If adopted, the rules would, among other things, rescind the SEC’s Industry Guide 7 (“Guide 7”) and significantly expand the extent of mineral resource and reserve disclosures made by registrants in public filings with the SEC required by US Securities laws (e.g., registration statements for IPOs, M&A transactions, annual and other periodic reports). Also, while the proposed rules technically apply only to registrants, the ultimate form of these rules will no doubt influence disclosure practices for any issuers seeking to access the US capital markets and companies who have granted royalties to a registrant.
Background to the Proposed Rules
The proposed rules reflect the SEC’s recognition that significant changes have taken place in the mining industry since Guide 7 was updated, more than 30 years ago. In this time period, mining has become increasingly globalised and many jurisdictions have adopted mining disclosure standards based on the Committee for Mineral Reserves International Reporting Standards (“CRIRSCO”), which differ significantly in many respects from Guide 7. While the proposed rules are largely based on CRIRSCO standards, they go beyond those standards in many important respects. Consequently, the proposed rules, if enacted, could result in more onerous reporting obligations for registrants. Also, as the disclosures required under the proposed rules are subject to civil liability provisions of US securities laws, there will likely be higher compliance costs and risks for registrants as well as experts engaged to prepare supporting documentation.
Highlights of Proposed Rules
Among other things, the proposed rules:
- define “mining operations” to include all related activities from exploration through extraction to first point of material external sale;
- apply where a registrant’s mining operations are material to its business or financial condition, with such operations being presumed material if a registrant’s mining assets constitute 10% or more of its total assets;
- require the presentation of mineral reserves to be made net of allowances for diluting materials and mining losses; note this is different from other CRIRSCO-based disclosure regimes;
- require a registrant to disclose mineral resources and material exploration results in addition to its mineral reserves; this represents a significant departure from Guide 7, which prohibits disclosure of estimates of mineral resources (other than reserves), except where otherwise required by foreign or state law;
- revise the definition of mineral resources to make it consistent with CRIRSCO-based standards and require disclosure of mineral resources and mineral reserves to be based on either a preliminary feasibility study or a final feasibility study by a “qualified person” which must include a technically and economically feasible life of mine plan;
- require that every disclosure of mineral resources, mineral reserves and material exploration results be based on documentation prepared by a “qualified person”, defined as a person who is both (1) a mineral industry professional with at least five years of relevant experience and (2) a member or licensee of a recognised professional organisation; note that the proposed rules do not require the qualified person to be independent but require disclosure of any relationship between the qualified person and the registrant (e.g., if it is prepared by an employee); note that while most CRISCO-based codes identify which organisations are deemed to be approved organisations, the SEC has adopted a more flexible standard in the proposed rules, leaving it to the judgement of the registrant as to whether the qualified person’s credentials satisfy the requirements;
- require a registrant to file a technical report summary prepared by a qualified person for each material property, setting forth scientific and technical information and conclusions reached concerning material mineral exploration results, initial assessments used to support disclosure of mineral resources, and preliminary or final feasibility studies used to support disclosure of mineral reserves; critically, the “qualified person” will have liability as an “expert” under US securities laws for any material misstatements or omissions in the technical report summary;
- require that calculations of mineral resources and reserves be based on a commodity price not higher than the trailing 24-month average unless there is a reasonable contract price; note this is a different approach from the CRIRSCO standards, which permits the use of any reasonably justifiable price based on long-term trends;
- require a registrant with more than one mining property to provide summary disclosure including a map and specified details relating to its 20 largest properties (regardless of materiality) as well as summary resource and reserve data grouped by commodity and geographic area; and
- require disclosure of internal controls used in developing exploration and mineral resource and reserve estimates, including disclosure that addresses quality control and quality assurance programs, verification of analytical procedures and comprehensive risks inherent in the estimation.
The new rules also require registrants that are royalty companies and similar companies to provide all applicable mining disclosure if the mining activities that generate the royalties or other payments are material to such company’s operations as a whole. This has potentially wide ranging implications for companies that have granted a royalties to a registrant as they will potential need to provide assistance to enable such royalty companies to comply with US reporting requirements.
The SEC proposed rules are open for public comment from interested parties which must be received on or before 15 August 2016. Read the full proposed rules.