• Use and Disclosure of Preliminary Economic Assessments by Mining Issuers
  • October 10, 2012 | Authors: Michael Brown; Gregory Hogan
  • Law Firm: Cassels Brock & Blackwell LLP - Toronto Office
  • On Thursday, August 16, 2012, the staff of the Canadian Securities Administrators (“CSA”) published CSA Notice 43-307 Mining Technical Reports - Preliminary Economic Assessments (“the Notice”). The Notice sets out staff’s position on certain issues regarding the use and disclosure of preliminary economic assessments (“PEAs”) in compliance with National Instrument 43-101 Standards of Disclosure for Mineral Projects (“NI 43-101”).


    Before considering the issues and recommendations in the Notice, it is important to clarify what a PEA is, and how it differs from other related studies.

    • A feasibility study (FS) is a comprehensive technical and economic study of the selected development option for a mineral project that includes appropriately detailed assessments of realistically assumed mining, processing, metallurgical, economic, marketing, legal, environmental, social and governmental considerations, together with any other relevant operational factors and detailed financial analysis, that are necessary to demonstrate at the time of reporting that extraction is reasonably justified (i.e., economically mineable).

      The results of the study may reasonably serve as the basis for a final decision by a proponent or financial institution to proceed with, or finance, the development of the project.

      The confidence level expressed in a feasibility study will be higher than that of a preliminary feasibility study or a PEA.

    • A preliminary feasibility study (or PFS) is a comprehensive study of a range of options for the technical and economic viability of a mineral project that has advanced to a stage where:

      • a preferred mining method (in the case of underground mining) or the pit configuration (in the case of an open pit) is established; and

      • an effective method of mineral processing is determined.

        A PFS includes a financial analysis based on reasonable assumptions on mining, processing, metallurgical, economic, marketing, legal, environmental, social and governmental considerations and the evaluation of any other relevant factors which are sufficient for a Qualified Person, acting reasonably, to determine if all or part of a mineral resource may be classified as a mineral reserve. The completion of a preliminary feasibility study is a minimum prerequisite for the conversion of mineral resources to mineral reserves.

        The confidence level of a preliminary feasibility study is less than that of a feasibility study, but higher than that of a PEA.

    • A PEA is a study other than a preliminary feasibility study or a feasibility study that includes an economic analysis of the potential viability of mineral resources. A PEA is sometimes also referred to as a “scoping study”.

      Unlike the other two types of study, a PEA may contain results of an economic analysis that includes, or is based upon, inferred mineral resources. However, where that occurs, disclosure based on the study must contain cautionary language, specifically:

      a) a statement of “equal prominence” that:

      • the preliminary economic assessment is preliminary in nature, that it includes mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would allow them to be categorized as mineral reserves, and that there is no certainty that the preliminary economic assessment will be realized, and

      • mineral resources that are not mineral reserves do not have demonstrated economic viability;

        b) a statement regarding the basis for the PEA and any qualifications and assumptions made by the Qualified Person; and

        c) a statement that describes the impact of the PEA on the results of any feasibility or preliminary feasibility study in respect of the subject property.

        The confidence level of a PEA is low, below that of either a feasibility or preliminary feasibility study.

    Guidance in the Notice

    The Notice identifies a number of issues that CSA Staff consider to be problematic:

    1. PEA as a Proxy for a PFS

    According to the Notice, a recurring problem is that issuers have “blurred the lines” between a PEA and a PFS by stating that some or all of the components of the PEA are done at the level of a PFS. The result is that an issuer has effectively produced a PFS but with inferred resources. As a result, the Notice recommends 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

    In addition, the PEA should be a “conceptual study of the potential viability of mineral resources”, so any disclosure that implies that the PEA has demonstrated economic or technical viability would be contrary to NI 43-101 and the definition of PEA.

    The Notice indicates that staff may take the position that an issuer is treating the PEA as a PFS if the issuer:

    • does not include the section 3.4(e) cautionary statement with equal prominence each time it discloses the economic analysis of the mineral resources;

    • uses the PEA as a basis to justify going directly to a FS or a production decision;1

    • discloses mining or mineable mineral resources or uses the term “ore”, which is essentially treating mineral resources as mineral reserves; or

    • otherwise states or implies that economic viability of the mineral resources has been demonstrated.

    The Notice cautions issuers to ensure that their disclosure of the results of a PEA is not misleading by providing appropriate context, cautionary statements and discussion of risk sufficient for the public to understand the importance and limitations of the results of the PEA.

    2. PEA Done in Conjunction with a PFS or FS

    Changes to NI 43-101 effective June 30, 2011, included an amendment that explicitly permits the use of PEAs on advanced properties. The result, however, has been some confusion as to when a PEA may be used in conjunction with a PFS or an FS.

    The Notice clarifies that the CSA broadened the definition of 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. In this context, the revised definition is based on the premise that the issuer is contemplating a significant change in the existing or proposed operation that is materially different from the previous mining study. In most cases, this will also involve considerably different economic parameters and capital investments. Examples of a significant change are a different scale of proposed operation (higher or lower throughput), a different scope of operation (higher or lower grade), the inclusion of other types of mineralization (oxide vs. sulphide), the use of alternative mining methods (open pit vs. underground) or the use of alternative processing technology.

    By definition, a PEA is a study other than a PFS or FS. The Notice indicates that two parallel studies done concurrently or in close time proximity to each other may not in substance be separate studies, but components of the same study. Therefore, 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, in the view of CSA staff, a PEA if it:

    • has the net effect of incorporating inferred mineral resources into the PFS or FS, even as a sensitivity analysis;

    • updates, adds to or modifies a PFS or FS to include more optimistic assumptions and parameters not supported by the original study; or

    • is a PFS or FS in all respects except name.

    3. Other Issues

    In addition, the Notice also cautions issuers regarding certain other issues with respect to the use and disclosure of PEAs:

    • PEA Disclosure and Technical Report Triggers. Issuers are reminded that disclosing results of potential economic outcomes for their material mineral properties could be considered to be a PEA and thus, if it was a first time disclosure or a material change to a previous PEA, could trigger the requirement to file a supporting technical report.

    • Potentially Misleading PEA Results. CSA Staff have observed instances of overly optimistic or highly aggressive assumptions in PEAs, as well as the use of methodologies that diverge significantly from industry best practice and guidelines. Issuers are reminded that disclosure regarding forward looking information must not be made unless the issuer has a reasonable basis for the forward looking information. Similarly, Qualified Persons are reminded that professional standards typically require the use of procedures and methods that are consistent with industry best practice and guidelines, and that if significant divergence is necessary, the nature and basis for the divergence should be disclosed. Divergences that are not justified could result in a requirement to revise and re-file a technical report.

    • PEA Disclosure that Includes By-products. The Notice indicates that the disclosure of the results of a PEA which includes projected cash flow for by-product commodities that are not included in a mineral resource estimate may be misleading and contrary to the definition of a PEA. Caution is urged in such circumstances.

    • Qualified Person - Relevant Experience. CSA Staff have observed situations where individuals taking responsibility for a technical report are not fully complying with the requirement to have experience relevant to the subject matter of the mineral project and the technical report. In such cases, the Notice warns that the experience of the Qualified Person may be challenged by CSA Staff.

    Finally, the Notice indicates that non-compliant use or disclosure of PEAs may result in issuers being forced to re-file or restate documents, and that the failure to do so could result in default or the issuance of a cease trade order. In addition, such non-compliance could have significant effects on the ability to complete proposed prospectus offerings in a timely manner.

    A copy of the Staff Notice is available on the websites of various CSA members, including the Ontario Securities Commission: www.osc.gov.on.ca.

    1 We note that NI 43-101 does not prohibit issuers from commencing a FS or justifying a production decision based upon a PEA. However, in certain circumstances, this approach may serve as a “red flag”, causing CSA staff to question whether the PEA is being used as a “proxy” for a PFS or FS. Issuers in such circumstances should be prepared for the possibility of such CSA staff inquiries.