers are licensed. Canadian chemists have been developing a national certification program for the profession, and the Standards Council of Canada has started work on an accreditation system for commercial labs. The task force has recommended a 5-year period for accreditation to come into force, and an interim practice of reporting the identity of the laboratory, and its accreditation status, in reports and releases.

The task force recommended that in-house labs and labs in foreign countries be subject to duplicate checks on at least one sample in every twenty.

The committee also recommended the adoption of the Canadian Institute of Mining, Metallurgy and Petroleum’s standard for classification of resources and reserves. The CIM classification is similar to the Australasian Institute of Mining and Metallurgy’s code, the United States Bureau of Mines system, and the definitions adopted by the Institution of Mining and Metallurgy in Britain.

Regarding disclosure, the most significant recommendation was that news releases should carry many of the same details as technical reports. The report also recommended that the company regularly disclose the status of its land tenure and environmental compliance and the political and legal risks affecting them.

The task force also endorsed an earlier recommendation in a report made by the TSE’s Committee on Corporate Disclosure (the Allen Report) that new laws provide that issuers, directors and officers be subject to civil liability for misleading corporate disclosure.

The task force also took aim at investment analysts’ reports, recommending that they disclose the qualifications of the authors and distinguish between information provided by the company and the analyst’s opinions and projections. Analysts will be expected to comply with standards of professional conduct promulgated by the Association for Investment Management and Research, and to be familiar with the new reporting standards.

The committee conceded that newsletter writers and Internet stock tipsters could have a substantial influence on the public, but decided it could not exert regulatory influence over them. It recommended instead that companies and QPs be obliged to take reasonable steps to correct misleading information in the public domain, whether from analysts or from unregulated tipsters.

The report called for increased vigilance by securities regulators and the police, backed up by more resources for enforcement of the law and a national clearing house for investigations and enforcement. Similarly, it recommended that the TSE have “specific discretionary authority” to require independent verification of exploration results at any time.

The TSE and OSC did not establish any timetable for implementing the recommendations, except that a 60-day period has been reserved for comments on the report. Carscallen said he expected that National Instrument 43-101 would be adopted in a final form some time in 1999. Carson said he expected that once the final report was issued, the recommendations applying specifically to the TSE would be adopted immediately.