On June 16, 2016, the Securities and Exchange Commission (SEC) proposed rules to modernize property disclosures for mining registrants which, if adopted, would mark the first comprehensive overhaul of the SEC’s disclosure requirements for mining companies in more than 30 years. The proposed rules form part of a larger “disclosure effectiveness initiative” which the SEC says “is aimed at modernizing our disclosure regime and providing more meaningful information to investors.”
According to the SEC, the proposed rules are intended to “provide investors with a more comprehensive understanding of a registrant’s mining properties, which should help them make more informed investment decisions” as well as “modernize the Commission’s disclosure requirements and policies for mining properties by aligning them with current industry and global regulatory practices and standards.” The proposed rules more closely align with the Committee for Mineral Reserves International Reporting Standards (CRIRSCO), which are globally recognized disclosure standards for the mining industry.
The current disclosure requirements for mining registrants are set forth in Item 102 of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934 and in Industry Guide 7 (Guide 7).
Consolidation of the mining disclosure requirements
The SEC has acknowledged that mining registrants have found that the current SEC mining disclosure rules, which are set out in Regulation S-K and Guide 7, often overlap, creating regulatory uncertainty among such registrants and, as a result, require a significant amount of staff interpretive guidance. Under the proposed rules, Guide 7 will be rescinded to create a new Regulation S-K subpart 1300, which is intended to eliminate any overlapping disclosure requirements and provide one standard set of disclosure rules for mining registrants.
Codification of materiality standard
Under the current mining disclosure regime, registrants are directed to provide disclosure for “significant mining operations” in accordance with Guide 7. However, the term “significant” is not defined in Guide 7 or Regulation S-K, though the SEC has historically advised registrants that it considers a registrant’s mining operations to be material if its mining assets constitute 10% or more of its total assets.
The proposed rules seek to clarify this standard and requires registrants to provide disclosure for their mining operations that are material to their business and financial condition. Materiality, in this context, will have the same meaning given to it under US securities laws.
The proposed rules also instruct that a registrant’s mining operations are presumed to be material if its mining assets constitute 10% or more of its total assets. However, the proposed rules further instruct that if a registrant’s mining assets fall below the 10% total assets threshold, such registrant would need to consider if there are other factors, quantitative or qualitative, which would render its mining operations material, including:
- mining operations that constitute 10% or more of some other financial measure, such as the registrant’s total revenues, net income or operating income;
- evidence that disclosure of a similar property or properties has had a significant impact on the price of a registrant’s securities;
- public disclosure by the registrant discussing the importance to its operations (e.g., from an operational or competitive standpoint) of a particular property or properties;
- the unique or rare nature of the particular mineral or the importance of the mineral to the registrant’s operations;
- the actual and projected expenditures on the registrant’s mining properties as compared to its expenditures on non-mining business activities; and
- the amount of capital raised or planned to be raised by the registrant for its mining properties.
Disclosure of material exploration results and mineral resources
Under the current mining disclosure regime, registrants are not required to provide disclosure in respect of their material exploration results and the disclosure of any non-reserve estimates of mineral resources is prohibited (subject to foreign and state law exceptions). Item 102 of Regulation S-K and Guide 7 only requires that mining registrants provide disclosure of their mineral reserves, but does not require that such disclosure be based on findings from qualified professionals.
The proposed rules, in summary, would require registrants to disclose their material exploration results and mineral resources in addition to their mineral reserves and, as discussed below, file reports authored by “qualified persons” to support such disclosure.
Qualified person requirement
The proposed rules require that disclosure of a registrant’s stated exploration results, mineral resources or mineral reserves, as filed with the SEC, be based on the findings of a “qualified person.” This requirement aligns with CRIRSCO and is intended to provide investors with further protection. Under the current regime, there is no requirement that a registrant’s disclosure of mineral reserves be based on the findings of an appropriately experienced professional and, in cases where an expert is used, there are no substantive requirements for that expertise.
Material exploration results
Under the proposed rules, material exploration results, which are defined 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”, will need to be disclosed for each of the registrant’s material properties.
The proposed rules would also require registrants to disclose specific information about its mineral resources for each of its material properties. Under the proposed rules, “mineral resources” would be defined as “as 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.” The proposed rules would also require that “when determining the existence of a mineral resource, a qualified person must be able to estimate or interpret the location, quantity, grade or quality continuity, and other geological characteristics of the mineral resource from specific geological evidence and knowledge, including sampling.”
Mineral resource classification
The proposed rules would adopt the CRIRSCO-based classification of mineral resources into inferred, indicated and measured mineral resources, and each registrant with material mining operations would be required to classify and disclose its mineral resources accordingly. Under the proposed rules, the terms inferred, indicated and measured mineral resources would be defined as:
- “inferred mineral resource” means that part of a mineral resource for which quantity and grade or quality are estimated on the basis of limited geological evidence and sampling;
- “indicated mineral resource” means that part of a mineral resource for which quantity and grade or quality are estimated on the basis of adequate geological evidence and sampling; and
- “measured mineral resource” means that part of a mineral resource for which quantity and grade or quality are estimated on the basis of conclusive geological evidence and sampling.
Under the proposed rules, inferred mineral resources, which have the lowest level of geological confidence of all mineral resources, may not be used in assessing the economic viability of a mining project.
The SEC believes this new classification requirement would “contribute to the accuracy of a registrant’s mining disclosure in SEC filings, and thereby benefit investors, because it is based upon an assessment of “geologic uncertainty,” which is the risk related to the quality, quantity and location of the mineral in the ground.”
Initial assessment of mineral resources
As proposed, a registrant’s disclosure of mineral resources must be based upon a qualified person’s initial assessment supporting the determination of mineral resources. Under the proposed rules, an “initial assessment” would be defined as “a preliminary technical and economic study of the economic potential of all or parts of mineralization to support the disclosure of mineral resources.” The initial assessment must include an analysis of certain modifying factors (as described further below) that are necessary to demonstrate that there are reasonable prospects for economic extraction and also must include cut-off grade estimation, (which is based on assumed unit costs for surface or underground operations and estimated mineral prices). When estimating mineral prices, the qualified person must use a commodity price that is no higher than the average 24-month historical price.
The following are modifying factors that the qualified person must evaluate while completing the initial assessment:
- site infrastructure (e.g., whether access to power and site is possible);
- mine design and planning (e.g., what is the broadly defined mining method);
- processing plant (e.g., whether all products used in the preliminary economic assessment can be processed with methods consistent with each other);
- environmental compliance and permitting (e.g., what are the required permits and corresponding agencies and whether significant obstacles exist to obtaining those permits); and
- any other reasonably assumed modifying factors, including socio-economic factors, necessary to demonstrate reasonable prospects for economic extraction.
Mineral reserve reporting
Under Guide 7, registrants are required to disclose their mineral reserves, defined as “that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination,” though there is no specific requirements regarding factors that must be considered when making a reserve determination.
New framework to mineral reserve determination
The proposed rules seek to adopt the CRIRSCO framework to mineral reserve determination, providing for the application of certain defined “modifying factors” to indicated or measured mineral resources in order to convert them to mineral reserves. Such framework is based on the following proposed definitions of mineral reserves, probable mineral reserves, proven mineral reserves, and modifying factors:
- “mineral reserves” means an estimate of tonnage and grade or quality of indicated or measured mineral resources that, in the opinion of the qualified person, can be the basis of an economically viable project;
- “probable mineral reserves” means the economically mineable part of an indicated and, in some cases, a measured mineral resource;
- “proven mineral reserves” means the economically mineable part of a measured mineral resource
- “modifying factors” means the factors that a qualified person must apply to mineralization or geothermal energy and then evaluate in order to establish the economic prospects of mineral resources, or the economic viability of mineral reserves.
Use of pre-feasibility and feasibility studies in mineral reserve determinations
Under the current disclosure regime, there is no requirement that registrants must provide supporting documentation to support their mineral reserve disclosure. In practice, the SEC has historically requested that registrants provide a final feasibility study in respect of such disclosure. The proposed rules have adopted the approach taken by CRIRSCO and specifically permit the use of either pre-feasibility or final feasibility studies to support a registrant’s determination of its mineral reserves.
Technical support summaries
The proposed rules require that registrants obtain and file a technical report summary from a “qualified person” as an exhibit to their SEC filings (as opposed to including it as a narrative) in support of a registrant’s stated exploration results, mineral resources or mineral reserves. Such report must identify and summarize for each material property the information that was reviewed and the conclusions that were reach by the qualified person the registrant’s exploration results, mineral resources or mineral reserves. No such requirement exists under the current disclosure regime.
Specific disclosure requirements
The proposed rules also outline the following specific disclosure requirements:
- A mining registrant with economic interests in two or more mining properties will be required to provide summary disclosure of its mining operations. Such disclosure would need to include maps showing the locations of all of the registrant’s mining properties and provide, in tabular form, property specific information for their 20 largest properties (based on asset value). Moreover, the registrant must provide summary mineral resource and mineral reserve disclosure for each identified property containing 10% or more of the registrant’s mineral reserve or 10% or more of the registrant’s combined measured and indicated mineral resources.
- A mining registrant must provide disclosure for each of its individual mining properties that is material to its business or financial condition.
- A mining registrant must provide disclosure on the internal controls that it uses in its exploration and mineral resource and reserve estimation efforts.
Applicability to foreign private issuers/MJDS filers
The SEC has stated that the proposed rules would apply equally to foreign private issuers and domestic registrants and, accordingly, it has proposed amending Form 20-F in order to make foreign private issuers subject to subpart 1300 of Regulation S-K.
The proposed rules, however, would not affect Canadian registrants who are eligible to file annual reports on Form 40-F. Such registrants report pursuant to Canadian disclosure requirements under the Multijurisdictional Disclosure System (“MJDS”).
Public comment on the proposed rules will be open for 60 days from the date of publication in the Federal Register.