CSA Provides Guidance on the Use and Disclosure of Preliminary Economic Assessments
The Canadian Securities Administrators (the “CSA”) recently published CSA Staff Notice 43-307 – Mining Technical Reports – Preliminary Economic Assessments (the “Notice”) which sets out the CSA’s position on several issues regarding the use and disclosure of a preliminary economic assessment (a “PEA”), as defined in National Instrument 43-101 – Standards of Disclosure for Mineral Projects (“NI 43-101”).
The economic analysis by way of a PEA is generally the first signal to the public that a mineral project has potential viability; therefore, the market views PEA results as important information. NI 43-101 defines a PEA as a study, other than a pre-feasibility study (a “PFS”) or feasibility study (a “FS”), which includes an economic analysis of the potential viability of mineral resources. PFSs and FSs, on the other hand, are more comprehensive studies which are sufficient to demonstrate the technical and economic viability of a mineral project and which, unlike PEAs, cannot include inferred mineral resources. As a PEA is a conceptual study of the potential viability of mineral resources, a cautionary statement, among other things, must be included each time disclosure of the economic analysis of mineral resources is made which indicates, with equal prominence, that the economic viability of the mineral resources has not been demonstrated.
The following is a summary of the issues raised in the Notice.
PEA as a Proxy for a PFS
CSA staff are encountering situations where issuers are: (i) representing that their PEA, or components of it, have been or will be done at or close to the level of a PFS; (ii) representing that the study is a PFS but for the inclusion of inferred mineral resources; and (iii) treating the PEA as a substitute or proxy for a PFS.
CSA staff advise that any disclosure that implies that the PEA has demonstrated economic or technical viability would be contrary to NI 43-101 and the definition of PEA and indicate that the CSA may take the position that an issuer is treating the PEA as a PFS if the issuer:
– does not include the required cautionary statement that the economic viability of the mineral resources has not been demonstrated with equal prominence each time it discloses the economic analysis of the mineral resources;
– uses the PEA as a basis to justify going directly to a FS or a production decision;
– discloses mining or mineable mineral resources or uses the term “ore”, which is essentially treating mineral resources as mineral reserves; or
– otherwise states or implies that economic viability of the mineral resources has been demonstrated.
PEA done in Conjunction with a PFS or FS
CSA staff have noted situations where issuers are preparing a PEA using inferred mineral resources concurrently with, or as an add-on or update, to their or PFS. CSA staff are concerned that this could lead to issuers indirectly including inferred mineral resources in their PFS or FS, which is prohibited by NI 43-101.
CSA staff point out that the CSA will generally consider that two parallel studies done concurrently or in close time proximity to each other are not in substance separate studies but, rather, components of the same study. Therefore, a study that includes an economic analysis of the potential viability of mineral resources that is done concurrently with or as part of a PFS or FS is not, in the view of the CSA, a PEA if it:
– has the net effect of incorporating inferred mineral resources into the PFS or FS, even as a sensitivity analysis;
– updates, adds to or modifies a PFS or FS to include more optimistic assumptions and parameters not supported by the original study; or
– is a PFS or FS in all respects except name.
PEA Disclosure and Technical Report Triggers
Issuers are reminded that they could trigger the requirement to file a technical report under 43-101 to support disclosure of the results of potential economic outcomes for the material mineral properties which is contained in the issuer’s corporate presentations, fact sheets, investor relations materials or any statement on the issuer’s website, or which is posted or linked from third party documents, reports or articles or otherwise adopted and disseminated by the issuer.
Potentially Misleading PEA Results
CSA staff expressed concern with issuers and qualified persons using overly optimistic or highly aggressive assumptions in PEAs, or methodologies that diverge significantly from industry best practice guidelines and standards for exploration and mineral resources, as this may result in misleading disclosure.
Issuers are reminded that any assumption under a PEA must have a reasonable basis in the context of the mineral project and are warned that the CSA may challenge the qualified person to explain or justify overly optimistic or aggressive assumptions, or ask the issuer to revise the PEA to take a more conservative approach.
Qualified Person – Relevant Experience
CSA staff are seeing situations where qualified persons are taking responsibility for technical reports or parts of technical reports that support the results of a PEA who do not have experience relevant to the subject matter of the mineral project and technical report.
Where the CSA has concerns that a qualified person does not have relevant experience, it will challenge the qualified person to explain or justify his or her relevant experience, or, failing that, will ask for a revised technical report from additional qualified persons.
Consequences of Material Deficiencies or Errors
Where material NI 43-101 disclosure deficiencies in a PEA are identified by the CSA, the issuer will generally be asked to correct the deficiencies by restating and re-filing the PEA. If such request is not complied with, the CSA may place the issuer on its reporting issuer default list, seek a commission order requiring the issuer to re-file the documents, or issue a cease trade order until the issuer corrects the deficiency. Issuers are cautioned that even if the deficiencies are corrected, the CSA may still pursue enforcement or other regulatory action for the original breach.
Issuers should also note that the issuance of a prospectus receipt could be delayed or withheld in the event that NI 43-101 disclosure deficiencies arise during a prospectus filing.
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