This article was written by Heath Lewis and David Jewkes.
Much has happened since ASIC first set the cat among the pigeons with the release of Information Sheet 214 in April 2016. The vociferous and passionate reaction from the mining and resources industry to ASIC’s guidance activated several rounds of consultation involving ASIC, JORC, ASX and other stakeholders, culminating in the publication of a revised Information Sheet 214 in October and, just last week, the release by ASX of interim guidance regarding the reporting of scoping studies.
While ASIC’s revised IS 214 demonstrated a more conciliatory stance (without embracing any significant policy revision), ASX’s interim guidance provides the more practical direction that issuers have been craving in connection with the release of scoping study announcements, filling some of the gaps in ASIC’s guidance.
In this update we consider the key aspects of ASX’s interim guidance, as well as the finessing of ASIC’s policy position. All the while wondering whether, if ASIC’s objective was to improve market standards or change behaviours, could there have been a more efficient and consultative (and less distracting) way of achieving that outcome?
ASIC Information Sheet 214
We don’t intend re-hashing all of the industry concerns with ASIC’s initial position represented in Information Sheet 214 ‘Version 1.0’ released in April 2016, but it’s fair to say it was met with much angst by the mining and resources industry. Many high profile members of that community publicly criticised ASIC’s approach, and it prompted a process of consultation between ASIC, ASX, JORC and industry.
This culminated in ASIC publishing much anticipated updated guidance in October 2016 (IS 214 ‘Version 2.0’) which included encouraging revisions (in the sense that ASIC demonstrated a willingness to listen, and adopted wording changes that suggested a more facilitative and realistic policy setting) as well as some substantive improvements. Those optimists among us who were hoping for a full-scale retraction or surrender on the part of ASIC would, however, have been disappointed.
Key changes to the ASIC guidance are as follows:
- production targets and other forward-looking information can be supported by mineral resource estimates, provided that sufficient work has been done around the process for “converting” the mineral resources into the anticipated future outcomes
- material assumptions relating to the JORC Code modifying factors must be disclosed to the extent that modifying factors have not been fully analysed and progressed (which is more likely to be the case as a company’s mineralogy moves away from the category of highest certainty, being proven reserves)
- ‘secured funding’ is not a compulsory pre-requisite to establishing a reasonable basis for (and therefore to publishing) a production target or financial forecasts based on them. However, what is necessary is that the assumptions underpinning the expectation that funding will become available as and when required need to have objectively reasonable grounds and must be disclosed
- ASIC encourages the express disclosure of whether debt or equity (or presumably other) funding is required to bring a project to life, and how much, with a view to giving investors a sense of the issuer’s capacity to deliver the outcome represented by the forward-looking information, and cautionary language regarding the potential for dilution of investors’ interests is also encouraged.
In many respects, IS 214 Version 2.0 appears to have largely embraced the market practice that has developed since publication of Version 1.0 in April 2016.
If additional and improved disclosure was a motivating factor for ASIC when it released IS 214 Version 1.0 (which we expect it was), then the convergence of market practice with ASIC’s expectations and guidance is a positive outcome, both for ASIC and also the broader industry.
ASX’s interim guidance
The latest step on the forward-looking information journey is the release by ASX last week of interim guidance designed to assist ASX-listed mining entities disclosing scoping study results to understand and comply with their existing regulatory obligations.
Building on the IS 214 framework, much of the ASX guidance reinforces the existing requirements of the ASX Listing Rules and the JORC Code with respect to the reporting of scoping studies. However, there are a handful of new developments in the interim guidance that are worth noting.
- Cautionary statements: in addition to reminding companies of the applicable ASX Listing Rule and JORC Code requirements, ASX prescribes a more fulsome cautionary statement to be used when scoping study results are announced, building on the cautionary statement contemplated by the JORC Code which ASX now indicates is inadequate. The cautionary statement must be proximate to the results of the scoping study and must be of equal prominence.
- Disclosure of all material assumptions: when production targets are disclosed with scoping study results that are not largely supported by ore reserves, that disclosure will need to be accompanied by disclosure of:
ASX notes that a failure to comply with these expectations may cause it to request from the issuer details regarding who approved the announcement, what assumptions they made as to the matters set out above, whether in their opinion those assumptions are reasonable, and the factors to which they had regard in forming that opinion.
- the extent to which the JORC Code modifying factors have been analysed and progressed, and any material assumptions that have been made about the modifying factors;
- any assumptions made specifically regarding the timeframe for development and production and with respect to the viability of funding (importantly, unlike ASIC, ASX has acknowledged that mining entities often have business plans that involve the realisation, or partial realisation, of potential project value prior to actual project development, including through sale of the project or the introduction of a joint venture partner); and
- the sequencing of various categories of resources and reserves in the production schedule.
- Reporting rules: ASX outlines a few rules to be followed when reporting scoping study results:
- production targets or forecast financial information (such as NPV, IRR or payback period) should not be included as a ‘headline statement’;
- ‘per share’ values should not be used to express the results, noting that, given the imprecise nature of a scoping study and the high probability of equity funding expanding the capital base, it will be a very exceptional case where a company would have reasonable grounds for doing so;
- a fair and balanced summary of the study must be presented or else the announcement may be misleading (with one potential consequence being the possibility of compulsory disclosure of the scoping study report (redacted for forward looking information without reasonable grounds));
- results should be presented as a realistic range (rather than single specific and precise figures), rounded off to an appropriately significant figure and be qualified with terms such as ‘approximately’, to emphasis the imprecise nature of the study; and
- the use of non-JORC Code terminology must be avoided.
- Disclosure checklist: attached to the interim guidance is a checklist which ASX notes it developed to assist listed entities verify they had met the applicable ASX Listing Rule requirements when disclosing the results of a scoping study. In addition to possibly requiring a full scoping study to be disclosed, ASX has indicated that it may also use the checklist as a compliance tool which issuers can be required to complete and provide to ASX (which may also be published on the platform).
It is worth noting that ASX’s guidance is labelled “interim”, recognising that ASIC, ASX, JORC and the broader industry still have work to do in order to develop an appropriate and robust regulatory framework to regulate scoping study disclosure. In due course, and subject to the necessary consultation processes, permanent changes to Chapter 5 of the ASX Listing Rules and to the JORC Code will be made, presumably reflecting ASX’s interim guidance.
What does it all mean for issuers?
ASIC’s intention when it issued IS 214 Version 1.0 was to assist the market and provide clear guidance regarding, among other things, the relevant legal and regulatory requirements applicable to mining and resources companies when publishing production targets (and financial forecasts based on them), which had particular relevance to the publication of scoping study results. A re-write of the ASIC guidance and now further interim guidance from ASX has resulted in a number of new considerations for issuers to take into account before publishing scoping study results (and production targets and related financial information more generally).
Market practice since IS 214 Version 1.0 was first released has seen improvement, which is a positive outcome. In addition, the reaction to IS 214 Version 1.0 resulted in ASIC, ASX, JORC and the mining and resources industry coming together to ventilate the various issues relevant to the use of forward looking statements in the context of scoping study results. Again, we consider this collaboration to be a positive outcome.
Despite these positives, we query whether the approach taken by ASIC releasing IS 214 Version 1.0 (ie. publish first and consult later) was necessarily the right one, and whether some of the drama might have been avoided during a very challenging time in the industry. Nevertheless, if the final outcome from this episode is highlighting the issue, defining an industry-wide solution through consultation and improving market behaviour, then it has likely been worth it.
Self-evidently, companies looking to publish scoping study announcements should familiarise themselves with IS 214 Version 2 and ASX’s interim guidance. In particular, companies should refer to the checklist provided with the ASX interim guidance to help satisfy themselves that the applicable legal and regulatory requirements have been met, including, importantly, disclosure of the material assumptions about the availability of project finance.
We’ve necessarily summarised the central issue for the purposes of this article. A more detailed summary of ASIC’s policy position at the time and the challenges it presented for certain companies in the mining and resources industry is set out in our earlier update which can be accessed here.