OSC review finds juniors struggling with disclosure

Ontario’s junior mining companies are struggling to meet disclosure requirements, a review by the Ontario Securities Commission (OSC) has found.

The review looked at the Management Discussion and Analysis filings (or MD&A’s) of 100 Ontario-based junior mining issuers with a market capitalization of less than $100 million. The OSC focused on key areas of disclosure, including: discussion of operations; liquidity and capital resources; related-party transactions; and reporting on use of financing proceeds.

And the biggest problem the OSC found was failure to fully disclose information, rather than a total absence of disclosure.

In particular, companies are relying too much on boilerplate disclosure and not including enough specifics in their MD&A’s, said Kathryn Daniels, deputy director of the OSC’s finance branch.

Part of the OSC’s outreach to small- and medium-sized enterprises, the review was carried out to better understand and support smaller issuers in their efforts to raise capital and meet their disclosure obligations, Daniels says.

“We are alive to the fact that . . . our market is under pressure and finding it very difficult to raise capital,” she said in an interview.

While issuers may face sanctions for inadequate disclosure, such as having to restate their filings, Daniels says the biggest risk juniors take when their disclosure is not up to snuff is turning investors off — something they can scant afford right now.

The report identifies several areas that need improvement, including the breakdown of exploration and evaluation spending into component parts; disclosure regarding related-party transactions; and for cash-strapped issuers, details about potential sources of financing and how they plan to continue operations.

MD&A’s are meant to supplement a company’s financial statements and provide management’s viewpoint and insight into its past performance and outlook, but incomplete disclosure keeps investors from forming a complete picture of the company’s health, prospects and business practices.

For example, many companies fell short on providing information about liquidity and capital resources. Only 21% of the companies reviewed included a quantified discussion about how they intend to meet their short and long-term working capital requirements. More than half of the issuers provided limited disclosure, if any, regarding their working capital needs, making it difficult to assess whether they had enough funds for the next year.

For issuers with a working ­capital deficiency, only 26% included details on how they plan to address the problem and meet upcoming obligations.

Companies also commonly failed to break down exploration costs (37% of issuers), G&A expenses (39%) and other spending into their material components. And 70% of exploration and development-stage companies provided only limited disclosure about future plans or milestones for their projects, including expected costs to reach the next stage.

Finally, while 95 of the companies under review disclosed some form of related-party transaction, 48% didn’t adequately disclose the identity of the related party involved.

Of the 100 companies reviewed, 54% of the companies were listed on the TSX Venture Exchange. Just over half the companies reviewed were at the resource stage, while 23% were at the exploration stage and 24% at the development or production stage.

Read more, including clear, specific examples of disclosure deficiencies and how to remedy them, in the OSC’s report, available at www.osc.gov.on.ca.