It is common practice in the mining industry to assess the economic viability of a mineral deposit/project at various development stages. The purpose of an economic assessment may be for internal planning purposes to allow company management to determine the priority of the project in comparison to other projects competing for management time and budget, or an economic assessment may be disclosed to the public to maintain investor interest in the activities of the company and to allow financing to be raised to advance the project.
The inclusion of Inferred Mineral Resources in economic analyses
NI 43-101 restrictions on public disclosure
Disclosure of the economic analyses of mineral projects to the Canadian public is governed by National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101). Canadian Securities Administrators have incorporated by reference into NI 43-101 the definitions of Mineral Resources and Mineral Reserves in CIM Definition Standards for Mineral Resources and Mineral Reserves (2005). In their guidance to the definition of Inferred Mineral Resources, CIM has taken a strong position against the inclusion of Inferred Mineral Resources in economic analyses that will be disclosed to the public: “Confidence in the estimate is insufficient to allow the meaningful application of technical and economic parameters or to enable an evaluation of economic viability worthy of public disclosure. Inferred Mineral Resources must be excluded from estimates forming the basis of feasibility or other economic studies.”
All of the recognized Western reporting codes agree that the confidence in the estimate of Inferred Mineral Resources is not sufficient to allow detailed mine planning and there can be no direct link from Inferred Mineral Resources to any category of Mineral Reserves. The category of “Possible Reserves” was effectively expunged from the mining lexicon late in the last century. NI 43-101 followed CIM’s guidance with a general prohibition on the disclosure of the results of an economic analysis that includes Inferred Mineral Resources under Section 2.3 (1)(b):
“An issuer must not make any disclosure of the results of an economic analysis that includes inferred mineral resources.”
Carve-out for preliminary assessments
The practical reality in the mining business is that investors want to have an understanding of the economic potential of a mineral project, even at a preliminary stage of assessment. At this early stage, a significant portion of the Mineral Resources may be in the Inferred category — particularly for deeper deposits only amenable to exploitation using underground mining methods. To restrict the economic analyses to just the Measured and Indicated Mineral Resource categories could result in a meaningless and potentially misleading result. Canadian Securities regulators recognized this investor need for information and provided a carve-out for studies at the level of Preliminary Assessments. Mining companies may disclose the results of economic analyses that include Inferred Mineral Resources at an early stage of the mineral project. “Early stage” was defined as being prior to the completion of a Preliminary Feasibility Study. There were certain conditions to the carve-out:
• Results of the Preliminary Assessment must be material to the company
• Cautionary language must be included with the disclosure of the Preliminary Assessment.
• The disclosure must include the basis of the Preliminary Assessment and the assumptions used.
• The disclosure would require the filing of a technical report supporting the Preliminary Assessment.
Proposed relaxation of restrictions in NI 43-101
Canadian Securities Administrators have proposed removing the restriction that a Preliminary Assessment could only be disclosed prior to the completion of a Preliminary Feasibility Study. If these changes to NI 43-101 are adopted, a company would be able to re-scope a mineral project that had a Preliminary Feasibility or Feasibility Study completed. For example, a Preliminary Feasibility Study of an all-open pit mining scenario could be reassessed as a Preliminary Economic Assessment of a combined open pit and underground mining operation. Under the changed rule, Inferred Mineral Resources could be included in the Preliminary Economic Assessment. One condition of this relaxed rule is that a company would have to explain to the investing public what the results of the Preliminary Economic Assessment means with respect to the previously disclosed Preliminary Feasibility Study. Should investors still rely on the results of the Preliminary Feasibility Study, or is the company completely rethinking how they may develop the project? If adopted, these changes to NI 43-101 will only take effect in mid-2011.
SEC restrictions on disclosure
Under NI 51-102 Continuous Disclosure Obligations, mining and exploration companies filing an Annual Information Form (AIF) in Canada must include all material information on their mineral projects. This may include the results of Preliminary Assessments. It is common practice for Canadian reporting companies to file their AIF with “a wrap” as their annual report with the United States Securities and Exchange Commission (SEC). Mining and exploration companies should consider the restrictions the SEC places on the disclosure of economic analyses that include Inferred Mineral Resources. Although SEC Industry Guide 7 makes some allowance for companies subject to NI 43-101, everything permitted under NI 43-101 is not necessarily acceptable to the SEC. Comment letters issued by SEC staff to mining companies on forms filed with the SEC are posted for public view on EDGAR (Electronic Data Gathering, Analysis, and Retrieval system). The SEC staff uses a combination of SEC Industry Guide 7 and accounting legislation to restrict the disclosure of economic analyses that are based on Mineral Resources as opposed to Mineral Reserves. This is particularly the case for mine production schedules or financial analyses that include Inferred Mineral Resources.
If Inferred Mineral Resources are included in the economic analysis of the Preliminary Assessment, SEC staff may require the company to refile their annual report with the Preliminary Assessment removed. Even a Preliminary Assessment that is restricted to Measured and Indicated Mineral Resources could be challenged by SEC staff if they consider there to be insufficient basis to the study, or if they perceive a significant risk that the economic results cannot be realized.
Greg Gosson is technical director, geology and geostatistics, Mining and Metals Consulting, for AMEC Americas Limited.