GLOBAL TRENDS IN THE MINING SECTOR
Worldwide exploration budgets rose to $3.5 billion in 2003, up 13% from 2002. The main recipients of increased exploration spending by companies were: Canada ($170 million); South Africa ($90 million); Mexico ($30 million); and Ghana, the United States and Venezuela, ($20 million each).
The number of large companies decreased from 141 in 1997, to 41 in 2003. The consolidation of large mining firms has had two significant effects. Firstly, Canada was among only six other countries where domestic companies controlled more than half of the large company market for mineral exploration. Of those countries, Australia, Brazil, and Russia had any significant mining exploration carried out in 2003. Secondly, firms spend a greater portion of their exploration budgets outside of their countries. Of the 2,797 active mining projects carried on by TSX-listed mining companies in January 2005, 47% were outside of North America.
During 2003 and 2004, Canada was the most significant country in terms of mining operations, international investment, and the raising of equity finance. Canadian firms account for 60% of all mining companies globally. Approximately 45% of the $12.7 billion in equity capital raised in 2003 by mining companies was raised on Canadian stock exchanges. Specifically, TSX-listed companies raised almost three times as much equity capital for mining as any other exchange globally.
This Global Trends section was extracted from a report by André Lemieux of Natural Resources Canada, and from a presentation by Elaine Ellingham of TSX Group dated April 26, 2005.
PROPOSED AMENDMENTS TO NATIONAL INSTRUMENT 43-101
The Canadian Securities Administrators (CSA) have proposed significant amendments to NI 43-101 - Standards of Disclosure for Mineral Projects and the accompanying Form and Policy.
Royalties
It is proposed that the definition of "Mineral Project" be expanded to make NI 43-101 applicable to companies holding material royalties (Royalty Issuers) because the technical information on the mineral products underlying a royalty interest is material. Royalty Holders, however, may not have the ability to file a technical report because access to technical data and project sites is generally not provided for in royalty agreements. The CSA's view is that issuers can contract into necessary access requirements. Although this approach might work with future royalties, it will be unsuitable for existing royalties.
Foreign Issuers
It has now been proposed to grant a blanket NI 43-101 exemption to foreign issuers with Canadian shareholders that meets the following criteria:
- incorporation/organization under the laws of a foreign jurisdiction;
- securities traded primarily on the New York Stock Exchange (NYSE), NASDAQ, London Stock Exchange (LSE), Australian Stock Exchange (ASE), or Johannesburg Stock Exchange (JSE), in compliance with all reporting requirements;
- being subject to securities laws of the United States, the UK, Australia or South Africa, and compliant with all continuous disclosure requirements;
- less than 10% of shares owned by Canadian residents when scientific and technical information about a mineral project is disclosed; and
- inclusion of a statement that the disclosure does not comply with NI 43-101 and no technical report will be filed to support such disclosure.
The SAMREC Code
The South African Code for Reporting Mineral Resources and Mineral Reserves (SAMREC) has been added as acceptable for reporting foreign mineral reserves and resources. A foreign issuer may use SAMREC provided that reconciliation to the mineral resource reserve categories set out in NI 43-101 is prepared. A Canadian issuer may use the SAMREC code for properties in a foreign jurisdiction provided that a similar reconciliation is included.
Technical Reports
The CSA has expressed concern about the use of blanket disclaimers in technical reports. Section 5.2 of the Companion Policy to NI 43-101 indicates that technical reports can only contain disclaimers for a limited purpose. The limited exception is intended to permit a qualified person to disclaim responsibility if other non-qualified experts were relied upon for legal, environmental, political or other advice that is not within the qualified person's area of expertise. Issuers must ensure that qualified persons do not insert blanket disclaimers that could interfere with their disclosure obligation on the System for Electronic Document Analysis and Retrieval (SEDAR).
Until recently, Canada was the only significant jurisdiction where mining issuers who sell securities in the exempt market (i.e.: to "accredited investors" or "sophisticated purchasers") must file a technical report. Due to the costs of compliance, many international private placements are unavailable to many Canadian investors. It is proposed that technical disclosure in an offering memorandum used to sell securities to Accredited Investors (which are, generally, individuals or companies which meet certain income or asset thresholds, pension funds, mutual funds, government institutions, securities dealers, insiders of the issuer, etc.) should not require a technical report.
In joint ventures between "producing issuers", and junior companies, producing issuers may prepare technical reports in-house, whereas junior companies are required to hire independent Qualified Persons. The amendments will permit junior companies to rely on scientific and technical information provided by producing issuers' qualified persons, thereby saving time and expense.
Certain TSX Venture Exchange-listed issuers are not required to file annual information forms. Rather, they file management discussion and analysis forms, which must be supported by a technical report to the extent that they provide technical information on a material mineral property.
An issuer can subjectively determine what is material. A '10% test' is set out in the Companion Policy to NI 43-10, which provides that a property will not be considered material if the most recently filed book value of the property, or value of consideration paid is less than 10% of the book value of the issuer's mineral properties and related assets. It is proposed that the 10% test be replaced with a subjective standard. The CSA directs issuers to consider the effects on market price and value of securities in light of current market activity. There may be difficulties in preparing and filing a technical report on a material property that an issuer intends to acquire, but does not yet own.
Currently, disclosure in an annual report does not require that a technical report be filed. It is proposed that a supporting technical report be required for all disclosure, whether written or oral, in respect of an issuer's material mineral properties, and for disclosure in an annual report.
An exemption is proposed from the requirement that a qualified person conduct a site visit for circumstances where an exploration site is "grass roots," and "extreme seasonal weather" prevents a site visit. This exemption would be limited to technical reports prepared within six months after the issuer acquires the property.
Coal
Previously the CSA indicated that coal resources and reserves should conform to the definitions of the Geological Survey of Canada: A Standardized Coal Resource/Reserve Reporting System for Canada (Paper 88-21). If an issuer owns foreign coal properties, the mineral resource and mineral reserve categories set out in the CIM Standards, and not the categories set out in Paper 88-21, should be used in respect of the issuer's coal properties.
CANADIAN "FOREIGN PROPERTY" RULE CHANGES, SECONDARY TSX LISTINGS WELCOMED
In the budget that passed second reading in Parliament May 19, 2005, the Canadian federal government repealed the "Foreign Property" rule, effective January 1, 2005, which limits the amount of Foreign Property that registered pension plans and other tax deferred retirement plans can hold.
Under the Foreign Property rule, Canadian pension plans were limited to investing no more than 30% of their assets in foreign property. Due to the plethora of TSX-listed Canadian mining companies, many Canadian investors have been reluctant to use their 30% Foreign Property basket to invest in foreign mining companies. This has had the result that foreign mining companies have "re-domiciled" in order to fully benefit from a listing on TSX, and secondary listings have historically been rare. With pension funds better able to invest in foreign property, secondary listings will be far more attractive.
Anticipated effects on foreign mining companies listed on other senior exchanges (such as the ASX - but not the Alternative Investment Market ("AIM") in London and possibly the JSE), and relevant TSX policies include:
- Distribution of the issuer's shares can be satisfied by their worldwide shareholder base, without requiring sufficient shareholders in North America to support a liquid market;
- Foreign mining companies may continue to meet domestic listing requirements rather than the higher foreign company listing requirements;
- TSX will not generally require reconciliation to Canadian GAAP if provincial securities commissions do not. They will not require it if the issuer reports under international financial reporting standards or if the issuer is an SEC foreign issuer reporting under US GAAP;
- If less than 25% of trading in the issuer occurs on TSX, then the applicable listing fee is the lower "foreign" listing fee, and TSX will defer to certain foreign stock exchanges on ongoing listing issues. Issuers are still required to comply with the TSX timely disclosure policy;
- While still requiring a NI 43-101 technical report, issuers will be able to apply for relief if they have JORC or SAMREC compliant reports; and
- Issuers will likely be required to have one or two directors with experience in the Canadian capital markets (though not necessarily resident Canadians).
Registered retirement savings plans and certain other deferred income plans may only invest in "qualified investments" prescribed by the Income Tax Regulations, which include shares listed on prescribed Canadian and foreign stock exchanges (of which AIM is excluded).
A NEW NATIONAL DIAMOND STRATEGY
The Canadian Diamond Industry and Need for Reform
Canada has become the world's third largest diamond producer of rough diamonds. Production continues to increase as projects such as Tahera Corporation's Jericho project in Nunavut, De Beers' Snap Lake project in the Northwest Territories and Victor project in Ontario reach development stages.
In July 2004, provincial and territorial mine ministers approved the action plan for a National Diamond Strategy (NDS), which serves as an indicator of forthcoming regulatory and industry changes.
Supply of Canadian Diamonds
The first recommendation of the NDS is to make the temporary flow-through share system and federal and provincial tax credit programs, permanent. Also recommended is the inclusion of community consultation and environmental impact assessments within the definition of "Canadian Exploration Expenses" for tax purposes. This would mitigate the rising regulatory costs associated with developing mines. The Plan suggests the creation of public-private partnerships to build the labour force capacity, especially within Aboriginal communities, and the harmonization of program eligibility requirements. The Plan recommends increased government funding for Geoscience, and the establishment of a national network of centres of excellence focused on downstream diamond sectors such as diamond cutting and fine diamond jewellery.
Demand for Diamonds Processed in Canada
The Plan recommends the abolition of the ten percent federal excise tax payable on jewellery on the grounds that it is discriminatory in failing to apply to all luxury goods, and counterproductive to the development of Canada's jewellery industry. There is no industry or government consensus surrounding certification, use of the official Canadian Diamond mark, or the Canadian Competition Bureau's definition of a "Canadian diamond." The Plan recommends that governments develop a certification process authenticating the origin of diamonds and jewellery on a voluntary basis as a marketing tool.
DEVELOPMENTS IN ABORIGINAL LAW
Two recent decisions of the Supreme Court of Canada, Haida v. British Columbia¸ 2004 SCC 73 and Taku River Tlingit First Nation v. British Columbia, 2004 SCC 74 define the extent to which the federal and provincial governments must consult with and accommodate First Nations when government action infringes established or claimed aboriginal rights. In Haida, the issue was the Government of British Columbia's reissue and transfer of a tree farm licence (TFL) to Weyerhaeuser Company Limited (Weyerhaeuser) on land claimed by the Haida First Nation (the "Haida"). The Haida claimed that in approving the TFL, the Province failed to adequately consult and accommodate their interests. The Haida also argued that Weyerhaeuser owed them a third party duty to consult.
In Taku, the Taku River Tlingit First Nation (the "Tlingits") attempted to prevent Redfern Resources Ltd. from constructing an access road as part of a process to reopen a mine. The relevant land was claimed as the traditional territory of the Tlingits, and the subject of treaty negotiations between the Tlingits and the Governments of Canada and British Columbia.
While the Court confirmed that the Province owed a duty to consult and seek workable accommodation of the Tlingits and the Haida, the Court circumscribed and limited the scope of the duty.
The Court confirmed that the duty to consult does not require an agreement be reached nor does it give aboriginal people a veto. Aboriginal people are also required to participate in the consultation in good faith. The Province, in turn, is obliged to be reasonable and so long as it has correctly assessed the strength of the aboriginal claim, the court will not set aside the decision of the Province. Importantly, the Court held in Haida that there was no third party duty to consult with aboriginal people in reference to section 35 Constitutional rights.
BRITISH COLUMBIA BUSINESS CORPORATIONS ACT
After over a decade of debate as to its substance, the new British Columbia Business Corporations Act replaced the old Company Act. The new Act creates a modern and flexible corporate regime that offers practical advantages for companies. It contains concepts in common with the federal Canada Business Corporations Act (CBCA), but it also contains provisions unique to
British Columbia .
Unlike the CBCA, the new Act contains no residency requirements for directors, a tremendous advantage for companies that prefer a Canadian jurisdiction of incorporation for a stock exchange listing or other purposes but which do not wish to be geographically constrained in the composition of their boards. Proceeding without Canadian resident directors may have ramifications which should be carefully evaluated, for instance under the Income Tax Act or the Investment Canada Act.
Also of interest is the ability under the new Act to select the kind of directors' or shareholders' resolutions that govern certain corporate acts. The most obvious examples of "corporate choice" arise in regard to alterations to authorized share structure and company name, alterations to the articles of the company, and the removal of directors. The articles may permit such acts to be authorized by way of directors' resolution, shareholders' ordinary resolution or shareholders' special resolution, among others. If the articles are silent as to this issue, then the default is a special shareholders' resolution that requires a "special majority" of votes. A company may set a special majority at any threshold between 2/3 and 3/4 of the votes cast; otherwise, a special majority is defined under the new Act to be 2/3 of the votes cast.
Approximately 300,000 existing British Columbia companies have two years to transition under the new Act. Those not currently incorporated under the laws of British Columbia may wish to consider incorporating in, or continuing into British Columbia.
CHANGES TO THE QUÉBEC MINING ACT
In 2000, the mining regime in Québec was simplified through changes to the Québec Mining Act, which now provides for only one title with respect to mining exploration on Crown land. In addition, the manner of acquiring claims on Crown land was changed from ground-staking to map designation with measures implemented to avoid conflicts between rights under these claims. One such measure is to place stake-claimed parcels surrounded by unstaked lands within defined territories where claims could be obtained only by ground staking (Defined Territories ).
Amendments to the Mining Act and underlying regulations have been in force since December 2003. Among the more important changes, the Act now specifies that claims can be obtained by map designation within the Defined Territories, but only if there are no apparent conflicts with existing ground-staked claims. An applicant must therefore file with an application, a statement from holders of ground-staked claims located within 1,000 meters from the land applied for. The existing claims holders must attest that their claims are not within the boundaries of the land applied for by map designation. Such a declaration would be enforceable against claimholders, subsequent owners and third parties notwithstanding any actual stakes found on the ground.
INTERNATIONAL DEVELOPMENTS
LONDON
AIM Avoids European Burdens
The LSE has announced that effective October 12, 2003, the regulatory status of the AIM market will adopt that of an "Exchange Regulated Market". The change has been driven by the planned implementation of certain European Directives focused on the Financial Sectors. Under the current structure of AIM, an EU Directive concerning the publication and content of prospectuses would require UK and non-EU companies that have chosen the UK as their home member state, to have their prospectuses approved by the Financial Services Authority (FSA).
One of the strengths of AIM is that the FSA does not approve prospectuses, but relies on the Company's Nominated Advisor (Nomad) system to ensure compliance. The reclassification of AIM as an Exchange Regulated Market will enable Nomads to continue in this role and avoid increasing the burden on companies seeking to list on AIM. The reclassification will also avoid the burden that would have been imposed by the Market Abuse Directive, which was to have been implemented in the UK on October 12, 2004. The Market Abuse Directive would have required AIM companies to draw up "insider lists" for the purpose of more rigorous monitoring of insider trading.
SOUTH AFRICA
Black Economic Empowerment
The policy of Black Economic Empowerment (BEE) aims to address inequalities that resulted from Apartheid's systematic exclusion of the majority of South Africans from participating in the economy. Goals of the BEE strategy include a greater representation and participation of "black people" (which includes "Africans, Coloureds and Indians") in the mainstream economy. The BEE policy is not legally binding, but rather a set of "best practice" guidelines embodied by Charters and accompanying Scorecards for each industry. When adopted by industry, the form and content of Charters and Scorecards must meet certain statutory criteria.
Recent legislation requires the South African public sector to take into account the Codes of Conduct found in Charters when issuing licences, concessions or legal authorizations; developing and implementing a preferential procurement policy; determining criteria for the sale of state-owned enterprises; and entering into partnerships with the private sector.
Beneficiation
The South African Precious Metals and Diamond General Amendment Bill (Draft Beneficiation Bill) was submitted for comment April 2004. The Draft Beneficiation Bill would replace the Diamond Act of 1986 and is intended to promote equitable access and local beneficiation. The Draft Beneficiation Bill (a) includes plans to place a 5% export levy on all diamonds exiting South Africa, and (b) allows the South African Diamond Board to enter into an agreement with any producer, thereby encouraging rough diamonds to be cut in the country.
Inward Listings By Foreign Entities On South African Exchanges
The South African Minister of Finance has recently approved the necessary exchange control provisions enabling listings of foreign companies on a South African stock exchange.
Foreign investors are not subject to exchange control approvals when investing in equities on the JSE. South African private individuals and institutional investors will be able to invest in these companies using their existing foreign investment allowances; therefore, there is still a restriction on the amount one can invest. However, in certain circumstances shareholders may accept shares as acquisition currency in respect of acquisition issues and to exercise their rights in terms of a rights offer. This policy will not result in any revision or relaxation of existing exchange control limits on South African investors, other than that institutional investors may invest an additional five percent of their total retail assets in inward listed securities. Where the individual or institutional shareholder is in excess of their exchange control limits, they will be given 12 months to realign their portfolios.
An applicant will be regarded as "African" if it is:
- Domiciled in Africa or its activities are geographically located in Africa; or
- Domiciled outside Africa but the majority of activities are geographically located in Africa.
These two factors will generally be determined by employment of assets and/or capital in countries that form part of the African Union.
In the event of an initial public offering, the initial inward listing should consist of only non-derivative equity instruments. Funds raised in terms of a prospectus should be deployed within one month of it being raised or recorded in an escrow account established for this purpose.
Fasken Martineau DuMoulin LLP is an international law firm with offices in Vancouver, Calgary, Toronto, Montreal, Quebec, New York, London and Johannesburg.
1. Contributions for the following summary were made by Global Mining Group members Michael Bourassa, Chuck Higgins, Christopher Sullivan (Toronto); Lynne Charbonneau (Vancouver); Jean-M Gagne (Quebec); Al Gourley (London); Peter Stafford, Alyson D'Oyley and Darryl Levitt (Johannesburg) and Aboriginal Group members Chuck Willms and Kevin O'Callaghan (Vancouver).