Heath Lewis of Clayton Utz outlines the main changes being proposed by the Australian Securities Echange in relation to its mineralogical information disclosure regime following two years of consultation with industry. It also discusses how the new requirements compare with the Canadian and South African markets.
Access to equity capital is the lifeblood for entities involved in the mining and extractive industries. This is particularly so for explorers and developers where cash tends to flow in one direction only.
Confidence in mineralogical reporting by mining and exploration companies is fundamental to the efficient operation of capital markets for those companies, and to the availability of capital at a tolerable cost.
It follows that listed companies, investors, analysts and other participants in the capital markets have a genuine vested interest in ensuring that public mineralogical data is reliable.
Pending changes to regulation in Australia indicate a shift in regulatory emphasis of the Australian Securities Exchange (ASX) in the direction of the more rigorous Canadian regime. Reliability and integrity of information remain paramount, but transparency of information and its derivation has assumed greater prominence.
This article outlines the main changes being proposed by ASX in relation to its mineralogical information disclosure regime following two years of consultation with industry. It also discusses how the new requirements compare with the Canadian and South African markets. Please note that this article does not exhaustively cover all ASX requirements, but rather focuses on the more material changes that have been proposed.
Disclosure of mineralogical information by companies listed on ASX is regulated by the ASX listing rules (Listing Rules) which are underpinned by the Corporations Act 2001. Chapter 5 of the Listing Rules explicitly imports the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC Code), a publication of the Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, the Australian Institute of Geoscientists and the Minerals Council of Australia (JORC). The ASX and JORC have announced proposed amendments to their respective publications which are expected to be adopted, with a 12-month transition period, towards the end of 2012.
The proposed amendments relate to key disclosure areas and respond specifically to reporting issues that have emerged in the Australian market, including where Australian reporting requirements could be seen to be out of step with international best practice.
The main thread that runs through most of the amendments is the desire to promote investor confidence and equity market integrity by facilitating more consistent and transparent reporting of mineral assets. ASX considers that improved transparency in relation to key assumptions and technical information relating to exploration and production, and their reporting, will help ensure that investors and their advisers are able to make informed investment decisions.
The proposed amendments are intended to achieve greater alignment and harmonisation with international reporting requirements in other developed mining markets, most significantly in Canada (by reference to the reporting requirements set out in the Canadian National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101), which applies to all companies listed in Canada with an interest in a mineral property) and in South Africa (by reference to the Johannesburg Stock Exchange Listing Requirements).
EXPLORATION RESULTS, MINERAL RESOURCES AND ORE RESERVES
An entity publicly reporting exploration results for the first time in relation to a material mining project will be required to disclose specific drill hole and intercept information, or an explanation of why the company has determined that specific items of otherwise required information are not material to understanding the reported results. The proposed changes would ensure consistency of reporting by ASX issuers, something which is presently lacking due to a degree of subjectivity of materiality, and therefore disclosure, being tolerated.
This will bring ASX’s reporting requirements for exploration results broadly into line with the Canadian requirements, and apply a more prescriptive obligation than that which currently exists under the South African Code for Reporting of Exploration Results, Mineral Resources and Mineral Reserves (SAMREC Code).
Mineral resources and ore reserves
An entity publicly reporting mineral resources estimates and ore reserves estimates will be required to disclose to the market a summary of all of the information material to understanding the reported estimates. The disclosure of mineral resources estimates (which must be categorised as inferred, indicated or measured) must include, among other things, the mining and metallurgical methods and parameters, and the disclosure of ore reserves estimates (which must be categorised as probable or proved) must include, amongst other things, the criteria used for classification and the mining method selected. In each case, other material modifying factors considered by the entity in the estimations must also be disclosed. The information included in the market announcement must be a fair and balanced representation of the information contained in a separate report prepared in accordance with the relevant sections of Table 1 of the JORC Code and issued at the same time as the announcement.
The new reporting obligations deliver significant consistency with the SAMREC Code and the Canadian reporting requirements set out in NI 43-101, which require similar disclosures of key assumptions, methods and modifying factors. A significant difference, however, is that public reporting of resource and reserve estimates does not trigger the onerous obligation for further disclosure by way of a technical report, as is the case under NI 43-101.
Preliminary feasibility study
Although the JORC Code currently requires that appropriate assessments and studies are carried out in converting mineral resources to ore reserves, it does not prescribe a particular level of study for the purpose of that conversion. The amendments introduce a requirement that a declaration of a maiden ore reserve estimate be supported by, at a minimum, a preliminary feasibility study. This brings the Australian regime substantially into line with the Canadian and South African regimes.
Currently, the JORC Code requires a competent person to report on specified matters only if they materially affect estimation or classification of the mineral resources or ore reserves or the understanding or interpretation of the results or estimates being reported.
The proposed amendments to the Listing Rules will require that mining entities reporting exploration results or initial or materially changed mineral resource and ore reserve estimates disclose a brief summary of the information elicited under each of the criteria under Table 1 of the JORC Code and, where a particular criterion is not considered relevant or material, the entity must disclose that fact and provide a brief explanation of why this is the case (in other words, the report must be drafted on an “if not, why not” basis, and it is not sufficient to say “not relevant” without an appropriate explanation). These amendments will result in more consistent disclosure of mineralogical estimates, and will assist the understanding and evaluation of the main risks and uncertainties associated with the estimates and the relevant mining project.
ASX has proposed additional requirements for the reporting of longer-term projections of future production and forecast financial information derived from the production targets, both for a mining entity as a whole and for material projects. The Listing Rules and the JORC Code do not currently directly address the reporting of production targets and associated forecast financial information, and ASX is concerned that current disclosures of production targets based on exploration results and targets (only) may mislead investors where an entity does not have a reasonable basis for the disclosure.
The proposed amendments will prohibit a mining entity from disclosing production targets based (i) on historical or foreign estimates of mineralisation, or (ii) solely on an exploration target or exploration results, by reason of the level of uncertainty associated with the mineralisation. Furthermore, a company reporting a production target based exclusively on inferred mineral resources or on a combination of inferred mineral resources and exploration targets, will be required to include proximate cautionary statements highlighting the low level of geological confidence associated with the mineralisation and the uncertainty that the production target will be realised. The entity must also disclose the factors that lead it to believe that it has a reasonable basis for disclosing a production target. Perhaps most significantly, these “low confidence” production targets may only be announced if an independent technical report supporting the veracity of the target is prepared and released.
The proposed amendments will bring the ASX reporting requirements in line with the Canadian requirements which exclude “Inferred Mineral Resources” from estimates forming the basis of a feasibility or other economic study. The amendments will also follow the South African SAMREC Code, which provides that exploration targets cannot be included in mine design, mine planning and economic studies.
To provide additional accessibility to an entity’s resources and reserves information, ASX proposes to introduce a requirement that a mining company must include a “mineral resources and ore reserves statement” in its annual report. Currently, although the JORC Code requires a mining entity to review and publicly report on their mineral resources and ore reserves at least annually, it is not generally accepted industry practice for such results to be included in the entity’s annual reports, and reporting content is not currently prescribed.
It is anticipated that the proposed annual statements of mining entities will facilitate year-on-year comparisons as they will be required to include, among other things, a summary of the entity’s mineral resources and ore reserves holdings at the end of the selected 12-month period and a comparison against those figures from the previous year, with an explanation of any material changes. The annual statement must also include a summary of the governance arrangements and internal controls that have been put in place with respect to its mineral resources and ore reserves and the estimation process.
The proposed amendments would bring the ASX reporting requirements into closer alignment with other jurisdictions. In Canada, in addition to the requirement that a “Technical Report” (including estimates of mineral resources and mineral reserves) be made available to support an annual information form, the CIM Estimation of Mineral Resources and Mineral Reserves Best Practice Guidelines 2003 make a number of recommendations in relation to the reporting of mineral resources and ore reserves in annual reports.
In South Africa, the SAMREC Code does not provide for an annual statement, but instead requires that where revised mineral resource and mineral reserve statements are publicly reported, they must be reconciled with previous statements, such that significant variances can be understood by investors.
HISTORICAL AND FOREIGN ESTIMATES
Currently, historical or foreign estimates of mineralisation for a material project cannot be reported in accordance with the JORC Code and therefore cannot be disclosed by an entity listed on ASX without obtaining a waiver – often a time-consuming and expensive exercise. ASX proposes to codify the circumstances in which such estimates can be disclosed, removing the existing requirement for a mining company to apply for a waiver.
An entity reporting historical or foreign estimates will be required to disclose supporting information on a number of matters including, amongst others, the relevance and reliability of the estimates, the source and date of the estimates, a summary of the key assumptions on which the estimates are based, and the work that needs to be undertaken to verify the estimates as mineral resources or ore reserves in accordance with the JORC Code.
In light of the above, it is worth enquiring why ASX did not more comprehensively adopt the prescriptive provisions of NI 43-101 and the other features of the Canadian regulatory landscape, particularly if harmonisation with international best practices was a consideration?
There are a few possible answers.
First, ASX has not suffered its Bre-X Resources moment. Some ASX issuers in the resources sector may not necessarily take a “black letter of the law” approach to corporate life, but the fact is that egregious over-promising and under-delivering of mineral assets has not impacted the mining and exploration sectors in Australia, certainly not in such a brazen manner as was experienced with Bre-X Resources. From afar it seems that NI 43-101 and its highly technical application by Canadian securities regulators is an understandable result of the event from which it was spawned.
Second, and slightly cynically, the new regime is likely an expression of the ASX’s pragmatism at a time where the competition for listings between bourses continues to be fierce. Reliability of information and efficient capital markets are part of the virtuous circle of equity capital raising at a low cost, but one cannot help but think that competition with overseas exchanges might encourage ASX towards a lower-impact, lower-compliance-cost approach.
Finally – and this is certainly the author’s preferred rationale – it may be that following years of experience with dual-listed companies and following an extensive 24-month consultation process, ASX has finessed rather than overhauled the regime so that it strikes the most appropriate balance between disclosure and transparency on the one hand, and a heavy compliance burden for mining and exploration companies on the other. In this regard, the influence of a significant number of submissions counselling ASIC against the adoption of an NI 43-101 regime ought not be underestimated.
The JORC Code’s “competent person” continues to underpin the integrity of the disclosure. However the amendments have subtly emphasised their role, imposing a degree of objectivity on their inherently subjective role by demanding transparency of analysis when it comes to the declaration of mineral resources and ore reserves, and possibly also exploration results. This has been achieved by the ASX’s proposal that competent persons follow, in effect, a prescribed analytical approach, tempered by a sensible “if not, why not” approach to the disclosure.
It may be that the approach of competent persons to analysis does not change. Indeed one would hope that to be the case as any such change would belie a previous deficiency. More realistically, however, the greater levels of transparency and consistency which are now being demanded, and the inevitable greater scrutiny of the basis for estimates, is very likely to result in more rigour and discipline being applied to the estimation and disclosure process. The competent person’s “behind the scenes” role has, to an extent, given way to an onstage role. Bouquets or brickbats await.