SETTING NEW STANDARDS — Questions & Answers

Q1.We realize that the final report will not be ready until sometime early next year. However, could you comment on the general response to the report and its key recommendations? Will these comments be made public in the final report?

John Carson: We were really pleased with the overall response, both because we received a lot of comment letters — over one hundred, from a wide range of constituents — and because of the great depth of the responses. Many of them were incredibly detailed and very valuable in terms of sizing up the recommendations in our interim report. The comments were generally supportive, and positive about the need to increase investor confidence and to strike the task force, but we also received a number of comments that expressed concerns about, or objections to, different recommendations, or had concerns about how the recommendations would be implemented. And, yes, we do intend to publish all the comments as an addendum to the final report.

Q2.The “Qualified Person” concept, as outlined in the interim report, is broader in scope than Australia’s “Competent Person.” The increased responsibilities (to define and ensure “best practices” are followed and to “sign off” on all disclosure relating to exploration programs and mining operations) have raised concerns about the QP’s exposure to legal liability, even though the report states that directors and officers of a mining company will be legally responsible for the company’s continuous disclosure. How will the concerns of QPs be addressed?

Ken Grace: We certainly understand some of the confusion out there. People got the impression that there was a shifting of responsibility and accountability from management on to the QP. That certainly is not the case — the officers of the company and the board of directors are now, and always will be, responsible for anything the company puts out, anything the company does, and its actions. What we are doing is putting an additional onus on the management by getting them to have the QP review what they put out to the public. I think the language will be clear when the final report comes out.

Maureen Jensen: What it really means is that the onus is on the company to have qualified persons involved in their programs and involved in reviewing the public release of the work being generated so that there is, for the investing public, a level of professionalism throughout the process.

Q3.How will the Allen Report (which recommended civil liability for misleading continuous disclosure) and other national policy instruments relating to disclosure fit into the task force’s final recommendations? What will they mean for investors?

Morley Carscallen: The Allen Report for the moment is just that, a report, but it is recommending that certain legislation be put through by the various provinces to enact [its] recommendations. However, there is now, and always has been, civil liability for misleading continuous disclosure. What the Allen Report does is two things: it changes the legal approach to establishing that liability; and at the same time it provides some amelioration of the liability for the professional. At the present time, if [someone] wants to go after a geoscientist for a professional error relating to continuous disclosure, the person suing has to prove that he relied on the report that the geoscientist issued, and he has to prove that the geoscientist was negligent in preparing that report. Under the Allen Report’s statutory liability, [an investor] doesn’t have to prove he relied on the misleading report, and the professional has to show he exercised due diligence and did his job responsibly. It shifts the weight to the other side . . . this is a balancing act, because, under the present regime, it is almost impossible for anyone but a very large investor to pursue these issues. However the very thing that makes this possible can create other problems. So, under the Allen Report, professionals will have damage limitations and will get several liability. At the present time there is joint and several liability, which means that if several people are involved in a problem, a plaintiff could collect all the damages from just one person. Under this proposal, the geoscientist or whomever will be responsible only for his portion of the damages determined by the court.

National Instrument 43-101 is a disclosure document for mining companies that has been out for comment. This comment period expired about a month ago and we are now looking at a large number of comments. By the way, this is not just the OSC; it involves a national committee, which doesn’t speed things up. It lays down standards for disclosure and picks up the QP requirement for disclosure on similar terms to those recommended by the Mining Standards Task Force. The QP concept is very much a central thread in this whole thing.

Q4.The report recommends that geoscientists, and QPs in particular, belong to recognized professional associations with disciplinary powers. Now that the Association of Professional Engineers of Ontario has rejected licensure of geoscientists under the Engineers’ Act, what happens next?

Maureen Jensen: Most provinces have engineers and geoscientists licensed under the same body. Ontario and Quebec are holes right now. We need some kind of an act in those provinces because the engineers in those provinces have voted against including geoscientists. The Ministry of the Attorney General [in Ontario] has decided that they don’t want to have to have an act to define geoscientists — they say “we don’t know anything about mining, we don’t know anything about geoscientists,” so they’ve passed it on to the Ministry of Northern Development and Mines, and [Mines Minister] Chris Hodgson has written you a letter, I believe, saying they will take this up. So there are now discussions between the Association of Geoscientists of Ontario and the ministry, for the ministry to back them in having an act.

Morley Carscallen: We wrote to and met with the attorney-general while it was still in their court, and we are also supporting the geoscientists with written letters to the [Northern Development and Mines] ministry. We’ve offered to meet with them to explain why it is important to us that something be done in Ontario.

Maureen Jensen: There are recommendations in the report that talk about reciprocal recognition. What the task force is suggesting is that all these various associations should recognize members of other ones so that, particularly in mining, with all its mobility, people can report in different jurisdictions.

John Carson: They can anyway under our recommendations. Our recommendations about a Qualified Person are really directed at what type of person is qualified to author a technical report, or to supervise an operation, in the eyes of the regulators. From that standpoint, the proposed definition of a Qualified Person covers anybody who is a member of a recognized professional organization, whether it be a Canadian organization or indeed a foreign association. So we do have reciprocity in our recommendations.

Morley Carscallen: Securities regulators will accept anyone who meets the definition similar to the one in the report. And it doesn’t say that they have to be in the province, or in Canada, or anywhere else.

Q6.The experience issue keeps coming up. What exactly will the committee consider to be “experience . . . relevant to the subject matter of the project”?

Ken Grace: I think the qualifications were the second most common query I heard. The current wording is slightly changed in the final report, to reflect that people need experience, part of which has to be relevant. For example, a mining engineer registered in Alberta, after working for the last five
years in a coal mine in the Foothills, is certainly a QP from the point of view of coal mining. But he would not be a QP for designing an exploration program for gold in the Timmins area. There will be some slightly grey areas.

The big thing is for the QP is (a) the academic qualification, (b) the registration with a recognized professional organization, and (c) experience pertinent to the particular task at hand. Professional organizations require 3-5 years’ experience for registration, so he’d have the general experience. But he must have some experience specific to the work at hand.

Q7.Confidentiality agreements have sometimes hidden the sins of wayward industry practitioners, as we saw in the Bre-X salting scandal. The task force has recommended that professional associations amend their codes of ethics or professional conduct to prohibit a QP from entering into a confidentiality agreement that conflicts with the duty to report a situation that may endanger the financial welfare of the public. How have professional associations and legal experts responded to this recommendation?

Steve Vaughan: I don’t think the legal community has really zeroed in on this yet, but it is a valid recommendation because, otherwise, [problems] can be kept from the public for a considerable period of time. Our recommendations are based on discussions about the codes in the Australian model, which require that an engagement letter be entered into every time a professional [takes on an assignment] with a company, [and] which prohibit [blanket] confidentiality, so this is not something new.

Q8.On the issue of independent QPs and independent sampling, did the committee consider making a recommendation that a full technical audit (including some independent sampling) be done when an independent QP first reports a resource estimate?

Morley Carscallen: Members of the task force discussed for some time the issue of data verification, and whether we should lay down certain standards and require certain specific things to be done by the QP, independent or otherwise. The ultimate conclusion was that you cannot come up with an absolutely iron-clad, never-varies formula for what a QP must do. What we are really doing with the QP concept is to turn to the professional and say, “do what you have to do, to do your job properly,” and if that includes independent data verification, then we expect QPs to do that, or otherwise satisfy themselves. We will ask whether there was, or wasn’t, independent verification and how things were done. As the project progresses, an independent QP is much more likely than a non-independent QP to do independent verification, simply because they will come new to the project, whereas the company QP will have been involved all along.

Q9.Under what circumstances might companies be requested to do independent sampling, including twinned drill holes?

Ken Grace: It depends on the circumstances. In the case of precious metals, twinning a hole may well be included in the verification of data prior to the carrying out of a feasibility study. But in the case of other mineral commodities, say coal for example, twinning a hole may not be necessary. It will be up to the QP to decide what has to be done to satisfy himself that the data are accurate.

John Carson: We’ll have that right, but it’s important to understand that we contemplate that this will be a rare circumstance. There won’t be any pre-set parameters setting out when we would do that. It’s something we might do when there are a lot of unanswered questions combined with significant market activity.

Q10.Best practices: The task force report emphasized “the need to establish exploration and field best practices” and went so far as to recommend that interim guidelines and objectives be adopted by the TSE. Yet it did not prescribe specific methods for the industry, particularly junior companies, to follow. Nor did it recommend policies adopted by other exchanges for disclosure of assay results. In the longer term, the report challenged the industry and its various associations to “take responsibility” for self-regulation and “raise the bar” in terms of generally accepted practices. Might this self-regulatory approach become an area of weakness that could be exploited by unscrupulous operators, and aren’t you relying on co-operation from too many quarters?

Maureen Jensen: No [to the latter]. This question has to be looked at in terms of the whole QP concept as put forward. And that is, for all of these practices, there will be a professional involved in all of the activities, including independent QPs at specific times, in the life cycle of a project. So instead of a laundry-list of all the things to do — which is impossible for the wide range of projects that the industry is involved with — we’re relying on qualified professionals to report in a specified manner, and to follow best practices.

Ken Grace: The task force felt, quite correctly, that it should not specify how far apart samples should be, or how they should be taken, or whatever. The fact that there is a best practices guideline [in the interim report] is because the task force felt there is a gap at the moment, until the industry comes up with something more specific.

Neil Hillhouse: I think the interim guidelines provide a straightforward and practical guide for people in the field to do a job properly, so the data are reliable without a whole lot of detail and rigidity built into the process. Some practices are simple, yet very important, such as how to take samples so they really are representative. I think the fine line we’ve tried to walk here is to avoid having a process of bureaucratic regulation, because a lot of the effort of the industry person then becomes defensive. Our intent was to provide assistance to ensure quality of data, and, on that basis, what we have is worthwhile.

Q11.Developing best practices: How does the TSE and OSC propose to monitor the mining industry’s response to their “best practices” challenge?

Maureen Jensen: Internally, we’ll look for the employment of best practices in the reports we get from companies, not just in technical reports filed for listing, but in continuous disclosure documents. So we’ll be constantly looking for that. On the outside, we’re seeing that it’s not appropriate for a group such as this to develop those guidelines. It really is up to the industry practitioners because they will be the ones who will have to live and work with them. I agree with Neil: if they are too specific, the field practitioners will be doing nothing more than going through checklists. So I’m trying to work with various industry associations that will be involved in implementing some of these recommendations and developing practices which are reasonable and high-level and which will guide the practitioner in developing quality programs. The Canadian Institute of Mining, Metallurgy & Petroleum (CIM) is one of those organizations.

Morley Carscallen: We’ll keep an eye on what the developments are in the profession, and then determine whether we’re satisfied that problems aren’t arising. Through our employees who are professionals, we would keep a handle on what’s going on.

Q12.There are ways of testing to see if you are, for example, drilling and sampling at an adequate spacing, and if you’re taking a large enough core sample. Is it reasonable to impose some sort of requirement that people do go back and check on this kind of thing, to drill part of their fence on a narrower spacing to see what the variability is?

Maureen Jensen: That’s the responsibility of the professionals involved with the program. If you’re bringing a report in, either to the OSC or the TSE, when you’re reporting your reserves and resources, or whatever you’re doing, you have to demonstrate that you applied professional principles — that it is a logical spacing, that you have done some verification. That’s all part of it, but I don’t think that can be regulated — that has to come from the p
rofessional. That’s the whole reason for being a professional.

John Carson: This whole objective of raising standards and credibility can only work if the industry directly participates and carries it out. If it’s just top-down from regulatory bodies, it will not work.

Ken Grace: If you use the terminology in the guidelines, that the spacing of the drill holes and the size of the holes be appropriate to the material being sought and the circumstances — so the QP has to use the appropriate spacing, core size, drilling method, et cetera.

Q13.Costs of compliance: Have concerns been raised by exploration companies about the cost of complying with the recommendations?

Neil Hillhouse: I think it’s important to realize that a lot of companies already comply pretty much with this kind of practice. We looked back at some of our previous reporting, for instance, and saw there were areas where we wouldn’t have met some of the proposals. But we met most of them, and even exceeded them in some cases, and I think a lot of other companies would have a similar experience. So I don’t think it’s onerous to comply with the best-practice guidelines, particularly if you have professionals on staff and have generally been following that kind of practice anyway. The practical application of how this is going to work will really be determined by the regulators, because they, over a period of time, will determine how the system is applied. The regulators will determine if it’s applied in such a way that the whole industry becomes very defensive and therefore unproductive, or whether it’s applied in a way that emphasizes the importance of best practices.

Q14.Reserves and resources: Will companies be required to conform to the CIM’s definitions in all disclosure documents? And will contained-metal estimates (ounces of gold, or pounds of metal) be explicitly excluded from the definition of reserves and resources?

Ken Grace: With respect to the CIM’s definitions, the answer is yes. They are not perfect; they have things even I disagree with, but it is not up to the task force to draw up a set of definitions. Rather, the idea is to have national definitions for resources and reserves done by a national body like the CIM, especially one that fits the international definitions. In this matter I would hope that as, and when and if, the CIM makes any changes, it would be incorporated automatically into the rules and regulations.

Maureen Jensen: As for contained metal, the disclosure guidelines in the appendix of the interim report — and it will be in the final report — talk about not using contained metal, and if you do, it has to be backed up by actual tonnes and grade.

Morley Carscallen: From a securities regulator point of view, we will have that same requirement. And, just as we do in other areas, we look to the professions — the CIM in this case — to establish the standard. Our problem is that the CIM definitions weren’t written with a view to be included in a rule [for regulatory purposes].

Q15.Data verification: The “best practices” guideline recommends that companies should submit blanks and standards to the laboratories they are using, but does not recommend routine submission of duplicate samples except for “duplicate assaying at other facilities.” Would you recommend submission of duplicates as well as blanks and standards, and would you also recommend quantitative (that is, statistical) examination of analytical quality control?

Ed Kimura: One of the things we have come up with is quality control programs in the early stages of exploration. For example, if a company is in a foreign jurisdiction, doing trenching programs or maybe drilling four or five preliminary diamond drill holes, there are ways and means of doing quality control to test for the accuracy, precision and contamination from the laboratory they might be using. This will perhaps get away from sending 5% of samples as duplicates to another lab that is accredited.

Then there is the other aspect of having a full-blown quality control program on an advanced project, and if companies follow these procedures this will end up cutting their overall costs in the long haul. By that, I’m saying that if you have the wrong assaying method, or contamination in the lab, you can end up re-assaying a whole batch of samples, which would, in the long run, cost the company a lot of money. So following this quality control program, both at the early stage and at the advanced stage, will be helpful.

Q16.The guideline has a series of recommendations for checking analytical variability, but no corresponding recommendation for checking sampling variability. Would you recommend routine resampling to determine the variability introduced in the sampling phase, or should that be left to the QP?

Ed Kimura: By sampling variability, you’re talking about the assay precision, and that’s also covered in the guideline that’s coming out. You do that with duplicate sampling. For instance, you could be riffle-splitting your sample into two, or, if you’re in a soil sampling program, you could take duplicate samples right at the soil sample site and submit both of them, with different sample numbers, to determine what kind of variability will exist.

Ken Grace: The matter of sampling variability has been addressed in the coming guidelines.

Q17.Analysts: The role of mining analysts is given some attention in the task force report, particularly the requirement to distinguish between information disclosed by the company and their own opinions and projections. The report also recommends that analysts comply with professional conduct standards established by the Association for Investment Management and Research (AIMR), whether they are members or not. In simple terms, what are those standards? And does the association have disciplinary powers?

John Carson: First of all, it’s important to note that not all research analysts are members of AIMR, a professional designation they can obtain by qualifying and passing an exam. Nevertheless, our recommendation is that whether an analyst is a member or not, his firm should ensure that he does follow the code of ethics and professional conduct that is set out. Describing those standards in simple terms is difficult because, as with many codes of conduct, they do go on at considerable length. But as you would expect, it covers the code of ethics and then goes on to talk about things such as [the analysts’] relationship with, and responsibility to, their clients. It also says that members should distinguish between facts and opinions in research reports, which is also addressed in the interim report. Yes, they have disciplinary powers, but we are not really looking to the AIMR’s disciplinary powers, as it is essentially an American organization with some members in Canada. In our report, we’re looking to brokerage firms in Canada who employ analysts to ensure that they follow the code of ethics and standards of professional conduct that are set out.

Q18.Why hasn’t the task force recommended that analysts and their employers disclose any investment in, or relationship with, the companies mentioned in research reports?

John Carson: All we can say at this point is that that is a subject we are addressing in the final report.

Q19.TSE market surveillance: Some have suggested that the TSE did not have sufficient technical expertise and resources to cope with the flood of junior companies that sought listings on Canada’s premier mining exchange during the last bull market. Among the recommendations in the report is one calling for a surveillance unit to monitor the quality of disclosure of public companies and their ongoing compliance with listing requirements. Is this unit in place and ready, willing and able to cope with the next rush of juniors seeking the prestige of a TSE listing?

John Carson: First of all, we’re not expecting to have a rush of juniors, having just raised our listing standards. No, the unit is not in place. The
final report isn’t out yet and the recommendations have yet to be made final. Action will follow the release of the final report, but it is important to know that we’ve started to scrutinize the content of press releases more closely, using the guidelines set out in the interim report.

Maureen Jensen: There has been an education process to make people aware of what should be in a release, and to try and bring out more information — and it is working.

Q20.New listing requirements: The TSE has tougher listing requirements in place now than a year ago. Some concerns have been raised that junior mining business will be lost to other Canadian exchanges, as happened a few decades ago. Are these concerns legitimate, or is the TSE merely “raising the bar” with respect to the quality of its listings across the board?

John Carson: The TSE is positioning itself as the senior market, and we don’t purport to cover all of the segments in the marketplace in terms of a place to list and trade securities. We fully recognize that there is an infrastructure in place in Canada to support the raising of venture capital and the financing of junior companies through the western markets and the Canadian Dealing [Network] here. We really look to those markets to perform those roles, and when a company has reached an appropriate stage of advancement, then they qualify to list on the TSE. The fact that not all companies list here is not necessarily a concern, as there is segmentation in the market. The different markets perform different roles.

Q21.The task force has recommended that governments expand the size, funding and scope of their enforcement units to be better able to respond to problems in securities markets and to attract and retain skilled investigators. What progress has been made by the OSC in this area?

Morley Carscallen: There are two aspects to this area. One is the criminal area — are the police being adequately funded and is there sufficient emphasis on that? — and the other is the securities regulatory side, where we have no criminal jurisdiction. What we do with people who misbehave is put them out of business. I can’t speak about what governments are doing directly with police forces. As far as OSC enforcement and resources are concerned, we are now self-funding. Our staff became our employees on the first of November, instead of employees of the government’s ministry of finance. At the moment, we’re a bit behind with people, but our first priority is to staff up.