Junior Mining: OSC Issues Guidance On MD&A Disclosure

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On February 6, 2014, the Ontario Securities Commission (“OSC”) released OSC Staff Notice 51-722 Report on a Review of Mining Issuers’ Management’s Discussion and Analysis Guidance (the “Report”). The Report summarizes the results of a review conducted by the OSC of the annual and interim Management’s Discussion and Analysis (MD&A) filed by 100 mining companies with market capitalization of less than $100 million (the “Review”) and is designed to serve as a tool to assist small mining companies to navigate regulatory requirements.

The Review focused on: 

  • venture issuer disclosure;
  • discussion of operations;
  • liquidity and capital resources disclosure;
  • disclosure of transactions between related parties;
  • disclosure of risk factors and uncertainties; and
  • reporting on use of financing proceeds. 

It should be noted that at the time of the Report there were approximately 449 Ontario mining issuers for which the OSC was the principal regulator and approximately 374 of these issuers (approximately 83%) had a market capitalization of less than $100 million. Out of the 100 Ontario mining issuers surveyed, 54% had a market capitalization of less than $25 million and 28% had a market capitalization of less than $10 million. In terms of stage of development, the majority of the issuers, 53%, were at the mineral resource stage, 23% were at the exploration stage and 24% were at the development or production stage.

Given the limited funding available for junior mining companies at the exploration and development stage, coupled with fluctuating precious and base metal prices, it should come as no surprise that the Review found the following deficiencies among junior mining companies:

  • venture issuers without significant revenue from operations were found to not provide an adequate breakdown of exploration and evaluation assets or expenditures;
  • exploration stage companies do not adequately discuss or itemize their exploration expenditures;
  • issuers with working capital deficiencies provide only very general discussions or none at all about potential sources of financing and how they plan to continue operations; and
  • issuers do not appropriately disclose the identity of related parties involved in related party transactions.

The Report also included examples of boilerplate language which lacked certain specificities required under Part 5 of National Instrument 51-102 ­Continuous Disclosure Obligations. In many instances issuers simply repeated information previously disclosed in an earlier MD&A without updating the information for the current year. 

The reality on the ground is that many small mining issuers are quickly running out of cash and are trying valiantly to reduce their overhead by withholding salaries or hiring skeleton staff, such as part-time CFOs, just to keep the lights on. Perhaps this is the reason why junior mining companies were found to have cut corners when preparing MD&A disclosure. Nevertheless, tough market conditions should not be used as an excuse to justify disclosure deficiencies.  

As stated by the OSC, the MD&A is a summary written through the eyes of management which allows management to provide insights beyond the numbers found in the financial statements. Therefore, deficiencies in MD&A disclosure prevent investors from making informed investment decisions. While there are some who might grumble that the new disclosure guidance is burdensome and that junior mining issuers cannot be expected to adhere to these guidelines, one must recall that the OSC’s mandate is to not only administer and enforce securities law, but to provide protection to investors and foster fair and efficient capital markets. The guidelines provided by the Report fulfill this mandate.

A copy of the Report is available on the OSC website at: OSC Staff Notice 51-722 Report on a Review of Mining Issuers’ Management’s Discussion and Analysis Guidance