NI 43-101 To Get An Overhaul

For anyone in the mining business and for many investors, the 1990s is synonymous with the Bre-X Minerals scandal.

Along with similar, smaller scams, Bre-X rode the ’90s bull market, and when the company fell after its Busang gold discovery in Indonesia proved to be a fraud in 1997 — destroying billions in investor capital — it helped take the market down with it.

And while the good times did eventually return for juniors (until the financial crisis took hold) it’s worth noting that, with the exception of Southwestern Resources’ Boka gold project, the frauds that flourished with the easy money of the 1990s were absent from the more recent bull market that peaked in 2007.

Credit for that difference goes to the regulation introduced in Canada in the wake of Bre-X– National Instrument (NI) 43-101, which mandated tough new standards of disclosure and quality control for mineral companies, all in the name of investor protection, says Robert Holland, chief mining adviser to the British Columbia Securities Commission (BCSC).

“Bre-X was the last in about a dozen major scandals (in the 1990s) — it really dwarfed the other ones — but there was a whole series of other ones before that, and to have only Southwestern in what was an extremely hot market to me is a strong endorsement that 43-101 is working,” Holland says.

Southwestern revealed in 2007 that assay results from its Boka project in China had been deliberately inflated. As opposed to Busang, the property did contain some gold, and the company was deemed valuable enough for its other assets to be taken over by Hochschild Mining at 50¢ a share. But there were other important differences between Boka and Busang — both of which can be at least partially attributed to NI 43-101.

For starters, the Boka fraud was caught internally, by the company itself.

“NI 43-101 brought a higher standard for all participants in the mining industry and in that case (Southwestern), it was actually the officers and directors that looked into the situation as opposed to the securities commissions or somebody else identifying it,” says Deborah McCombe, executive vice-president of Scott Wilson Mining Group, part of consultancy Scott Wilson Roscoe Postle Associates.

Second, Southwestern didn’t spook the market and raise questions about other exploration companies, says James Whyte, senior geologist at the Ontario Securities Commission (OSC), and that’s partially because of the investor protection afforded by the regulation.

“The problem at Southwestern meant damage control for Southwestern, but it didn’t mean damage control for the whole industry,” Whyte says, “And that, I think, is due to more careful reporting and more careful disclosure.”

That said, Holland, who is heading the first comprehensive review of the policy since it was enacted in February 2001, believes there is room for improvement. So does the industry at large.

During informal consultations with industry players — executives, consultants, lawyers, analysts, and self-regulatory organizations — that took place between February and April, the B. C., Ontario and Quebec securities commissions heard from more than 150 professionals. While the BCSC is the lead on the work, it is currently reviewing and incorporating comments from across the country, including contributions from the Alberta, Saskatchewan and New Brunswick commissions.

The first glimpse the public will see of any proposed revisions will be in April 2010, when a draft proposal is tentatively scheduled to be published. It will then be open for a 90-day public comment period, followed by further fine-tuning and review, and could be in effect by June 2011. Vancouver-based mining lawyer Brian Abraham, a partner at Fraser Milner Casgrain and a member of the Canadian Securities Administrators’ Mining Technical Advisory and Monitoring Committee, which is participating in the review, says the focus will likely be on clarifying the existing policy, rather than tightening or relaxing any of its provisions.

Overburdened QPs?

The BCSC is looking at a number of possible revisions, including reassessing technical report triggers, creating broader, more flexible rules for disclosure of previous resource and reserve estimates, and including in the instrument the flexibility to update the list of accepted foreign professional associations a QP must belong to.

But in discussions so far and in interviews conducted by The Northern Miner, a few dominant issues have emerged, namely the liability of qualified people, the form of technical reports, and consents.

Holland says that in reaction to the magnitude of the Bre-X scandal, it’s possible the regulation laid a little too much responsibility on the QP’s shoulders.

“The qualified people are bearing a lot of liability and regulatory responsibility and my personal feeling is consistent with what I’m hearing out there, (which) is that maybe that’s too much; maybe the issuer should be taking more responsibility.”

At the heart of NI 43-101 is the qualified person. All of a company’s disclosure must be based on scientific and technical information prepared by a QP, who must be a member of a recognized professional association and must have experience relevant to the project he or she is working on. In addition, the QP is responsible for reviewing and signing off on any news releases or other disclosure based on information he/she prepared, to verify that it is accurate and not misleading.

While other similar regulations governing disclosure around mineral projects in the rest of the world have a similar concept to the QP — such as Australia, which originated the concept of the “competent person,” Whyte says there is a distinction between NI 43-101 and other regulations.

“The big difference here is that there’s a qualified person that carries the can for all disclosure, all announcements,” he says. “We want to make sure that the people who are actually responsible for disclosure are the securities issuers — management and directors of the companies, rather than piling that all onto the consultant.”

However, many see consultants’ fears about liability as overblown.

“As a professional geoscientist or a professional engineer, there is responsibility for the work you do, so yes there is some liability attached to that,” says Scott Wilson’s McCombe.

President and CEO of Vancouver-based Corriente Resources (CTQ-T), Ken Shannon, a member of the CSA’s Mining Technical Advisory and Monitoring Committee since its inception in 2001, says that although he’s not a legal expert, from what he understands, the liabilities have always been there.

“Now that somebody’s stated it in black and white, all of a sudden people view that as news that there’s some new liability — or even worse, some increased liability.”

Shannon adds that it would be difficult to prosecute a QP for information contained in a standard technical report.

“Geology in particular is an inexact science,” he says. “A lot of what people do is educated guesswork combined with a bit of intuition and it’s very hard to prove that someone was negligent writing a standard, everyday geology report, unless you go out of your way to engage in criminal behaviour.”

Nevertheless, perceived increased liability has had a negative effect on the length and technicality of technical reports — detailed descriptions of properties that are triggered by various milestones and events under NI 43-101, such as issuing securities, and first-time reporting of resources and reserves or economic studies. Some QPs throw every scrap of information including assay sheets into technical reports that comprise hundreds of pages, so they can say there’s no possible way they haven’t met their duty. Keeping in mind the purpose of NI 43-101 — to improve disclosure so that investors have a clear, fully informed view of projects — current practices are impeding investors’ understanding of what these reports are actually sayi
ng, Shannon says.

“A full, true and plain disclosure is what regulators are trying to get to and gigantic reports that take days to wade through. . . for the average person to download that off the Internet and make any sense of it is just hopeless,” he says.

Shannon adds that the original concept of NI 43-101 called for summary reports of much more detailed underlying information. “All the investors are looking for is summary information that meets some kind of test of quality.”

As QPs vary in their interpretations of how far they must go to do their due diligence under NI 43-101, greater clarity in the instrument could encourage simpler, more investor-friendly reports, says Latin American Minerals (LAT-V) president and CEO David Wahl.

But Wahl, a mining engineer who has worked as a consultant in the past, says it’s not just the consultants’ fears of liability that are to blame for reports being unwieldy and overly technical. It’s also the instrument itself, which requires that more than 26 individual items and multiple sub-items be addressed. Some of those items, Wahl says, mandate the inclusion of technical and analytical information that only serve to confuse investors.

“Half the time. . . unless you’ve got a PhD in geochemistry or analytical chemistry, (that information) is totally incomprehensible to the investor,” he says.

Wahl believes the policy was an “extreme” reaction to Bre-X, designed to reduce or eliminate risk to investors, and for that reason ended up being overly structured and rigid. “It actually forced the consultants to focus on the letter of the policy rather than the spirit of the policy,” he says.

And while he praises the elevation of reporting standards that’s come with 43-101, Wahl says it’s also made for expensive, repetitive technical reports that almost obscure the purpose of the report — to inform investors of the merits of the property and its worthiness of financing.

While the BCSC is looking at making changes to the technical report, it won’t likely change the level of detail required.

Instead, in response to complaints about the suitability of the form of the report for projects in advanced stages, the OSC’s Whyte says it’s likely that either the form will be modified, or a separate form tailored to advanced projects will be introduced.

“The form works for properties at early stages, up to the level of a resource calculation, but it has a lot of sections that don’t apply to production and development,” he says.

Updated consents

If there is one point on which there is wide agreement, it’s that NI 43-101’s requirement of getting updated consents from QPs is both annoying and impractical.

NI 43-101 allows issuers to reuse technical reports the next time one is triggered, as long as there have been no material changes to a property, and the company must get the consent of the QPs involved that the report is still current.

But there are practical problems with that. Like what if the company wants to raise money right away to take advantage of an opening in the market, and one or more of the QPs who wrote the report is unreachable, halfway around the world?

Scott Wilson’s McCombe has a unique perspective on the matter, having served as chief mining consultant for the OSC from 2000-07. She joined the OSC when the policy was being written and oversaw a modest revision in 2005 that served to streamline and clarify the instrument. Now on the other side of the industry divide, she admits the regulators didn’t foresee all the consequences of requiring updated consents.

“It doesn’t always work out exactly as you think when you’re developing something,” McCombe says. “Now, actually seeing the practical side of it. . . companies are on a very short timeframe when the market situation comes, so to get that technical report and the QPs gathered to provide these consents can be difficult.”

QPs are sometimes asked to provide consents for reports they wrote or contributed to a couple of years ago, McCombe says, even though they likely haven’t been involved with the project since.

“That qualified person (may be) in a position that they have to do some due diligence of the project and perhaps even go to site again and there’s quite a pressure, a stress on the QP because of that — they’re the ones that are on the line,” she says.

One source, who is well-versed in NI 43-101 but did not want to be named, suggests the need for updated consents is an interpretation of the regulators, and under the policy, should not be required for reports based on scoping, prefeasibility and feasibility studies.

“(Economic) studies speak at a particular moment in time,” the source says, adding that metals prices and predictions for metals prices, as well as other assumptions underlying such studies are always changing.

Unfortunately, the regulators have no flexibility over prospectus consents, which are mandated by the Securities Act, says the OSC’s Whyte. Technical report consents, however, do fall under the scope of the current review. Whyte, a former editor of The Northern Miner, said at a recent CIM luncheon presentation in Toronto that one idea being looked at is indeed making issuers responsible for reports being current after they are filed. However, he added that consents are vital to investor protection and that QPs shouldn’t be able to escape from expert’s liability.

If investor protection is the end goal, there are issues with the enforcement of the policy rather than the policy itself, suggests Corriente’s Shannon.

Shannon says not all technical reports are NI 43-101 compliant, even if they say they are, and would like to see more resources going towards compliance.

“The regulations are completely adequate to provide significant protection to investors and as long as those regulations are fully enforced, then we’re all set,” he says.

But not everyone agrees. While Shannon argues better enforcement is all that’s necessary, others say NI 43-101 should go further to protect investors — and by extension, the industry’s own cash flow.

“Believe it or not, people in the mineral exploration and development business want regulations that protect the public because they want an environment where they can raise money,” says the unnamed source, who has decades of industry experience.

The source says NI 43-101 should force more detailed disclosure of upstream risks such as market and metallurgical risks. While technical reports are supposed to address markets for the material in question, for example, many investors who were caught up in the skyrocketing price of molybdenum oxide leading up to last year’s peak of US$34 per lb. and crash to around US$8 in April, may not have actually understood the risks of moly’s small, specialized market, he says.

Whether or not there’s a widespread appetite for more stringent regulation, no one would argue that the costs of NI 43-101 haven’t been well worth bearing.

“What (NI 43-101) did was it established a benchmark, and yes it is difficult, it’s costly, there’s no question about that,” says mining lawyer Brian Abraham. “But was it necessary to restore some credibility in the junior marketplace and the general marketplace for mining? It sure was.”

For more information on the revisions, visit www.bcsc.bc.ca.