May 11, 2011

Introduction

Companies which need to issue a prospectus in the UK are required to comply with the Prospectus Rules issued by the Financial Services Authority in accordance with the Prospectus Directive (no. 2003/71/EC).  In so doing, companies must also take into account the recommendations issued by the Committee of European Securities Regulators ("CESR") for the consistent implementation of the European Commission's Regulation on Prospectus no. 809/2004.  The recommendations have been recently updated by CESR's successor, the European Securities and Markets Authority ("ESMA") and this note addresses the new provisions, which are now in force, relevant to natural resources companies.  The old CESR recommendations had given rise to problems for natural resources companies in the past particularly in relation to certain of the specific disclosure requirements and the requirement to produce a CPR wherever the company has not been a "mineral company" for at least the three preceding years. 

The difficulties in determining the precise information that needed to be supplied in some cases together with some fairly rigid requirements in others had given rise to a number of criticisms and in March 2011, ESMA announced that some important amendments would be made to the recommendations for natural resources companies designed to take on board the concerns raised.  The new provisions are set in paragraphs 131-133 and Appendices I, II and III of the ESMA update of the CESR recommendations.  It should also be noted that these recommendations will be followed by competent authorities in other member states of the European Union as well as the UK.

"Mineral Company"

The definition of "mineral company" has now changed from companies whose principal activity is or planned to be the extraction of mineral resources to companies with "material mineral projects".  "Mineral projects" means exploration, development, planning or production activities whereas the old definition excluded exploration activities of all types.  Activities include any of metallic ore, industrial minerals, gemstones, hydrocarbons and solid fuels undertaken by natural resources companies.  Materiality is to be assessed having regard to all the company's mineral projects taken as a whole.  Arguably, this brings in a wider range of companies than an assessment by reference to principal activity and would catch diversified conglomerates with some mining and oil and gas business.  ESMA has however expressed the view that this is merited because the provisions are designed to ensure that prospectuses contain appropriate disclosure of reserves and resources.

Additional Disclosure Information

The recommendations as to what is to be included in all prospectuses of mineral companies have been clarified to provide for the inclusion of the following information:

(a) details of mineral resources, and where applicable reserves and exploration results/prospects in accordance with one of the reporting standards acceptable under the codes and/or the organisations set out in Appendix 1;

(b) anticipated mine life and exploration potential;

(c) indication of duration and main terms of any licences or concessions and legal, economic and environmental conditions for exploring and developing those licences or concessions;

(d) indications of the current and anticipated progress of mineral exploration and/or extraction and processing; and

(e) explanation of any exceptional factors.

Significant Gross Change

Where the transaction described in the prospectus includes the acquisition of a mineral company or of reserves and/or resources and constitutes a significant gross change then this information must also be provided on the assets being acquired and reported on separately. Significant gross change arises where there is a variation of more than 25% relative to one or more indicators and also covers circumstances where the issuer has a complex financial history.

Removal of Requirement to Provide Cash Flow Estimates

The revised recommendations have addressed criticism of the requirement to produce estimates of cash flow and an accountant's report.  Having considered requiring a forward-looking management-prepared statement on capital expenditure plans instead, ESMA decided not to include this on the basis that such information would need to be disclosed in any event under the Prospectus Rules.

Instead, the new recommendations provide considerably more detail on when a competent person's report is required to be included in a prospectus, what it should contain and what standards it should adhere to.  This change is to be welcomed as providing more certainty to issuers rather than relying on the former somewhat vague requirement to agree the content of the CPR with the relevant competent authority.

Exemption From Requirement to Include CPR in Prospectus

An issuer is exempt from the requirement to include a CPR in the prospectus if it can demonstrate that:

(a) it has already published a suitable CPR in accordance with one of the reporting standards set out in Appendix I;

(b) it is already admitted to trading on either a regulated market, an equivalent overseas market, or an appropriate multi-lateral trading facility; and

(c) it has continued to report and publish annually details of resources and reserves and exploration results/prospects in accordance with one of the reporting standards set out in Appendix I.

These exemptions will be of particular interest to qualifying overseas companies who wish to publish a prospectus in the UK.

There are dispensations from some of these requirements for companies admitted to trading before 1 July 2005 and where reporting of certain information has been or is prohibited by third country securities laws or regulations with identification, if applicable, of the information omitted and the relevant provisions prohibiting disclosure.

Requirements of CPR

The CPR must be prepared by a person who:

1. has the required competency requirements as prescribed by the relevant codes/organisations (listed in Appendix I); or is professionally qualified from an appropriate recognised professional association and has at least 5 years' relevant professional experience; and
2. is independent of the company and is not paid by way of a fee linked to the admission or value of the issuer.

The CPR must:

1. be dated not more than 6 months from the date of the prospectus and the prospectus must contain an appropriate negative statement in relation to material change since that date;
2. report mineral resources and where applicable, reserves and exploration results/prospects in accordance with one of the reporting standards under the codes and/or organisations set out in Appendix I;
3. contain as a minimum segmented information (using a unit of account appropriate to the scale of its operations) as set out in Appendix II in the case of a mining company and Appendix III in the case of an oil and gas company.

Internationally Recognised Mineral Standards

Appendix I lists the acceptable internationally recognised mineral standards.  The list includes only the CRIRSCO – aligned mining codes and the PRMS – aligned oil and gas codes.  The mining reporting standards include JORC, SAMREC, PERC and CIM Guidelines.

Content of CPR

Appendix II sets out the recommended content of a CPR to the extent it is not already specified under the code, statute or regulation the company reports under.  The information should cover:

1. Legal overview with a description of rights, including environmental obligations, and licences and consents, and material terms including host government rights and partner arrangements;
2. Geological overview;
3. Resources and reserves specifying the information that is to be provided and how this should be presented, distinguishing inferred, indicated/measured resources, and proved/probable reserves, together with assumptions and appropriate reconciliations;
4. Valuation of reserves specifying how it is made, the assumptions used and sensitivity analysis;
5. Environmental closure liabilities, environmental permits and commentary on facilities which are of material significance;
6. Historic production statistics and operating expenditures over a minimum 3 year period;
7. Infrastructure including a discussion of location, accessibility, supply, storage and health and safety;
8. Maps showing material details; and
9. Any special factors, if applicable.

Summary

While much of what is set out in the updated recommendations represents already accepted market practice, the amendments are generally to be welcomed as providing more clarity, certainty and effective guidance as to what is required to be included in a prospectus for a natural resources company, as well as the circumstances in which a CPR is or is not required, what it should contain and which codes and/or organisations are acceptable in the UK.  The exemptions from the requirement to include a CPR in a prospectus providing certain conditions are met are particularly welcome and should simplify the process for qualifying companies already listed or seeking to list in the UK.