Canaco-Published Artical on Hearing
All a matter of opinion and interpretation.
Canaco 'reputation' on the line as regulators call hearing over material disclosure
Canaco and the British Columbia Securities Commission are set to duel in a hearing in May over whether infill drilling results were material.
Author: Kip Keen
Posted: Wednesday , 25 Apr 2012
HALIFAX, NS (MINEWEB) -
A fight over the notion of what is material is erupting between junior explorer Canaco Resources (TSX-V: CAN) and the securities regulator in British Columbia. The British Columbia Securities Commission (BCSC) served Canaco with a notice of hearing on Tuesday - the date for which will be set on May 29 - that pits the two sides against each other over the thorny question of when drilling results are material and how a junior should disclose them in light of competing interests such as issuing options.
The BCSC is taking junior Canaco to task over how it issued options to senior management and directors back in late 2010 just before the release of drilling results. It alleges Canaco should have expected drilling results would boost its shareprice when they were released just days and weeks after it issued options to Canaco directors and officers.
But Canaco denies the claim, arguing the infill drilling results were not material as they did not impact the overall size or grade of its Magambazi deposit in Tanzania. In responding to the BCSC allegations Canaco drew a picture of a securities regulator on the hunt without evidence and on the precipice of setting a dangerous precedent that could shake up the securities landscape for juniors in BC, a home jurisdiction for many of the world's top junior companies.
And Canaco warned it was willing to fight hard over the matter with management, directors and a former director saying their reputations were on the line.
The BCSC's central allegation is that Andrew Lee Smith, Canaco president and CEO, Randy Smallwood, a former director and the President and CEO of Silver Wheaton, and two current Canaco directors, David Parsons and Brian Lock, voted for an options plan on December 3, 2010, that granted directors, officers and consultants 7.2 million stock options at a C$4.56 price. But the BCSC maintains they had in their hands at that time drilling results which were then made public in three separate press releases December, 6, 9 and 22, 2010 - just after the issue of the options.
These were drilling results, the BCSC, noted that Canaco described as "spectacular."
The BCSC charges, considering the price of the options - too low it says - and the timing of the release of the drilling results, that Smith, Parsons, Lock and Smallwood "failed to act in the best interests of Canaco."
But in response to the allegations, Canaco takes a simple defense on the specific charges: the drilling results weren't material. Indeed Canaco asked Micon International, a consulting firm, to assess whether the drilling results had an impact on the deposit. The answer from Micon was that on whole they did not.
"The ‘new' holes have not significantly increased the size or extent of the previously known mineralization and a thorough examination of the assay results indicates that they would not likely have a significant effect, one way or the other, on the results of a mineral resource estimate," Micon wrote in a letter dated January 19, 2011, and posted by Canaco on its website.
Smith, Parsons, Lock and Smallwood make this point loud and clear to the BCSC in a scathing letter they wrote to the BCSC a few days ago in anticipation of the notice of hearing. "If your staff has even a scrap of evidence to suggest that the drill results changed the tonnage or grade of the deposit, they have chosen not to share it with us," they write. "We take it that there is no such evidence and that your staff's position is that Canaco's directors should have predicted that the market price of the shares would spike significantly even though the market expected infill results and those results did not change the tonnage or grade of the deposit.
That notion of predicting, or guessing, that drilling results, which Canaco argues were not material, would excite investors and cause a spike in Canaco's shareprice is a bone of contention for Smith, Parsons, Lock and Smallwood. Sounding exasperated, they write, "Market reaction to value-changing information is difficult enough to predict. We know of no branch of learning that permits the reliable prediction of market behavior in response to information that has no effect on the value of the business. Nor do we know of any case in which a Securities Commission has found drill results to be material even though they did not change the value of the deposit."
Thus, in its pursuit of Canaco on the basis that such drilling results are material, the four warn that the BCSC is going too far with potentially devastating results on the exploration industry. "If the BCSC staff's interpretation is upheld in a hearing, there will almost never be a time when a junior company with an infill program can issue stock options."
They say the BCSC, in taking them on through a hearing, will face stiff opposition. Using forceful language Smith, Parsons, Lock and Smallwood look ready to wage a crusade against the BCSC to defend their character.
"We have no other option: each of us is a senior mining executive with an unblemished regulatory history," they write in a letter dated April 20 to the BCSC. "Each of us has a lengthy record of creating shareholder value. We are not prepared to lose our reputations over this matter. Fortunately, we have not only the will but the means to defend ourselves, and we are confident that we will prevail on the facts and the law, and in the court of public opinion."
In the letter - written before the BCSC issued the notice of hearing - they also asked the BCSC to meet with Canaco to discuss the issue of materiality in the case "before you commit your staff, the respondents, and the Commission to a major and high-profile piece of litigation."
One analyst contacted by Mineweb for comment on the hearing said, "It seems like a lot of fuss over nothing." As did Canaco, the analyst, who preferred not to be named, noted that the options in question were never exercised, are out of the money anyway and that Canaco had offered to the BCSC to cancel them.
"The real losers in all this will be the shareholders I would imagine," the analyst said