ASIC's take on forward-looking statements

In brief

ASIC has recently raised concerns about forward-looking statements by Australian miners that are made on the basis of preliminary scoping or feasibility studies. In a new Information Sheet, it has suggested that, without certainty as to project funding, such statements could constitute misleading conduct. In light of the controversy surrounding the publication of this Information Sheet, Partner Richard Malcolmson and Associate Jerome Entwisle revisit the current law on misleading statements as to future matters.

Information Sheet 214

The Australian Securities and Investments Commission (ASIC) published Information Sheet 214 (IS 214) in April 2016. Aimed at 'forward-looking' or 'predictive' statements by mining and resources companies, IS 214 seeks to consolidate other guidance on the topic by ASIC and the ASX¹, and to curb what ASIC sees as potentially misleading conduct by certain companies in the sector, particularly when making 'investment-inducing' statements. As an Information Sheet, IS 214 is not binding on ASIC or companies, but it does provide an important insight into how ASIC interprets relevant legislative provisions and when it is likely to take enforcement action.

ASIC classifies as a 'forward-looking statement' any statement that is about a future matter including, for mining or exploration companies, production targets, forecast financial information, and income-based valuations (ie valuations based on a discounted cash flow calculation). This definition dovetails with the detailed disclosure requirements for listed mining and resources companies in ASX Listing Rules 5.15-5.19 concerning production targets and forecast financial information derived from production targets.

The majority of IS 214 is a summary of a resource company's obligations under relevant legislation and Listing Rules and, significantly, ASIC's interpretations of certain aspects of those obligations. ASIC reminds companies that:

• to ensure a statement as to future matters is not misleading (and therefore in contravention of the prohibitions in the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth) on misleading or deceptive conduct or documents), the statement must be made on 'reasonable grounds' as at the date the statement is made;² and
• even if disclosure is in accordance with ASX Listing Rules 5.15-5.19 (which require compliance with the JORC Code³ and the express disclosure of certain assumptions), a statement as to future matters may be misleading if it is not based on reasonable grounds.

ASIC goes on to distinguish such 'forward-looking' or 'predictive' statements from what it refers to as 'aspirational statements', meaning 'high-level vision statements': eg a statement to the effect that 'to be viable, Y Ltd requires an ore reserve of 300m tonnes of haematite at an annual production rate of 10m tonnes'. ASIC says that these do not need to be based on reasonable grounds, as they would not be interpreted by the market as 'predictive in nature'.

IS 214 goes on to state ASIC's view on how reasonable grounds could be established for forward-looking statements. ASIC's view is that a forward-looking statement made on the basis of an 'ore reserve' determined in accordance with the JORC Code is unlikely to be misleading, because the Code requires the identification of the volume of ore that has been demonstrated to be viable under reasonable financial assumptions.⁴  

More controversially, where an 'ore reserve' has not been established, and predictions are instead based on a less certain 'mineral resource' estimate or exploration result, ASIC urges caution unless the estimate is based on a sufficient level of geological knowledge and confidence and all JORC Code 'modifying factors' are 'sufficiently progressed'. The 'modifying factors' (which include infrastructure, economic, marketing, social and government factors) are considerations used to convert a mineral resource into an financially viable ore reserve.

ASIC's particular concern appears to be with the 'economic' modifying factor, ie whether the company is able to demonstrate that extracting the minerals is financially viable. For a start-up or new project, ASIC suggests that a company should not make predictions as to the production or cash flow of the potential mine (including NPVs based on discounted cash flows) until there are reasonable grounds to believe that adequate capital and operational finance will be in place to support development and production. Where secured funding is not yet in place, ASIC considers this could include consideration of factors such as the company's capitalisation, financial position and debt/equity finance track record.

Scoping studies and preliminary results are singled out by ASIC as information that should not be disclosed or relied upon for forward-looking statements as to production or profitability, except in limited circumstances. ASIC does say, however, that preliminary studies may form the basis of 'aspirational statements' that do not mention production targets or forecast financial information: eg 'the results of the preliminary study were positive and justify the company to commit to the next stage of exploration and development'. This is a reiteration of the ASX's position in its 'Mining Reporting FAQ', although the FAQ expressly recommends that a company in possession of a scoping or preliminary study containing production targets or financial forecasts should 'obtain legal advice about [its] particular situation'.⁵

The industry's reaction

According to recent media, the industry's reaction to IS 214 has been largely negative – with suggestions that it is 'overly prescriptive', and is causing a 'roadblock' for companies by effectively preventing miners from relying on scoping studies and preliminary reports to seek project finance or otherwise raise capital.⁶  

It has been reported that the Minerals Council of Australia (MCA), the Association of Mining and Exploration Companies (AMEC) and the Australasian Joint Ore Reserves Committee (JORC) have each said they are going to raise their members' concerns with ASIC and seek further clarification on IS 214.⁷ AMEC, in particular, has suggested that IS 214 has the potential to 'prevent companies from releasing important material information to shareholders and the market at crucial funding points … as well as impeding them from the opportunity to raise capital when needed'.⁸ There have been reports that some exploration companies have already withheld proposed releases out of a concern that they may contravene ASIC's guidance.⁹

What does IS 214 mean for miners today?

ASIC is keen to emphasise that IS 214 is not intended to change the current law on forward-looking statements. A company cannot issue a public statement referring to a production target that is based solely on an exploration target and inferred mineral resources, as this would contravene Listing Rule 5.15. On the other end of the spectrum, forecasts based on proved or provable ore reserves are unlikely to be misleading and, accordingly, can be released, subject to the qualifications required by Listing Rules 5.16-5.19.

Where a company has measured or indicated mineral resources, it should proceed with caution and consider whether the grounds upon which any proposed forward-looking statements are based are reasonable. The information may prima facie need to be disclosed (with appropriate qualifiers as required by the Listing Rules) if it is market-sensitive information. Where release of the information is potentially misleading, due to a concern about the reasonableness of the grounds upon which it is based, then IS 214 would suggest particular caution be exercised, and the company's competing obligations under the Corporations Act and Listing Rules to make full disclosure and to avoid engaging in misleading conduct be weighed carefully.

In this respect, IS 214 does not seek to provide particularly detailed guidance, apart from warning against the dangers of releasing forward-looking statements based on incomplete (and therefore potentially misleading) information. However, there is considerable case law in the trade practices area about misleading conduct, which adds more colour and nuance to the analysis of when forward-looking statements may or may not be misleading. The general principle is that whether or not a statement is misleading must be determined objectively by reference to the relevant surrounding facts and circumstances.¹⁰ The classic statement of the courts' position on statements as to future matters was in Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd¹¹, where it was observed:

…that a prediction proves inaccurate does not of itself establish that the maker of the prediction did not believe that it would eventuate or that the belief lacked any, or any adequate, foundation. Likewise, the incorrectness of an opinion (assuming that can be established) does not of itself establish that the opinion was not held by the person who expressed it or that it lacked any, or any adequate, foundation.
…An expression of opinion which is identifiable as such conveys no more than that the opinion expressed is held and perhaps that there is basis for the opinion. At least if those conditions are met, an expression of opinion, however erroneous, misrepresents nothing.

 

This judicial commentary suggests that whether or not a future statement is misleading, or lacked reasonable grounds, is not a 'black and white' matter. It will always depend on the context and particular terms of the relevant statement. As ASIC observes, a caveat or disclaimer (even in the form required by Listing Rule 5.16) will not always be sufficient to avoid a forward-looking statement giving rise to a misleading imputation. The precise terms of the disclaimer need to considered in context of the entire release.¹²

To give an example in the resources context, in Re Midwest Corporation Limited,¹³ the Takeovers Panel considered that a production target in an offer document, which described the inherent risk and key conclusions associated with achieving that target, was still misleading. This was because it did not adequately disclose that the target was aspirational only, that the financial information to support the target was not currently available and that it was not supported by a JORC Code compliant ore reserve.

In summary, IS 214 stands as a reminder for mining and resources companies of their legal obligations under the Corporations Act, ASIC Act and Listing Rules, and as a caution from the regulator. It will be interesting to see if there are any further developments on this front, in light of the concerns raised by industry bodies in relation to aspects of the guidance. In the meantime, companies should continue to carefully consider the content and wording of their announcements on a case-by-case basis, with a particular eye to the existence and expression of the reasonable grounds supporting any forward-looking or predictive statements.