Most mineral projects that proceed to commercial production do so on the basis of certain advanced technical studies. The key milestone is usually a feasibility study which demonstrates, among other things, the existence of mineral reserves. Canada’s mining disclosure rule, National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101), is largely based on the assumption that this is the route that a mining company will take. In most cases, having a feasibility study in hand is the only way for a mining company to get the substantial project financing that is required from third-party lenders in order to get a mine built and advanced to the commercial production stage.
However, there is usually an exception to every rule in life, and there are certain cases where mining companies are able to make a production decision and take a project to production without a feasibility study. For example, some companies elect to proceed to production only on the basis of a preliminary economic assessment (PEA), which can consist of an economic analysis of mineral resources (not reserves) with a greater degree of potential inaccuracy than a feasibility study. There are even exceptional cases where mining companies decide to proceed to production without completing a PEA. For example, they may only have a resource estimate and not much more than that.
This begs the question: is such an approach permissible under NI 43-101? And if so, what are some of the potential risks and pitfalls of such an approach?
What NI 43-101 says
Like its full title suggests, NI 43-101 is a mining disclosure rule. So based on that, one could argue that Canadian securities regulators have no mandate under NI 43-101 to dictate to mining companies when – or if – they should undertake certain advanced mining studies such as feasibility studies. In other words, whether a mining company does or doesn’t undertake a feasibility study should be purely a business and technical decision left in the hands of the company’s management and directors. It turns out that, while that is technically true under NI 43-101, that is not quite the whole story either. There are disclosure implications to consider.
This issue is addressed specifically in section 4.2(6) of the Companion Policy to NI 43-101, which states as follows:
Production Decision – The Instrument does not require an issuer to file a technical report to support a production decision because the decision to put a mineral project into production is the responsibility of the issuer, based on information provided by qualified persons. The development of a mining operation typically involves large capital expenditures and a high degree of risk and uncertainty. To reduce this risk and uncertainty, the issuer typically makes its production decision based on a comprehensive feasibility study of established mineral reserves.
We recognize that there might be situations where the issuer decides to put a mineral project into production without first establishing mineral reserves supported by a technical report and completing a feasibility study. Historically, such projects have a much higher risk of economic or technical failure. To avoid making misleading disclosure, the issuer should disclose that it is not basing its production decision on a feasibility study of mineral reserves demonstrating economic and technical viability and should provide adequate disclosure of the increased uncertainty and the specific economic and technical risks of failure associated with its production decision.
Under paragraph 1.4(e) of Form 51-102F1, an issuer must also disclose in its MD&A whether a production decision or other significant development is based on a technical report.
What’s a mining company to do?
What this means, then, is that if a mining company makes a production decision which is not based on a feasibility study, our securities regulators expect that the company’s mining disclosure will contain appropriate cautionary language alerting the reader to that fact and the attendant risks.
An example of such cautionary language would be in a press release where a company which has not carried out a feasibility study is disclosing that it has decided to proceed to production. Immediately following that disclosure, the following language might be appropriate:
The Company advises that it is not basing its production decision on a feasibility study of mineral reserves demonstrating economic and technical viability, and as a result there is increased uncertainty and there are multiple technical and economic risks of failure which are associated with this production decision. These risks, among others, include areas that are analyzed in more detail in a feasibility study, such as applying economic analysis to resources and reserves, more detailed metallurgy and a number of specialized studies in areas such as mining and recovery methods, market analysis, and environmental and community impacts.
Not surprisingly, one area where we see some mining issuers getting into trouble these days (e.g., being noted in default by our securities regulators) is in failing to use any such cautionary language.
Other risks to consider
Even if a mining company duly uses such cautionary language, there are a couple of things that should be borne in mind if a company decides to proceed to production without a feasibility study. For one thing, it’s clear from the overall tone of the securities regulators’ statements on this issue, and from the fact that they are monitoring disclosure and going after issuers that fail to comply, that any company taking this approach will open itself up to a sort of “enhanced scrutiny” by regulators. Mining companies who choose this route are, in a sense, putting themselves in the regulatory crosshairs and will have to be careful about their mining technical disclosure going forward.
A related point is that this can result in some rather strange and awkward situations from a mining disclosure perspective. Consider, for example, the use of the term “ore”. In section 2.2(2) of the Companion Policy, it states, “We consider the use of the word ‘ore’ in the context of mineral resource estimates to be potentially misleading because ‘ore’ implies technical feasibility and economic viability that should only be attributed to mineral reserves."
So this can put a company which proceeds all the way to production and beyond without at least a preliminary feasibility study in a rather odd position. This does not mean that such a company can never use the term “ore”, but unless and until such a company achieves actual profitable production, a company is putting itself at regulatory risk in using the term in its mining disclosure.
So is it ok under NI 43-101 for a mining company to go to production without a feasibility study? The answer is that mining companies can do it, but should weigh the risks and proceed with care.