ASIC has consolidated its guidance on forward-looking statements in the mining and resources industry (Information Sheet 214) and introduced new controversial requirements.
- INFO 214 sets out ASIC’s guidance regarding the ‘reasonable grounds’ that must exist for an entity to make forward-looking statements about its mining and resources production targets and financial forecasts.
- ASIC’s guidance indicates that a project at the development stage or for which secured funding is not in place is unlikely to have ‘reasonable grounds’ for forward-looking statements.
- ASIC’s guidance may have the effect that mining companies who have not declared an ore reserve will be unable to disclose production targets or discounted cash flow valuations unless they have firm funding commitments.
- ASIC suggests that instead of disclosing a production target a company can make ‘aspirational statements’, announce exploration targets or disclose parts of a preliminary study that do not contain forward-looking statements.
- Guidance has attracted controversy with industry bodies calling for changes.
ASIC has released Information Sheet 214: ‘Mining and resources: Forward-looking statements‘ (INFO 214) which consolidates ASIC guidance on forward-looking statements commonly made in the mining and resources industry.
What is a forward-looking statement?
ASIC defines a forward-looking statement as ‘a statement about a future matter and is not just a statement about [a] company’s present intention‘.
For mining or exploration companies, forward-looking statements include:
- production targets (i.e. projections or forecasts of the amount of minerals to be extracted from mining tenements for periods that extend past the current and forthcoming year);
- forecast financial information; and
- income-based valuations.
Aspirational statements distinguished
Unlike forward-looking statements, aspirational statements are high-level vision statements that do not refer, directly or by implication, to a production target or forecast financial information.
ASIC gives the following examples of aspirational statements:
- statements of a general objective, such as ‘X Ltd aims to be a 500,000 plus ounces per annum gold producer in five years’
- statements of hurdle rates, such as ‘To be viable, Y Ltd requires an ore reserve of 300m tonnes of haematite at an annual production rate of 10m tonnes’
The difference between forward-looking statements and aspirational statements is not always clear. INFO 214 provides some guidance in identifying whether a statement is forward-looking or merely aspirational, and encourages entities to seek expert advice.
Aspirational statements do not have to be based on reasonable grounds because they are not predictive in nature. Similarly, the results of a preliminary study can be published without reasonable grounds if it does not mention the production target or forecast financial information.
Forward-looking statements require ‘reasonable grounds’
Under the law, forward-looking statements must not be made unless there are reasonable grounds for the statement.
So, for example, statements regarding production targets or forecast financial information may be made only if there are reasonable grounds for the underlying assumptions supporting the production target or forecast financial information.
Income-based discounted cash flow/net present value valuations involve the use of forward-looking information such as predicted mineral production, capital costs, operational costs, commodity prices and exchange rates. All must be based on reasonable grounds.
What are ‘reasonable grounds’ according to INFO 214?
Production targets, forecast financial information and income-based valuations
Reasonable grounds for these should be established with particular reference to the JORC Codes reporting and estimation framework for mineral resources and ore reserves reporting.
The requirement for reasonable grounds is not satisfied if information is:
- based solely on exploration targets; or
- solely or partly on ‘historical estimates‘ or ‘foreign estimates‘ of mineralisation (as these terms are defined in the ASX Listing Rules),
because ASIC considers this information too conceptual, speculative and unreliable.
JORC-compliant ore reserve estimations
An up-to-date and correctly estimated ore reserve is considered sufficient to establish reasonable grounds for a forward-looking statement.
This is because an ore reserve, as defined in the JORC Code, is ‘the economically mineable part of a measured and/or indicated mineral resource‘ at the time of reporting, and the term ‘economically mineable‘ implies that extraction of the ore reserves has been demonstrated to be viable under reasonable financial assumptions.
Mineral resource estimations
Where ore reserves have not been reported in compliance with the JORC Code, reasonable grounds for forward-looking statements will exist only if:
- the JORC Code mineral resource estimates being used are based on a sufficient level of geological knowledge and confidence; and
- all JORC Code modifying factors (being the considerations used to convert mineral resources to ore reserves and include, but are not limited to, mining, processing, metallurgical, infrastructure, economic, marketing, legal, environmental, social and government requirements) are sufficiently progressed.
If secured funding is not in place
Forward-looking statements for start-up and other projects (including publishing conclusions from income-based valuation methodologies) should be made only if there are reasonable grounds for the statement at the date it is made, including the availability of project finance.
ASIC states that although it may be possible to show reasonable grounds before having secured funding in place, ASIC will be concerned, and consider regulatory options, if no objectively reasonable grounds have been disclosed that support the conclusion that funding will become available as and when required by development or production schedules.
INFO 214 provides the following list of examples of factors to consider in assessing reasonable grounds when funding is not yet secured:
- the company’s size and capitalisation relative, in particular, to the upfront capital expenditure requirement;
- the company’s financial position, including its gearing and revenues (if any);
- the company’s debt/equity financing track record and support;
- how dilutive any financing would be to existing shareholders;
- the company’s support from substantial holders or other large offtake or joint venture partners, including by heads of agreement;
- the project’s financial, economic and marketing metrics; and
- the overall state of relevant economies, demand/supply curves for your proposed mineral production, and current debt/equity capital funding markets.
Updating forward-looking statements and projects changing hands
ASIC requires all material assumptions on which a forward-looking statement is based to be disclosed.
Such assumptions should be reviewed periodically to determine whether there have been any material changes to the assumptions over time which may require disclosure to the market under continuous disclosure obligations.
ASIC also states that a buyer of a project should reassess the underlying assumptions supporting the forward-looking statements made by a vendor for any changed circumstances that may mean the statements no longer have a reasonable basis. For example, previous statements may no longer have reasonable grounds where the buyer, unlike the vendor, has insufficient stand-alone financial capacity or reasonable grounds to fund the project.
The ASIC guidance has been controversial with the Association of Mining and Exploration Companies which is concerned about the restrictions on what small exploration companies can say about the economic potential of their discoveries.
The Australian reported that Lion Selection Group fund manager Hedley Widdup noted that in Canada it was illegal for companies to not disclose the very project metrics that INFO 214 now describes as misleading. He said it was far better for companies to disclose all assumptions about their economic modelling and allow the market to judge the results, rather than follow ASIC’s new model, which prohibits much of that information from being released.
Written by: Eugene Fung | Partner | +61 7 3338 7524 | firstname.lastname@example.org