Securities regulators are back on the warpath when it comes to junior miners. In the past several months regulators have been busy sending a harsh message to companies that there will be consequences if they don’t follow precise disclosure rules related to their projects. Miners have lost out on financings and had trading of their stocks halted after getting in the crosshairs of securities commissions, a development that only adds more risk to an already risky business.
“It has certainly been a wake-up call to capital market participants that they need to be mindful of their technical disclosure, or their deals can get hung up,” said Jeremy Fraiberg, co-chair of the mining group at Osler, Hoskin & Harcourt LLP.
‘It has certainly been a wake-up call to capital market participants’
For investors, the crackdown is a reminder that caution is always warranted when looking at how companies interpret drilling results, economic assessments and other data. While Canada has come a long way from the Bre-X era, disclosure deficiencies still pop up.
Provincial regulators have recently gone after a long list of juniors for alleged lapses. Some of the most talked-about names include Extorre Gold Mines Ltd., Rio Novo Gold Inc., Karnalyte Resources Inc., Orbite Aluminae Inc., and Clifton Star Resources Inc. None of them have categorically denied making mistakes.
The seemingly sudden interest in junior miners didn’t come out of nowhere. Regulators do routine compliance reviews to make sure miners are meeting requirements, and they talk among themselves when they notice deficiencies. The British Columbia Securities Commission (BCSC), for instance, decided a year ago that it needed to get more aggressive in fixing disclosure issues.
“We decided it was time to step up a bit and take action against companies that were not complying,” said Andrew Richardson, director of corporate finance at the BCSC.
In the heyday of the Vancouver Stock Exchange, investors understood they should take almost anything a junior miner said with a grain of salt. But the Bre-X scandal in 1997 and subsequent fallout ushered in a new set of rules for mining disclosure. National Instrument 43-101 dictates specific practices that every company must follow and is designed to prevent confusion about mineral deposits. The rules also ensure companies get qualified experts to approve and sign off on their data.
Nevertheless, disclosure quality tends to ebb and flow with the market and Mr. Richardson notes there is always room for improvement. Some of the typical mistakes companies make that commissions are noticing these days include misclassifying resources (for example, adding inferred resources to other categories), incorrectly using historical drilling data, and misinterpreting technical studies.
For example, Extorre released a preliminary economic assessment (a very early stage study) on a gold property in Argentina called Cerro Moro, but characterized some aspects of the document as being at the level of a pre-feasibility study, a more advanced study. Keeping the study at a preliminary level allows a company to use inferred resources as the basis for economic analysis, which would not be allowed in a pre-feasibility.
The BCSC said Extorre management made statements that could lead investors to interpret its document as a pre-feasibility rather than preliminary assessment. Extorre also used terms such as “ore” and “mineable resources” that are not allowed under 43-101 rules.
These may seem like relatively minor mistakes, but the differences between the two types of studies can be massive. One source noted that pre-feasibility studies almost never produce better numbers than preliminary assessments, yet investors often make the mistake of treating them the same way.
In this case, the BCSC was alarmed enough that it held up Extorre’s $50-million equity financing.
Extorre had to withdraw the offering (it later completed a $25-million financing instead).
Two other juniors, Rio Novo and Karnalyte, also lost out on financings because regulators stepped in.
“Historically, [disclosure issues] didn’t get in the way of financings. Now they do. That’s a sign from the regulators that this is now a more serious thing,” said Greg Ho Yuen, a partner at law firm Fasken Martineau.
In addition to cancelled financings, disclosure issues have resulted in a couple of lengthy stock halts. Shares in Clifton Star, for example, were cease traded by the BCSC for more than seven months because the company failed to file the proper paperwork for its Quebec-based Duparquet project. It had pieced together historic information that was deemed not sufficient.
And Orbite Aluminae was halted for several weeks by Quebec’s Autorité des marchés financiers (AMF) because of a lack of clarity around the company’s claims about its rare earth resources in the province. The AMF eventually accepted the conclusions in Orbite’s report, but an independent audit found the study lacked proper analysis.
One of the unique challenges for junior miners is that fixing disclosure problems can take a very long time. Companies have to churn out hundreds of pages of data if regulators force it to file a new technical report for a project.
Complicating matters is that securities commissions do not have endless resources at their disposal, but will always take a closer look at companies when they file a prospectus. That means disclosure problems are likely to be uncovered at the worst possible time, something Extorre and other miners have learned the hard way.
But investors are also getting a harsh reminder that they need to recognize that juniors can make spectacular discoveries, but still find ways to derail their projects that have nothing to do with geology.