New SEC Rules Pose Challenges for Canadian Mining Registrants
On October 31, 2018, the US Securities and Exchange Commission (the “SEC”) adopted final rules (the “Rules”) updating disclosure requirements for registrants with material mining operations under the US Securities Act of 1933 (as amended, the “Securities Act”) and the US Securities Exchange Act of 1934 (as amended, the “Exchange Act”), including foreign private issuers filing annual reports or registration statements with the SEC on forms 20-F, F-1, F-3 or F-4, voluntarily filing on domestic reporting forms or preparing offering circulars on Form 1-A under Regulation A+.
Mining registrants must bring their disclosure into compliance no later than their first fiscal year beginning on or after January 1, 2021. Canadian issuers filing annual reports or registration statements under the Canada-US Multijurisdictional Disclosure System (the “MJDS”) do not need to comply with the Rules.
The Rules are substantially consistent with the Committee for Mineral Reserves International Reporting Standards (“CRIRSCO”) disclosure framework and other CRIRSCO-derived disclosure frameworks, including Canadian National Instrument 43-101 (“NI 43-101”), and should therefore be familiar to Canadian mining registrants. Nonetheless, nuanced deviations from the NI 43-101 framework and the closure of the “foreign law” exemption, which previously enabled Canadian registrants to include certain of their NI 43-101 disclosure in filings with the SEC, means that Canadian registrants should revisit their US disclosure obligations.
Overview of the Rules
The Rules update disclosure requirements for mining registrants set forth in Item 102 of Regulation S-K under the Securities Act (“Item 102”), the Exchange Act and the SEC’s guidelines for mining disclosure as set forth under Industry Guide 7. As part of this update, the Rules relocate and consolidate all such disclosure requirements to new subpart 1300 of Regulation S-K under the Securities Act. Industry Guide 7 will remain effective until all registrants are required to comply with the Rules, at which point it will be rescinded.
The Rules’ most significant updates relate to the disclosure of mineral resources, mineral reserves and exploration results and the role of qualified persons (“QPs”).
Disclosure of Mineral Resources
Historically, registrants could only disclose mineral resources if required by foreign or state law – the so-called “foreign law” exemption. The SEC interpreted this carveout to permit disclosure of mineral resources by Canadian registrants made pursuant to their NI 43-101 obligations. Under the Rules, however, all registrants must now disclose mineral resources. While the standards for such disclosure are largely consistent with the NI 43-101 framework, subtle differences mean that Canadian companies can no longer rely on disclosure prepared in accordance with NI 43-101.
Under the Rules, the SEC definition of “mineral resources” is materially identical to the corresponding NI 43-101 definition, consisting of “a concentration or occurrence of material of economic interest in or on the earth’s crust in such form, grade or quality, and quantity that there are reasonable prospects for its economic extraction.” As is the case under the NI 43-101 framework, the Rules require a reasonable estimate of only those minerals that can be extracted economically, not an inventory of all mineral resources. Additionally, under the Rules, resources must be classified as either inferred, indicated or measured.
Registrants disclosing mineral resources must enlist a QP to prepare an “initial assessment” comprising a “preliminary technical and economic study of the economic potential of all or parts of mineralization to support the disclosure of mineral resources.” Such initial assessment must support reasonable prospects for the economic extraction of the mineral resource. Additionally, prior to declaring a new mineral resource, a QP must prepare a “technical report summary,” the substance of which is set forth in the Rules. A QP must also prepare a technical report summary when disclosing any material changes in mineral resources disclosed in previous SEC filings.
Classification of Mineral Reserves
As under Industry Guide 7, the Rules require registrants to disclose mineral reserves. However, the Rules now require registrants to distinguish between “probable mineral reserves” and “proven mineral reserves,” again similar to the NI 43-101 framework. Companies must enlist a QP to determine whether a mineral reserve is probable or proven. For mineral reserves to qualify as proven, their extraction must be, in the opinion of the QP, “economically viable under reasonable investment and market assumptions.” The QP must also prepare a technical report summary when the registrant first declares mineral reserves or when it discloses material changes to previously-disclosed mineral reserves.
Disclosure of Exploration Activities and Results
Neither Item 102 nor Industry Guide 7 address disclosure of exploration activities or results. In contrast, the Rules explicitly permit and provide guidance on such disclosure, which is again broadly in line with the NI 43-101 framework. Under the Rules, disclosure of material exploration activities and results is required, whereas disclosure of non-material exploration activities and results is voluntary.
The Rules define exploration results broadly as “data and information generated by mineral exploration programs (i.e., programs consisting of sampling, drilling, trenching, analytical testing, assaying, and other similar activities undertaken to locate, investigate, define or delineate a mineral prospect or mineral deposit) that are not part of a disclosure of mineral resources or reserves.” Excluded are estimates of tonnage, grade and production rates or assessments of economic viability.
Role of QPs
As discussed above, the Rules require QPs to substantiate disclosure in certain circumstances. The Rules define a QP as a “mineral industry professional with at least five years of relevant experience in the type of mineralization and type of deposit under consideration and in the specific type of activity that person is undertaking on behalf of the registrant.” A QP must also be in good standing with a “recognized professional organization,” though the Rules do not list qualifying organizations.
Most importantly, registrants must file technical report summaries prepared by QPs supporting disclosure of mineral resources and reserves as well as, in the case of mineral resources, initial assessments. Registrants do not need to enlist QPs to prepare technical report summaries in support of exploration results.
Key Differences Between the Rules and NI 43-101
The Rules broadly align US disclosure requirements for registrants with material mining operations with the CRIRSCO-derived NI 43-101 framework. However, there are several key differences to note.
Requirements Concerning Qualified Persons
Like the Rules, the NI 43-101 framework utilizes qualified persons to substantiate certain disclosure by mining registrants. The frameworks differ, however, in the credentials QPs must possess. Pursuant to the Rules, a QP must be an eligible member or licensee in good standing of a recognized professional organization. Such organization must provide a public list of members in good standing. While NI 43-101 similarly requires QPs to be in good standing with a “professional association,” there is no requirement that qualifying professional associations provide such a public list.
Additionally, pursuant to the Rules, a QP must have a minimum of five years’ experience in the type of mineralization, deposit and activity being undertaken. The NI 43-101 standard is broader, requiring that QPs have “at least five years of experience in mineral exploration, mine development or operation, or mineral project assessment, or any combination of these, that is relevant to his or her professional degree or area of practice.” Likewise, the Rules do not require, as NI 43-101 does, that a QP hold a university degree or equivalent accreditation in geoscience or engineering. However, most recognized professional organizations require such credentials in order to apply for membership.
While such differences may seem immaterial, Canadian registrants accustomed to working closely with certain QPs may find that such QPs fail to meet the Rules’ specific eligibility requirements.
Finally, in certain circumstances, NI 43-101 requires that the QP be independent and/or named. Under the Rules, individual QPs need not be independent and must be named only if they are employees of the registrant.
Treatment of Mineral Resources and Reserves
The Rules and NI 43-101 differ in their treatment of mineral resources and mineral reserves disclosure. First, the Rules refer to “technical report summaries” and “initial assessments” instead of NI 43-101’s “technical reports” and “preliminary economic assessments.” While the requirements for each are broadly equivalent, subtle differences in content prevent registrants from relying on one framework in order to comply with the other.
Second, the Rules require that a QP prepare an initial assessment before declaring a mineral resource, whereas NI 43-101 does not require a preliminary economic assessment in order to do so. Finally, under the Rules, registrants need only file a technical report summary when declaring mineral resources or mineral reserves or disclosing material changes to previous technical report summaries. Under NI 43-101, a technical report is required for all material properties, regardless of whether the registrant is declaring a new mineral resource or mineral reserve or updating a previous technical report.
The Rules go far to align disclosure obligations for mining registrants under the Securities Act and the Exchange Act with those imposed by globally-accepted CRIRSCO-derived frameworks, including NI 43-101. As a result, Canadian registrants will find the Rules familiar. However, subtle differences mean dedicating time and resources to comply with two disclosure frameworks, particularly as the “foreign law” exemption is no longer available. Among other tasks, this will involve Canadian registrants confirming that their QPs, resource and reserve estimates and technical reports comply with the Rules. Counsel familiar with both US and Canadian frameworks can assist in completing such checks and in designing and implementing procedures for bringing NI 43-101 disclosure into compliance with the Rules.