PUBLIC FINANCING AND LISTING IN CANADA FOR MINING AND EXPLORATION ISSUERS

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 2
(Apr 2007)
CHAPTER 14B
PUBLIC FINANCING AND LISTING IN CANADA FOR MINING AND EXPLORATION ISSUERS
Raymond A. McDougall
Stikeman Elliott LLP
Toronto, Ontario, Canada

RAYMOND A. MCDOUGALL

Raymond McDougall is a partner in the Toronto office of Stikeman Elliott LLP. A member of Stikeman Elliott's Global Mining Group, his practice is focused primarily on securities-related matters, including financings, mergers and acquisitions and advising on mineral disclosure issues. Mr. McDougall's clients include public companies and Canadian securities dealers.

He graduated with a B.A. from McGill University in Montreal in 1992 and an LL.B. from Osgoode Hall Law School in Toronto in 1996. He has practiced with Stikeman Elliott since that time and he was seconded to the Ontario Securities Commission in 1997 and to the Toronto Stock Exchange in 1999.

Mr. McDougall is a member of the Law Society of Upper Canada, the Canadian Bar Association and the Ontario Bar Association. In connection with his mining industry experience, he is a member of the Canadian Institute of Mining, the Prospectors and Developers Association of Canada and the Rocky Mountain Mineral Law Foundation.

Mr. McDougall's mining industry focus originated from his interest in minerals and his personal involvement in the mineral collecting community. He is a regular speaker on mineral-related matters and a collector of fine mineral specimens.

Mining Industry Financing Canada, TSX and TSXV

• More activity in the Canadian capital markets, TSX and TSXV than any other international markets

• TSX and TSXV owned and operated by TSX Group Inc., itself a corporation listed on the TSX

• Regulatory regime highly specialized for mining sector

• National Instrument 43-101

• Specific listing requirement regimes for exploration and mining companies

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Mining Companies Listed on Major Global Stock Exchanges

Number of Listed Mining Companies

(as at December 31, 2006)

• TSX Group has largest concentration (58%) of listed mining companies in the world

• Aggregate market capitalization:

— TSX US$ 249.5 billion

— TSXV US$ 30.4 billion

• 45 of TSX mining companies have market cap of over US$ 1 billion

• Largest concentration of mining analysts - 60

New Company Mining Listings on Major Global Stock Exchanges in 2006

• 112 new mining listings added to TSX (65) and TSXV (47) in 2006

• 30 additional companies became TSX or TSXV mining issuers in 2006 by way of other listing transactions such as reverse-takeover transactions

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International Exploration and Mining Projects Financed Through the Canadian Capital Markets

• Many companies listed on the TSX and TSXV are international in one or more aspect

— Listed issuers include non-Canadian companies of various countries of origin

— 30% of CEOs and directors of listed issuers are non-Canadian

— 32% of the 8,706 mineral projects held by listed issuers are located outside North America

Mining Equity Financings 2002 Through 2006

Over the past five years, the TSX and TSXV together have led all international stock exchanges in mining equity financings

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2006 Financing Activity

• In 2006, TSX-listed and TSXV-listed mining sector issuers completed 1,293 financing transactions, raising US$ 10.1 billion, representing:

— 84% of total global public mining financing of transactions by number

— 35% of the total global mining financing of transactions by value

Listing and Financing in Canada

• Traditional IPO: closely-held private company with exploration/mining assets raising money in public offering with listing

• Spin-Off: large mining company has exploration (or mining) assets not achieving any value within the company's portfolio, in comparison with its core assets (maintains some ownership of new public company)

• Attractive exploration or mining asset is available for acquisition and needs financing acquired and taken public (usually by reverse-takeover transaction in business combination with a listed shell company)

• Additional listing for international public company

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Business Objectives for Exploration/Mining Companies Considering Canadian Capital Markets

• Accessing capital required for next phase of one or more projects

• Favorable valuations of the issuer's securities due to liquidity and active secondary market trading

• Analyst coverage of the issuer to add to likelihood of higher valuations

• Presence in the same markets with majority of world's public mining companies to facilitate merger, acquisition and joint venture opportunities

Transaction Structuring Alternatives

• (1) Initial Canadian public offering with listing

• (2) Reverse take-over transaction, with or without prior financing

• (3) Simple additional listing for international issuers

• (4) Accessing capital in Canada through "private placement" financing, with or without concurrent listing

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Initial Canadian Public Offering with Concurrent Listing

• Often the most likely structure to yield achieve the business objectives successfully (therefore frequently chosen, despite time and expense involved)

• True IPO (private company or spin-off) or Canadian IPO for international issuer

• Not necessary to re-domicile as Canadian corporation

• Prospectus, technical reports, listing application

Reverse Take-Over Transactions

• RTOs, also known as "backdoor listings" involve business combination transaction (assets or shares) in which the business is sold to a listed shell company in exchange for shares of the listed company

• Usually completed as a series of transactions, including a financing

• Not less time or expense than IPO with prospectus and often more complicated and longer time frame

• Useful in specific circumstances, most commonly to accommodate a financing at a point in time, quickly (which cannot be done under prospectus due to rules against pre-marketing)

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Additional Listing

• Issuers with securities listed on one or more international stock exchanges add TSX listing

• No financing in Canada

• Long-form listing application and technical reports are required

• Less time, less cost, not often successful (although there are cases)

• Canadian market success usually requires critical mass of Canadian holders to generate secondary market activity on TSX (or TSXV)

Additional Listing with Private Placement Financing

• International issuer finances and lists in Canada concurrently

• Financing on a private placement basis to "accredited investors"

• Achieves some Canadian shareholding

• No immediate liquidity due to four-month statutory hold period

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National Instrument 43-101 - Standards of Disclosure for Mineral Projects

• Cornerstone of the success of the Canadian capital markets

• Applies to all disclosure, written or oral, made by every issuer (public and private) with respect to a "mineral project" on a property material to the issuer

• "Mineral project" means any exploration, development, or production activity, including a royalty interest or similar interest in these activities, in respect of diamonds, natural solid inorganic material, or natural solid fossilized organic material, including base and precious metals, coal and industrial minerals

The Three Fundamentals of NI 43-101

• (1) Rules prohibiting certain mineral disclosure and prescribing the mineral disclosure standards (reserve and resource categories)

• (2) Rules requiring that a "qualified person" (often must be independent) prepare or supervise all of an issuer's scientific and technical disclosure (includes certification and expert liability)

• (3) Requirement that scientific and technical disclosure about mineral projects on properties material to the issuer be supported by technical reports in prescribed form

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NI 43-101 Considerations

• Timing impact of Technical Reports on the transaction

• Regulatory review of Technical Reports

• Foreign code reporting: issuers may make disclosure of mineral reserves and mineral resources in accordance with US SEC Industry Guide 7, the JORC Code (Australia), the IMMM Reporting Code (UK), or the SAMREC Code (South Africa) if a reconciliation to NI 43-101 is included

The Canadian IPO Process

Step 1

• Retain advisors and professionals

• Investment bankers

• Legal

• Auditors/Financial Statements

• Technical / engineering

Step 2

• Internal reorganization as required of corporate chain and assets

• Commencement of due diligence

Step 3

• Prepare Preliminary Prospectus and file with Regulators

• Apply for TSX listing

Step 4

• Settle regulatory deficiencies/comments

Step 5

• Financial closing

Elapsed Time - 3 to 4 months

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Canadian IPO Discussion Topics

• Domicile of Issuer

• Directors

• Management

• Office location

• Timing

• Size of Canadian Offering

• Toronto Stock Exchange Listing Requirements

— Personal Information Form Clearance

— Technical Listing Requirements

PUBLIC DISTRIBUTION	• TSX: Aggregate market value of CS4 million (300 public shareholders)
• TSXV: Aggregate market value of CS1 million and (20% public shareholders)
MANAGEMENT	• All officers, directors and holders of more than 10% of the company's stock must produce details of their background, business experience and industry knowledge.
• Management and directors must have experience and technical expertise relevant to the project and sufficient knowledge of the Canadian capital markets
SPONSORSHIP	• All issuers (except most senior) are required to provide to TSX a sponsorship letter from an underwriting firm (an assessment of the applicant company and evidence of market support for the company's stock)
• Sponsors must comment on management projections, site visits, principal properties, as well as management credentials, experience and technical expertise.

TSX...