Mining without feasibility studies risks losing projects

Mining companies that move to production without pre-feasibility or feasibility studies face risky consequences. Though forgoing studies is rare, it can lead to costly delays and regulatory issues, Alexander Pizale, a partner at Cassels Brock & Blackwell says.

Majors and mid-tier miners usually support a production decision with a National Instrument 43-101 technical report. It includes a reserve estimate and meets Canadian Institute of Mining, Metallurgy and Petroleum (CIM standards for a PFS or FS.

Skipping those studies places a greater focus on issuers, or any publicly-traded company working in the mining sector, to meet regulators’ continuous disclosure obligations.

“Issuers must spell out that their production decision did not rely on a feasibility study and outline the specific risks that may derail the project,” Pizale told The Northern Miner in an interview. “Once production begins a technical report filed before production may no longer meet NI 43-101 standards, leaving issuers potentially exposed.”

Projects proceeding to production with the conventional feasibility studies tend to be operated by juniors mining high-grade, low-capex deposits, brownfield sites near existing mills or in regions where small-scale mining is more common.

Two examples of projects that rushed into production without PFS or FS and paid the price are Campo Morado in Mexico and Nechalacho in Canada’s Northwest Territories. Farallon began mining the G-9 deposit at Campo Morado in April 2009 without a feasibility study. Nyrstar bought the asset for $293.6 million (C$409 million) in December 2010. However, it stopped operations in January 2015 due to low zinc prices and security issues. Then, in June 2017, Nyrstar sold the mine for $20 million.

Vital Metals (ASX: VML; US-OTC: VTMXF) subsidiary Cheetah Resources skipped a feasibility study to save upfront costs and began trial mining rare earths at Nechalacho in 2021 using ore sorting. It built a Saskatoon processing plant but had spent C$18 million by mid-2022 and faced overall capex doubling to C$37 million, The Northern Miner reported at the time.

With a half-finished C$55 million facility and no clear path to completion, the company placed the mine and its Saskatoon unit into bankruptcy in Oct. 2023, leaving ore stockpiled and the project stalled.

Spell it out

For mining issuers starting production without a reserve estimate backed by a PFS or FS, Pizale states that managers must clearly explain all assumptions related to cost and volume forecasts. Failing to do so leaves shareholders exposed and invites scrutiny under section 4.2(6) of the NI 43-101 Companion Policy.

“They must warn investors that ‘there is no guarantee that production will begin as anticipated,’ or ‘at all,’ or that ‘anticipated production costs and volumes will be achieved’,” Pizale said.

Section 4.2(6) stems from the Canadian Securities Administrators and is binding under provincial securities rules. Commissions such as the Ontario Securities Commission and the British Columbia Securities Commission enforce it under their Securities Acts and can mandate corrective disclosures or pursue enforcement actions.

Oversight further extends to regulators, who now urge issuers to highlight unsupported production choices in management’s discussion and analysis (MD&A) reports. They also want that noted in the MD&A’s annual information disclosures.

But even the clearest disclosure doesn’t replace an investor’s own review of the technical and economic assumptions behind a production decision. “Ultimately, investors must perform their own due diligence and cannot rely solely on issuer statements,” Pizale said.

Material facts matter

Issuers are to update technical reports once mining methods, infrastructure and cost estimates become known, Pizale warns. Failing to add specific language, such as ‘advanced property’ disclosures, can render filings obsolete and invite enforcement measures.

To stay inside NI 43-101’s guardrails, Pizale urges issuers to consult legal and technical advisers before announcing production. Ideally, they should file a new technical report once construction starts. This report must cover mining methods, project infrastructure, market studies and both capital and operating costs.

“Clear, thorough disclosure preserves investor trust and shields issuers from costly compliance breaches,” Pizale said.