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Preliminary Economic Assessments – Can You Have Your Cake And Eat it Too?

Presented by: Alan Hutchison January 22, 2013

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Recent Focus on PEAs • In an era of cost overruns the market is increasingly focusing

on economic viability rather than resource inventory • PEA allows for less precision on details of development

scenarios which makes it less expensive than a pre-feasibility study

• Inclusion of inferred resources in economic analysis only permitted at a PEA stage, which allows issuers to disclose economics without having drilled off the deposit

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BCSC Focus on PEAs • Increase in popularity of PEAs have attracted the attention of

securities regulators

• On August 16, 2012 the regulators published CSA Notice 43-307 setting out the regulators’ position on certain practices in connection with PEAs

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Context of a PEA vs. PFS/FS • NI 43-101 defines a PEA as:

“a study, other than a pre-feasibility study, that includes an economic analysis of the potential viability of mineral resources”

(emphasis added)

• In contrast, a pre-feasibility study is defined as: “a comprehensive study of a range of options for the technical and economic viability of a mineral project…”

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Context of a PEA vs. PFS/FS (cont.)

• And a feasibility study is defined as: “a comprehensive technical and economic study of the selected development option for a mineral project…”

• Key differences in wording: – “potential viability” for a PEA vs. “viability” for a PFS (meaning viability

has been established) – Use of the term “comprehensive” to describe a PFS or FS vs. a PEA

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NI 43-101 Considerations – Inferred Resources

• Issuers are restricted from disclosing results of an economic analysis that includes or is based on inferred resources except in limited circumstances (s. 2.3(1)(b))

• A PEA is one of the limited circumstances, provided: – a cautionary statement with equal prominence is included stating that

inferred resources are considered to speculative geologically to have economic considerations applied to them that would enable them to be categorized as mineral reserves, and there is no certainty that the PEA will be realized

– the basis for the PEA is disclosed along with any qualifications and assumptions

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NI 43-101 Considerations – Report Triggers

• The disclosure of the results of a PEA that constitutes a material change in relation to the issuer is a technical report trigger

• Disclosure of studies that are components of a PEA but do not include economic analysis (i.e. metallurgical studies, project infrastructure studies, environmental studies) is not a technical report trigger

• BUT be careful that the context of the disclosure does not amount to a PEA, and be careful that multiple component studies do not in the aggregate amount to a PEA

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PEA Scenarios A. Over-Built PEA B. Assumption Based PEA C. Revised PEA D. No PEA

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Scenario A – Over-Built PEA • Many issuers want to ensure that the components of a PEA are

as accurate as possible to withstand scrutiny and avoid subsequent significant changes

• Components like mine planning, capital and operating costs, metallurgical work for recoveries typically disclosed with greater certainty than a PEA requires

• Overall quality of the PEA is emphasized

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Scenario A – Over-Built PEA (cont.)

• Regulatory concern is that issuers try to pass off a PEA (likely with inferred resources included in the economic analysis) as the equivalent of a PFS

• The BCSC may treat a PEA as a PFS if: – no inclusion of required cautionary statements – the PEA establishes a basis for a FS or production decision – states or implies economic viability of the resources has been

established

• Be careful not to expect too much out of a PEA

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Scenario B – Assumption Based PEA • A PEA is intended to represent the first signal to the public that

a project may be economically viable. The level of detail and certainty is not expected to be the same as a PFS or FS, so assumptions may be required.

• All assumptions must have a reasonable basis

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Scenario B – Assumption Based PEA (cont.)

• Avoid highly aggressive or overly optimistic assumptions, such as:

– metal prices – recovery rates – by product credits – capital costs not funded by the issuer (i.e., government funding for

roads, power or other infrastructure)

• The more aggressive the assumptions the greater chance of subsequent revision along with a greater chance of regulatory intervention over misleading disclosure

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Scenario C – Revised PEA • 2011 amendments to NI 43-101 now permit issuers to go

backwards in terms of scope of development if new facts emerge

• Revised PEAs are possible although keep in mind that the level of certainty should remain the same

• Where PEAs are completed for new satellite deposits added to projects that are already at PFS or FS stage, be careful not to effectively bring inferred resources into a PFS or FS for the overall project.

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Scenario D – No PEA • Just because an issuer completes studies that are components

of a PEA doesn’t mean a PEA needs to be completed or disclosed

• Sometimes an issuer is better off taking more time to get more certainty on the PEA components before completing a PEA or PFS

• Remember to be consistent – if an issuer does not proceed to a PEA, disclosure must not address economics, potential viability or development scenarios of a project

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QP Considerations • Definition of a qualified person requires that QPs have

experience relevant to the subject matter of the mineral project and technical report

• Even at a PEA stage, disclosure of economic analysis and the assumptions and inputs required requires additional expertise than a resource stage report

• Keep in mind QP liability for technical reports

Thank you! Alan Hutchison alan.hutchison@fmc-law.com 604-443-7119

The preceding presentation contains examples of the kinds of issues companies dealing with Preliminary Economic Assessments could face. If you are faced with one of these issues, please retain professional assistance as each situation is unique.