UNDERSTANDING THE SEC'S PROPOSED NEW MINING DISCLOSURE RULES: QUESTIONS AND ANSWERS
| Jurisdiction | United States |
UNDERSTANDING THE SEC'S PROPOSED NEW MINING DISCLOSURE RULES: QUESTIONS AND ANSWERS*
Dorsey & Whitney LLP
Salt Lake City, UT
Jason Brenkert
Dorsey & Whitney LLP
Denver, CO
Kimberley Anderson
Dorsey & Whitney LLP
Seattle, WA
Christopher Doerksen
Dorsey & Whitney LLP
Seattle, WA
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WILLIAM B. PRINCE is a partner in Dorsey & Whitney LLP's Salt Lake City office where he co-chairs the firm's Mining & Natural Resources Industry Group. His practice includes domestic and international mining transactions, natural resources-related environmental and compliance matters, and energy development projects. Bill is currently a member-at-large on the Rocky Mountain Mineral Law Foundation Board of Directors, is the former chairman of the Special Institutes Committee and has served as a trustee of the Foundation and twice as the Annual Institute Mining Section chair. He was a founding member of the International Mining Professionals Society and served for two years as chairman of the Hard Minerals Committee of the ABA Section of Natural Resources, Energy and Environmental Law. He authored "Joint Development of Coal and Coalbed Methane" presented at the 48th Annual Rocky Mountain Mineral Law Institute in Lake Tahoe, Nevada, and at the Foundation's Special Institute on Regulation and Development of Coalbed Methane, and co-authored "Developing an Environmental Model: The Growing Diversity of International Environmental Standards and Agendas Affecting Mining Companies" published in the Colorado Journal of International Environmental Law and Policy. Bill is a native of Albuquerque, New Mexico. He earned his J.D. from the University of Utah College of Law. In a prior life, he was a river guide in Colorado, Utah and Arizona.
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A. INTRODUCTION
On June 16, 2016, the U.S. Securities and Exchange Commission (SEC) proposed a major overhaul of the disclosure requirements for companies that are engaged in material mining operations, including royalty companies. The proposed rules would replace the SEC's decades-old guidelines, set forth in Industry Guide 7 (Guide 7), with new subpart 1300 of Regulation S-K, which would be based on the Committee for Mineral Reserves International Reporting Standards (CRIRSCO). The new rules, if adopted, would be the most significant development in the SEC reporting requirements of mining and royalty companies since the passage of the Sarbanes-Oxley Act in 2002.
B. PROPOSED RULES IN QUESTION AND ANSWER FORMAT
This paper presents a short primer covering the SEC's proposed rules. The complex proposed rules, however, do not easily lend themselves to a nutshell condensation. To simplify the topic, the authors have organized the paper through the use of questions and responses focusing on the key concepts behind the proposed rules. While this approach is useful, the paper is not and should not be treated as a comprehensive summary of the detailed proposed rules. The proposed rules are attached as Appendix A. A full discussion of the SEC's description of the background, purpose and content of the proposed rules can be found at Modernization of Property Disclosures for Mining Registrants, 81 Fed. Reg. 41,652 (proposed June 27, 2016) (to be codified at 17 C.F.R. pts. 229, 239, 249). The complete SEC release can be accessed at https://www.gpo.gov/fdsys/pkg/FR-2016-06-27/pdf/2016-14632.pdf.
1. Why has the SEC proposed new rules for mining companies?
The SEC's guidelines for mining disclosure, currently set forth in Guide 7, have not been updated for more than 30 years. During this period, mining has become an increasingly globalized industry and several foreign countries have adopted mining disclosure standards based on the Committee for Mineral Reserves International Reporting Standards (CRIRSCO), which significantly differ from Guide 7. For example, unlike Guide 7, CRIRSCO standards:
• Require companies to disclose material mineral resources;
• Require that any public report about a company's exploration results, mineral resources and mineral reserves be prepared by a "competent or qualified person"; and
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• Permit disclosure of mineral reserves to be based on a preliminary feasibility (pre-feasibility) study or a final feasibility study.
Because of the widespread adoption of the CRIRSCO standards,1 industry participants have requested revisions to Guide 7, urging the SEC to align its mining disclosure rules with the CRIRSCO-based codes. The SEC's proposal to replace Guide 7 with a CRIRSCO-based code takes into account these global developments and industry participants' concerns.
2. What types of companies will be subject to the new rules?
As proposed, the new rules would apply to an SEC registrant that has mining operations that are material to its business or financial condition.
Mining operations is defined under the proposed rules as including operations on all mining properties that a registrant:
• Owns or in which it has, or it is probable that it will have, a direct or indirect economic interest;
•Operates, or it is probable that it will operate, under a lease or other legal agreement that grants the registrant ownership or similar rights that authorize it, as principal, to sell or otherwise dispose of the mineral; or
• Has, or it is probable that it will have, an associated royalty or similar right.
The SEC has not modified its definition of materiality in the proposed rules. Information is material if there is a substantial likelihood that a reasonable investor would attach importance to such information in determining whether to buy or sell the securities registered.
The proposed rules provide that a registrant's mining operations are presumed to be material if they consist of 10% or more of its total assets. They also provide that a registrant's mining operations may be material even if they comprise less than 10% of its total assets if, when considered with other quantitative or qualitative factors, the required disclosure concerning the mining operations would significantly alter the total mix of information available. The proposed rules do not specify what method of valuing a registrant's assets should be used.
Because the proposed rules define mining operations to include both direct and indirect economic interests, and because the standard for disclosure is materiality, companies that hold royalties, streaming agreements or other economic interests with respect to mining properties, as well as companies that invest in mining companies, would be subject to the proposed rules if such interests are material to the registrant's business or financial condition.
3. Will foreign private issuers be subject to the new rules?
Foreign private issuers that file annual reports or registration statements with the SEC on Form 20-F, that file registration statements on Forms F-1, F-3 or F-4, that voluntarily file on U.S.
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domestic reporting forms or that prepare offering circulars on Form 1-A under Regulation A+ would be required to comply with the proposed rules in such forms.
Canadian issuers that file annual reports or registration statements with the SEC under the Multijurisdictional Disclosure System (MJDS), including Forms 40-F, F-10, F-7, F-8 and F-80, would not be required to comply with the proposed rules.
4. What are the main differences between the SEC's existing guidance and the proposed rules?
The chart in Appendix B provides an overview of the main differences between existing Guide 7 and related SEC guidance, and the proposed new rules.
5. Are the SEC's proposed rules the same as the standards under Canada's National Instrument 43-101 or other CRIRSCO-based codes?
No. While the SEC's proposed rules are intended to be substantially similar to those of other CRIRSCO-based codes, they differ from each of those CRIRSCO-based codes in certain respects. SEC registrants that are subject to other CRIRSCO-based codes should compare such codes to the SEC's proposed rules and determine whether the differences would have any material implications for the registrant.
6. How do the new rules affect the characterization of a mining company and its properties as being in the exploration, development or production stage?
• The new rules would introduce a materiality threshold for being considered a development or production stage issuer. Under the new rules, a registrant would be defined as:
• An exploration stage issuer if it has no material property with mineral reserves;
• A development stage issuer if it engaged in the preparation of mineral reserves for extraction on at least one material property; or
• A production stage issuer if it is engaged in material extraction of mineral reserves on at least one material property.
The new rules would also clarify how individual properties of a mining company should be described. Under the new rules, an individual property would be defined as being:
• An exploration stage property if it has no mineral reserves disclosed;
• A development stage property if it has mineral reserves disclosed, but with no material extraction; and
•A production stage property if it has material extraction of mineral reserves.
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It should be noted that both Guide 7 and the new rules require a registrant to have disclosed mineral reserves in order to describe itself as being either a development or production stage company, regardless of whether the registrant is actively constructing a mine or operating a producing mine. Guide 7 does not discuss the characterization of individual properties, or distinguish between properties of a registrant that are at different stages of development.
7. Who is a qualified person?
Consistent with CRIRSCO-based mining codes, the new rules would introduce the concept of a qualified person, a mineral...
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