ASIC has revised its Information Sheet 214 on forward-looking statements by mining companies, following industry feedback. While continuing to emphasise that these statements must be based on reasonable grounds, ASIC has clarified that forward-looking statements based on estimates of mineralisation can be made so long as miners disclose the assumptions upon which they are based and, in particular, do not mislead investors about their financial capacity to deliver the forecast results. Partner Richard Malcolmson and Associate Jerome Entwisle report.
20 October 2016
- The revised IS 214 clarifies ASIC's view on how mining companies must balance their duties to keep the market informed of all price-sensitive information and also to ensure that they do not mislead the market by making 'forward-looking' statements without 'reasonable grounds'.
- Forward-looking statements (eg production targets or project valuations) can be made on the basis of early investigations or where secured funding is not yet in place, but ASIC has cautioned that under Australian law companies are still required to ensure that such statements are based on 'reasonable grounds' and that all relevant assumptions underlying those statements have also been disclosed.
As reported in our Client Update: ASIC's take on forward-looking statements, the Australian Securities and Investments Commission (ASIC) published Information Sheet 214 (IS 214) earlier this year to consolidate guidance issued by ASIC and the ASX on 'forward-looking' or 'predictive' statements by mining and resources companies.
Since its release, industry bodies have raised concerns that IS 214 was overly prescriptive and prevented companies (particularly junior miners) from releasing important material information to shareholders at crucial funding points.
On 12 October 2016, ASIC issued a clarification of the guidance with 'minor drafting changes'. ASIC said that '[t]he changes have been made in response to concern and misunderstandings that arose at the time of INFO 214's original release in April'. In a media statement accompanying the revised IS 214, ASIC Commissioner John Price said that 'ASIC recognises the importance of ensuring all in the industry have a shared understanding of the existing requirements for good disclosure'.1
The main purpose of IS 214 was to emphasise that under Australian law 'forward-looking statements' (such as production targets or NPV-based project valuations) must be based on 'reasonable grounds', otherwise those statements may be misleading or deceptive for potential investors.
This basic principle remains the key message in the revised IS 214. The main change has been to remove the suggestion that it would not be appropriate to make forward-looking statements about production targets or project values where all of the JORC Code modifying factors (which determine when an ore reserve is sufficiently identified) are not sufficiently progressed, particularly where secured funding is not in place. The revised guidance takes a more nuanced approach, focusing on careful consideration of the 'reasonable grounds' for a statement and disclosure of the assumptions underlying the statement.
To give one example, the previous guidance stated that, where a company only has mineral resource estimates (and not a defined ore reserve), then it would only be able to show 'reasonable grounds' for a forward-looking statement based on those estimates if it had a sufficient level of geological knowledge and confidence and all JORC Code modifying factors were sufficiently progressed. The revised guidance, on the other hand, states that companies need to 'consider carefully' whether they have reasonable grounds. This includes considering not only the level of confidence in the mineralisation underpinning the statement but also any assumptions about the 'modifying factors'. The more that all the JORC Code modifying factors have been progressed, then the greater the likelihood that a company will have 'reasonable grounds' for a forward-looking statement.
Rather than potentially dissuading companies from releasing information that may be qualified or uncertain in some respects, ASIC now suggests that the information can be released (and may need to be released if it is price sensitive) but should be accompanied by disclosure of how the JORC Code modifying factors have been analysed and progressed and any material assumptions that have been made to arrive at the forward-looking statement.
To address the main concerns raised about the previous guidance, ASIC has now made it clear that companies do not necessarily need to have secured funding in place to demonstrate 'reasonable grounds' for production targets or NPV-based valuations. However, companies must have (and disclose) a reasonable basis for the assumptions that they are making about their funding sources to avoid such projections being misleading.
On this topic, ASIC now says:
When you disclose a production target for a mining project, or forecast financial information or income-based valuation based on a production target, you need to be careful that you do not mislead investors about your financial capacity to deliver those results. If project finance (debt or equity) will be required to achieve the stated outcomes, this should be clearly disclosed, together with an estimation of the amount needed. It will also be appropriate to warn investors if this requirement for project finance is likely to result in a dilution of the value of their existing shares, if this is the case.
This is an important clarification by ASIC and is in accordance with the general principles relating to continuous disclosure and misleading or deceptive conduct under Australian law.2
As the ASIC guidance now acknowledges, market guidance based on mineral resource estimates is necessarily qualified in some respects until all of the JORC Code modifying factors have been sufficiently progressed. It may be that an otherwise promising mineral resource turns out to be less economically viable than originally anticipated as the analysis progresses. However, this does not mean that a company is unable to release information to the market based on such estimates. What it means is that the market must be kept suitably updated on the status of the company's investigations by being explicit about the assumptions underlying the forward-looking statements and the degree of confidence that the company has in those predictions. This is particularly important where companies may only have a limited number of active or prospective projects, as early information about prospective projects will be market-sensitive but also apt to mislead the market unless appropriately explained and qualified.
The revised IS 214 also revisits the issue of scoping or pre-feasibility studies and clarifies that companies may release parts of such studies. Parts of the study that include reliable, relevant information of a technical nature, but do not contain forward-looking statements, may be released to keep the market properly informed on the company's prospects. They may also inform the information that is required to be disclosed as part of 'Table 1' of the JORC Code.
Consistent with the rest of the guidance note, aspects of such studies that include forward-looking statements such as production targets, forecast financial information or NPV-based valuations should not be released to the market unless they are based on 'reasonable grounds' (which, as noted above, will require consideration of the progress of the JORC Code modifying factors). This, however, does not prevent the disclosure of 'aspirational' statements based on these studies, which are clearly identified as such (e. 'the results of the preliminary study were positive and the results justify the entity to commit to the next stage of exploration and development').
- See ASIC's media release: '16-349MR ASIC clarifies guidance for forward-looking statements in the mining and resources industry', issued 12 October 2016.
- See our previous publication, Client Update: ASIC's take on forward-looking statements, for more detail.