Letter to the editor: Groia’s NI 43-101 Proposal Would Paralyze Industry

I read with astonishment the commentary “NI 43-101 gives false sense of security” (T. N. M., Aug. 31-Sept. 6/09). While largely correct, in fact the recommendations for yet more rigid supervision of sampling and laboratory procedures proposed by Joseph Groia and James MacNeil would encumber the industry with very significant additional costs, consume increasingly limited management time, institutionalize independent consultants more so than at present and, most importantly, achieve very little of merit.

While lawyers and consultants might find great merit in creating an ever-more-rigid regulatory environment, the impact of the National Instrument (NI) 43-101 review must be to increase shareholder confidence. The reality is that in the last decade since Bre-X Minerals, there have been very few cases of fraud in the industry and my perception is that the incidence of fraud is decreasing.

Australia is an example of a different regulatory environment, one that does not involve the production of NI 43-101 reports. For longer than NI 43-101 has been active in Canada, all press releases containing technical information have required sign-off by a qualified person (QP or competent person) being a member in good standing of a recognized professional organization. Since enactment of this simple regulation, there have been very few frauds within the industry in Australia as a consequence.

The most notable Australian fraud was the Karpa Springs event back in 1990. This fraud involved a qualified person. However, there have been very few such events since. Interestingly, Clark Easterday and brothers Dean and Lennard Ireland who were convicted for the fraud were subsequently released on appeal and no other person has ever been charged. I became aware of this fraud before Perilya Mines Ltd. announced the deception simply due to some careful sampling on the property in the weeks prior to the negative results being published. Anyone, including Perilya, could have done the same.

Southwestern Resources’ Boka property was the subject of a comprehensive NI 43-101 report by a QP and the subsequent fraud went undetected until the property had reached an advanced stage.

Would a QP and a NI 43-101 report at the time have detected Bre-X? It’s a tough question to answer in hindsight, but considering the number of well-qualified persons who visited the project and broker analysts who wrote reports on the company, I suspect that Bre-X would have passed the NI 43-101 report test at the time. The evidence of fraud at Bre-X, like Karpa Springs, was there for the observant and those with access to the information. I was convinced of the fraud before Strathcona released its report after being provided with a copy of the metallurgical report, which all too clearly showed that the gold recovered from Bre-X “ore” looked identical to alluvial gold.

Groia and MacNeil suggest that the salting of samples at Bre-X “would have required incredible technical ability.” Unfortunately, this is not the case — it simply requires persons with a dishonest disposition and a little organization.

Groia and MacNeil state that the QP should be fully independent of the party for whom they are working, such independence determined by an income test. While this concept works well for the NI 43-101 reporting regime, it would be wholly dysfunctional if applied to the regular reporting of results. Public companies are required to announce material results as and when they become available. For an independent as suggested by Groia and MacNeil to sign off on all technical press releases in an active company would likely require full-time employment, thereby failing the income test or would result in very significant delays to the issuance of reports. Such a suggestion is clearly unworkable.

The most effective barriers to fraud in an industry which is susceptible to it is not the independent 43-101 report, but a strong sense of ethical behaviour by the professionals in the industry, and swift action by professional organizations against the dishonest and criminal prosecution under existing laws. Professional ethics is best addressed through membership of professional organizations and requirements for ongoing professional education and participation in technical and educational conferences and workshops.

Unfortunately, there are still many in the industry who believe that attendance at promotional conferences such as the outstanding Prospectors and Developers Association of Canada convention is adequate for this purpose — it is not.

In summary, the NI 43-101 report procedure does not protect shareholders and provides far more information than shareholders require to reach an investment decision.

The qualified person sign-off on reports and results is, however, most important, and this mechanism to enhance shareholder confidence can be further enhanced by strengthening educational requirements within existing international professional organizations.

The proposal by Groia and MacNeil to strengthen independent supervision will not improve shareholder confidence but will create additional work for professional service personal and consultants.

This industry does not need more regulation.

— John Menzies CEO, EurOmax Resources Sofia, Bulgaria j.menzies@cmi-capital.com