SETTING NEW STANDARDS — Strict national disclosure rules envisioned

“Management is pleased to report drilling at the Golden Glow prospect has intersected minable widths of gold-bearing mineralization.”

National Instrument 43-101 and its Companion Policy propose to put to an end to such flimsy assertions, requiring all disclosures, whether continuous or not, to be explicit and precise. National Instrument 43-01 is destined to replace, and expand on, National Policies 2-A and 22, both of which currently guide companies in publicly reporting their exploration, development or production activities.

The implications of the instrument were the focus of a recent panel discussion at the Toronto Stock Exchange (TSE). The panel included members of the Mining Standards Task Force, regulatory bodies, and representatives of the mining industry. The audience consisted of individuals from some of the affected companies, brokerage houses and financial institutions.

During the discussion, regulators made it clear that the new standards will apply to all disclosure, from a preliminary prospectus through to, and including, reports on production.

“The main parts of 43-101 trigger the kinds of disclosure regulators want to see in press releases, as well as when reports are necessary,” said Kathryn Soden of the Ontario Securities Commission. “It also covers situations in which independent persons are required.

“Arguably, without the previous enforcement of Policy 22, many people believed there weren’t any specific requirements for reporting in a continuous disclosure context. The new standards make it clear this will now be the case.”

The Instrument is the result of a challenge to the authority of regulators to set requirements through policy statements. As a result of that dispute, the Canadian Securities Administrators, or CSA (of which Soden is a member), began a process several years ago to reformulate their policy statements either into rules or more relevant policy statements. The team consisted of representatives from Ontario, Quebec, British Columbia and Alberta, with Commissions Chairs from across the country receiving the draft copy for consideration prior to its publication last July.

The Companion Policy, which is not legally binding, provides the mining sector with additional definitions and the views of the CSA as to the manner in which the proposed Instrument is to be interpreted and applied. It was derived principally from policies 2-A and 22, in conjunction with reports by the Canadian Institute of Mining, Metallurgy & Petroleum (CIM) and MICON International, which were submitted to the task force.

The new guidelines cover both written and oral disclosure, plus any information issued electronically. In particular, the instrument will regulate exploration activities, with individual programs overseen by a “Qualified Person” (QP).

Reference to any technical information or data must reflect the QP’s views and receive his stamp of approval. And although this need not be verbatim (a requirement under the current policies), disclosures must be based on information prepared under their supervision, with written disclosures to include that individual’s name.

Situations in which an independent QP is required include the filing of prospectuses and first-time reporting of resources or reserves. Some exemptions will apply, particularly for companies with gross revenue from mining operations averaging more than $50 million per year in each of the three most recently completed fiscal years.

One of the more extensively tackled issues in 43-101 is the reporting of resources and reserves. The recommendations apply to all disclosures and employ the definitions laid out in a CIM report published in September 1996. Soden, however, added that the CSA will continue to follow the progress of the task force and is prepared to modify the definitions to meet up-to-date specifications.

“I think we’ve confused a lot of people by parsing the CIM definitions and changing a few words, but the rule-making process strictly requires inclusion of certain words and the omission of others,” Soden explained. “It wasn’t our intent to change the definitions . . . and we are certainly going to address those concerns.”

Upon ministerial approval, the instrument will require that companies state that only reserves have demonstrated economic viability and must clearly identify the category to which the resource or reserve applies. As well, inferred resources or possible reserves are not to be added to their more advanced respective categories.

Additionally, the methods used to calculate the estimates must be clearly indicated, as well as to what extent reserves are included in the total resource.

The task force has recommended that the TSE require companies to report actual or projected production costs as defined by the Gold Institute, modified to apply to minerals generally. It also encouraged the Canadian Institute of Chartered Accountants and the Society of Management Accountants of Canada to carry out a research study aimed at standardizing the calculation and reporting of production costs.

While foreign codes will be allowed, a company must apply for an exemption in order to prove that such definitions are similar to those adopted by the task force. Estimations that could be affected by political or legal issues must be specified in both cases.

In the case of industrial minerals, the draft report states that a credible market and a feasible transportation system is to be attached to the resource. Resource calculations for diamonds and coal ought to conform to the formulas outlined in papers published by the Geological Survey of Canada and the Association of Professional Engineers, Geologists and Geophysicists of the Northwest Territories.

All reference, whether oral, electronic or written, to resources or reserves are to be based on information prepared by, or under the supervision of, a QP.

References to data in written disclosures require the following:

• a statement that the QP has independently verified the data, including sampling and assaying data underlying the information or opinions asserted; and
• a description of the nature of any limitations on such verification, and an explanation for any failure to produce an independent verification.

  Regulators will no longer be satisfied with sketchy exploration information; instead, they will require written reports to cover all bases, including:

• the results of any geochemical or geophysical surveys and a summary of any geological interpretation, when any such references to the property are made;
• a statement as to whether the issuer or a contractor carried out the surveys and investigations; and
• a summary description of practically all geological information, including sample locations, number, spacing, etc., when any sample or assay results are given. (Any significantly higher-grade sections in a lower-grade interval, plus the true widths of the individual samples or sample composites, to the extent known, must also be identified.)

  At the Setting New Standards conference, Lynda Bloom of geochemical consulting firm Analytical Solutions and Russ Calow of Lakefield Research spoke on the importance of analytical quality control, an exercise that is often poorly understood by many practising geoscientists and engineers.

  Calow noted the use of International Standards Organization certification for laboratories and, citing the mining industry’s reliance on chemical data, said the industry “should be leading this initiative and not following it.”

  Bloom observed that fraudulent chemical testing takes the form of sample tampering or phony “proprietary” analytical procedures. Tampering can best be thwarted by using tamper-evident sample bags, strict chain-of-custody procedures, and independent verification of the results. Lab accreditation and the use of accepted analytical procedures are the best defence against fraudulent analytical work.

  Both speakers agreed that adequate quality control is the surest safeguard against faulty laboratory results. Both also noted that the degree of precision needed dep
  ends greatly on the stage of exploration or development the project has reached.

  Instances in which a company may be obliged to file reports to the Securities Commission include:

• becoming a reporting issuer in a local jurisdiction;
• supporting publicly announced statements or information describing mining projects in a prospectus other than one filed under the Prompt Offering Qualification system, or a prospectus filed under that system that contains new information not contained in a previously filed report;
• an offering memorandum; and
• an annual information form or annual report that includes new information not contained in a previously filed report;

Unlike press releases, reports will require far more information from the QP, as well as an attached certificate signed, dated and sealed by the QP. The latter obligation is currently the case in several provincial jurisdictions.

Many other requirements are outlined in the report, several of which may be modified to reflect some of the concerns expressed by affected individuals, companies and groups. These comments are currently being analyzed by the CSA in preparation for drafting the final report.