Will disclosure rules about production targets drive junior resource companies out of Australia?

28 October 2013

Junior mining companies seeking to raise funds to pursue further exploration activities face pressure from investors to provide an indication of their project’s expected financial characteristics.

Every investor wants the answers to “what is the potential scale of the project”, “how much will the project cost” and “what returns can I expect from my investment”?

Mining companies (particularly at the junior end) have historically used conceptual or scoping studies as the trigger for providing such prospective financial information to investors.

But recently, numerous ASX-listed resource companies have retracted public statements regarding the results of conceptual or scoping studies for natural resources projects due to concerns being raised about its reliability.

Such retractions throw into doubt what information contained within such studies[1] is able to be publicly disclosed.

ASX has released a series of frequently asked questions that confirm prospective financial information contained in conceptual or scoping studies can only be disclosed if there is a reasonable basis for it. In working out whether a reasonable basis exists, a key factor is whether the company is able to disclose the production target on which the study is inevitably based.

Many of the companies issuing retractions have based their studies on a production target underpinned by inferred mineral resources only. The new Listing Rules for mining companies that take effect on 1 December 2013 specify that it is only in exceptional circumstances that reasonable grounds for disclosing such a production target would exist.

The number of retractions issued already suggests that such grounds would only exist in exceptionally exceptional circumstances.

But where does that leave a company that has completed a scoping study based on an inferred mineral resource that they are not permitted to disclose publicly? More importantly, if they communicate the results of the study to potential investors, are those potential investors able to trade on that information?

The approach taken in ASIC Regulatory Guide 170 would suggest that such information may not be material to investors because it is too inherently speculative and unreliable. This would mean that such information is not ‘inside information’ and could be traded on.

The problem with this approach is that it results in market participants having access to different levels of information in the market – those that are aware of the company’s view on the project’s potential financial characteristics, and those that are not. It’s also unclear where this leaves research analysts, who would clearly want to publish information about a project’s potential financial characteristics in their investment recommendations to clients.

If on the other hand such information was considered materially price sensitive, potential investors who have access to that information wouldn’t be able to trade due to insider trading concerns. This would negatively impact on attracting investment due to a liquidity discount while such information remains ‘inside information’.

It would also put the mining company in a tricky spot if confidentiality over the information was lost, as it would find itself subject to an immediate disclosure obligation under the ASX Listing Rules. This would force the ASX to allow disclosure of information that previously wasn’t allowed to be disclosed due to concerns it may be misleading.

The real problem when it comes to the disclosure of prospective financial information derived from a production target is that there is no half-way house. Either there is a reasonable basis for it (in which case all of the information can be disclosed) or there isn’t (in which case none of the information can be disclosed).

Make no mistake. This is not an easy issue for the regulators to deal with.

Conceptually, companies should have sufficient confidence that they have a resource base capable of economic extraction before they start providing prospective financial information relating to the costs of development and profitability of extraction.

But this is a catch twenty two as companies need to raise the funds to finance the drilling program to better define their resource base. Investors demand information about the project’s expected characteristics (in terms of scale, cost and returns) before funding those further exploration activities.

A better solution would be to allow certain prospective financial information that is derived from a hypothetical production target to be disclosed provided it is clear that:

  • the production target on which the prospective financial information is based is aspirational in nature;[2] and
  • the disclosure contains clear warnings around the reliability of the assumed production target that underpins the prospective financial information.

An example would be the disclosure of estimated capital costs of developing a project, where industry benchmarks are available to assist in providing a reliable estimate. Such information may be materially price-sensitive for an investor in assessing the likelihood of the company raising the required funding to enable the project to proceed, irrespective of the geological confidence in the resource base.

But this approach doesn’t sit within the current regulatory framework which deems statements in relation to forward-looking matters to be misleading if they are not based on reasonable grounds, even though the cautionary language itself may go some way to reducing the risk that investors could be misled.

It may be that we are seeing a move towards the approach taken by the US Securities Exchange Commission, which prohibits the disclosure of any mineral resources (only ore reserves are generally able to be disclosed in the US). Indeed, ASIC has expressed views previously which would be consistent with this approach insofar as production targets are concerned.

The practical effect of that approach would be to drive junior resource companies out of the Australian market, and into alternative markets where there is more flexibility to provide prospective financial information on resource projects to investors so as to maximise the prospects of the company raising the required capital to further the development of their project.

Such a move wouldn’t be a good outcome for the Australian resources industry.

  [1] The primary objectives of these studies are often to establish a sufficient basis to continue to pursue the development of the project.

  [2] ASX Guidance Note 31 confirms that the new Listing Rules relating to production targets were not intended to apply to statements that are clearly aspirational in nature.

The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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Christian Owen

Partner. Perth
+61 8 9460 1708


Russell Philip

Partner. Perth
+61 8 9460 1673