As outgoing president of the Prospectors and Developers Association of Canada (PDAC), I have had the luck during my term to experience the exploration industry go from a very deep depression in 2002 through to a satisfying resurgence. This was exemplified by the record number of people who attended our 72nd annual convention in Toronto. The more than 9,000 delegates ranged from highly technical practitioners of the exploration business through to retail investors.
However, there is potential for a dark cloud to form over all who have the best interests of the exploration industry at heart. Those who have been in exploration through thick and thin, “for richer or for poorer,” are in it for the long haul. Those who may be drawn to the industry over the short term potentially see quick money being made and want to be part of that action without necessarily taking on the inherent responsibilities. Those of us who have been around for a long time quickly recognize who fits in which category.
Over the past six years, the industry, in conjunction with governments and regulators, has taken a hard look at the way it does business. Roscoe Postle Associates, a company founded by Bill Roscoe and John Postle, was this year’s recipient of the Special Achievement Award by the PDAC, which recognized its dedicated activities raising the standards of the way industry communicates its results to investors. This work has given us National Instrument 43-101 and other regulations that enhance reporting requirements. If fully adhered to, NI 43-101 goes a long way toward providing accurate and balanced information to the public and their advisors on the risks of mineral properties. It most certainly makes property fraud much harder to perpetrate. However, NI 43-101 focuses on the technical reporting by geoscientists and not on market and financial issues.
I was surprised when a leader in the exploration business suggested that the risk to our ability to raise capital that is posed by those who would engage in illegal or unethical practices in mineral exploration or financing, should be debated at the PDAC board meeting during the convention. The significance of this board meeting is that it is open to the membership.
It was clear in the lively discussion that ensued that all agreed that those who perpetrate what are clearly illegal or unethical practices must suffer severe consequences. This is to the benefit of the honest practitioners. It was also felt that the Canadian regulators or governments had not shown the will or ability to ensure that this actually happened. As is often remarked, there appear to be no consequences suffered as a result of the Bre-X scandal except by the investors. The honest individuals in junior companies are well-aware that dishonest practitioners can ruin the business for everyone.
The question might be asked: What are the responsibilities of our community?
— The “Qualified Persons” (QPs) have to ensure that they adhere to the requirements of their professional status and the regulators’ requirements for reporting. They have to resist pressure from unscrupulous promoters to change the text of their reports.
— The professional associations need to take action when a professional does not adhere to their code. This could perhaps take the form of a warning, but severe penalties may be necessary as well.
— Legal firms and lawyers are often closely involved with company reporting and are responsible for ensuring honest and accurate reporting.
— The analysts, who are often the only independent people (other than the QP) who have visited an exploration site in the field, need to be qualified and honest in their recommendations to their clients, that is, the retail or institutional investors.
— Newsletter writers are responsible for interpreting company results for the benefit of their subscribers.
— The executives of the exploration company have to measure their actions against the long-term interest of their company and the industry. They should not exert undue pressure on the QP to alter his report to create a false sense of optimism about a mineral property.
— Regulators have to apply the rules rigorously so that “bad” practice is driven out. News releases and other communications must be in accordance with stated regulatory requirements, and for mining this means a strict application of the CIM definitions of resources and reserves in public reporting.
— The Investment Dealers Association of Canada (IDA) needs to apply its own internal standards for analysts and the firms the IDA regulates.
There are many others involved in the business, including politicians responsible for regulatory agencies, self-regulating organizations such as Market Regulation Services and the stock exchanges, industry associations (such as the IDA), and the analysts’ societies, and all of them need to take their responsibilities seriously.
A chain is only as strong as its weakest link. Consequently, a properly functioning mineral exploration securities market requires that all the above participants take their roles seriously. Some professionals in the exploration business believe geoscientists have been unfairly singled out for application of new regulations and that it is time similar efforts were applied to those involved in the financial side of the business. The geoscience profession has taken its responsibilities to heart with the development of NI 43-101 and the professional registration of geoscientists.
Even if we all live up to the above ideals, there is still no guarantee fraud cannot occur. It can and it will happen; however, with the application of standards and professionalism, it will be easier to detect.
There are also some deep flaws in Canadian regulations, and these need to be examined. Governments must listen to industry’s plea for these issues to be addressed. At present, the added rules and regulations affect the honest operators, but there has been little improvement in the enforcement with respect to the bad operators.
Regulators are poorly equipped to monitor the amount of reporting that is taking place during an upturn in the business, as is occurring at this moment. The funds available for exploration in Canada have increased more than fourfold and yet the regulators are working with the same number of staff. They need people with qualifications in mining and geoscience to read the various news releases and NI 43-101 reports to ensure that they adhere to the requirements, and to reject them if they do not.
Also, the Canadian regulatory system, with its multitude of provincial securities regulators, does not lend itself to prosecuting market fraud at the criminal level. Canada is alone in the developed world in having a multitude of regulators, with the criminal code applicable only by the federal government. This situation is unsatisfactory for both the honest companies and the investors as they watch the “bad apples” get away with breaking the rules. It must be resolved by Canadian governments in a way that reinforces the ability of regulators to exact penalties that are commensurate with the crimes committed. It is also necessary that judges stop regarding white-collar crime as victimless and not as real crime. Defrauding individual investors is criminal and should be punished as such.
The report of the Wise Persons’ Committee, set up to review the structure of securities regulation in Canada, stated that “Canada suffers from inadequate enforcement and inconsistent investor protection.” The committee recommended that Canadian governments take action to create a single national regu- lator. The PDAC agrees with this conclusion.
Canada derives tremendous benefits from its exploration and mining industry. It is a sector of the economy that is both technologically sophisticated (according to the federal government, the mining industry purchases more computers than any other) and international (of the 1,600 or so exploration companies in the world, about 1,200 are based in Canada). At the same time the mining industry is a huge supporter of the country’s infrastructure, such as rail and ports. The mining sector has worked hard to raise standards and enforce them, and now it is time for everyone involved in the industry to work together for the benefit of our financial markets so that the raising of exploration capital by Canadians sets the standard globally for securities issues.
— The author is the president of the Prospectors & Developers Association of Canada.
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