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Under NI 43-101, when a preliminary prospectus, a rights offering or an annual information form (AIF) is filed, if new material information about a project is obtained, companies must complete an updated technical report in order to complete the financing. With a short form prospectus, the trigger for a new technical report is higher and limited to a first time disclosure or material change to reserves / resources and/or the result of a preliminary economic assessment (PEA). However, completing a short form prospectus requires a current AIF to be filed, which often triggers the lower NI 43-101 threshold.
Updating a technical report adds not only costs, but also time that could result in missed opportunities to raise funds when market appetite permits. Given the threshold for materiality is not always clear, uncertainty exists around when an update is required. Therefore, PDAC is pushing an initiative to alter subsection 4.2(1) of NI 43-101, so only first time disclosure of (or material change to) reserves, resources and/or a PEA triggers the requirement for an updated technical report when filling a preliminary prospectus, rights offering or AIF.
Below, a more detailed explanation of the situation, as well as the relevant text of subsection 4.2(1) of NI 43-101 is provided.
Subsection 4.2(1) of NI 43-101 lists the circumstances under which a requirement for updating a technical report could be triggered if a threshold has been crossed (For reference, see the content of subsection 4.2(1) in the bottom of this document). The subsection explains the threshold for most circumstances: if the issuer obtained any new scientific or technical information that relates to a mineral project on a property is material to the issuer, this would trigger the requirement for a new technical report. This may include new information on reserves, resources, geochemistry/geophysics surveys, new drilling results and assays, as well as changes in various assumptions that impact the economic results of a project.
Section 4.2(1) also lists two circumstances under which the requirement for an updated technical report is triggered only in case of a first time disclosure (or material change to) reserves, resources and the result of a preliminary economic assessment (PEA). Item (b) refers to a short form prospectus, and item (j) covers any written disclosure that was not addressed in items (a-i) of subsection 4.2(1).
An issuer can use a previously filed technical report if it remains current under NI 43-101. However, since the materiality test may be applied to items of information aggregated together, it can be difficult for an issuer to pre-determine whether their previously filed technical report remains current.
Among the circumstances listed on subsection 4.2(1), several financing mechanisms are included:
- item (a) deals with a preliminary prospectus
- item (e) deals with a rights offering for reporting issuers
- item (f) deals with the Annual Information Form (AIF), which must be filed in order to use the short form prospectus.
The trigger in the above circumstances has the lower threshold, according to which any material information may require an update of the technical report.
Updating a technical report is a time and money consuming task. Therefore, the regulator’s requirement to update a technical report when conducting financing may result in increased cost of financing, and more importantly, in missing the market time-window for a financing opportunity. Moreover, the difficulty to determine if a technical report is current may drive junior mining issuers to unnecessarily update technical reports already on file, or alternatively, avoid public financing and seek a private placement, an option that prevents an issuer from increasing its shareholder base.
The proposal of the PDAC securities committee is to change subsection 4.2(1) for items (a), (e) and (f) (which deal with preliminary prospectus, rights offering and AIF, respectively) so that:
- A requirement for updated technical report would be materiality at the issuer level only (as opposed to the project level), and
- Only for first time disclosure of, or material change to, reserves, resources and PEA results, as is the trigger in items (b) and (j).
* Note: It may be more difficult to convince CSA staff to permit a carve-out for virtually all of Section 4.2(1) and for that reason PDAC suggests limiting the carve-out to preliminary prospectus (a), rights offering circular (e) and AIF (f). These are the ones which would have the most benefit to junior exploration issuers.
As a result of the proposed change:
- Easier for issuers (and regulators) to know when an updated technical report is triggered
- Reduction in the number of “unnecessary” technical reports that are prepared and filed
- Reduced cost of gaining access to the capital markets to raise finance.
- Junior issuers would be more likely to:
- file an AIF to qualify as a short form prospectus issuer
- expand their shareholder base and not have to rely on private placements
- avoid providing expensive incentives (warrants etc.) to complete private placements
As a result of the above, access to capital would be easier for junior companies, which then would be able to focus in what they do best – explore for mineral resources.
APPENDIX: National Instrument 43-101 – Section 4.2(1): Obligation to File a Technical Report in Connection with Certain Written Disclosure about Mineral Projects on Material Properties
(1) An issuer must file a technical report to support scientific or technical information that relates to a mineral project on a property material to the issuer, or in the case of paragraph (c), the resulting issuer, if the information is contained in any of the following documents filed or made available to the public in a jurisdiction of Canada:
(a) a preliminary prospectus, other than a preliminary short form prospectus filed in accordance with National Instrument 44-101 Short Form Prospectus Distributions;
(b) a preliminary short form prospectus filed in accordance with National Instrument 44-101 Short Form Prospectus Distributions that discloses for the first time
- (i) mineral resources, mineral reserves or the results of a preliminary economic assessment on the property that constitute a material change in relation to the issuer; or
- (ii) a change in mineral resources, mineral reserves or the results of a preliminary economic assessment from the most recently filed technical report if the change constitutes a material change in relation to the issuer;
(c) an information or proxy circular concerning a direct or indirect acquisition of a mineral property where the issuer or resulting issuer issues securities as consideration;
(d) an offering memorandum, other than an offering memorandum delivered solely to accredited investors as defined under securities legislation;
(e) for a reporting issuer, a rights offering circular;
(f) an annual information form;
(g) a valuation required to be prepared and filed under securities legislation;
(h) an offering document that complies with and is filed in accordance with Policy 4.6 - Public Offering by Short Form Offering Document and Exchange Form 4H - Short Form Offering Document, of the TSX Venture Exchange, as amended;
(i) a take-over bid circular that discloses mineral resources, mineral reserves or the results of a preliminary economic assessment on the property if securities of the offeror are being offered in exchange on the take-over bid; and
(j) any written disclosure made by or on behalf of an issuer, other than in a document described in paragraphs (a) to (i), that discloses for the first time
- (i)mineral resources, mineral reserves or the results of a preliminary economic assessment on the property that constitute a material change in relation to the issuer; or
- (ii)a change in mineral resources, mineral reserves or the results of a preliminary economic assessment from the most recently filed technical report if the change constitutes a material change in relation to the issuer.