SEC Proposes Modernization of Mining Disclosure Rules
By Gregory Hogan, Alexander Pizale
It has been a long time coming, but the SEC has finally acknowledged that its disclosure requirements for mining properties differs significantly from the international mining disclosure regimes adopted by many foreign countries, including Canada. As a result, the SEC recently proposed revisions to the property disclosure requirements for mining companies and related guidance, currently set forth in Item 102 of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934 and in Industry Guide 7.
The SEC’s proposal is available here and open for comments.
Below is a summary of the proposed changes:
- Consolidation of the Mining Disclosure Requirements – Industry Guide 7 will be rescinded and other regulations would be introduced and amended that would govern disclosure for companies with mining operations. A new Regulation S-K subpart would govern disclosure for registrants with mining operations.
- Standard for Mining-Related Disclosure – The new regulations would clarify when disclosure of mining operations is necessary. The materiality of mining operations to a company’s business or financial condition would be determined under a uniform standard aligned with global regulatory practices. Disclosure would be required if the mining operations are material to the company’s business or financial condition. Materiality would need to be assessed on a subjective basis; however, there would be a presumption of materiality if mining assets constitute 10% or more of the company’s total assets. A property may be material below this threshold, but there is presumed materiality at 10%.
- In Canada, National Instrument 43-101 (“NI 43-101”) has moved away from a bright line test for materiality. Instead, qualitative and quantitative factors, such as the potential effect on both the market price and value of the company’s securities, should be assessed in respect of the company as a whole when determining if a property is material. This is similar to the proposed SEC approach but with no 10% or more of the company’s assets as a presumption of materiality.
- Qualified Person and Responsibility for Disclosure – A mining company’s disclosure of reserves, resources and material exploration results would have to be supported and documented by a “Qualified Person” – a mineral industry professional with at least five years of relevant experience who is a member of a recognized professional organization. Such a Qualified Person would not be required to be independent but the relationship with the Company would need to be discussed.
- NI 43-101 has similar five year relevant experience and professional organization membership requirements for a Qualified Person. Also, a Qualified Person is required to take responsibility for any technical report filed by a company on a material property. However, under NI 43-101 a technical report is often required to be independent, with exceptions where a non-independent technical report is permitted.
- Treatment of Exploration Results – The new proposals would require a company to disclose material exploration results for each of its material properties. Materiality with respect to exploration results would be determined based on their importance to assessing the value of a material property or in deciding whether to develop the property. “Material exploration results” is defined as data and information generated by sampling, drilling, trenching, analytical testing and other similar activities undertaken to investigate a mineral prospect that is not part of mineral resources or mineral reserves.
- In Canada, NI 43-101 does not mandate disclosure of exploration results (though the requirement to disclose material changes or material information may achieve the same result) other than in the context of completing a technical report.
- Treatment of Mineral Resources; New Categories – Industry Guide 7 precludes the disclosure of mineral resources in SEC filings. The proposed rules would change this by permitting a mining company to disclose mineral resources in addition to mineral reserves, if a Qualified Person is engaged to conduct the applicable analysis to establish mineral resources. Further, the proposed rules would require a registrant with material mining operations to classify its mineral resources into inferred, indicated and measured mineral resources in order of increasing confidence based on the level of underlying geological evidence
- Under NI 43-101 companies are required to report mineral resources to the extent mineral resources have been established and especially if such mineral resources have then been converted to mineral reserves. In addition, any mineral resource must be assigned to one of the 5 categories in the CIM Definitions. The definition in the proposed rule appear to be generally consistent with the CIM definitions.
- Treatment of Mineral Reserves – The proposed regulations would clarify the factors that must be considered when making a reserve determination and permit either a pre-feasibility or feasibility study as the basis for this determination.
- NI 43-101 also requires a pre-feasibility or feasibility study to define mineral reserves.
- Technical Reports - A company would additionally need to obtain a technical summary report written by a Qualified Person for each material property to be filed with the SEC. The technical report summary would be used to support the disclosure of mineral resources, mineral reserves or material exploration results for each material property. The technical report summary would include, along with extensive descriptive information about the property, the scientific and technical information that forms the basis for the disclosure.
- NI 43-101 has a similar requirement for a technical report summary document that supports disclosure of scientific and technical information. The form is similar to the form under NI 43-101.
- Specific Disclosure Requirements – Companies would have to provide both summary disclosure of mining operations and individual property disclosure in tabular format, amongst other requirements designed to standardize the process. The disclosure would have to delineate the internal controls used in estimating exploration results, reserves, and resources. A company would also have to provide a summary of its mineral resources and mineral reserves at the end of its most recently completed fiscal year, by commodity and geographic area, and for each property containing 10% or more of the registrant's mineral reserves or 10% or more of the registrant’s combined measured and indicated mineral resources.
These new proposed rules would apply to domestic and foreign companies registered with the SEC. There would be an exception for Canadian MJDS companies, but non-MJDS companies would be required to continue to comply with both US and Canadian rules.
As the mining industry is increasingly globalized, a need arises to better harmonize disclosure requirements to ensure transparency across the international platform and to avoid confusing investors. In our view, the SEC is taking a positive step towards improving the property disclosure requirements for mining registrants.
The authors of this article gratefully acknowledge the contributions of Summer Student Koen Yi.