# Modernization of Property Disclosures for Mining Registrants > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2016-14632 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** June 27, 2016 - **Citation:** 81 FR 41652 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 229, 239, and 249 [Release Nos. 33-10098; 34-78086; File No. S7-10-16] RIN 3235-AL81 Modernization of Property Disclosures for Mining Registrants AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: We are proposing revisions to the property disclosure requirements for mining registrants, and related guidance, currently set forth in Item 102 of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934 and in Industry Guide 7. The proposed revisions are intended to provide investors with a more comprehensive understanding of a registrant's mining properties, which should help them make more informed investment decisions. The proposed revisions would also modernize the Commission's disclosure requirements and policies for mining properties by aligning them with current industry and global regulatory practices and standards. In addition, we are proposing to rescind Industry Guide 7 and include the Commission's mining property disclosure requirements in a new subpart of Regulation S-K. DATES: Comments should be received on or before August 26, 2016. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( http://www.sec.gov/rules/proposed.shtml ); or • Send an Email to rule-comments@sec.gov . Please include File Number S7-10-16 on the subject line; or • Use the Federal eRulemaking Portal ( http://www.regulations.gov ). Follow the instructions for submitting comments. Paper Comments • Send paper comments to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number S7-10-16. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Web site ( http://www.sec.gov/rules/proposed.shtml ). Comments are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. Studies, memoranda or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the SEC's Web site. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Elliot Staffin, Special Counsel, in the Division of Corporation Finance, at (202) 551-3450, or Dr. Kwame Awuah-Offei, Academic Mining Engineering Fellow, in the Division of Corporation Finance, at (202) 551-3790, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. SUPPLEMENTARY INFORMATION: We are proposing to rescind Industry Guide 7 1 under the Securities Act 2 and the Exchange Act, 3 amend section 102 of Regulation S-K, 4 add new exhibit (96) to Item 601 of Regulation S-K, 5 add new subpart 1300 of Regulation S-K, 6 amend Form 1-A, 7 and amend Form 20-F. 8 1 17 CFR 229.801(g) and 229.802(g). 2 15 U.S.C. 77a et seq. 3 15 U.S.C. 78a et seq. 4 17 CFR 229.102. 5 Proposed 17 CFR 229.601(b)(96). 6 Proposed 17 CFR 229.1301 et seq. 7 17 CFR 239.90. 8 17 CFR 249.220f. Table of Contents I. Introduction II. Proposed Mining Disclosure Rules A. Consolidation of the Mining Disclosure Requirements B. The Standard for Mining-Related Disclosure 1. Overview 2. Definitions of Exploration, Development and Production Stage C. Qualified Person and Responsibility for Disclosure 1. The “Qualified Person” Requirement 2. The Definition of “Qualified Person” D. Treatment of Exploration Results E. Treatment of Mineral Resources 1. Mineral Resource Definition 2. Mineral Resource Classification 3. The Initial Assessment Requirement 4. USGS Circular 831 and 891 F. Treatment of Mineral Reserves 1. The Framework for Determining Mineral Reserves 2. The Type of Study Required To Support a Reserve Determination G. Specific Disclosure Requirements 1. Requirements for Summary Disclosure 2. Requirements for Individual Property Disclosure 3. Requirements for Technical Report Summaries 4. Requirements for Internal Controls Disclosure H. Conforming Changes to Certain Forms Not Subject to Regulation S-K 1. Form 20-F 2. Form 1-A III. General Request for Comments IV. Economic Analysis A. Baseline 1. Affected Parties 2. Current Regulatory Framework and Market Practices B. Analysis of Potential Economic Effects 1. Consolidation and Harmonization of the Mining Disclosure Requirements 2. Qualified Person and Technical Report Summary Requirements 3. Treatment of Exploration Results 4. Treatment of Mineral Resources 5. Treatment of Mineral Reserves 6. The Pricing Model for Determination of Mineral Resources and Reserves 7. Specific Disclosure Requirements 8. Conforming Changes to Certain Forms Not Subject to Regulation S-K 9. Compliance Costs of Preparing and Filing Forms C. Anticipated Impact on Efficiency, Competition, and Capital Formation D. Request for Comment V. Paperwork Reduction Act A. Background B. Summary of Collection of Information Requirements C. Estimate of Potentially Affected Registrants D. Estimate of Reporting and Cost Burdens E. Request for Comments VI. Initial Regulatory Flexibility Act Analysis A. Reasons For, and Objectives of, the Proposed Action B. Legal Basis C. Small Entities Subject to the Proposed Rule Amendments D. Reporting, Recordkeeping, and Other Compliance Requirements E. Duplicative, Overlapping or Conflicting Federal Rules F. Significant Alternatives G. Request for Comment VII. Small Business Regulatory Enforcement Fairness Act VIII. Statutory Authority I. Introduction The Commission's disclosure requirements and related guidance for properties owned or operated by mining companies are contained in Item 102 of Regulation S-K and Industry Guide 7. Item 102 sets forth the basic disclosure requirements for a registrant's “principal” mines that are “materially important.” 9 Instruction 3 to Item 102 requires disclosure of “material information” concerning the “production, reserves, locations, development, and the nature of the registrant's interest,” including additional disclosure requirements for individual properties that “are of major significance to an industry segment.” Instruction 7 to Item 102 states that “the attention of issuers engaged in significant mining operations is directed to the information called for in Guide 7,” which identifies disclosures beyond what is required by Item 102. 9 Instruction 2 to Item 102 refers registrants to Instruction 1 to Item 101 of Regulation S-K for the quantitative and qualitative factors they should take into account in determining whether properties should be described under Item 102. Guide 7 sets forth the views of the staff of the Division of Corporation Finance on how mining company registrants can comply with the Commission's description of property disclosure requirements applicable to registrants. 10 The centerpiece of Guide 7 is its disclosure guidance for mineral reserves, which are defined as “that part of a mineral deposit that can be economically and legally extracted or produced at the time of the reserve determination.” 11 Guide 7 further classifies mineral reserves into “proven” and “probable,” with proven mineral reserves having a higher degree of assurance than probable mineral reserves. The Guide does not define the term “mineral.” 10 When it published the first Industry Guides in 1968, the Commission stated that, “[t]hese guides are not rules of the Commission nor are they published as bearing the Commission's official approval. They represent policies and practices followed by the Commission's Division of Corporation Finance in the administration of the registration requirements of the Act, but do not purport to furnish complete criteria for the preparation of registration statements.” Release No. 33-4936 (December 9, 1968) [33 FR 18617] (December 17, 1968). 11 See paragraph (a)(1) of Guide 7. Under both Item 102 and the Guide, a registrant may not disclose estimates for non-reserve deposits, such as mineral resources, 12 unless such information is required to be disclosed “by foreign or state law” or unless “such estimates previously have been provided to a person (or any of its affiliates) that is offering to acquire, merge, or consolidate with the registrant, or otherwise to acquire the registrant's securities.” 13 While there are numerous foreign mining disclosure codes, only Canada 14 has adopted its code as a matter of law. 15 12 Resources are generally defined in international mining codes, and generally understood in the industry, as mineral deposits having prospects for economic extraction that are less certain than those for reserves because economic viability has yet to be demonstrated. See, e.g, SME Guide for Reporting Exploration Results, Mineral Resources and Mineral Reserves (“SME Guide”) pt. 33 (2014), which is available at: http://www.smenet.org/docs/publications/2014_SME_Guide_Reporting_%20June_10_2014.pdf . See also section II.E, infra. 13 See Instruction 5 to Item 102 of Regulation S-K. Instruction 3 to paragraph (b)(5) of Guide 7 also includes the same provision limiting disclosure of estimates for deposits other than mineral reserves, as does Instruction 1 to Item 4.D of Form 20-F. 14 See Canada's National Instrument (“NI”) 43-101 (“Standards of Disclosure for Mineral Projects”) (2012), which is available at: http://web.cim.org/standards/documents/Block484_Doc111.pdf . Other foreign mining codes have been adopted as listing standards for foreign securities exchanges or as guidelines by foreign securities commissions. The staff in the Commission's Division of Corporation Finance has taken the view that these other codes are not covered by Item 102's “foreign or state law” exception. Therefore, in the staff's view, only the Canadian mining disclosure requirements serve as a basis for disclosure of mineral resource estimates in SEC filings, and only with respect to Canadian registrants. 15 We are not aware of any state mining disclosure laws that are applicable and have not observed a company providing mineral resource disclosure based on state law. Guide 7 has not been updated for more than 30 years. 16 During this period, mining has become an increasingly globalized industry and several foreign countries have adopted mining disclosure standards based on the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) 17 that significantly differ from the Guide. For example, the CRIRSCO standards 18 require companies to disclose material mineral resources; require that any public report about a company's exploration results, 19 mineral resources and mineral reserves be prepared by a “Competent or Qualified Person;” 20 and permit disclosure of mineral reserves to be based on a preliminary feasibility (“pre-feasibility”) study or a final feasibility study. 21 16 The disclosure requirements for companies engaged in mining activities were last updated in 1982 when the Commission amended Form S-18 to add certain disclosure requirements applicable to mining companies. See Release No. 33-6406 (June 4, 1982) [47 FR 25126] (June 10, 1982). The Commission later transferred its mining disclosure requirements from Form S-18 to Guide 7. See Release No. 33-6949 (July 30, 1992) [57 FR 36442] (August 13, 1992). 17 CRIRSCO is an international initiative to standardize definitions for mineral resources, mineral reserves, and related terms for public disclosure. CRIRSCO has representatives from professional societies involved in developing mineral reporting guidelines in Australasia (Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC)), Canada (Canadian Institute of Mining Metallurgy and Petroleum (CIM)), Chile (Minera Comision), Europe (Pan-European Reserves and Resources Reporting Committee (PERC)), Mongolia (Mongolian Professional Institute of Geosciences and Mining (MPIGM)), Russia (National Association for Subsoil Examination (NAEN)), South Africa (South African Code for Reporting of Exploration Results, Mineral Resources and Mineral Reserves (SAMREC)), and the USA (Society for Mining, Metallurgy and Exploration, Inc. (SME)). CRIRSCO's Web site is located at: http://www.crirsco.com . 18 The CRIRSCO-based codes, which are best practices of professional associations, have been incorporated into the listing rules of various foreign stock exchanges. All the codes (together with the listing rules that make them binding) require disclosure of exploration results, mineral resources, mineral reserves, and other information about mining properties as long as they are deemed material. 19 Exploration results are defined as data and information generated by mineral exploration programs that might be of use to investors but which do not form part of a disclosure of mineral resources or mineral reserves. See, e.g., CRIRSCO's International Reporting Template pt. 18 (2013), which is available at: http://www.crirsco.com/templates/international_reporting_template_november_2013.pdf . 20 In addition, the CRIRSCO-based codes require that the qualified person must consider and apply certain factors (“modifying factors”) in his/her evaluation of the economic prospects and economic viability of the minerals. See the discussion in Sections II.F.1 and II.F.2, infra. 21 A feasibility study is a technical and economic study of a mineral project necessary to demonstrate that extraction is economically viable. The two kinds of studies commonly used to demonstrate economic viability, in public disclosure, are preliminary feasibility (also called pre-feasibility) and final feasibility (also called feasibility) studies. A feasibility study is more comprehensive, and as a result more accurate, than a pre-feasibility study. Over the years, as part of its filing review and comment process, the staff has provided supplemental guidance, including requesting clarifications or additional disclosure, to assist registrants in providing the appropriate disclosure about their mining operations and properties. For example, in contrast to the practice under the CRIRSCO standards, the staff historically has requested that a registrant obtain a specific type of feasibility study ( i.e., a final feasibility study) in order to support a determination of mineral reserves. Because of the widespread adoption of the CRIRSCO standards, industry participants have requested revisions to Guide 7. 22 Among other matters, 23 these participants have urged the Commission to align its mining disclosure rules with the CRIRSCO-based codes by allowing a mining registrant to disclose both mineral resources and reserves. 24 These participants asserted that this would provide investors with a more complete understanding of the economic potential of a registrant's properties. 25 Finally, these participants also requested that the Commission address what they characterize as the uncertainty caused by the fact that Guide 7 and staff comment letters are not rules of the Commission, but rather non-binding guidance provided by the Division of Corporation Finance (“Division”). 26 22 See, e.g., the petition for rulemaking by the Society for Mining, Metallurgy and Exploration, Inc. (“SME Petition for Rulemaking ”) (October 1, 2012), which is available at: http://www.sec.gov/rules/petitions/2012/petn4-654.pdf . 23 For example, the SME also specifically expressed concern regarding the limited guidance provided by the staff on when the disclosure of certain non-reserve deposits known as “mineralized material” would be appropriate. 24 We also have received letters from members of the United States Congress requesting that the Commission update and harmonize Guide 7 with global reporting requirements. See the letter, dated July 7, 2014, from Representatives Shelley Moore Capito, Stevan Pearce, Blaine Luetkemeyer, Sean Duffy, Steve Stivers, Stephen Fincher, Mick Mulvaney, Randy Hultgren, Ann Wagner, Andy Barr, Tom Cotton, Keith Rothfus, and William Lacy Clay; and the letter, dated August 13, 2014, from Senators Dean Heller, Mike Crapo and John Tester. These letters are available at: http://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml . 25 Unless otherwise stated, in this release the term “property” refers to mining properties, which are properties at which the registrant engages in mining activities. Mining activities include exploration, development and production of minerals. The term “mine” refers to a specific geographic location at which the registrant produces minerals. A property could include multiple mines. 26 See SME Petition for Rulemaking at 9. In light of these global developments and industry participants' concerns, we are proposing to modernize our disclosure rules for properties owned or operated by mining companies by more closely aligning those rules with the CRIRSCO-based codes in several respects. For example, the proposed rules would require a registrant with material mining operations to disclose, in addition to its mineral reserves, mineral resources that have been determined based upon information and supporting documentation by one or more qualified persons. Industry participants assert that such an alignment should help place U.S. mining registrants on a more level playing field with non-U.S. mining companies that are subject to one or more of the CRIRSCO-based mining codes. 27 This release requests comment on all aspects of our proposed rules, and we encourage all interested parties, including investors, companies, and other market participants, to submit comments. 28 27 In this regard, the SME has questioned the attractiveness of the U.S. capital markets for mining companies in light of the differences between Guide 7 and the CRIRSCO-based codes: “All of these factors decrease the attractiveness of the U.S. market to current and potential reporting companies. In light of increased globalization, companies have more choices as to which capital markets to access. Although the U.S. still presents one of the largest markets and thus will attract companies on that basis alone, there is a marked reluctance, particularly among exploration-stage mining companies, to pursue initial listings in the U.S. This harms our stock exchanges, as well as our financial markets.” SME Petition for Rulemaking at 14. 28 The Commission also has issued a concept release on Regulation S-K seeking input on updating and modernizing our business and financial disclosure requirements. See Release No. 33-10064 (April 13, 2016), [81 FR 23916] (April 22, 2016). The concept release requests comment on a range of topics that also may apply to mining companies, such as disclosure pertaining to risk factors, description of property and sustainability. We continue to encourage interested parties to submit comments on the concept release. II. Proposed Mining Disclosure Rules A. Consolidation of the Mining Disclosure Requirements As noted above, the Commission's current mining disclosure regime involves overlapping disclosure requirements and policies in different locations (Regulation S-K and Guide 7), with an instruction (Instruction 7 to Item 102) that registrants engaged in significant mining operations should “direct their attention” to Guide 7. The combination of the overlapping structure of the disclosure regime for mining registrants and the brevity of Guide 7 (which has led to a significant amount of staff interpretive guidance through the comment process) may have created some regulatory uncertainty among mining registrants, particularly new registrants. To help address this uncertainty, we propose to rescind Guide 7 and create new Regulation S-K subpart 1300 29 that would govern disclosure for registrants with mining operations. 30 In addition, we propose to amend Item 102 of Regulation S-K to replace the instruction that “the attention of issuers engaged in significant mining operations is directed to the information called for in Guide 7” with a new instruction requiring all mining registrants to refer to and, if required, provide the disclosure under new Regulation S-K subpart 1300. 31 29 Proposed 17 CFR 229.1301 et seq. 30 Proposed Regulation S-K subpart 1300 would apply to registration statements under the Securities Act and the Exchange Act as well as to annual reports under the Exchange Act. 31 Registrants that have material non-mining operations would continue to provide non-mining property disclosures under Item 102 of Regulation S-K. Foreign private issuers that use Form 20-F to file their Exchange Act registration statements and annual reports, or that refer to Form 20-F when filing their Securities Act registration statements on Forms F-1 and F-4, are generally not subject to Regulation S-K. Because we believe that the same property disclosure requirements should apply to both domestic and foreign mining registrants, the proposed rules would amend Form 20-F to instruct registrants to refer to, and if required, provide the disclosure under subpart 1300 of Regulation S-K. 32 This proposed treatment would be consistent with current staff practice whereby foreign registrants are subject to the same Guide 7 and other disclosures as domestic mining registrants. 32 See section II.H., infra. Having one source for mining disclosure obligations should facilitate mining registrants' compliance with their disclosure requirements by eliminating the complexity resulting from the existing structure of Commission disclosure obligations in Regulation S-K and staff disclosure guidance in Industry Guide 7. Moreover, consolidating the disclosure requirements from Guide 7 into Regulation S-K would eliminate any uncertainty about their authority. 33 33 See note 26, supra. We discuss the expected benefits and costs of the proposed rules in section IV, infra. Request for Comment 1. The Commission's current mining disclosure regime consists of disclosure requirements located in Item 102 of Regulation S-K and disclosure policies located in Guide 7. Has this disclosure regime caused uncertainty for mining registrants? If so, would establishing a sole regulatory source for mining disclosure by rescinding Guide 7 and including the disclosure requirements for mining registrants in a new Regulation S-K subpart, as proposed, reduce this uncertainty? 2. Should we amend Item 102 of Regulation S-K by eliminating the instruction that refers mining registrants to the information called for in Guide 7 and instead instruct them to refer to, and if required, provide the disclosure under new Regulation S-K subpart 1300, as proposed? Should we instead retain Guide 7 and Item 102 of Regulation S-K as separate sources for mining disclosures? If so, how should they apply to registrants? B. The Standard for Mining-Related Disclosure 1. Overview Under Item 102 of Regulation S-K, registrants are required to disclose principal mines, other materially important physical properties, and significant mining operations. Guide 7 only applies to registrants engaged or to be engaged in significant mining operations. When construed together, Item 102 and Guide 7 suggest that there are two levels of reporting under the Commission's current mining disclosure regime. For registrants that have one or more principal mines or other materially important properties but lack significant mining operations, Item 102 requires less detailed information. For registrants that have significant mining operations, Guide 7 calls for more extensive disclosures. Although both Item 102 and Guide 7 refer to “significant” mining operations, the staff historically has advised registrants to apply materiality in determining what disclosures to provide. Guide 7 does not define “significant” mining operations while Item 102 does not specify the particular quantitative factors to be considered in determining the materiality of a mine. In the absence of specific guidance, the staff has historically used 10% of a registrant's total assets as the benchmark for determining the materiality of a registrant's mining operations. We propose that a registrant be required to provide the disclosure under new subpart 1300 of Regulation S-K if its mining operations, as that term is defined in Instruction 1 to proposed Item 1301(b), 34 are material to its business or financial condition. 35 For purposes of the new subpart, the term “material” would have the same meaning as under Securities Act Rule 405 and Exchange Act Rule 12b-2. 36 34 The term “mining operations” would include operations on all mining properties that a registrant owns or in which it has, or it is probable that it will have, a direct or indirect economic interest. It also would include operations on mining properties that a registrant operates, or it is probable that it will operate, under a lease or other legal agreement that grants the registrant ownership or similar rights that authorize it, as principal, to sell or otherwise dispose of the mineral. Finally, “mining operations” would include operations on mining properties that a registrant has, or it is probable that it will have, an associated royalty or similar right. See Instruction 1 to proposed Item 1301(b). For purposes of subpart 1300, the term “probable” would have the same meaning as the U.S. GAAP definition of that term. See ASC Section 450-20-20. 35 See proposed Regulation S-K Item 1301(a). Because we are proposing to consolidate the revised mining disclosure rules under new Regulation S-K subpart 1300, the proposed rules would eliminate Instruction 3 to Item 102, which requires the disclosure of certain specified material information, including “more detailed information” about a mining registrant's individual properties that “are of major significance.” 36 See Id. Pursuant to Securities Act Rule 405 (17 CFR 230.405) and Exchange Act Rule 12b-2 (17 CFR 240.12b-2), a matter is material if there is a substantial likelihood that a reasonable investor would attach importance to it in determining whether to buy or sell the securities registered. This definition is consistent with the U.S. Supreme Court's holding in TSC Industries v. Northway, Inc., 426 U.S. 438, 449 (1976), that a fact is material if there is a substantial likelihood that the fact would have been viewed by a reasonable investor as having significantly altered the “total mix” of information made available. Under proposed new subpart 1300, when determining the materiality of its mining operations, a registrant would have to: • Consider both quantitative and qualitative factors, assessed in the context of the registrant's overall business and financial condition; • aggregate mining operations on all of its mining properties, regardless of size or type of commodity produced, including coal, metalliferous minerals, industrial materials, geothermal energy, and mineral brines; 37 and 37 For a discussion of the treatment of mineral brines and energy under proposed subpart 1300, see section II.E.1, infra. • include, for each property, as applicable, all related mining operations from exploration through extraction to the first point of material external sale, including processing, transportation, and warehousing. 38 38 See proposed Item 1301(b) of Regulation S-K. Consistent with current staff guidance, we are proposing to define “mining operations” to include all related activities from exploration through extraction to the first point of material external sale. 39 We believe that including all activities up to the point of first material external sale is appropriate because all such activities are necessary to convert the mineral resource to saleable product, which generates the registrants' revenues. This definition would, however, exclude all activities subsequent to the first point of sale. Although such activities may add value to the saleable mining product, they are not necessary to convert the resource into a saleable product. For example, an aluminum producer who has material bauxite mining operations and material external bauxite sales would not include any subsequent refinery activities (such as processing the bauxite into aluminum) in the scope of its mining property disclosure. We also note that, because this approach would be consistent with current staff guidance, it is not expected to significantly alter existing disclosure practices. 39 See proposed Item 1301(b)(3) of Regulation S-K. Proposed new subpart 1300 would instruct that a registrant's mining operations are presumed to be material if its mining assets constitute 10% or more of its total assets. 40 We believe it would be appropriate to presume materiality under the proposed rules when mining assets are at or above a threshold of 10 percent of total assets because at that level the mining assets are likely to contribute significantly to the registrant's business or financial condition. We further believe that the 10% asset threshold is appropriate because it is consistent with similar 10% thresholds that the Commission has used to determine disclosure requirements under a variety of forms and rules. 41 Finally, the proposed asset test would provide registrants with an easily applied quantitative standard to use regarding whether they are subject to the new mining disclosure requirements. 40 See Instruction 2 to proposed Item 1301(b) of Regulation S-K. The 10% test is a “rule of thumb” that the staff has historically applied in the mining context. 41 See, e.g., Item 2.01 of Form 8-K (17 CFR 249.308); sections 4-08 and 10-01 of Regulation S-X (17 CFR 210.4-08 and 210.10-01); and Items 101 and 911 of Regulation S-K (17 CFR 229.101 and 229.911); see also ASC Section 280-10-50-12. The proposed new subpart would further instruct that if a registrant's mining assets fall below the 10% total assets threshold, it would need to consider if there are other factors, quantitative or qualitative, which would render its mining operations material. 42 Such factors could include: 42 See Instruction 3 to proposed Item 1301(b) of Regulation S-K. Similarly, because the 10% asset test is a presumption, a registrant with mining operations that constitute more than 10% of its total assets could evaluate all the relevant quantitative and qualitative factors and conclude that the mining operations are not required to be disclosed under the proposed standard. • Mining operations that constitute 10% or more of some other financial measure, such as the registrant's total revenues, net income or operating income; • evidence that disclosure of a similar property or properties has had a significant impact on the price of a registrant's securities; • public disclosure by the registrant discussing the importance to its operations ( e.g., from an operational or competitive standpoint) of a particular property or properties; • the unique or rare nature of the particular mineral or the importance of the mineral to the registrant's operations; • the actual and projected expenditures on the registrant's mining properties as compared to its expenditures on non-mining business activities; and • the amount of capital raised or planned to be raised by the registrant for its mining properties. 43 43 Many of these factors are similar to factors enunciated in Canada's Companion Policy 43-101CP to National Instrument 43-101, General Guidance, paragraph 5, which is available at: http://web.cim.org/standards/documents/Block484_Doc111.pdf. See also the Australian Stock Exchange (ASX) Listing Rules, Guidance Note 31, pt. 2.2, which is available at: http://www.asx.com.au/documents/rules/gn31_reporting_on_mining_activities.pdf . The proposed standard is generally consistent with the existing disclosure requirements that registrants routinely apply throughout their required filings. It is also consistent with existing staff guidance relating to the disclosure requirements for companies with mining operations. Moreover, as discussed below, we are proposing rules and instructions to help registrants apply the proposed standard under a variety of circumstances, including situations that are not expressly addressed by the current mining disclosure rules. 44 We believe the proposed requirements could enhance disclosure to investors. 44 See section II.B.1.i-iii, infra. Finally, because the proposed standard is generally consistent with the disclosure standard under the CRIRSCO-based mining codes, it should not alter the disclosure practices of the numerous mining companies that are listed and operate in multiple jurisdictions. Request for Comment 3. Should the disclosure standard under the revised mining disclosure rules be whether a registrant's mining operations are material to its business or financial condition, as proposed? Why or why not? If not, what standard should we adopt for determining whether a registrant must provide the mining disclosure under the revised rules? Why? 4. Are the quantitative and qualitative factors described in this section relevant to the determination of the materiality of a registrant's mining operations? Why or why not? Are there other factors, such as those identified in Canada's Companion Policy 43-101CP to National Instrument 43-101, General Guidance, that a registrant should consider for the materiality determination instead of or in addition to the factors described in this section? Should we include these or other factors as part of the rule provision governing the materiality determination? If so, which factors should we include in the rule? 5. Should we adopt the proposed presumption that a registrant's mining operations are material if they consist of 10% or more of its total assets? Would a percentage higher or lower than 10% be better than the proposed threshold? Why or why not? Should it be a presumption, as proposed, or should it be a bright line requirement? If the former, how might the presumption be rebutted? Is there another quantitative factor, such as revenues, that a registrant should consider instead of or in addition to the proposed asset test? 6. When assessing the materiality of its mining operations, should we require a registrant to aggregate all of its mining properties, regardless of size or type of commodity produced, including coal, metalliferous minerals, industrial materials, geothermal energy, and mineral brines, 45 as proposed? Why or why not? Should we exclude any of the specified commodities from the proposed aggregation requirement? If so, which commodities and why? 45 As discussed in section II.E.1, we are proposing that the commodities covered by the definition of mineral resource include mineralization, including dumps and tailings, geothermal fields, mineral brines, and other resources extracted on or within the earth's crust. See proposed Item 1301(d)(14)(ii) of Regulation S-K. 7. When assessing the materiality of its mining operations, should we require a registrant to include, for each property, as applicable, all related activities from exploration through extraction to the first point of material external sale, including processing, transportation, and warehousing, as proposed? Why or why not? Is “the first point of material external sale” the appropriate cut-off or should we use some other measure? Are there certain activities that we should exclude from the materiality determination, even if they occur before the first point of material external sale? If so, which activities, for which minerals or companies, and why? Are there certain activities after the point of first material external sale that we should include? If so, which activities, for which minerals or companies, and why? 8. Are there specific qualitative or quantitative factors relating to the environmental or social impacts of a registrant's properties or operations that a registrant should consider in making its materiality determination? i. Treatment of Vertically-Integrated Companies Some companies have material mining operations that are secondary to or in support of their main non-mining business. For example, a metal manufacturer may operate iron ore or coal mines to supply raw material for its primary business. Neither Guide 7 nor Item 102 addresses whether or when a vertically-integrated manufacturer 46 is required to provide mining disclosure. 46 A vertically-integrated manufacturer is a company that owns part of its supply chain. In this context, it refers to a registrant that has mining operations to supply raw material to its manufacturing business. Proposed new subpart 1300 would apply to all registrants with mining operations, including vertically-integrated manufacturers. Specifically, a mining operation owned by a registrant to support its primary business could be material and require disclosure. The fact that the registrant's primary business operation is something other than minerals extraction would not be determinative of whether disclosure would be required under the proposed subpart. For example, the bauxite mining operations of an aluminum manufacturer, whose primary business is manufacturing, not mining, could be material and require disclosure if its bauxite operations represent ten percent or more of the registrant's assets, even though they are not the registrant's primary operations, or the primary source of the registrant's revenues. In addition, even if the bauxite or other mining operations of such a vertically-integrated manufacturer constitute less than ten percent of its total assets, its mining operations could still be material and trigger disclosure obligations if, for example, the manufacturer derives a competitive advantage from, or substantially relies upon, its ability to source that particular mineral from its mining operations. Requiring disclosure of mining operations in such circumstances would be consistent with the disclosure currently provided in SEC filings and should not significantly alter existing disclosure practices. In addition, subjecting vertically-integrated companies to the proposed rules would align the disclosure requirements for such companies with those of companies primarily engaged in mining activities. Also, we note that most of the foreign jurisdictions that have CRIRSCO-based rules require disclosure for material mining properties and provide no exemptions for vertically-integrated companies. 47 47 For example, ASX Listing Rules require disclosure of exploration results, mineral resources and mineral reserves for all “material mineral projects.” In defining a “material mineral project,” the ASX Listing Rules, Guidance Note 31, pt. 2.2, provides that “[i]n many cases, it will be readily apparent that a particular mining activity is a material mining project for the purposes of the Listing Rules and therefore the disclosure requirements in Listing Rules 5.7-5.19 will apply to any disclosures of exploration results, estimates of mineral resources or ore reserves, historical estimates or foreign estimates of mineralisation, or production targets for that project. Judgment however may need to be exercised where an entity has multiple mining projects or where it has a mix of mining projects and other business activities.” Request for Comment 9. Should we require vertically-integrated companies, such as manufacturers, to provide the disclosure required under new Regulation S-K subpart 1300, as proposed? Why or why not? ii. Treatment of Multiple Property Ownership As discussed above, the primary focus of the current rules and guidance is on individually significant or material properties. It is, however, very common for registrants to own multiple mining properties. In some instances, the registrant will have multiple properties that all involve exploration, development or extraction of the same mineral. In other situations, the registrant's operations will primarily involve exploration, development or extraction of one mineral from several properties, but the registrant also will own one or more ancillary properties where it explores, develops or extracts small amounts (relative to the predominant mineral) of a different mineral. Neither Item 102 nor Guide 7 provides guidance concerning when or what disclosure is required in these situations. To address this, the staff has provided interpretive guidance about what, if any, disclosure is required by multiple or ancillary property owners. Under the proposed rules, a registrant with multiple properties would be required to consider all of its mining properties individually and in the aggregate, regardless of size or commodity produced, when assessing whether it must provide the mining disclosure required by new subpart 1300 of Regulation S-K. 48 A registrant with multiple properties, none of which is individually material, but which in the aggregate constitute material mining operations, would have to provide summary disclosure 49 concerning its combined mining activities rather than providing disclosure for individual properties. 50 48 See proposed Item 1301(b)(2) of Regulation S-K. 49 See section II.G.1, infra for a more detailed discussion of the summary disclosure requirements, which would include summary information about a registrant's 20 largest properties, by asset value. In the case of a registrant with material mining operations in the aggregate, but with no individual properties that are material, we believe that investors would benefit more from the proposed summary disclosure concerning the registrant's properties in the aggregate than from detailed disclosure concerning each individual property, some or all of which may not have mineral resources, mineral reserves or exploration results. 50 To the extent that an individual property is material to a registrant's operations, the proposed rules would also require detailed disclosure about that property. See section II.G.2, infra, for a discussion of those disclosure requirements. Under the proposed rules, a registrant could be required to provide disclosure for a particular property, depending on the facts and circumstances, even if ancillary to the registrant's predominant commodity. For example, a property on which a registrant explores, develops or extracts a relatively small amount of a particular mineral, compared to its predominant mineral, could be material based upon the amount of actual and projected expenditures on the property as compared to its expenditures on other properties. We believe the proposed rules would provide a clear and consistent standard for registrants to apply in determining the scope of their disclosure obligations, while helping to ensure that investors receive relevant information about the operations and risks associated with registrants' mining operations. Request for Comment 10. Should we require a registrant with multiple properties to provide the disclosure required by proposed Regulation S-K subpart 1300, as proposed? Why or why not? Should we require a registrant with multiple properties, none of which is individually material, but which in the aggregate constitute material mining operations, to provide only summary disclosure concerning its combined mining activities, as proposed? Why or why not? 11. Are there difficulties that a registrant with multiple properties could face when determining if disclosure is required under the proposed rules? If so, how should our mining disclosure rules address such difficulties? 12. Should we require more detailed disclosure about individual properties that are material to a registrant's mining operations, as proposed? Why or why not? iii. Treatment of Royalty Companies and Other Companies Holding Economic Interests in Mining Properties Some registrants are royalty companies, which are companies that do not own or operate a property, but rather own the right to receive payments, called a royalty right, from the owner or operator of a property. 51 In addition, some registrants hold other economic interests, similar to royalty rights, also without owning or operating a property. 52 Neither Item 102 nor Guide 7 address whether royalty or similar companies must provide disclosure about the mining operations and properties underlying their economic interest. Consequently, the staff has provided guidance about whether and how such companies should provide mining disclosure. 51 A royalty, in this context, is typically a payment to the royalty right holder from the property owner or operator in return for: (i) Providing upfront capital; (ii) paying part of amount due land owners or mineral right holders; or (iii) converting a participating interest in a joint venture into a royalty right. Such payment is most often based on a percentage of the minerals, revenues, or profits generated from the property. 52 Examples include the right to purchase all or a portion of minerals from a mine under a metal purchase agreement (a “stream” agreement) or a working interest in the underlying property. Under the proposed rules, consistent with prior staff guidance, a royalty company or other registrant that holds a similar economic interest would have to provide all applicable mining disclosure if the mining operations that generate the royalty or other payment (the underlying mining operations) are material to the royalty or similar company's operations as a whole. Similar to a producing mining company (that owns or operates properties), a royalty or similar company would have to assess both quantitative and qualitative factors to determine whether the underlying mining operations are material. 53 53 In this regard, because a registrant with royalty or other similar economic interests does not own or operate the producing property, revenues are often a more relevant benchmark than assets for determining materiality. Investors in royalty and other similar companies need information about the material mining properties that generate the payments to the registrant, including mineral reserves and production, to be able to assess the amounts, soundness and sustainability of future payments. For the royalty or similar company and its investors, the mining property underlying the royalty or similar payments is the primary or only source of revenues and cash flow. As such, we believe royalty companies and other companies holding similar economic interests should provide the same type and amount of disclosure as registrants with mining operations. The proposed rules would require a royalty or similar company to provide disclosure only for those underlying properties, or portions of underlying properties, that generate the registrant's royalties or similar payments, and only for the reserves and production that generated its payments in the reporting period. 54 We do not believe that investors in a company holding royalty or similar rights need information relating to portions of the mining property that do not contribute to the registrant's royalty stream, as such portions do not impact the results of operations or overall value of the registrant. This proposed limitation on the scope of the disclosure required for royalty or other similar companies also recognizes the limitations of the company's rights. Specifically, the registrant may not have access to information about portions of the mining property that do not contribute to the registrant's revenue stream. 55 54 See Instruction 2 to proposed Item 1303(b)(2) of Regulation S-K and Instruction 4 to proposed Item 1304(b)(5) through (7) of Regulation S-K. 55 This is consistent with the Commission's current rules providing that information required need be given only insofar as it is known or reasonably available to the registrant. See Securities Act Rule 409 (17 CFR 230.409) and Exchange Act Rule 12b-21 (17 CFR 240.12b 21). A royalty or similar company would need to describe the material properties that generate its royalties or similar payments and file a technical report summary for each such property. 56 Such a registrant would not, however, have to submit a separate technical report summary about a property that is covered by a current technical report summary filed by the producing mining registrant. In that situation, the royalty or similar company may incorporate by reference the producing registrant's previously filed technical report summary. 57 56 As discussed, in section II.C.1 infra, the proposed rules would require registrants to file technical report summaries, as exhibits, to support disclosure of mineral resources, mineral reserves, and material exploration results. 57 See 17 CFR 230.411 and 17 CFR 240.12b-32, which permit any document filed with the Commission under any act administered by the Commission to be incorporated by reference as an exhibit to a statement or report filed with the Commission by the same or any other person, and require that the registrant clearly identify in the reference the document from which the material is taken. Request for Comment 13. Should we require a royalty company, or a company holding a similar economic interest in another company's mining operations, to provide all applicable mining disclosure if the underlying mining operations are material to its operations as a whole, as proposed? Why or why not? Should disclosure for such companies be required under other circumstances? 14. Should we permit a royalty company, or other similar company holding an economic interest in another company's mining operations, to provide only the required disclosure for the reserves and production that generated its royalty payments, or other similar payments, in the reporting period, as proposed? Why or why not? If not, what additional disclosure should be required by such registrants? 15. Should we require a royalty company, or other similar company holding an economic interest in another company's mining operations, to describe its material properties and file a technical report summary for each such property, as proposed? Should we allow a royalty or other similar company to satisfy the technical report summary requirement by incorporating by reference a current technical report summary filed by the producing mining registrant for the underlying property, as proposed? Are there circumstances ( e.g. when a royalty company purchases a royalty agreement and is not reasonably able to gain access to such information) in which a royalty or similar company should not be required to file a technical report summary concerning the underlying property? 2. Definitions of Exploration, Development and Production Stage Guide 7 defines the stages used to describe mining operations, “exploration stage,” “development stage,” and “production stage,” as follows: • Exploration Stage—includes all registrants engaged in the search for mineral deposits (reserves) which are not in either the development or production stage. • Development Stage—includes all registrants engaged in the preparation of a determined commercially minable deposit (reserves) for its extraction which are not in the production stage. • Production Stage—includes all registrants engaged in the exploitation of a mineral deposit (reserve). 58 58 Guide 7 paragraph (a)(4). Guide 7 applies these definitions to the registrant as a whole, however, and not on a property-by-property basis. As such, Guide 7 does not provide guidance as to when and how the definitions of exploration, development and production stage apply to registrants that own properties in different stages. To address this ambiguity and to help ensure that investors receive disclosure that accurately reflects a registrant's operational status, we are proposing to revise the Guide 7 definitions of exploration, development and production stage so that the definitions apply to individual properties, as follows: • An exploration stage property is a property that has no mineral reserves disclosed; 59 59 See proposed Item 1301(d)(6) of Regulation S-K. • a development stage property is a property that has mineral reserves disclosed, but with no material extraction; 60 and 60 See proposed Item 1301(d)(3) of Regulation S-K. • a production stage property is a property with material extraction of mineral reserves. 61 61 See proposed Item 1301(d)(20) of Regulation S-K. We also are proposing to revise the Guide 7 definitions as they apply to issuers in order to recognize that issuers may have properties in differing stages, as follows: • an exploration stage issuer is one that has no material property with mineral reserves; 62 62 See proposed Item 1301(d)(5) of Regulation S-K. • a development stage issuer is one that is engaged in the preparation of mineral reserves for extraction on at least one material property; 63 and 63 See proposed Item 1301(d)(2) of Regulation S-K. • a production stage issuer is one that is engaged in material extraction of mineral reserves on at least one material property. 64 64 See proposed Item 1301(d)(19) of Regulation S-K. Finally, we propose to specify that a registrant that does not have reserves on any of its properties, even if it has mineral resources or exploration results, or even if it is engaged in extraction without first disclosing mineral reserves, 65 cannot characterize itself as a development or production stage company. 66 The proposed rules would also require a company to identify an individual property with no mineral reserves as an exploration stage property, even if it has other properties in development or production. 67 65 There are registrants that start development or production without first disclosing mineral reserves. Such practices increase the business' risks due to the absence of the detailed technical and economic analysis required to disclose reserves, thus increasing the degree of uncertainty surrounding the quantities and quality of the mineral to be extracted. 66 See the Instruction to proposed Item 1304(b)(3) of Regulation S-K. 67 Id. We believe that these proposed changes would resolve the ambiguities in the Guide 7 definitions. They also would be consistent with prior staff guidance, which should minimize changes in disclosure practices for registrants and their investors. Under the proposed definitions, a registrant would be able to characterize its properties separately, but would be limited in when and how it can characterize its operational stage. Specifically, it would not be able to characterize itself as a development stage registrant unless it is engaged in the preparation of mineral reserves for extraction on at least one material property. We believe this would benefit investors by providing them with clearer, more accurate and consistent disclosure about the type of company and level of risk involved. In particular, prohibiting a registrant without any mineral reserves from characterizing itself as a production or development stage company would help eliminate the possibility that such a registrant, by definition a higher risk company, would incorrectly characterize itself as being in a lower risk stage, thereby potentially misleading or confusing investors. Further, providing definitions that apply to specific properties would align the disclosure requirements with current accounting practices under U.S. GAAP and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). 68 Conforming the definitions in the proposed requirements to the applicable accounting practice should benefit both registrants and investors by providing a consistent framework for the presentation of financial and property disclosures, thereby reducing compliance burdens and facilitating comparability. 68 Although there is no authoritative guidance under U.S. GAAP that directly addresses accounting for mining activities, the accounting practice has typically been based on the definition of an asset in Statement of Financial Accounting Concepts Elements of Financial Statements (“Concept Statement 6”), with a focus on the operational stage of individual properties rather than on the stage of the registrant. Similarly, accounting for costs under IFRS also focuses on individual properties. Request for Comment 16. Should we define “exploration stage property,” “development stage property” and “production stage property,” as proposed? Why or why not? Would these definitions facilitate compliance by registrants with properties in more than one stage of operation? 17. Should we also revise the definitions of “exploration stage issuer,” “development stage issuer” and “production stage issuer,” as proposed? Why or why not? Should the definition of “development stage issuer” and “production stage issuer” depend on having “at least one material property”, as proposed? Should we instead base the definitions on consideration of the characteristics of all mining properties? For example, if a registrant has a single development-stage material property that constitutes 10% of its mining assets, with the remainder of the mining assets all constituting exploration stage properties, should the registrant be able to identify itself as a development stage issuer? 18. Would the two proposed sets of definitions appropriately classify the particular stage of a registrant's mining operations? Should the definitions be property-based and dependent on whether mineral resources or reserves have been disclosed, are being prepared for extraction, or are being extracted, as applicable, on one or more material properties? Would having two proposed sets of definitions create unnecessary complexity or investor confusion? 19. Should the proposed rules specify that a registrant that does not have mineral reserves on any of its properties, even if it has mineral resources or exploration results, or even if it is engaged in extraction without first disclosing mineral reserves, cannot characterize itself as a development or production stage company, as proposed? Why or why not? C. Qualified Person and Responsibility for Disclosure 1. The “Qualified Person” Requirement All of the CRIRSCO-based codes require that any public report about a company's exploration results, mineral resources and mineral reserves be based on and fairly reflect information and supporting documentation prepared by a “competent” or “qualified person.” 69 “Public report” as used in the CRIRSCO-based codes includes all communication by a company to investors on exploration results, mineral resources and mineral reserves. 70 The purpose of this requirement is to ensure that a registrant's public declaration of exploration results, mineral resources and reserves is supported by the findings of a mineral industry professional having the relevant level of expertise. 71 In contrast, neither Guide 7 nor Item 102 requires that a registrant's disclosure of mineral reserves be based on the findings of an appropriately experienced professional. 72 While an author of a study or technical report that forms the basis of mineral reserves disclosure in a Securities Act registration statement must consent to the use of its name as an expert, 73 there is no requirement to use an expert for reserves disclosure and, if one is used, there are no substantive requirements for that expertise. 69 See, e.g., CRIRSCO's International Reporting Template pt. 8; Canada's NI 43-101 pt. 2.1; and JORC Code pt. 9. 70 For example, Australia's JORC Code defines public report as: “. . . reports prepared for the purpose of informing investors or potential investors and their advisers on Exploration Results, Mineral Resources or Ore Reserves. They include, but are not limited to, annual and quarterly company reports, press releases, information memoranda, technical papers, Web site postings and public presentations.” JORC Code pt. 6 (2012). The JORC Code is available at: http://www.jorc.org/docs/JORC_code_2012.pdf . 71 The CRIRSCO-based standards are built on three governing principles: transparency, materiality and competence. All these codes define competence to mean that technical work should be done by a professional with requisite expertise. See, e.g., CRIRSCO's International Reporting Template pt. 3, which states: “Competence requires that the Public Report be based on work that is the responsibility of suitably qualified and experienced persons who are subject to an enforceable professional code of ethics and rules of conduct.” See also JORC Code pt. 9 and SME Guide pt. 3. 72 Guide 7 only calls for disclosure of the name of the person estimating the reserves and the nature of his or her relationship to the registrant. See Guide 7 paragraph (b)(5)(ii). In addition, if a registrant supplementally provides a copy of a technical report to Division staff, Guide 7 specifies that the copy include the name of its author and the date of its preparation, if known to the registrant. See Guide 7 paragraph (c)(2). 73 See Securities Act Rule 436 (17 CFR 230.436); see also 17 CFR 229.601(b)(23)(i). We are proposing that every disclosure of mineral resources, mineral reserves and material exploration results reported in a registrant's filed registration statements and reports must be based on, and accurately reflect information and supporting documentation prepared by, a “qualified person,” 74 as defined by the proposed rules. 75 In addition, the proposed rules would require that the registrant: 74 See proposed Item 1302(a) of Regulation S-K. While we refer to the qualified person in the singular throughout this release, we note that it is common for a registrant to have more than one qualified person prepare a technical report for a mining property or project. As proposed, the registrant's responsibilities would apply to each qualified person so engaged. 75 See section II.C.2, infra. • Be responsible for determining that the person meets the qualifications specified under the new subpart's definition of “qualified person” and that the disclosure in the filing accurately reflects the information provided by the qualified person; 76 76 See proposed Item 1302(a). • obtain a dated and signed technical report summary from the qualified person, which identifies and summarizes for each material property the information reviewed and conclusions reached by the qualified person about the registrant's exploration results, mineral resources or mineral reserves; 77 77 See proposed Item 1302(b)(1) of Regulation S-K. • file the technical report summary with respect to every material mining property as an exhibit to the relevant registration statement or other Commission filing when the registrant is disclosing for the first time mineral reserves, mineral resources or material exploration results or when there is a material change in the mineral reserves, mineral resources or exploration results from the last technical report filed for the property; 78 78 See proposed Item 1302(b)(2) of Regulation S-K and discussion in section II.G.2, infra. • obtain the written consent of the qualified person to the use of the qualified person's name and any quotation or other use of the technical report summary in the registration statement or report prior to filing the document publicly with the Commission; 79 79 See proposed Item 1302(b)(3) of Regulation S-K. • identify the qualified person who prepared the technical report summary in the filed registration statement or report; 80 and 80 See proposed Item 1302(b)(4) of Regulation S-K. • state whether the qualified person is an employee of the registrant, and if the qualified person is not an employee of the registrant: ○ Name the qualified person's employer; ○ disclose whether the qualified person or the qualified person's employer is an affiliate 81 of the registrant or another entity that has an ownership, royalty or other interest in the property that is the subject of the technical report summary; and 81 As used in proposed Item 1302(b), the term “affiliate” has the same meaning as in § 230.405 or § 240.12b-2. See the Instruction to proposed Item 1302(b)(4) of Regulation S-K. ○ if the qualified person or the qualified person's employer is an affiliate, disclose the nature of the affiliation. 82 82 See proposed Item 1302(b)(4) of Regulation S-K. If the filing that requires the technical report summary is a Securities Act registration statement, the qualified person would be deemed an “expert” who must provide his or her written consent as an exhibit to the filing pursuant to Securities Act Rule 436. 83 In such situations, the qualified person would be subject to liability as an expert for any untrue statement or omission of a material fact contained in the technical report summary under Section 11 of the Securities Act. 84 83 See 17 CFR 230.436 and 229.601(b)(23). A registrant would also have to file the written consent as an exhibit to an Exchange Act registration statement or report when the Exchange Act filing is automatically incorporated into a previously filed Securities Act registration statement. 84 15 U.S.C. 77k(a)(4). The Securities Act and the Exchange Act each provide that the registration statements and periodic reports required under those statutes shall contain such information and documents as the Commission may require, as necessary or appropriate in the public interest and for the protection of investors. 85 We believe that the proposed requirement that a registrant's disclosure of mineral resources, mineral reserves and material exploration results in SEC filings be based on and fairly reflect information and supporting documentation prepared by a “qualified person” would further the protection of investors for several reasons. 85 See Securities Act Section 7(a) (15 U.S.C. 77g(a)) and Exchange Act Sections 12(b)(1),)12(g)(1), and 13(a) (15 U.S.C. 78l(b)(1), 78l(g)(1), and 78m(a)). First, this requirement could make the determination and reporting of material exploration results or estimates of mineral resources and reserves more reliable. 86 This is particularly important since we are proposing to require, for the first time, that a registrant with material mining operations disclose mineral resources and material exploration results in SEC filings. Second, we believe that the proposed requirement that a registrant file a copy of the technical report summary for each material property as an exhibit to the SEC filing would enhance investor understanding of a registrant's material properties. Specifically, it would provide investors with a summary of the scientific and technical information that is the basis for the registrant's disclosure of mineral resources, mineral reserves and material exploration results, which should enable investors to assess better the value of the registrant's material properties. Third, the proposed qualified person requirement would help to mitigate any risks associated with our proposal to require disclosure of mineral resources or material exploration results, which reflect a lower level of certainty about the economic value of mining properties than is reflected in the disclosure of mineral reserves. 87 Finally, the proposed qualified person requirement would strengthen the Commission's disclosure requirements in a manner consistent with most foreign mining jurisdictions, thus benefiting investors and promoting uniformity. 86 To the extent that a registrant's determination of mineral resources, mineral reserves and material exploration results is currently based on information and supporting documentation prepared by persons who would be “qualified persons” under the proposed rules, the potential benefits of this requirement could be less. In addition, our proposal presumes that the standards that we have set forth for determining who is a “qualified person,” which are consistent with CRIRSCO-based standards, are the appropriate standards. There may be situations when that presumption excludes a person with significant, relevant experience because that person has chosen not to be a member of a recognized professional organization. Despite the professional competency of such person, he or she will not be deemed to be a “qualified person” under the proposed rules. 87 See sections II.D and E, infra. We propose to require the registrant to file the technical report summary as an exhibit (rather than in the body of the annual report or registration statement) in order to separate the underlying scientific and technical information in the technical report summary from the narrative disclosure concerning the registrant's operations. 88 We believe this would result in clearer and more accessible disclosure for investors, enabling them to understand the disclosure more effectively from both an operational and technical viewpoint. 88 The staff currently has the ability to request a copy of a technical report as supplemental material, where it is deemed appropriate, during the course of its review of a registration statement or report. See Securities Act Rule 418 (17 CFR 230.418) and Exchange Act Rule 12b-4 (17 CPR 240.12b-4). Securities Act Rule 418(a)(6) specifically authorizes the staff, “where reserve estimates are referred to in a document,” to request “a copy of the full report of the engineer or other expert who estimated the reserves.” 17 CFR 230.418(a)(6). The proposed requirement to obtain a signed and dated technical report summary would help establish the authenticity and relevance of the technical report summary. The proposed requirement to obtain the written consent of the qualified person to use his or her name and any quotation or other use of the technical report summary would help ensure that such information is not included in an SEC filing without the qualified person's actual knowledge. In addition, requiring the registrant to file the qualified person's written consent is consistent with the Commission's approach to the use of an expert's report in Securities Act filings 89 and would align the Commission's mining disclosure rules with the CRIRSCO-based codes, which impose a similar written consent requirement. 90 89 See, e.g. , Securities Act Rule 436. 90 See, e.g. , Canada's NI 43-101 pt. 8.3; the JORC Code pt. 9; South Africa's SAMREC Code pt. 8 (2009), which is available at: http://www.samcode.co.za/downloads/SAMREC2009.pdf ; and the SME Guide pt. 8. The proposed requirement that a registrant identify the qualified person that prepared the technical report summary and, if the qualified person is not an employee of the registrant, disclose whether the qualified person or the qualified person's employer is an affiliate would provide investors with relevant information to assess the reliability of the disclosure and align the Commission's mining rules with most of the CRIRSCO-based codes, which impose a similar identification requirement. 91 91 See, e.g., the JORC Code pt. 9; EU's PERC Reporting Standard pt. 9 (2013), which is available at: http://www.vmine.net/PERC/documents/PERC_REPORTING_STANDARD_2013_rev2.pdf . A limited exception to this is Canada, which requires a registrant to file a technical report summary prepared by an independent qualified person in certain circumstances: When becoming a first-time registrant; when supporting the first time reporting of mineral resources, mineral reserves, or a preliminary economic assessment of a material property; or when reporting a 100% or greater change in the total mineral resources or reserves on a material property, when compared to the last disclosure. See NI 43-101 pt. 5.3. We are not proposing that a qualified person must be independent from the registrant for several reasons. First, we believe that our approach would help to limit the compliance burdens on registrants. Second, we believe that other aspects of the recommended proposals, such as disclosure of the qualified person's credentials and his or her affiliated status with the registrant or another entity having an ownership or similar interest in the subject property, along with the application of potential expert liability in Securities Act filings, should provide adequate safeguards for investors. Finally, as discussed above, our approach is consistent with most of the CRIRSCO-based codes, 92 which permit a qualified person to be an employee or other affiliate of the registrant as long as the registrant discloses its relationship with the qualified person. 92 See Id. Request for Comment 20. Should we require, as proposed, that the determination of mineral resources, mineral reserves and material exploration results, as reported in a registrant's filed registration statements and reports, be based on and accurately reflect information and supporting documentation prepared by a qualified person? Why or why not? Would imposing a qualified person requirement help mitigate the risks associated with including disclosure about a registrant's mineral resources and exploration results in SEC filings, given that mineral resources and exploration results reflect a lower level of certainty about the economic value of mining properties? Why or why not? 21. Should the registrant be responsible for determining that the qualified person meets the qualifications specified under the new subpart's definition of “qualified person” as proposed? Why or why not? If not the registrant, who should be responsible for this determination? 22. Should we, as proposed, require a registrant to obtain a technical report summary from the qualified person, which identifies and summarizes the information reviewed and conclusions reached by the qualified person about the registrant's exploration results, mineral resources or mineral reserves, before it can disclose those results, resources or reserves in SEC filings? Why or why not? Should we instead require a registrant to obtain an unabridged technical report, rather than a technical report summary, before it can disclose exploration results, mineral resources or mineral reserves in SEC filings? Should we require the technical report summary to be dated and signed, as proposed? Why or why not? 23. If we require, as proposed, that a registrant obtain a technical report summary from the qualified person, should we also, as proposed, require that the registrant file the technical report summary as an exhibit to the relevant registrant statement or other Commission filing when one is required? Why or why not? 24. Should we require, as proposed, a registrant to file the technical report summary when the registrant is disclosing mineral reserves, mineral resources or material exploration results for the first time or when there is a material change in the mineral reserves, mineral resources or exploration results from the last technical report filed for the property? Why or why not? Should we instead require a registrant to file the technical report summary more frequently, such as with every Commission filing, or less frequently? 25. Should we require, as proposed, a registrant to obtain the written consent of the qualified person to the use of the qualified person's name and any quotation or other use of the technical report summary in the registration statement or report prior to filing the document publicly with the Commission? Why or why not? 26. Should we require that a registrant identify the qualified person that prepared the technical report summary and disclose whether the qualified person is an employee, as proposed? Why or why not? Should we also require a registrant to name the qualified person's employer if other than the registrant, and disclose whether the qualified person or the qualified person's employer is an affiliate of the registrant or another issuer that has an ownership, royalty or other interest in the property that is the subject of the technical report summary, as proposed? Why or why not? 27. Should we require a registrant to state whether the qualified person is independent of the registrant? Why or why not? If we were to require the registrant to state whether the qualified person is independent of the registrant, should we define “independent” for purposes of that requirement? If so, how? For example, should we base the definition of independence on comparable provisions under Canada's NI 43-101? 93 Similar to the Canadian provisions, should we provide examples of when a qualified person would not be considered to be independent? If so, what examples should we provide? Alternatively, similar to the Commission's rule regarding when an accountant is not independent, 94 should we provide that a qualified person is not independent if the qualified person is not capable of, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the qualified person is not capable of, exercising objective and impartial judgment on all issues encompassed within the qualified person's engagement? Are there any other alternative standards on which we should base a definition of independence for the purpose of the qualified person requirement? 93 Pt. 1.5 of Canada's NI 43-101 provides that a “qualified person is independent of an issuer if there is no circumstance that, in the opinion of a reasonable person aware of all relevant facts, could interfere with the qualified person's judgment regarding the preparation of the technical report.” Pt. 1.4 of NI 43-101 (CP) then provides guidance regarding when a qualified person would not be considered to be independent: “We consider a qualified person is not independent when the qualified person (a) is an employee, insider, or director of the issuer; (b) is an employee, insider, or director of a related party of the issuer; (c) is a partner of any person or company in paragraph (a) or (b); (d) holds or expects to hold securities, either directly or indirectly, of the issuer or a related party of the issuer; (e) holds or expects to hold securities, either directly or indirectly, in another issuer that has a direct or indirect interest in the property that is the subject of the technical report or in an adjacent property; (f) is an employee, insider, or director of another issuer that has a direct or indirect interest in the property that is the subject of the technical report or in an adjacent property; (g) has or expects to have, directly or indirectly, an ownership, royalty, or other interest in the property that is the subject of the technical report or an adjacent property; or (h) has received the majority of their income, either directly or indirectly, in the three years preceding the date of the technical report from the issuer or a related party of the issuer.” 94 See Rule 2.01(b) of Regulation S-X (17 CFR 210.2-01(b)). 28. Should we require that a registrant's disclosure of exploration results, mineral resources or mineral reserves in a SEC filing be based on the determination of a qualified person that is independent of the registrant? If so, should we impose such a requirement only under certain circumstances, such as when the filing discloses resources or reserves by the registrant for the first time; a material change in previously disclosed resources or reserves that has occurred or is likely to occur; or a 100% or greater change in the total mineral resources or reserves on a material property, when compared to the last disclosure? In each case, why or why not? 29. Alternatively, rather than requiring the qualified person to be independent, should we require, when the qualified person is affiliated with the registrant or another entity having an ownership or similar interest in the property, that a person independent of the registrant and qualified person review the qualified person's work? If so, what qualifications should the independent reviewer possess? If we require an independent review when the qualified person is affiliated with the registrant, should the review be for all disclosures of mineral resources, mineral reserves and material exploration results, or only those that are related to material properties? Should this review be required only in certain circumstances, such as when the filing discloses resources or reserves by the registrant for the first time; a material change in previously disclosed resources or reserves that has occurred or is likely to occur; or a 100% or greater change in the total mineral resources or reserves on a material property, when compared to the last disclosure? Should we instead adopt an independent review requirement for the work of an affiliated qualified person in all circumstances? In each case, why or why not? 30. Should we require the registrant to disclose any material conflicts of interest that could reasonably affect the judgment or decision making of the qualified person, such as material ongoing business relationships between the registrant and the qualified person or the qualified person's employer? 31. Would the proposed technical report summary filing requirement impose a significant burden on registrants? If so, which registrants and why? Are there changes that we could make to this proposed requirement to alleviate any such burden? 2. The Definition of “Qualified Person” We are proposing to define a “qualified person” as a person who is a mineral industry professional with at least five years of relevant experience in the type of mineralization and type of deposit under consideration and in the specific type of activity that person is undertaking on behalf of the registrant. In addition, in order to be a qualified person, a person must be an eligible member or licensee in good standing of a recognized professional organization at the time the technical report is prepared. 95 95 See proposed Item 1301(d)(22) of Regulation S-K. For an organization to be a “recognized professional organization,” it must be either recognized within the mining industry as a reputable professional association, 96 or be a board authorized by U.S. federal, state or foreign statute to regulate professionals in the mining, geoscience or related field. Furthermore, the organization must: 96 This standard is also used in Canada's NI 43-101, although that instrument does not provide factors to assess when determining which organizations are reputable. See the definition of “professional association” in NI 43-101 pt. 1.1. • Admit eligible members primarily on the basis of their academic qualifications and experience; • establish and require compliance with professional standards of competence and ethics; • require or encourage continuing professional development; • have and apply disciplinary powers, including the power to suspend or expel a member regardless of where the member practices or resides; and • provide a public list of members in good standing. 97 97 See proposed Item 1301(d)(22) of Regulation S-K. This proposed definition is similar to the definition of competent or qualified person under the CRIRSCO-based codes. 98 It differs, however, from those codes in at least one respect. Although CRIRSCO provides some guidance about what constitutes a “recognized professional organization,” 99 most of the CRIRSCO-based codes require that a competent or qualified person be a member of one or more “approved” organizations identified in an appendix to the code. 100 This list is updated periodically by the various code regulators. 98 The CRIRSCO standards require that a competent or qualified person have at least five years of relevant experience “in the style of mineralization and type of deposit under consideration and in the activity which that person is undertaking” and be a member or licensee in good standing of a recognized professional organization. See CRIRSCO's International Reporting Template pt. 11; see also the JORC Code pt. 11; the SAMREC Code pt. 10; the SME Guide pt. 9; and the PERC Reporting Standard pt. 10. The recognized professional organizations under CRIRSCO standards have and apply disciplinary powers to member classes eligible to serve as qualified persons and most require professional development to maintain such membership. 99 See CRIRSCO's International Reporting Template pt. 11. 100 See, e.g., the JORC Code pt. 11; the SAMREC Code pt. 9; the SME Guide pt. 9; and the PERC Reporting Standard pt. 10. In contrast, our proposed definition is more flexible while still providing assurance that the qualified person has the appropriate level of professional expertise to support disclosure of exploration results, mineral resources, or mineral reserves. Although this flexible approach would require registrants to exercise some judgment as to the qualified person's credentials, we believe it is a better option than requiring the person to be a member of one of several specifically identified organizations, as is the case under most of the CRIRSCO-based codes. Although the “approved organization” approach may be initially easier to apply, it could also become outdated as circumstances change. This could adversely impact the quality of disclosure. In contrast, our principles-based approach would provide flexibility to allow for ease of compliance and protection of investors. As discussed above, an organization that is recognized “within the mining industry as a reputable professional association,” can be, if all the other conditions are satisfied, a “recognized professional organization.” We are not, however, proposing any specific factors that would indicate that a professional association is reputable. We are instead seeking comment on what factors we should consider, and whether such factors should be incorporated into the final rules. Examples could include the frequency and quality of an association's peer-reviewed publications, the number and global distribution of its members, and whether and to what extent the association publishes guides or standards that are accepted and used in the industry. Regarding the minimum experience requirement, we believe five years would be an appropriate time frame to use for purposes of the definition of a qualified person. It ensures a prolonged period of professional experience without unduly restricting the pool of qualified experts. Furthermore, it is an accepted industry standard found in the corresponding definitions under the CRIRSCO-based codes. 101 101 See, e.g., NI 43-101 pt. 1.1, JORC pt. 11, CRIRSCO Template pt. 11, and SAMREC pt. 10. To assist registrants in applying the “qualified person” definition, we are also proposing detailed instructions to the definition of “qualified person.” 102 The instructions describe the specific types and amount of experience necessary for various types of mining activities and mineral deposits. For example, if the qualified person is preparing or supervising the preparation of a technical report concerning exploration results, the relevant experience must be in exploration. If the qualified person is estimating, or supervising the estimation of, mineral resources, the relevant experience must be in the estimation, assessment and evaluation of mineral resources and associated modifying factors. 103 Similarly, if the qualified person is estimating, or supervising the estimation of, mineral reserves, the relevant experience must be in engineering and other disciplines required for the estimation, assessment, evaluation and economic extraction of mineral reserves. 104 102 See the proposed instructions to paragraph (d)(22) of Item 1301. 103 The term “modifying factors” is defined in proposed Item 1301(d)(15) of Regulation S-K. They are the factors that a qualified person would be required to apply to mineralization or geothermal energy and then evaluate in order to establish the economic prospects of mineral resources, or the economic viability of mineral reserves. These factors include, but are not restricted to, mining, energy recovery and conversion, processing, metallurgical, economic, marketing, legal, environmental, infrastructure, social and governmental factors. See section II.F.1, infra, for a discussion of the proposed definition of modifying factors. Under the proposed rules, a qualified person would have to evaluate qualitatively the modifying factors to demonstrate “reasonable prospects for economic extraction” when determining mineral resources, but need not undertake the quantitative assessment to establish “economic viability” required for mineral reserve determination. 104 See Instruction 1 to proposed Item 1301(d)(22). Pursuant to the proposed instructions, a qualified person must also have relevant experience in evaluating the specific type of mineral deposit under consideration ( e.g., coal, metal, base metal, industrial mineral, mineral brine, or geothermal fields). What constitutes relevant experience in this regard is a facts and circumstances determination. For example, experience in a high-nugget, vein-type mineralization such as tin or tungsten would likely be relevant experience for estimating mineral resources for vein-gold mineralization whereas experience in a low grade disseminated gold deposit likely would not be relevant. 105 105 See Instruction 2 to proposed Item 1301(d)(22). The proposed instructions would further state that it is not always necessary for a person to have five years' experience in each and every type of deposit in order to be an eligible qualified person if that person has relevant experience in similar deposit types. For example, a person with 20 years' experience in estimating mineral resources for a variety of metalliferous hard-rock deposit types may not require as much as five years of specific experience in porphyry-copper deposits to act as a qualified person. Relevant experience in the other deposit types could count towards the experience in relation to porphyry-copper deposits. 106 106 See Instruction 3 to proposed Item 1301(d)(22). In addition to experience in the specific type of mineralization, if the qualified person is engaged in evaluating exploration results or preparing mineral resource estimates, the proposed instructions would require the qualified person to have sufficient experience with the sampling and analytical techniques, as well as extraction and processing techniques, relevant to the mineral deposit under consideration. As proposed, sufficient experience would mean that level of experience necessary to be able to identify, with substantial confidence, problems that could affect the reliability of data and issues associated with processing. 107 107 See Instruction 4 to proposed Item 1301(d)(22). For a qualified person applying the modifying factors to convert mineral resources to mineral reserves, the proposed instructions would require that the person must have both sufficient knowledge and experience in the application of these factors to the mineral deposit under consideration and experience with the geology, geostatistics, mining, extraction and processing that is applicable to the type of mineral and mining under consideration. 108 108 See Instruction 5 to proposed Item 1301(d)(22). These detailed instructions would help ensure that the qualified person has the appropriate level of experience for both the type of activity involved and the type of mineral deposit under consideration to make accurate assessments about the registrant's exploration results, mineral resources and mineral reserves. At the same time, we believe that the proposed definition of “qualified person,” taken together with the proposed instructions, would assist registrants in applying this definition and would provide sufficient flexibility in terms of the required level of experience and professional standing. Moreover, because the CRIRSCO-based codes provide similar guidance for the type of experience required for a competent or qualified person, the proposed definition should not significantly alter existing disclosure practices for registrants subject to those codes. 109 109 See, e.g. , the Canadian Institute of Mining, Metallurgy and Petroleum Definition Standards-For Mineral Resources and Mineral Reserves (“CIM Definition Standards”) 2 (2010), which is available at: http://web.cim.org/standards/MenuPage.cfm?sections=177&menu=178 ; the JORC Code pt. 11; the SAMREC Code pt. 10; the PERC Reporting Standard pt. 10; and the SME Guide pt. 9. Request for Comment 32. Should we define a qualified person in part to be a mineral industry professional with at least five years of relevant experience in the type of mineralization, as described here and in the proposed rule, and type of deposit under consideration and in the specific type of activity that person is undertaking on behalf of the registrant, as proposed? Why or why not? Should we specify the particular type of professional, such as a geologist, geoscientist or engineer, required under the definition? The years of experience required under the proposed definition is consistent with the CRIRSCO-based codes. Is five years the appropriate number of years to constitute the minimum amount of relevant experience required under the definition in our rules? Should we require a lesser or greater number of years of relevant experience ( e.g., 3, 7, or 10 years)? 33. Should we define a qualified person to be an individual, as proposed? Or should we expand the definition, in cases where the registrant engages an outside expert, to include legal entities, such as an engineering firm licensed by a board authorized by U.S. federal, state or foreign statute to regulate professionals in mining, geosciences or related fields? Why or why not? If we expand the definition in this manner, should the firm or the responsible individual sign the technical report summary and provide the required written consent? Similarly, what professional experience should be required and how would a firm satisfy the professional experience requirement? Should we adopt qualified person requirements for firms that are different than the proposed requirements for individual qualified persons? If so, what should these requirements be? 34. Do the proposed instructions provide the appropriate guidance for what may constitute the requisite relevant experience in the particular activity involved and in the particular type of mineralization and deposit under consideration? Is there different or additional guidance that we should provide in this regard? 35. Should we define a qualified person in part to be an eligible member or licensee in good standing of a recognized professional organization at the time the technical report is prepared, as proposed? Why or why not? Should we require an organization to meet the six criteria specified in the proposed definition in order to be a recognized professional organization, as proposed? Should the definition of a qualified person take into account whether, and the extent to which, a person has been disciplined by their professional organization? If so, how? Should the definition specify that the organization must require, rather than require or encourage, continuing professional development? Are there different or additional criteria that we should require for an organization to be a recognized professional organization? 36. What factors should we consider in determining whether a professional association is recognized as reputable with regards to the definition of a recognized professional organization? Are the examples we provided appropriate factors for determining whether a professional association is recognized as reputable or are other factors more appropriate? Should any of these factors be incorporated into the final rules? 37. Instead of the proposed flexible approach, should we require that a qualified person be a member of an approved organization listed in an appendix to the mining disclosure rules or in a document posted on the Commission's Web site? If so, how should the Commission determine which organizations to approve and how frequently should the Commission update the approved organization list? 38. Should we, as proposed, require a registrant to disclose the recognized professional organization(s) that the qualified person is a member of, and confirm that the qualified person is a member in good standing of the organization(s)? 39. Are there different or additional conditions that a person should have to satisfy in order to meet the definition of qualified person? For example, should we require that a person have attained a particular level of formal education (bachelor's degree, master's degree, or doctorate) in order to be a qualified person? If so, what level of education would be appropriate? Would such a minimum education requirement disqualify a significant percentage of persons from being considered as qualified persons who otherwise possess the requisite relevant experience? 40. Is the definition of qualified person too restrictive, thus increasing the cost and difficulty associated with finding a qualified person? Alternatively, should the definition be more restrictive, to help ensure a qualified person has an appropriate level of training and expertise? In either case, why? 41. Instead of prescribing qualifications for the qualified person, should we instead require a registrant to provide detailed disclosure regarding the qualifications of the individual who prepared the technical report summary? Why or why not? D. Treatment of Exploration Results Neither Guide 7 nor Item 102 addresses the disclosure of exploration results in Commission filings. 110 In contrast, the CRIRSCO-based codes require the disclosure of material exploration results, which are defined as data and information generated by mineral exploration programs that might be of use to investors but which do not form part of a disclosure of mineral resources or mineral reserves. 111 110 Accordingly, the staff does not request disclosure of exploration results. If a registrant voluntarily provides exploration results, the staff will review, and if appropriate, issue comments on, such disclosure. 111 See, e.g., the JORC Code pts. 17, 20 and 31; the SAMREC Code pts. 18-19; the PERC Reporting Standard pts. 16-18; and the SME Guide pts. 17, 20 and 31. We are proposing to require that a registrant disclose material exploration results for each of its material properties. 112 Similar to the CRIRSCO-based codes, we propose to define exploration results as data and information generated by mineral exploration programs ( i.e., programs consisting of sampling, drilling, trenching, analytical testing, assaying, and other similar activities undertaken to locate, investigate, define or delineate a mineral prospect or mineral deposit) that are not part of a disclosure of mineral resources or reserves. 113 A proposed instruction would explain that when determining whether exploration results are material, a registrant should consider their importance in assessing the value of a material property or in deciding whether to develop the property. 114 This instruction is consistent with the purpose of exploration activity, which is to determine whether a mining property contains a deposit that is economically viable and worth developing or to reduce the uncertainty surrounding that determination. 115 Prior to establishing the economic viability to an acceptable degree of certainty, exploration results are also used to assess the potential value of the property. 116 Hence, we believe that when determining whether exploration results are material, registrants should consider how the exploration results affect the valuation of a property or the decision to develop the property. 112 See proposed Item 1304(b)(6) of Regulation S-K. 113 See proposed Item 1301(d)(4) of Regulation S-K. 114 See proposed Instruction to Item 1304(b)(6) of Regulation S-K. 115 See, e.g., José L. Lee-Moreno, “Mineral Prospecting and Exploration,” in 1 SME Mining Engineering Handbook 105 (P. Darling, ed., 2011), which states that ”[t]he main objective of minerals exploration is to locate ore deposits, which are anomalous accumulations of one or more minerals that can be mined at a profit.” 116 It is accepted industry practice that the presence of mineralization and indications of exploration potential are factors in valuation of mining properties. See, e.g., Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports (“the VALMIN Code”) pt. 74-79 (2005). Also, relevant accounting principles require valuation to include consideration of the so-called “value beyond proven and probable,” which includes exploration potential. See FASB ASC 930-360 and 930-805 (formerly Emerging Issues Task Force, Fin. Accounting Standards Bd.), EITF Abstracts: Mining Assets: Impairment and Business Combinations, Issue No. 04-3 (Mar. 17-18, 2004), which is available at: http://www.fasb.org/pdf/abs04-3.pdf . The proposed rules would preclude the use of exploration results, by themselves, to derive estimates of tonnage, grade, and production rates, or in an assessment of economic viability 117 because of the level of risk associated with exploration results. Exploration results, by themselves, are inherently speculative in that they do not include an assessment of geologic and grade or quality continuity and overall geologic uncertainty. Therefore, we believe exploration results are insufficient to support disclosure of estimates of tonnage, grade, or other quantitative estimates. Tonnage and grades should only be part of mineral resource and reserve estimates, which must include an assessment of geologic and grade or quality continuity and overall geologic uncertainty. 118 117 See proposed Item 1301(d)(4) of Regulation S-K. 118 Similar restrictions on the use of exploration results exist in the CRIRSCO-based codes. See, e.g., CRIRSCO Template pt. 18, which states that “[i]t should be made clear in public reports that contain Mineral Exploration Results that it is inappropriate to use such information to derive estimates of tonnage and grade.” See also SME Guide pt. 31 and JORC Code pt. 18. Despite these limitations, we believe that disclosure of material exploration results would provide investors with a more comprehensive picture of a registrant's mining operations and help them make more informed investment decisions. A company engaged in mining activities frequently uses exploration results, prior to a determination of mineral resources, to assess the economic potential of its property as part of its decision to develop a property. In addition, a company uses exploration results to determine whether mineral resources exist and to estimate the mineral resources. To the extent that mineral resources (and mineral reserves estimated from them) on a particular property are material, depending on the facts and circumstances, the exploration results that led to the estimation of those mineral resources could also be material. For example, exploration results that have significantly impacted the registrant's analysis or estimates of the life of a material mining project would be considered material, thus triggering a disclosure obligation. Requiring the disclosure of material exploration results would align our disclosure rules with most foreign mining codes, 119 which would help to provide for a consistent level of mining disclosure across relevant jurisdictions. We believe that the potential risk associated with the uncertainty inherent in exploration results would be mitigated by precluding the use of exploration results alone, without due consideration of geologic uncertainty and economic prospects, to serve as a basis for disclosure of tonnage, grade, and production rates, or in an assessment of economic viability. 119 See note 111, supra. At this time, we are not proposing to require the disclosure of exploration results by a registrant that has material mining operations in the aggregate but no individual properties that are material. 120 If a company has determined that it lacks material mining properties, we believe it is unlikely that such a company would have exploration results that are material. While a company with no material properties could voluntarily elect to disclose exploration results for its properties, we do not believe investors would benefit from a requirement to disclose exploration results under those circumstances. 120 An example of such a registrant would be an industrial minerals company that has more than 50 properties none of which is individually material. Under the proposed rules, such a company would be required to provide summary disclosure concerning its mineral resources and mineral reserves. See section II.G.1, infra. Request for Comment 42. Should we require a registrant to disclose material exploration results for each of its material properties, as proposed? Why or why not? Alternatively, should we permit registrants to provide exploration results in a summary form? 43. Should we define exploration results as data and information generated by mineral exploration programs ( i.e., programs consisting of sampling, drilling, trenching, analytical testing, assaying, and other similar activities undertaken to locate, investigate, define or delineate a mineral prospect or mineral deposit) that do not form part of a disclosure of mineral resources or reserves, as proposed? Why or why not? Are there other characteristics that we should include in the definition of exploration results? Are there other activities that we should include as examples of mineral exploration programs? Are there activities that we should exclude as examples of mineral exploration programs? 44. What are the risks that could result from requiring disclosure of material exploration results? Should we prohibit the use of exploration results to derive estimates of tonnage, grade, and production rates, or in an assessment of economic viability, as proposed? Why or why not? Would prohibiting the use of exploration results for these purposes, as proposed, adequately protect investors from the increased risk associated with including information having a lower level of certainty about the economic value of mining properties? 45. When determining whether exploration results are material, should a registrant consider their importance in assessing the value of a material property or in deciding whether to develop the property, as proposed? Why or why not? Are there other circumstances that would better define when exploration results are material? If so, what are those circumstances? 46. We are proposing to require the disclosure of material exploration results for each material property. Should we also require disclosure of material exploration results when the registrant has determined that it has in the aggregate material mining operations but no individual properties are material? Would disclosure of material exploration results for its properties in the aggregate (when none is individually material) provide additional meaningful disclosure for investors? If so, how should a registrant disclose such exploration results? Should it provide such results in summary form? Or should it provide detailed disclosure about all material exploration results for all of its properties? E. Treatment of Mineral Resources The determination of mineral resources is the second step, after mineral exploration, that geoscientists and engineers use to assess the value of a mining property. 121 Most foreign mining codes require the disclosure of material mineral resources. 122 In contrast, Item 102 and Guide 7 preclude the disclosure of mineral resources in Commission filings (subject to the “foreign or state law” exception discussed above). 123 According to some industry groups, 124 this restriction has limited the completeness and relevance of SEC filings. 121 First, they use the exploration results to determine if a mineral deposit is present. Next, they estimate the mineral resources, which are the portions of the mineral deposit that have prospects of economic extraction. The last step is the determination of mineral reserves, which are the economically mineable portions of the mineral resources. 122 See, e.g. , the JORC Code pts. 4 and 14; the SAMREC Code pts. 4 and 14; the SME Guide pts. 3 and 20; and the PERC Reporting Standard pts. 4 and 13. 123 See Instruction 3 to paragraph (b)(5) of Guide 7 and Instruction 5 to Item 102 of Regulation S-K. 124 See the SME Petition for Rulemaking at 1. We are proposing to require a registrant with material mining operations to disclose specified information in its Securities Act and Exchange Act filings concerning any mineral resources, as defined in the proposed rules, that have been determined based on information and supporting documentation from a qualified person. As proposed, a registrant with material mining operations that has multiple properties would have to provide both summary disclosure about its mineral resources and more detailed disclosure concerning its mineral resources for each material property. 125 125 See sections II.G.1 and II.G.2, infra, respectively, for a discussion of the proposed summary and individual property disclosure requirements for mineral resources and reserves. Under the proposed rules, a registrant could not disclose that it has determined that a mineral deposit constitutes a “mineral resource” (or, for that matter, a “mineral reserve”) unless that determination is based upon information and supporting documentation 126 prepared by a qualified person. Nevertheless, there would be no requirement that a registrant make such an affirmative determination. For example, a registrant could choose not to engage a qualified person to conduct the analyses and prepare the documentation necessary to support a determination that a mineral deposit is a mineral resource (or reserve). In that case, under the proposed rules, in the absence of such information and supporting documentation, the registrant would be deemed not to have any mineral resources, and as such, would not be required to disclose mineral resources in a filing. If, however, the registrant did make the determination that it had mineral resources based upon information and supporting documentation prepared by a qualified person ( e.g., as part of its efforts to attract investors or secure project financing), then under the proposed rules the registrant would be required to disclose such mineral resources. This approach is consistent with the CRIRSCO-based codes. 127 126 As discussed in sections II.E.3 and II.F.2, infra, by “information and supporting documentation,” we mean an initial assessment for mineral resource determination and a preliminary or final feasibility study for mineral reserve determination. 127 Similarly, the other significant mining jurisdictions do not require a registrant to make the determination that it has mineral resources or reserves, as defined by those codes. The regulatory frameworks do, however, require disclosure of mineral resources and mineral reserves once the registrant has made the determination that it has them and they are material. See, e.g., ASX Listing Rules 5.7, 5.8, and 5.9, which provide guidance for disclosure of exploration results, mineral resources and mineral reserves for “material mining projects,” and which are available at: http://www.asx.com.au/documents/rules/Chapter05.pdf . Requiring a mining registrant with material mining operations to disclose mineral resources in addition to mineral reserves would provide investors with additional important information concerning the registrant's operations and prospects. The importance of this information is demonstrated by the fact that most foreign mining codes require the disclosure of mineral resources, U.S. registrants routinely disclose mineral resource information on their Web sites, and many mining company analysts consider mineral resource information as an important factor in their valuations and recommendations. Requiring the disclosure of mineral resources would also place U.S. registrants on a level playing field with Canadian mining registrants and non-U.S. mining companies that are subject to one or more of the other CRIRSCO-based mining codes. Requiring disclosure of mineral resources in Commission filings could increase the reporting costs for those mining companies that do not currently disclose mineral resource information. We believe, however, that any such increase would be minimal as most mining companies already assess mineral resources in order to determine reserves. 128 Requiring the disclosure of mineral resources could also increase the possibility that investors may misunderstand the economic value of a mining company, given that mineral resources are less certain than mineral reserves. As explained below, however, we believe that this risk is limited by the proposed definition of the term mineral resource, by requiring disclosure of the particular class of mineral resource, and by requiring an initial assessment for mineral resource disclosure. We also believe that there are potential benefits to investors from the disclosure of mineral resources, including more comprehensive and potentially more accurate disclosure of mineral reserves. 129 128 Best practice in mining engineering is to first determine the quantity and quality of the material of economic interest ( i.e., mineral resource estimation), prior to engineering and economic evaluation, to determine if any or all of that material can be extracted economically ( i.e., mineral reserve estimation). See, e.g., Alan C. Noble, “Mineral Resource Estimation,” in 1 SME Mining Engineering Handbook 203 (P. Darling, ed., 2011), which states “[t]he ore reserve estimate follows the resource estimate.” 129 Given that mineral reserves estimates are based on estimates of mineral resources, we believe that the rigor surrounding the disclosure of mineral resources as well as the attendant scrutiny from the qualified person, particularly with regards to mineral resource classification, is likely to lead to more reliable mineral reserves disclosure. As previously noted, Item 102 and Guide 7 preclude the disclosure of estimates other than reserves in SEC filings unless such information is required to be disclosed by foreign or state law. Since we are proposing to require the disclosure of estimates for mineral resources in addition to mineral reserves by a registrant with material mining operations, the foreign or state law exception would no longer be necessary. Therefore, the proposed rules would eliminate this exception. Request for Comment 47. Should we require a registrant with material mining operations to disclose mineral resources in addition to mineral reserves, as proposed? Why or why not? 48. What are the risks that could result from requiring a registrant with material mining operations to disclose its mineral resources? How could the Commission mitigate those risks? 49. Under the proposed rules, a registrant with material mining operations could choose not to engage a qualified person to determine whether a mineral deposit is a mineral resource, with the result that the registrant would not be required to disclose mineral resources that may exist. Should the rules, as proposed, preclude a registrant from disclosing mineral resources in an SEC filing if it has elected not to engage a qualified person to make the resource determination? Alternatively, should the rules permit a registrant to disclose mineral resources in an SEC filing, despite not having engaged a qualified person to make the resource determination, in certain instances? If so, in what instances would it be appropriate to permit such disclosure? 1. Mineral Resource Definition Because both Item 102 and Guide 7 prohibit the disclosure of non-reserve estimates except as required under foreign or state law, there currently is no Commission definition of “mineral resource.” The proposed rules would define “mineral resource” as a concentration or occurrence of material of economic interest in or on the earth's crust in such form, grade or quality, and quantity that there are reasonable prospects for its economic extraction. 130 The proposed rules would define the term “material of economic interest,” as used in the definition of mineral resource, to include mineralization, including dumps and tailings, 131 geothermal fields, mineral brines, and other resources extracted on or within the earth's crust. As proposed, the term “material of economic interest” would not include oil and gas resources as defined in Regulation S-X, 132 gases ( e.g. helium and carbon dioxide), or water. 133 130 See proposed Item 1301(d)(14)(i) of Regulation S-K. 131 The term “dumps” refers to stockpiles of mined material. The term “tailings” refers to a mixture of fine mineral matter and process effluents generated by mineral processing plants. 132 See 17 CFR 210.4-10(a)(16)(D). 133 See proposed Item 1301(d)(14)(ii) of Regulation S-K. The proposed rules would further specify that, when determining the existence of a mineral resource, a qualified person must be able to estimate or interpret the location, quantity, grade or quality continuity, and other geological characteristics of the mineral resource from specific geological evidence and knowledge, including sampling. 134 In addition, when determining the existence of a mineral resource, as proposed, the qualified person must conclude that there are reasonable prospects for economic extraction of the mineral resource based on an initial assessment that he or she conducts by qualitatively applying the modifying factors 135 likely to influence the prospect of economic extraction. 136 134 See proposed Item 1301(d)(14)(iii)(A) of Regulation S-K. 135 See proposed Item 1301(d)(15) of Regulation S-K for the definition of modifying factors. 136 See proposed Item 1301(d)(14)(iii)(B) of Regulation S-K. Similar to the CRIRSCO-based codes, the proposed definition of mineral resource would state that it is not to be merely an inventory 137 of all mineralization drilled or sampled. 138 A mineral resource is instead a reasonable estimate of mineralization, taking into account relevant factors such as cut-off grade, 139 likely mining dimensions, location or continuity, which, with the assumed and justifiable technical and economic conditions, is likely to, in whole or in part, become economically extractable. 140 137 The term “inventory of mineralization” means an estimate of the total quantity of mineralization based on the available evidence. 138 See, e.g., JORC Code pt. 20; CRIRSCO International Reporting Template pt. 21; and SAMREC Code pt. 21. 139 The term cut-off grade refers to the grade (the concentration of metal or mineral in rock) at which the destination of the material changes during mining. For establishing prospects of economic extraction, it is the grade that distinguishes between the material that is uneconomic and the material that is economic a [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2016-14632. Public record. Not legal advice.