Do you expect new regulatory processes to follow the resurgence in commodities prices? How can mining sector clients stay ahead of the curve in this respect?
Effective January 1, 2021, the TSX Venture Exchange (TSXV) made significant improvements to the Capital Pool Program (CPC) based on input from stakeholders. While a CPC is listed on the TSXV on the basis it has no initial commercial operations, the sole purpose for its listing is for experienced management to identify and consummate a qualifying transaction (QT) often by way of a reverse take-over (RTO) involving an operating target company. It has been a common go-public vehicle for junior mining companies and with the increase in commodity prices we expect to see increased CPC listings and RTO activity in the mining industry in 2021. According to the TSXV, since 1986 there have been over 2600 CPCs created and more than 2000 QTs completed, with many CPCs graduating to the TSX.
The amendments to the CPC program offer increased flexibility by removing the “transfer to NEX rule” such that there is no longer any requirement to complete a QT within 24 months after the initial listing, increasing the maximum limit on the aggregate funds a CPC may raise from $5 million to $10 million, increasing the amount of seed share capital raised below the IPO price from $500,000 to $1 million, and removing the prohibition on completion of a subsequent RTO within the first year of completing the QT. From a mining perspective, where many projects are international, foreign residents may now serve as directors and officers of a CPC subject to a Canadian/USA majority requirement, and such majority residency requirement completely falls away once the QT is completed provided the resulting issuer remains compliant with TSXV Policy 3.1-Directors, Officers, Other Insiders & Personnel and Corporate Governance.
Will new regulations on the levels of ammonia and other chemicals in mines cause environmental compliance challenges? If so, how will that affect operators of mining projects?
The amendments to Canada’s Metal and Diamond Mining Effluent Regulations (“MDMER”) which come into force on June 1, 2021, will alter the regulation of effluent discharged from both new and existing metal and diamond mines. While the effluent concentration limits for zinc, nickel and copper discharged from existing mines will remain unchanged, operators of existing mines should become familiar with the MDMER’s new discharge limits for concentrations of arsenic, cyanide, and lead, as well as for un-ionized ammonia. New mining operations commencing on or after June 1, 2021 will also face restrictions on discharges of certain concentrations of arsenic, cyanide, lead, and un-ionized ammonia, in addition to new limits for zinc, nickel and copper. Mine operators should therefore take steps to confirm compliance under the MDMER, including through the engagement of water quality consultants. If effluent quality from a mine is non-compliant with the MDMER, mine operators may be required to retrofit or build new water treatment facilities in order to avoid penalties. Since the required capital expenditures have the potential to be significant, mine operators are encouraged to engage experts early to determine if and how the MDMER amendments may affect their current or planned mining operations.
How can investors protect themselves against inaccurate mineral resource estimates from mining issuers?
On October 29, 2020, the Canadian Securities Administrators released Multilateral Staff Notice 51-361 –Continuous Disclosure Review Program Activities for the fiscal years ended March 31, 2020 and March 31, 2019 (the Notice) which summarized the results of the CSA’s continuous disclosure review program aimed at improving the quality and accuracy of public company disclosure. While the review is primarily conducted to assist reporting issuers in complying with their applicable continuous disclosure obligations, the Notice serves as useful guidance for investors when making investment decisions regarding mining companies and comparing their disclosure records.
National Instrument 43-101-Standards of Disclosure for Mineral Projects (NI 43-101) sets out the requirements applicable to mining issuers’ disclosure of technical and scientific information regarding mining projects and the requirement to file a technical report authored by a qualified person (QP). The Notice identified many deficiencies in technical report content relating to mineral resource estimates, the disclosure of estimates, and a lack of compliance with Part 3 of NI 43-101. Examples of deficiencies in technical reports included omissions by the QP to include the proposed mining methods and a failure to articulate the specific procedures the QP undertook in verifying data. The CSA also noted that routine disclosure (such as in press releases, AIFs, websites) often failed to state both the tonnage and grade of mineral resources or mineral reserves, whether the mineral reserves were included or excluded from the mineral resource estimates, or included boilerplate risk disclosure not specific to the mineral project. Issuers were also advised to avoid the use of hyperlinks (which can be broken over time) for maps, sections or tables and to instead include those items directly in their filings to ensure a permanent record is available on SEDAR for public access.
It is incumbent on investors to review the guidance from the CSA, like the Notice, be wary of deficient or overly promotional disclosure, and compare and contrast the disclosure records of mining issuers when making investment decisions.
How has the Impact Assessment Act (IAA) affected the mining industry? How can clients minimize planning costs and reduce delays related to these processes?
The IAA received Royal Assent on June 21, 2019 and came into force on August 28, 2019 replacing the Canadian Environmental Assessment Act, 2012. The key objectives of the IAA are to provide more certainty, coordination, efficiency, inclusiveness, and transparency in the federal review process for assessing the impacts of major resource development projects and projects carried out on federal lands. The desired effect of the IAA is to build trust and confidence in the decision-making processes to be conducted by the new Impact Assessment Agency of Canada (the Agency) based on evidence, science, sustainability, public engagement, and Indigenous participation. The new Canadian Impact Assessment Registry website (Registry) also provides the public with access to information regarding the assessment type and the current phase of the proposed project, as well as the key documents filed by the proponent and the Agency, including the Agency’s notice of impact assessment decisions with reasons.
Under the IAA, an assessment is required for “designated projects”, which can be determined in two ways: (i) projects described in the Physical Activities Regulations (commonly referred to as the Project List) and (ii) projects designated through the use of ministerial discretion (where the Minister of Environment is of the opinion that the physical activity may cause adverse effects within federal jurisdiction or adverse direct or incidental effects, or public concerns related to those effects warrant the designation).
The IAA contains five phases to impact assessment: planning, impact statement, impact assessment, decision-making, and post-decision. The new planning phase is intended to create efficiencies, both in time and cost, early in the process with more predictable timelines and outcomes on next steps for mining proponents. Where the Agency determines that an impact assessment is required for a “designated project” and the Agency will proceed with an impact assessment, the Agency must advise the proponent of its reasons for the decision and the information it requires from the proponent to conduct its impact assessment. The IAA also provides the Minister with the authority to put an end to a proposed project before an impact assessment is even decided upon or commenced by the Agency if, in the Minister’s opinion, the proposed project would cause unacceptable environmental effects within federal jurisdiction or that the proponent/the project will not be awarded key permits or approvals by other federal regulators.
What is the future of the “net benefit” test of the Investment Canada Act (ICA)? What advice do you have for clients in the mining sector trying to navigate these regulations?
The net benefit test under the ICA is generally applied only to high value transactions as a result of dramatically increased review thresholds for investors from countries that are WTO members or have free trade agreements with Canada. As a result, most foreign investors only have to file a short notification under the ICA either pre – or within 30 days, post – closing.
Transactions subject to net benefit review are few in number (9 for the year ended March 31, 2019) and rarely subject to prohibition. In the mining sector, the Government rejected the takeover of Potash Corporation of Saskatchewan by BHP Billiton in 2010 largely for political reasons: a minority federal government soon facing an election and opposition by a premier concerned about foreign ownership of a “strategic” resource. The lesson learned was investors acquiring potentially sensitive targets should engage early on in government relations to tout the benefits of the transaction (e.g., contributions to economic and community vitality).
With net benefit review on the decline, national security reviews under the ICA have figured more prominently. In December 2020, the federal Cabinet blocked Shandong Gold Mining from acquiring TMAC Resources, a gold mining company in Nunavut reportedly for national security reasons (e.g., the state-owned status of Shangdong and proximity of TMAC to an early warning system and the Northwest Passage). As “national security” is not defined in the ICA, the term may be evolving to encompass economic self-sufficiency and possibly “critical mineral” security, a growing Canadian concern. In April 2020, the government also warned of closer scrutiny of foreign acquisitions of distressed Canadian companies and investments by foreign states and individuals closely tied to such states. Where a proposed transaction raises possible national security concerns, foreigners are well-advised to make ICA filings pre-closing and consult with the government to identify and address any potential hurdles under the ICA.
Staying on the subject of foreign investment, do you expect FIPAs to play a bigger role in the mining sector going forward? What can owners and operators do to protect themselves from the risks associated with partnering with foreign investors?
In principle, Foreign Investment Promotion and Protection Agreements (“FIPAs”) are designed to level the playing field between foreign and domestic investors. However, certain protections which FIPAs offer to foreign investors in Canada have the potential to be superseded by decisions made under the ICA to protect Canada’s national security interests, or Ministerial determinations under the “net benefit” review process. Recently, there appears to be a global trend of increased scrutiny of inbound investment, including state-owned or influenced investment, attributable to tensions over global relations and trade. Increased examination of inbound investment may result in the slowing of capital into the mining sector, exerting downward pressure on asset valuations due to a reduced pool of potential bidders. In the current landscape, owners of Canadian mining assets considering an investment from, or sale to, a foreign state-owned entity, should consult with the government early to identify and address potential issues, and broaden their network of substitute investors and potential purchasers as much as possible. While the Biden administration may bring about a more conventional trade order, tensions are likely to continue to affect inbound investments into the mining sector, causing uncertainty for our domestic mining industry.