In brief - Future statements must be based on reasonable grounds
The Australian Securities and Investments Commission (ASIC) has released an Information Statement (214) to provide stakeholders with a better understanding of existing rules concerning forward-looking statements.
In the light of this new Information Statement, entitled "Mining and resources - Forward-looking statements
", resource companies should take care when publishing forward-looking statements and distinguish them from aspirational statements, as those that fail to comply with the legal requirements face legal and reputational risks.
Mining and resources industry participants critical of new guidelines
ASIC's new guidelines have attracted criticism from high level players in the mining industry, as well as their corporate advisors. They have given rise to a fear that raising capital will be significantly more difficult, and costly, thus making it far more complicated for smaller players to enter the market or develop their projects, especially against the background of proposals to amend the ASX listing rules to raise the bar for admission of entities.
There is also the possibility that an unintended consequence of the guidelines will be that all previous work done on estimating resources on a project would have to be discarded.
The Minister for Resources, Josh Frydenberg, has defended the guidelines, noting that: "You've got to give retail investors an opportunity to understand the potential of the resource that's in place."
Mining and resources investors often rely on predictive statements
In short, the guidelines state that investors in mining and resources companies commonly place strong emphasis on forward-looking statements when considering an investment. In mining, these predictive statements generally include:
- production targets
- forecast financial information
- income-based discounted cash flow valuations
Refer to JORC and VALMIN Codes, ASX listing rules and ASIC guides when establishing reasonable grounds
Under the Corporations Act 2001
, a statement about future matters must be based on reasonable grounds at the date the statement is made or it will be misleading. The test for "reasonable grounds" is an objective one based on the circumstances of each case.
Reasonable grounds must be established by taking into consideration relevant professional and industry standards. Some of these standards and guidelines can be found in the Joint Ore Reserves Committee's JORC Code
and VALMIN Code
, as well as ASX listing rules, in particular chapter 5 concerning additional reporting on mining and oil and gas production and exploration activities
Reasonable grounds for a statement will be assessed at the date it is made. For that reason it is very important that all information, including any material underlying assumptions, is properly considered before any forward-looking statements are made.
The implications of the guidelines are that before a company makes a forward-looking statement it must ask two very important questions:
- Is the statement in any way misleading?
- If not, are there "reasonable grounds" on which the statement is based?
In relation to reports concerning mineral resources, there is heavy emphasis on modifying factors
, possibly more than at times in the past. In this regard, failure to adequately consider modifying factors such as the mining, processing, metallurgical, infrastructure, economic, marketing, legal, environmental, social and government requirements, can render a mineral resource estimation that is otherwise "correct", misleading.
Another issue is that using a discounted cash flow valuation may only be reasonable if project funding has been secured. In other words, a belief, even if reasonable, that funding will be available on acceptable terms, may be insufficient as reasonable grounds for a forward-looking statement.
The net effect of these and related approaches by ASIC set out in the guidelines mean that resource companies should adopt more rigorous compliance procedures around making announcements concerning mineral resources.
Aspirational statements convey vision and are carefully distinguished from forward-looking statements
It is important also to distinguish between forward-looking statements and "aspirational statements". ASIC states that aspirational statements are not predictive in nature but rather are high-level vision statements that do not, directly or by implication, refer to a production target or forecast financial information.
The effect is that companies may announce exploration targets or disclose parts of the study that do not contain forward-looking statements.
Aspirational statements do not carry the same "burden of proof" as forward-looking statements. In this regard they can be very useful tools for mining companies seeking investment. However, it is vital that the statement is clearly recognised as an aspirational statement.
- Aspirational statement: Mining Ltd aims to be a significant coal producer within the next five years.
- Forward-looking statement: Mining Ltd aims to increase its current output of 500,000 plus ounces per annum to double the capacity.
The difficulty is that there is no clearly defined line between aspirational statements and forward-looking statements. In many cases, it will be a question of degree, despite very different consequences attaching to the two types of statement.
Balancing investors' interests with the need to raise capital
AMEC (the Association of Mining & Exploration Companies) and others are conducting consultation rounds and intend to make representations to government about the guidelines. While the regulatory intent is clearly valid, there are concerns that the guidelines go too far with the result that for mineral resources (as opposed to reserves), production targets and discounted cash flow valuations cannot be used as forward-looking statements, but perhaps as aspirational statements. Drawing the line between the two will cause uncertainty and may make attracting investment even more difficult in an already difficult capital market.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2019.