Commentary: New SEC reporting rules to ‘level playing field’

Currently, U.S. mining companies must report to investors and the public on their mineral properties in compliance with an overlapping and archaic mineral disclosure regime set out in Industry Guide 7, which was last updated in 1982. The Guide 7 regime has become counterproductive to the goals of full disclosure, and increasingly inconsistent with mineral reporting and disclosure standards used in the rest of the world.

In June, after more than 30 years and repeated efforts by various professional organizations and mining companies to modernize the rules, the Securities and Exchange Commission (SEC) has proposed to replace Guide 7 with comprehensive mineral reporting regulations.

The current system has placed U.S. mining companies at a severe competitive disadvantage in the global marketplace, as compared to their peers in other countries including Canada, Australia, South Africa, the European Union, Chile, Hong Kong and Russia, where regulators have adopted the global standards established by the Committee for Mineral Reserves International Reporting (CRIRSCO). Under the CRIRSCO global standards, mining companies can report their proven and probable “reserves” in addition to reporting on the broader category of mineral “resources” and material exploration results.

Reserves are generally defined as those mineral deposits that the company knows can be “economically and legally extracted or produced,” which must be based on a “bankable” or “final” feasibility study performed on the deposit. Such final feasibility studies require multiple years and multiple millions of dollars to complete. Mineral resources are a more broad category of mineral property that include mineral deposits that have reasonable prospects for eventual economic extraction, but which may not be at the highest confidence level required to be categorized as a reserve, because no such final feasibility study has been performed on the deposit.

For mining companies and their investors, mineral resources represent an important measure of the long-term prospects and viability of the deposit, and the company as a whole. Contrary to the CRIRSCO standard, Guide 7 generally limits U.S. mining companies from informing its investors and the public about its mineral resources in the same terms as it describes its reserves, thus artificially depriving these companies from describing the prospectivity of its properties.

There is no doubt that the outdated regulations have dissuaded mining companies from listing in the United States. As the former corporate secretary of Newmont Mining, I can attest that the regulations created a significant disadvantage for our company in demonstrating its competitive value to global investors. This is because the rules are not only more restrictive for U.S. companies, but the outdated regulatory regime also includes an exemption that allows Canadian-listed companies to ignore those reporting restrictions imposed on U.S.-listed companies.

Canadian listed companies can instead follow their own global reporting guideline (National Instrument 43-101) when they file their mineral reports in the United States. Thus, returning to the example of Newmont, the miner’s Canadian-filed peers not only have an advantage in being able to use the modern reporting standards outside the U.S., they also can adopt those same modern (and broader) mineral reporting standards in their U.S. filings with the SEC, while their U.S. counterparts have been forced to exclude resources from their U.S. filings. To add to the confusion, the SEC has had a practice of allowing U.S. companies to disclose resources and material exploration results on their websites, but not in their quarterly and annual reports filed with the SEC, thus creating contradictory statements between company websites and their public filings.

A simple comparison of Newmont’s reserves and resource reporting is illustrative. In its 2015 annual report, Newmont reported 73.7 million oz. of proven and probable gold reserves as of Dec. 31, 2015. Separately, at the same date Newmont reported “gold mineralized material of 2,192 million tons at an average grade of .017 oz. per ton.” This “mineralized material” essentially includes mineral resources that cannot be reported as such. Note that Newmont cannot report the mineralized material in terms of ounces of contained gold, as they do with reserves. This requires that the reader multiply the number of tons by the grade per ton (which Newmont cannot do in its reporting), resulting in another 37.2 million oz., or approximately one-third of the total mineral resource that Newmont owns, which it cannot report as such.

After decades under the old regime, Newmont and its peers can look forward to a new regulatory environment on the horizon.  On June 16, 2016, the SEC issued a 296-page proposed rulemaking, wherein it proposes to rescind Guide 7 and replace it with a new subpart 1300 of Regulation S-K. Once finalized, the new regulations are intended to modernize the reporting regulations governing U.S.-based public mining companies and include the following significant changes:

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Replace Item 102 and Guide 7 with a single standard requiring companies to disclose all material mining operations;
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Require companies to disclose mineral resources and material exploration results in addition to its reserves;
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Permit disclosure of mineral reserves to be based on either a preliminary or final feasibility study;
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Provide updated definitions of mineral reserves and mineral resources;
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Require disclosure for mining operations as a whole and more detailed disclosure for individual properties;
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Require that all such mineral reporting be based on, and accurately reflect information and supporting documentation prepared by a qualified person (QP); and
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Require companies to obtain a technical report summary from the QP summarizing for each material property exploration results, mineral resources or mineral reserves.

Although the proposed regulations are extensive and may impose an increased administrative burden on U.S. mining companies by requiring their technical and legal staffs to interpret and comply with a lengthy and entirely new reporting regime, it is likely that the regulations will be well received, as they are intended to provide investors and the public with more comprehensive information in better alignment with global industry standards. For that reason, although the proposed regulations would benefit from simplification in several aspects, reforming Guide 7 demonstrates a substantial step in supporting the U.S. mining industry in the U.S. and placing U.S. mining companies on a more level playing field with non-U.S. mining companies.

Comments to the proposed rulemaking are due to the SEC by Aug. 26, 2016.

— Based in Denver, Jeffrey Reeser is a member in the Energy and Natural Resources and Business Practice Groups of law firm Sherman & Howard (www.shermanhoward.com). He has more than 20 years of experience as an executive and general counsel in the mining and technology industries, and can be reached at jreeser@shermanhoward.com.