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Securities Commissions State Their Views on Preliminary Economic Assessments and Qualified Persons

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Mining and Capital Markets Bulletin

On August 16, 2012, the Canadian Securities Administrators (CSA) published two staff notices pertaining to National Instrument 43-101 – Standards of Disclosure for Mineral Projects (NI 43-101), namely CSA Staff Notice 43-307 Mining Technical Reports – Preliminary Economic Assessments  and CSA Staff Notice 43-308 Professional Associations under NI 43-101 Standards of Disclosure for Mineral Projects.

CSA Staff Notice 43-307

On June 30, 2011 the CSA promulgated an amended version of NI 43-101. One of the prominent features of the amended instrument was the broadening of the definition of a preliminary economic assessment (PEA) in response to industry concerns that issuers needed to be able to take a step back and re-scope advanced stage projects based on new information or alternative production scenarios.

On February 27, 2012, Fasken Martineau's Global Mining Group issued a bulletin discussing the securities commissions’ growing discomfort with the use of PEAs by issuers.  In late January 2012, the Securities Commissions of British Columbia and Ontario stated during a conference that PEAs had been allowed for advanced properties in order to allow issuers to step backward to assess alternative development options and to take a fresh look if a pre-feasibility study (PFS) or feasibility study (FS) was no longer current or relevant.  The Commissions asserted that a PEA should not be done concurrently with or as part of a PFS or FS, or as a way to include inferred resources in a PFS or FS.  Fasken Martineau's Global Mining Group anticipated that the Commissions would issue a staff notice to address these concerns, which they did on August 16, 2012. 

The following is a summary of the prominent features of CSA Staff Notice 43-307: 

  • PEA as proxy for a PFS: the Commissions recommend that issuers do not describe a study as a PEA unless it clearly falls into the definition of a PEA, or compare their PEA or any components of it to the standards of a PFS if the study includes inferred mineral resources.  This is intended to address situations where issuers represent that their PEA, or components of it, have been or will be done at or close to the level of a PFS, or that the PEA will somehow demonstrate the economic viability of mineral resources. PEAs are conceptual in nature and can only establish the potential viability of mineral resources.  In this regard, issuers are recommended to ensure that their disclosure of the results of a PEA is not misleading by providing appropriate context, cautionary statements (including under section 3.4(e) of NI 43-101— that mineral resources that are not mineral reserves do not have demonstrated economic viability), and a discussion of risk sufficient for the public to understand the importance and limitations of the results of the PEA. 
  • PEA done in conjunction with a PFS or FS: the  Commissions take the position that a study that includes an economic analysis of the potential viability of mineral resources that is done concurrently with or as part of a PFS or FS is not a PEA if it (i) has the net effect of incorporating inferred mineral resources into the PFS or FS, even as a sensitivity analysis, (ii) updates, adds to or modifies a PFS or FS to include more optimistic assumptions and parameters not supported by the original study, or (iii) is a PFS or FS in all respects except name.  This is intended to address situations where issuers prepare a PEA using inferred mineral resources, concurrently with or as an add-on or update to their PFS or FS, with the effect being that issuers may be including indirectly inferred mineral resources in their PFS or FS, in contravention with NI 43-101.
  • PEA disclosure and technical report triggers: the Commissions reiterate that an issuer may trigger the requirement under section 4.2(1)(j) of NI 43-101 to file a technical report to support disclosure of the results of a PEA if the disclosure is (i) contained  in the issuer’s corporate presentations, fact sheets, investor relations materials or any statement on the issuer’s website; or (ii) posted or linked from third party documents, reports or articles or otherwise adopted and disseminated by the issuer.  The requirement to file a technical report under section 4.2(1)(j) of NI 43-101 is usually triggered by the disclosure of information in news releases.  The Commissions underscore the fact that the filing of a technical report may be triggered by other forms of disclosure, whether such disclosure is direct or indirect.
  • Potentially misleading PEA results: The Commissions express their concern with overly optimistic or highly aggressive assumptions in PEAs, or methodologies that diverge significantly from industry best practices, which in their view may result in disclosure that is misleading.  Because PEAs are based on a number of assumptions that are forward-looking, issuers should comply with Part 4A of National Instrument 51—102 Continuous Disclosure Obligations, and have a reasonable basis for such forward-looking information.  If the Commissions are of the view that some of the assumptions are overly aggressive, they may challenge the qualified person to explain or justify the assumptions, failing which they will ask them to revise the PEA to take a more conservative approach.
  • By-products:  The Commissions have concerns with the disclosure of the results of PEAs which includes projected cash flows for by-product commodities that are not included in the mineral resource estimate.  The Commissions consider that the inclusion of such by-products is misleading, and recommend that issuers include cash flow projections only for commodities that have been properly categorized as measured, indicated or inferred mineral resources.
  • Relevant experience of QP:  The Commissions are concerned with individuals taking responsibility for technical reports or parts thereof that support the results of a PEA, while not fully complying with the requirement to have experience relevant to the subject matter for the mineral project and the technical report.  The qualified person should have relevant experience in the commodity, type of deposit and situation under consideration.

The Commissions have a wide array of tools to address situations where an issuer may be deficient with respect to NI 43-101 disclosure.   They may request that the disclosure be re-stated and the documents re-filed, place the reporting issuer on the default list, issue a cease-trade order until the deficiency is addressed, and may pursue enforcement action for the original breach, even if the issuer corrects the deficiency.  For an example, please refer to the order dated August 14, 2012 of the British Columbia Securities Commission which imposes a cease-trade order on Barkerville Gold Mines Ltd. after the company filed a 43-101 technical report to support the disclosure of the results of a PEA in a news release dated June 28, 2012.

CSA Staff Notice 43-308

As per Staff Notice 43-308, Chartered Professional Engineers (CPeng) of the Institution of Engineers of Australia are now considered ‘qualified persons’ under NI 43-101.

As part of its revisions to NI 43-101, the Securities Commission decided to revise the definitions of ‘qualified person’ by moving away from the strict definition that it previously had for individual members of foreign associations, and adopting a seemingly more liberal definition based on the QP meeting certain criteria as opposed to belonging to certain professional associations. While NI 43-101 as revised in June 2011 appeared in principle to embrace more professional associations, it set out in Appendix A of its companion policy a list of foreign associations which in the commissions’ view met the tests of the new definition of the instrument, and which, ironically, had the effect of excluding certain individuals who were previously considered “qualified persons”. An example of this are members of the Australian Institute of Mining and Metallurgy, who now need to be either fellows or chartered professional members in order to qualify as QPs. 

It is expected that the Commissions will continue to update the list of foreign associations that they think meet the test in the definition of ‘qualified person’.  In fact,  the Commissions encourage issuers to make submissions to have associations that they believe meet the test in NI 43-101 included on that list.


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