A Cautionary Tale in Publishing Misleading Technical Reports
In the wake of a resurgence of interest and activity in the Canadian mining sector, the importance of compliance by mining companies with National Instrument 43-101 - Standards of Disclosure for Mineral Projects (“NI 43-101”) cannot be overlooked. As previously discussed in “A Primer on Disclosure Standards and Requirements in the Canadian Mining Sector,” Canadian publicly-listed mining companies need to ensure that any public disclosure of scientific and technical information regarding their mineral projects complies with NI 43-101. In the absence of such compliance, legal ramifications will arise, which may include sanctions and fines imposed by Canadian securities regulators.
A recent example of this is the Notice of Hearing issued by the British Columbia Securities Commission (the “BCSC”) on October 22, 2020 (the “Notice of Hearing”), relating to QcX Gold Corp., formerly First Mexican Gold Corp. (the “Company”), its former CEO, James Voisin (“Mr. Voisin”), and geoscientist, John Archibald (“Mr. Archibald”, and collectively with the Company and Mr. Voisin, the “Accused”).1 In 2014, the Company hired an external experienced mining engineer (the “Consultant”) to provide a rough estimate of potential mineral resources (the “Estimate”) on the Company’s principal asset, the Hilda 30 concession in Sonora State, Mexico (the “Property”). The Consultant made it clear that the Estimate was not solid enough to be published in a technical report for investors to rely upon, and was told by Mr. Voisin that the Estimate would only be used by the Company internally. A month later, Mr. Archibald was hired by the Company to produce a formal NI 43-101 compliant technical report on the Property (the “Technical Report”). In the Technical Report, Mr. Archibald disclosed the Consultant’s Estimate without the Consultant’s knowledge or consent, and without having the relevant qualifications required under NI 43-101 in order to be considered a “qualified person” himself, with the requisite knowledge to prepare a formal NI 43-101 compliant technical report.
In the Notice of Hearing, the BCSC alleges, among other things, that: (i) the Accused breached various sections of the Securities Act (British Columbia) by knowingly publishing an unsubstantiated estimate of resources on the Property; (ii) even when the Consultant revised the Estimate less than three months after the Technical Report was filed, to contain 72% less gold and 83% less silver due to the fact that Mr. Voisin had provided the Consultant with incorrect information, the Company failed to disclose these material changes and allowed the public to continue to rely on the information in the Technical Report for nearly two years; (iii) Mr. Archibald was not in fact qualified to produce the Technical Report as he had no previous experience in calculating or estimating mineral resources; and (iv) Mr. Voisin is alleged to have committed insider trading by trading shares of the Company on 121 different days, with knowledge of material undisclosed information relating to the mineral resources on the Property.
NI 43-101 contains the rules and guidelines for reporting and disclosing technical information related to mineral properties owned by publicly-listed Canadian mining companies. The purpose of NI 43-101 is to ensure that misleading and fraudulent information relating to mineral properties is not published and promoted to investors. It was introduced following the Bre-X scandal in the late 1990s in order to protect investors from unsubstantiated mineral project disclosures, and is amongst the strictest regulations for mining companies in the world. Issuers, like the Company, must be cognizant of the requirements set forth in NI 43-101 relating to technical disclosure, as non-compliance will be flagged by securities regulators, like the BCSC, and organizations like the Investment Industry Regulatory Organization of Canada (IIROC). Non-compliance will result in, among other things, retractions and amendments of technical information previously disclosed, sanctions, fines and, in rare circumstances, cease trading of securities. Directors and officers involved with the non-compliance may also be prohibited from acting as a director or officer of any reporting issuer, and engaging in any investor relations activities.
NI 43-101 also contains rigorous rules relating to technical reports, including that the report must be prepared by an independent “qualified” individual. In particular, technical reports should be prepared by an independent qualified individual, such as an engineer with at least five years of experience in mineral project assessment, who also has the appropriate expertise for a particular mineral project. As previously discussed in “A Primer on Disclosure Standards and Requirements in the Canadian Mining Sector,” it is the responsibility of the Canadian reporting issuer and its directors and officers to ensure that the author of its technical report is a “qualified person” and meets the criteria contained in NI 43-101 with respect to qualified persons.
While the allegations relating to the Accused have yet to be proven, they are set to be heard in a hearing before the BCSC in January 2021. Regardless of the decision of the BCSC in these circumstances, this case should provide guidance to mining companies on the importance of accurate and timely disclosure of technical information for their mining projects pursuant to NI 43-101, and will be the subject of additional bulletins from the Mines & Minerals Group at Aird & Berlis. Our Mines & Minerals Group can advise on all aspects of a mining company’s activities, including mining disclosure standards, technical reports and recruitment of qualified persons. For more information, please visit our Mines & Minerals webpage.
1 The following historical information is taken from the Notice of Hearing.