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Securities regulators are back on the warpath when it comes to junior miners. In the past several months regulators have been busy sending a harsh message to companies that there will be consequences if they don’t follow precise disclosure rules related to their projects. Miners have lost out on financings and had trading of their stocks halted after getting in the crosshairs of securities commissions, a development that only adds more risk to an already risky business.
“It has certainly been a wake-up call to capital market participants that they need to be mindful of their technical disclosure, or their deals can get hung up,” said Jeremy Fraiberg, co-chair of the mining group at Osler, Hoskin & Harcourt LLP.
For investors, the crackdown is a reminder that caution is always warranted when looking at how companies interpret drilling results, economic assessments and other data. While Canada has come a long way from the Bre-X era, disclosure deficiencies still pop up.
Provincial regulators have recently gone after a long list of juniors for alleged lapses. Some of the most talked-about names include Extorre Gold Mines Ltd., Rio Novo Gold Inc., Karnalyte Resources Inc., Orbite Aluminae Inc., and Clifton Star Resources Inc. None of them have categorically denied making mistakes.
The seemingly sudden interest in junior miners didn’t come out of nowhere. Regulators do routine compliance reviews to make sure miners are meeting requirements, and they talk among themselves when they notice deficiencies. The British Columbia Securities Commission (BCSC), for instance, decided a year ago that it needed to get more aggressive in fixing disclosure issues.
“We decided it was time to step up a bit and take action against companies that were not complying,” said Andrew Richardson, director of corporate finance at the BCSC.
In the heyday of the Vancouver Stock Exchange, investors understood they should take almost anything a junior miner said with a grain of salt. But the Bre-X scandal in 1997 and subsequent fallout ushered in a new set of rules for mining disclosure. National Instrument 43-101 dictates specific practices that every company must follow and is designed to prevent confusion about mineral deposits. The rules also ensure companies get qualified experts to approve and sign off on their data.
Nevertheless, disclosure quality tends to ebb and flow with the market and Mr. Richardson notes there is always room for improvement. Some of the typical mistakes companies make that commissions are noticing these days include misclassifying resources (for example, adding inferred resources to other categories), incorrectly using historical drilling data, and misinterpreting technical studies.
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