SETTING NEW STANDARDS — What’s at stake

Mining’s survival tied to public confidence and acceptance Statistics are poor tools for telling the story of mining’s enormous contribution to Canada. Numbers have little romance, and few Canadians are aware that in 1997 the minerals and mineral-processing sector contributed $26.2 billion to the country’s gross domestic product. That same year, total direct mining, smelting, refining and purchases of mining goods and services contributed $42.3 billion to the economy, about 6% of total gross domestic product.

Nor are many people aware that Canada is the world’s centre for mining financing, representing 48% of total global equity raised for exploration and mining. In 1997, Canadian financial institutions raised $6.7 billion ($4.8 billion equity and $1.9 billion debt) for the global mineral industry. That same year, the shares of more than 300 mining companies comprised about 27% of trading volume on the Toronto Stock Exchange. And the Vancouver Stock Exchange, home to more than 850 mining companies, raised more than $900 million of the world’s mining exploration financing that year.

Canada’s mining achievements are many, and are cause for national pride. But in 1997 a shadow was cast over the industry’s reputation by a series of mining scandals, most of which took place outside the country.

Results from a gold project in Ghana dazzled the market early that year, but an independent consultant later found that improper sampling had been used and that sample tampering was the most probable cause of the high values. A Vancouver-based company listed on an American exchange pulled fabulous drill results from a property in Nevada, but, once again, the samples were found to have been salted. And in the jungles of Kalimantan, the “largest gold deposit in the world” was found to be a fraud, with placer gold systematically and scientifically added to samples for a period of years.

Public confidence in the mining and investment sectors were badly shaken in 1997, as the fallout hit the pocketbooks and retirement savings of many Canadians (and Americans). Investors caught in these scandals were more than unhappy; they sought retribution through the courts by filing a series of lawsuits, some of which are ongoing.

While it is inaccurate to say that these scandals brought about the current bear market for resource stocks (weak metals prices and problems in the global economy are the main culprits), they did erode investor confidence and expose weaknesses in the Canadian regulatory regime, particularly with respect to disclosure.

Some of these weaknesses had been recognized even before the scandals occurred, resulting in efforts to bring about better reporting requirements for publicly traded companies through National Instrument 43-101. The 1997 scandals heightened the need for this national disclosure policy, which is expected to be released for final review next year. They also served as an impetus to the formation of a joint task force between the Ontario Securities Commission (OSC) and the Toronto Stock Exchange (TSE).

The task force was co-chaired by Morley Carscallen, the OSC’s vice-chairman, and John Carson, senior vice-president of market regulation for the TSE. The remaining members were selected so as to provide representation from mining companies, including juniors, and the brokerage and legal communities. They are: David Beatty, vice-president of Yorkton Securities; Robert Cook, director of market surveillance for the TSE; mining consultant John Drury; James Gill, president of Aur Resources; David Harquail, vice-president of Franco-Nevada Mining; Neil Hillhouse, chairman of Orvana Minerals; consulting geologist Ed Kimura; Kathryn Soden, manager of market operations for the OSC; and Steve Vaughan, partner, Aird & Berlis.

The task force spent nine months on a comprehensive review of the mining industry and how it is financed. Its mandate was to review the standards governing the conduct of mineral exploration programs and disclosure of results, and to make recommendations for improving these standards — all with a view to restoring investor confidence. And it had to do all this without compromising Canada’s ability to remain a world leader in mining and mine financing.

Earlier this summer, a draft report containing 55 recommendations was released for public comment. Its core recommendations — namely the “Qualified Person” concept and licensure for geoscientists, and the need for best industry practices, higher disclosure standards and improved regulatory oversight — have garnered widespread support from the mining industry and investors.

However, since the report was released, earlier this year, concerns have been raised about the responsibilities, duties and liabilities of the Qualified Person; about the costs of meeting the new higher standards; and about the work that remains to be done to ensure licensure for geologists in a way that would assist their national and global mobility.

The task force recommendations generated plenty of formal and informal discussion, in a variety of public forums. Investors made it clear that they wanted perpetrators of mining scams punished. They made it known that they wanted better-quality research from analysts and better disclosure from mining companies.

Mining professionals wanted their efforts to restore confidence matched by the investment community and regulators. The Canadian Institute of Mining, Metallurgy and Petroleum (CIM) articulated this point in its submission to the task force (published in the February 1998 issue of CIM Bulletin):

“While the minerals industry accepts its responsibility for increased security against fraud and negligence, CIM believes that the brokerage and investment industry should share in this responsibility, particularly with respect to those junior companies where the potential for misleading and fraudulent activities are greatest. The interpretation of data, the formation and publication of opinion and the subsequent recommendations to clients without any degree of professional accountability should be as much a concern to the task force as potential misrepresentations by mineral industry professionals.”

The CIM recommended, among other things, that analysts be qualified as professionals or “competent persons” under the provincial associations of professional engineers and geoscientists.

The mining industry also sent a clear message that it did not wish to be saddled with expensive, complex and unworkable rules.

The job facing the task force now is to sort through all these comments and prepare a final report. Some changes are expected, including recommendations governing the conduct of analysts. For investors, the codes and guidelines will ensure consistency and accountability and provide a yardstick to measure both a company’s technical performance and the quality of its disclosure. At the end of the day, investors should have better tools to do their own due diligence and more information on which to base their investment decisions.