Property Disclosure Rules for Mining Registrants

Transcription

1 Property Disclosure Rules for Mining Registrants SEC s Proposal Would Align Its Disclosure Requirements With Current Industry and Global Regulatory Standards SUMMARY The SEC has proposed rules to modernize property disclosure requirements for mining registrants under a new subpart 1300 of Regulation S-K that would replace requirements currently set forth in Item 102 of Regulation S-K, Item 4.D of Form 20-F and Industry Guide 7. The proposed rules represent a significant overhaul of the existing requirements, and would bring the SEC s rules in line with current industry and global regulatory practices and standards, providing more comprehensive disclosure on a registrant s mining properties. The proposed rules would apply to U.S. reporting companies and non-u.s. companies reporting on Form 20-F. The proposed rules are available on the SEC s website at Comments on the proposed rules are due no later than August 26, BACKGROUND The SEC s current mining disclosure requirements are set forth in Item 102 of Regulation S-K, Item 4.D of Form 20-F and, in somewhat more detail, in Industry Guide 7, which has not been updated in 30 years. Instead, the SEC has been providing individual registrants with supplemental guidance to clarify unclear or outdated disclosure requirements as questions arose. Over this period, a significant number of foreign countries have adopted disclosure standards based on the Committee for Mineral Reserves International Reporting Standards (known as CRIRSCO ) that differed in significant ways from the SEC s rules and guidance. With certain limited, yet important, exceptions, the proposed rules are generally consistent with the disclosure framework established by CRIRSCO-based codes. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 PROPOSED RULES The key features of the proposed rules are: Standard for Disclosure. Mining registrants would be required to provide disclosure if their mining operations are material to their business or financial condition. Qualified Persons. All disclosure of mineral resources, mineral reserves or material exploration results would have to be based on information prepared by a qualified person. Technical Report Summaries. Qualified persons would be required to prepare technical report summaries for each material mining property that are filed with the SEC. When a technical report summary is included in a Securities Act registration statement, the qualified person would be considered an expert for Section 11 purposes. Disclosure of Mineral Resources and Exploration Results. In addition to mineral reserves, mining registrants would be required to disclose material mineral resources and material exploration results (in each case if determined by a qualified person) for each material mining property. Changes to Mineral Reserves Disclosure. The definition of mineral reserves would be revised to adopt a framework for applying modifying factors to determine mineral reserves and permit pre-feasibility studies to provide the basis for determining mineral reserves. Additional Specific Disclosure Requirements. Mining registrants with multiple mining properties would have to provide summary disclosure of their mining operations. Detailed disclosure would be required for each individually material mining property. In addition, registrants would be required to provide disclosure on the internal controls used in exploration and mineral resource and reserve estimation efforts. Oil and gas resources and operations, which are already addressed by a different part of Regulation S-K, are not covered by the proposed rules. A. Disclosure Required if Mining Operations Are Material to Business or Financial Condition Under current Item 102, a registrant is required to disclose its principal mines, other materially important physical properties and significant mining operations. Industry Guide 7 provides additional guidance on disclosure in respect of significant mining operations. However, neither Item 102 nor Industry Guide 7 provides a specific test for determining materiality or significance. The SEC staff has historically applied a threshold of 10% of a registrant s total assets as a determinant of material mining operations. The proposed rules provide that disclosure is required if the registrant s mining operations are material to its business or financial condition. Mining operations 1 would be deemed material if there is a substantial 1 Mining operations would be defined consistently with current staff guidance to include all related activities from exploration through extraction to the first point of material external sale. -2-

3 likelihood that a reasonable investor would attach importance to them in determining whether to buy or sell the relevant securities. 2 A mining registrant would have to consider the following when determining the materiality of its mining operations: quantitative and qualitative factors, assessed in the context of the registrant's overall business and financial condition; aggregate mining operations on all of its mining properties, regardless of size or type of commodity produced; and for each property, as applicable, all related mining operations from exploration through extraction to the first point of material external sale, including processing, transportation and warehousing. An instruction to the proposed rules states that a registrant s mining operations are presumed to be material if they consist of 10% or more of its total assets, but may be material even if less than 10% of total assets, based on other quantitative or qualitative factors. The proposing release notes that such factors could include, among other things, financial metrics other than percent of assets, evidence of impact on the price of the registrant s securities, public disclosures by the registrant discussing the importance of the mining operations, or planned capital spending or capital raising relating to the mining operations. The release also notes that for vertically integrated companies, the relationship of mining operations to the rest of the business may affect the materiality analysis. The disclosure requirements would apply to all registrants with material mining operations, whether or not mineral extraction is a registrant s primary business. As provided in prior SEC staff guidance, royalty companies or companies that hold similar economic interests would also be subject to these disclosure requirements, with certain exceptions, for the mining operations that generate royalty or other payments that are material to the royalty or similar company s operations taken as a whole. B. Qualified Person and Technical Report Summary Requirement Under the proposed rules, all disclosure of mineral resources, mineral reserves and material exploration results would have to be based on, and accurately reflect, information and supporting documentation prepared by a qualified person. This requirement would be a departure from the current framework, which does not require the use of an expert for reserves disclosure, and brings the SEC s disclosure rules in line with CRIRSCO-based codes. A qualified person must be a mineral industry professional with at least five years of experience in the relevant type of mineralization, deposit and activity, and a member or licensee in good standing of a recognized professional organization. The qualified person does not have to be independent, and may be an employee of the registrant. An organization s qualification as a recognized professional 2 Material is defined in the proposed rules by reference to Securities Act Rule 405 and Exchange Act Rule 12b

4 organization would be based on a qualitative, factor-based test, providing for more flexibility than most CRIRSCO-based codes. Under the proposed rules, the registrant would be responsible for determining that the qualified person meets the specified criteria, and for ensuring the accuracy of the information provided by the qualified person, which would have to include a signed and dated technical report summary which discusses each material mining property in detail. The technical report summary would have to be filed as an exhibit to the periodic report or registration statement that includes the related disclosure for the first time, or when there is a material change. When the technical report summary is included in a Securities Act registration statement, the qualified person would be considered an expert, with resulting liability under Section 11 for any untrue statement or omission of a material fact contained in the summary. For each material mining property, the technical report summary must identify and summarize the scientific and technical information and conclusions reached concerning mineral exploration results, initial assessments used to support disclosure of mineral resources or preliminary or final feasibility studies used to support disclosure of mineral reserves. The proposed rules call for detailed information relating to the property and its characteristics, the registrant s interest in it, and the technical work done to support the related disclosures. To the extent practicable, the descriptions in the technical report summary would have to comply with the SEC s plain English principles, and registrants would not be permitted to include large amounts of technical or other project data (e.g., large amounts of drill hole data) in the report or as appendices to the report. The proposed rules would make the qualified person responsible for any report, opinion or statement of another expert that is being relied on in the technical report summary. C. Material Exploration Results to Be Disclosed for Each Material Mining Property Current SEC rules and guidance do not call for disclosure of material exploration results. The proposed rules would (like most CRIRSCO-based codes) require mining registrants to disclose material exploration results for each material mining property. However, a registrant that has material mining operations in the aggregate but no individually material mining property would not be subject to this requirement. The extent to which exploration results should be considered material would depend on the importance given to them in assessing the value of a material property or in deciding whether to develop a specific property. However, under the proposed rules, as under CRIRSCO-based codes, disclosure of material exploration results may not include estimated tonnage and grades. Such quantitative estimates may only be included in mineral resource and reserve estimates, which reflect an assessment of geologic and grade or quality continuity and overall geologic uncertainty. D. Mineral Resources to Be Disclosed Based on Qualified Person s Initial Assessment Under current rules and guidance, registrants are, subject to limited exceptions, precluded from disclosing mineral resources, which are mineral deposits having prospects for economic extraction less certain than -4-

5 those for reserves. As under CRIRSCO-based codes, the proposed rules would require registrants to disclose mineral resources, but only if they have been determined based on information and supporting documentation from a qualified person. If no such determination has been made (and there is no obligation on the part of the registrant to make such a determination), the requirement to disclose mineral resources would not apply. Disclosure of mineral resources must be based on a qualified person s initial assessment, which the proposed rules refer to as a preliminary technical and economic study of the economic potential of all or parts of mineralization to support that disclosure. In line with CRIRSCO-based codes, the central factor to determining whether a deposit qualifies as a mineral resource is whether, after taking into account the modifying factors set out in the proposed rule and any other relevant operational factors, there are reasonable prospects of economic extraction. As proposed, in addition to mineralization and dumps and tailings, the definition of mineral resources would include non-solid matter, such as mineral brines and geothermal fields, thereby making the disclosure requirements applicable to registrants engaged in extraction activities related to brines and geothermal fields. Under the proposed rules, mineral resources would be classified (in order of increasing confidence) as inferred, indicated and measured mineral resources, defined in a manner substantially similar to CRIRSCO-based classifications. A registrant would have to classify and disclose its mineral resources in accordance with these classifications. Use of the U.S. Geological Survey s Circular 831 and Circular 891 to classify mineral resources in SEC filings would no longer be permissible. In contrast to CRIRSCO-based codes, the proposed rules would require disclosure of the geologic uncertainty associated with the different classes of mineral resources, in accordance with a prescribed format of numerical estimates indicating the level of uncertainty. In addition, similar to current SEC guidance 3, estimates of mineral resources would have to be based on a commodity price that is no higher than the average daily closing price during the 24-month period preceding the end of the fiscal year covered by the applicable initial assessment, except where prices are defined by contract (so long as the price provided for in the contract is reasonable). E. Mineral Reserves Disclosure The proposed rules would define mineral reserves as an estimate of tonnage and grade or quality of indicated or measured mineral resources that, in the opinion of a qualified person, can be the basis of an economically viable project. The proposed rules would require the qualified person to disclose the specific factors that have caused the qualified person to conclude that extraction of the mineral reserves is economically viable. In addition, the price used to determine the economic viability of mineral reserves could not be higher than the 24-month trailing average daily closing price (except where determined by 3 Current SEC guidance provides for a three-year trailing average spot price. -5-

6 contract), as described above in respect of mineral resources. In contrast to the CRIRSCO framework, mineral reserve estimates would have to be presented net of allowances for diluting materials and mining losses. Currently, Industry Guide 7 does not set forth what factors should be considered when making mineral reserve determinations. Supplemental SEC staff guidance has, to date, required that determinations and disclosure of mineral reserves be based on final feasibility studies. The proposed rules, consistent with CRIRSCO-based standards, provide a detailed prescriptive framework for determining mineral reserves by applying certain modifying factors to indicated or measured (but not inferred) mineral resources for conversion into mineral reserves. The proposed rules permit pre-feasibility studies, as well as final feasibility studies, conducted by qualified persons to provide the basis for determination and disclosure of mineral reserves. F. Additional Specific Disclosure Requirements The current rules do not explicitly address disclosure obligations of registrants with mining operations based on multiple mining properties that are significant in the aggregate but not individually. Under the proposed rules, in addition to providing detailed disclosure about any individual material mining property, registrants that own two or more properties would have to provide summary disclosure of their mining properties (including maps showing mining property locations) that includes tables setting forth specified information about the 20 properties with the highest asset values, and total mineral resources and reserves of the registrant, as at the end of the last fiscal year. These disclosure requirements would apply whether or not the registrant s primary business is mining, and would apply to royalty companies or companies that hold similar economic interests so long as the mining operations that generate the royalty or other payment are material to the registrant s operations taken as a whole. In addition to this summary disclosure in respect of multiple properties, detailed disclosure would have to be provided for each individual material mining property. Such disclosure would have to include a description of the property (including location, infrastructure and ownership or leasehold information), a history of previous operations and the proposed program of exploration, a description of the condition and status of the property and facilities and a description of any significant encumbrances (including permitting and other regulatory matters). Lastly, the proposed rules would require registrants to describe the internal controls used when estimating exploration and mineral resources and reserves. Such disclosure would have to cover quality control and quality assurance programs, verification of analytical procedures and comprehensive risk inherent in the estimation process, in a manner substantially similar to CRIRSCO-based codes requirements. -6-

7 G. Application to Foreign Private Issuers Item 4.D of Form 20-F would be amended to require issuers engaged in mining operations to provide the disclosures required by proposed subpart 1300 of Regulation S-K, and to file related technical summary reports. Under current rules, Canadian issuers filing on Form 20-F have been permitted to provide the disclosure required by National Instrument in lieu of providing Guide 7 disclosure. Under the proposed amendment to Form 20-F, this approach would no longer be permitted. However, Canadian issuers reporting pursuant to the Multijurisdictional Disclosure System on Form 40-F would not be affected by the proposed rules. * * * Copyright Sullivan & Cromwell LLP

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