JOHANNESBURG (miningweekly.com) – While listed junior miners have to contend with tough economic realities, they are still required to comply with continuous disclosure (CD) requirements under the various securities authorities of Canada – failing which a cease-trade order may result.
In recent months there has been an increase in the number of companies affected by regulatory orders such as adding the issuers to a default list, issuing cease-trade orders or referring issuers for enforcement as the result of incorrect CD filings, or the complete failure thereof.
Recent examples included Vancouver-based New Guinea Gold, which had been issued with a cease-trade order by the British Columbia Securities Commission (BCSC) on May 1, for failing to provide audited financial statements for the year ended December 31, 2011.
Other companies that, in recent months, came under the scrutiny of securities authorities, be it in BC, Ontario or Quebec, included Clifton Star Resources, Rio Novo Gold, Extorre Gold Mines, Karnalyte Resources and Orbite Aluminae.
Mining strategist Chris Ecclestone told Mining Weekly Online that the problem with juniors failing to meet their CD obligations might lie in the fact that the small companies have small management structures, and as these companies grow, they often have to hire-in qualified employees.
“In my recent experience, I have seen companies, especially juniors without stable sources of income, burning through money at unsustainable rates – mostly owing to top-heavy management structures, without making any significant progress in moving projects up the value curve,” he said in a telephone interview.
Ecclestone added that owing to a private sector skills shortage in the mining industry, many of the hired professionals are charging exorbitant rates for their services, and when companies cannot afford them anymore, they simply stop paying – the consequence being that the company does not have a qualified person anymore to approve the CD filings.
Having a qualified person to approve CD filings is a critical requirement, Ontario Securities Commission (OSC) spokesperson Dylan Rae told Mining Weekly Online.
“I expect a lot more companies to receive cease-trade orders, especially after the second-quarter results start coming out. Many companies did not curtail spending soon enough, perhaps by September 2011 when the new bear market started,” Ecclestone said.
He believes such companies have little prospect of receiving further cash from investors.
TSX-listed Globex Mining CEO Jack Stoch agreed, pointing to the state of junior exploration being in disarray. He said investors in general are concerned about their investments.
“The push to preserve cash and limit risk now dominates investor psychology,” he said in a statement.
He described investors reacting to any positive news as a wakeup call to sell stock, and all other news as negative, even the good news.
Stoch said stock prices are at new lows, making raising exploration and development funds extremely difficult, and dilutive. “Companies are marking time, afraid to move forward, afraid to take any exploration or market risk for fear that such action will be viewed poorly,” he said.
Kaiser Bottom Fish blog writer and mining analyst John Kaiser told Mining Weekly Online that the junior resource sector had wandered into the arena of “critical materials” for which there is not the same level of expertise in the independent mining consultant community, which has created teething pains for many juniors.
He cited the example of Orbite Aluminae, where “outright ignorance” contributed to a flawed preliminary economic assessment (PEA) in January.
“Without question there will be some companies which deliberately distort reality. We should also keep in mind that PEAs have 30% to 35% error margins, while prefeasibility studies have 15% to 25% error margins, so there is plenty of room for base case assumptions to prove wrong, especially in the climate of revenue and cost-side volatility.
“This has created concern that many of these studies, unless they are negative, are not worth the paper they are printed on,” he said.
Kaiser did, however, point out that the increase in cease-trade orders being issued may be a direct result of the sheer increase in the amount of CD filing the authorities are sifting though, especially in Canada, owing to the increased responsibilities National Instrument 43-101 imposes on listed companies.
This was compared with the ASX, where according to the “outdated” Joint Ore Reserves Committee guidelines, no public company disclosures are required, which Kaiser added, might have resulted in a large number of companies seeking TSX listings in recent times to improve their investor visibility.
Statistics published in the 2010 Corporate Finance Branch report of the OSC pointed to a trend in which the amount of reviews undertaken by the commission in 2010 rose by 12% to 490; but of that number, the amount of reviewed higher-risk stock issuers’ CD filings that resulted in an outcome declined by 9% year-on-year to 72%.
The OSC is the main regulator of about 460 reporting issuers operating in the mining industry. These issuers have a combined market capitalization of more than $200-billion, representing 24% of Ontario’s market capitalisation.