INSIGHT Fri 18/05/2012

The case for an AusCodes framework (JORC/VALMIN)

Jonathan Bell*, 25 January 2012

CURRENTLY there is a debate which highlights a serious capability gap in the Australian regulatory reporting system. For the mining industry, it also poses a significant opportunity.

The Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the ‘JORC Code’) is under review by the Joint Ore Reserve Committee (‘JORC’) and the Australian Securities Exchange (‘ASX’), with input from the Australian Investments and Securities Commission (‘ASIC’). Regular review and debate is a healthy, evolutionary activity and in this instance concern value, forward looking statements and reporting structures.

While the issues raised by JORC, ASX and ASIC are valid and pertinent, some of the proposed changes appear to fall outside of the original scope and into area’s more suited to The Code for the Technical Assessment and Valuation of Mineral and Petroleum Assets and Securities for Independent Expert Reports (‘VALMIN Code’). This scope-creep may be a reflection of the VALMIN Code not being incorporated in the ASX Listing Rules, despite it being the more natural vehicle for issues relating to value, forward looking statements and detailed mineral reporting.

The JORC Code’s current evolutionary trajectory may have far-reaching implications and it raises serious questions about the scope of the JORC Code and the future role of the VALMIN Code. The author’s considers that the current debate focuses on individual issues without a ‘big-picture’ point of view, the result of which may ultimately make the structure of the Australian regulatory reporting system inferior to it international peers.

This would mean that while Australia has the newest mining specific code system, it runs the risk of being structurally inferior to both the South African and Canadian systems.

A little background

ASX listed resource companies are subject to various legal and regulatory requirements, most notably the Corporations Act of 2001 (CommAus, 2005), ASIC Regulatory Guidelines (‘RG’) (which reference the JORC and VALMIN Codes) and ASX Listing Rules (under which there is reference to the JORC Code). The Corporations Act sets out the laws for Australian business entities, primarily relating to corporations (companies) but also to partnerships and managed investment schemes. At several thousand pages long, the Corporations Act is the world’s largest corporate statute, dwarfing its nearest equivalent in Sweden which is a couple of hundred pages long. Needless to say, it is a complex document which effectively sets the background and framework for Australian businesses, either ASX listed or privately owned. While there is no direct reference to the JORC Code or VALMIN Code, ASIC requires that reporting be done in accordance with these so as to satisfy subsection 412(1)(a)(ii) of the Corporations Act (ASIC, 2010).

Building on from the Corporations Act, are ASIC RGs. These provide a broader base of reference for reporting across all industries and provide an overarching framework and guidance to both ASX listed and privately owned companies by:

• Explaining when and how ASIC will exercise specific powers under legislation (primarily the Corporations Act).
• Explaining how ASIC interprets the law.
• Describing the principles underlying ASIC's approach, and/or;
• Providing practical guidance (for example, describing the steps of a process such as applying for a licence, or giving practical examples of how regulated entities may decide to meet their obligations).

While there are numerous RGs, some of the most relevant to ASX-listed resource companies are:

• RG111 – Content of Expert Reports (RG111), which was updated in March 2011. This RG primarily serves to provide investors make informed decisions on proposed transactions by providing guidance on how Independent Experts should conduct an analysis, the methodologies they may use and the reporting requirements. The RG contains a footnote reference to additional reporting standards and guidelines exemplified by the VALMIN Code.
• RG112 – Independence of Experts (RG112), also updated in March 2011. This RG provides guidance on matters where there is a requirement for an independent opinion or analysis on such matters as professional relationships, conduct and when and how third party expertise should be used. It is under the latter point that technical (mining related) expertise becomes a requirement in the regulatory framework, mostly in the form of independent mining consultancies.
• RG170 – Prospective financial information (RG170) updated in April 2011, but subject to another review, possibly in 2012 (Dodd, 2011b). This document provides guidance on matters concerning prospective financial information, including expectation or prediction of future performance, benefits or costs. RG170 is designed to help the understanding of when prospective financial information can or should be disclosed, what constitutes reasonable grounds for doing so and the manner in which it is disclosed.
• RG228 – Prospectuses: Effective disclosure for retail investors (RG228) last updated in November 2011. This sets out ASIC’s guidance on the content of prospectus documents and how to word and information in a clear, concise and effective manner. This RG makes specific reference to both the JORC Code and the VALMIN Code.

The formal incorporation of the JORC Code into the ASX Listing Rules is a result of the unique characteristics associated with the mining industry and which stem from unscrupulous reporting practices which previously occurred, particularly, during the 1960s nickel boom (JORC, 2011b). Since its inclusion in the ASX Listing Rules in 1989, the JORC Code was revised in 1992, 1996, 1999 and 2004, with a fifth revision scheduled for 2012.

It is reasonable to expect that most people involved with ASX listed resource companies are familiar to some extent with the JORC Code and to a lesser degree the VALMIN Code. However, the JORC Code practitioners or ‘Competent Persons’, may not be adequately aware of the overarching regulatory requirements of the Corporations Act, ASIC RGs and ASX Listing Rules.

Furthermore, there is a general lack of understanding of how these regulatory mechanisms may impact on them if they contravene these requirements while meeting the minimum reporting requirements of the JORC Code. This has implications for the evolution of the JORC Code.

The issues

Currently, the JORC Committee and the ASX have issued separate industry consultation papers relating to the proposed amendments to the update of the 2004 edition of the JORC Code. The items for discussion put forth by each proponent are compared in Table 1 (below).

In addition to the issues outlined above, it is proposed that the 2012 Edition of the JORC Code include a number of previous ‘Company Updates’ (stop-gap solutions between code updates), which concern:

• Non-JORC Code compliant reporting (ASX, 2003).
• Metal equivalents, competent person’s consent forms and reporting of Inferred Resources (ASX, 2007a).
• Reporting of historical estimates (ASX, 2007b).
• Not reporting in ground or in-situ values (ASX, 2008).

Discussion

While the issues proposed for discussion are important and valid, some may not fit well under the current scope of the JORC Code, in particular in-situ values, production targets and detailed modifying factors. These issues primarily concern value (in the dollars/cents sense), forward looking statements and reporting structures. The author considers these issues to be a poor fit under the JORC Code, which is meant to concern the communication and presentation of very technical items.

Value, forward looking statements and reporting structures are quite complex and interconnected with other more generic areas of regulations. The current edition of the JORC Code is largely silent (or at least vague) in its reference to these items.

However, the recent public consultation about the JORC Code update suggests that it may become much more prescriptive in these areas.

If some of the suggested prescriptive amendments to the JORC Code on issues outside of its traditional scope are adopted, this may create the potential for loop holes, redundancy and conflicting guidance with the over-arching laws and regulations. Such unintended consequences may result in a less efficient system, with the possible need for near-term stop-gap solutions (eg ‘Company Updates’). Such Company Updates promote and engrain further scope-creep, thereby confusing the original purpose of the JORC Code and planting the seed for future evolutionary problems.

Value

The March 2008 Company Update details that the practice of applying commodity prices to deposit endowments is not permissible as it lacks transparency and materiality (ASX, 2008). Clearly, stating that a 100,000 ounce gold deposit has an in-situ value of $150 million using $1500 per ounce is potentially misleading as it does not apply appropriate modifying factors. The reporting of in-situ values is a misguided attempt to convey the value of a deposit. But is the JORC Code the best medium for reporting value? In the author’s opinion, the likely answer is ‘no’ as the purpose of the JORC Code is mineral centric, not value-centric. Rather, the communication of the monetary value of mineral assets falls in the mandate of the VALMIN Code, which is tailored to fit within the over-arching regulatory mechanisms such as RG111 and RG170.

The March 2008 Company Update resulted in the issue of value being addressed in ASIC’s RGs, VALMIN Code and the JORC Code. Value being discussed in three regulatory documents is not efficient and may create conflict between what are supposed to be an integrated and efficient framework. Furthermore, the chances are that evolution will dictate that the consideration of value within the JORC Code be expanded, necessitating the skill set of the JORC Committee. This would presumably take the form of a sub-committee and raises the question of what is the purpose of the existing VALMIN Code if the JORC Code is to evolve to cover the same areas of responsibility?

In the author’s opinion, formally including the March 2008 Company Update into the JORC Code will result in regulatory overlap and inefficiency as well as unnecessary evolutionary danger. It may be prudent for the custodians of the JORC Code to decide whether value is really within their current mandate and the merits/pit-falls associated with an expansion of that mandate. The author considers it may be short-sighted for the JORC Code to include value related matters, and is of the opinion that the reporting in-situ values should be addressed in the more topic specific VALMIN Code.

Forward looking statements

A number of issues within the ASX and JORC Committee consultation papers concern forward looking statements, namely production targets, reasonable prospects for eventual economic extraction, and modifying factors.

The JORC Committee, ASX and ASIC all have differing opinions on the additional detail required in the reporting of the above issues. Each issue draws on many aspects including the confidence of a Mineral Resource/Ore Reserve estimate and modifying factors such as mining, metallurgical, economic/financial assumptions, markets, marketing, extraneous logistics, exchange rates, financing as well as legal, governmental and socio-environmental considerations. The input assumptions to these are statements upon which investors will make financial decisions and as such may be considered forward looking statements/prospective financial information. The importance and implications of this cannot be understated, as evidenced by ASIC dedicating a ~8500 word document to the topic (RG170). As Competent Persons are largely from technical backgrounds, many may not be aware of the broader reporting requirements and may fall foul of such mechanisms. Consequently, any expansion or elaboration on the above issues, must be done so as not to unintentionally expose the users of the JORC Code to the broader regulatory requirements of the Corporations Act and ASIC’s RGs and their associated enforcement.

The risk posed by an amendment to the JORC Code to elaborate into areas that may be considered to represent forward looking statements is that it may:

• Not be sufficiently comprehensive, placing it at odds with or necessitate and extensive education programme about over-arching regulatory requirements.
• Require future elaboration (Company Updates) to address loopholes and conflicts, resulting in scope-creep of the JORC Code’s original mandate.

So while on face value guidance by the JORC Code on forward looking statement may appear to be a simple matter, it is potentially a complex area involving a wide range of issues for which the current structure of the JORC Code is not suited. If the custodians of the JORC Code consider that forward looking statements do need to be prescribed, thereby necessitating direct influence with the over-arching requirements, then it may:

• Need to draw from a more diverse range of expertise, including becoming more versed in the requirements of the Corporations Act and ASIC’s RG.
• Overlap with content within the existing VALMIN Code.
• Become an unwieldy document with an ambiguous scope.

As an alternative to addressing detailed regulation and guidance on the mining specific use of forward looking statements, the author considers that the VALMIN Code is much better placed to address production targets as it already covers some of the subject matter; can easily be modified to directly address the matter; maintains the focus of the JORC Code on the reporting of exploration results and mineral estimates; and is referenced by ASIC RG111 (Content of Expert Reports)

Reporting structures and framework

One of the solutions proposed by the ASX to deal with the disclosure of detailed key assumptions is akin to the mandated structure of the Canadian National Instrument 43 101 (‘NI43-101’) (NI43-101, 2011). If this solution is pursued, is the JORC Code suited to prescribing reporting structures like the NI43-101? This does not seem to be the case.

Alternatively, does the VALMIN Code already have the framework and much of the language suited to providing guidance on detailed technical reports? The answer being ‘yes’, it is already in scope and referred to in the title of the document. If the JORC Code custodians elect to implement an NI43-101 like reporting requirement, then in the author’s opinion the stakeholders are best served by having the:

• JORC Code concern high-level reporting of forward looking statements.
• JORC Code should cross reference the VALMIN Code regarding such matters.
• VALMIN Code provide the framework and guidance for in-depth, substantiated forward looking statements contained within a comprehensive NI43-101-like document that meets the requirements of ASIC’s RG228.

In both the ASX and JORC Committee consultation papers, there is much discussion on international comparisons, principally relating to the South African and Canadian regulatory jurisdictions. On this basis it is worth examining how these jurisdictions regulate the technical aspects unique to the mining industry and it is noteworthy that in each, the scope of each code is different, as shown in the table below.

(1) SAMCODE (2009). (2) SAMVAL (2009). (3) CIM (2005). (4) CIMVAL (2003).
(5) NI43-101 (2011).
*If commentary about in-situ values and production targets are incorporated.
**If detailed information about modifying factors and production targets are mandated in an NI43-101 style report.

The most recent is the South African Minerals Codes (SAMCODE) system, in which the SAMREC and SAMVAL Codes are seamlessly integrated. The strength of this structure is that there is essentially one custodial oversight body that manages the SAMREC and SAMVAL sub-committees. In contrast, the Canadian system involves three disassociated codes/definitions that quarantine the role of each regulation, but lacks a dedicated oversight body. The proposed Australian system also lacks an oversight body to manage both the codes, but also lacks quarantined roles as evidenced by the proposed scope of JORC Code creeping into VALMIN Code’s mandate. The proposed JORC Code modifications mean that it has a direct influence on all three areas of scope, yet lacks the comprehensiveness and maturity in the newly proposed areas.

In the author’s opinion, this would mean that while Australia has the newest mining specific code system, it runs the risk of being structurally inferior to both the South African and Canadian systems because of its overlap and confusion of scope.

The scope creep in the JORC Code is in part due to the VALMIN Code not being formally recognised in the ASX Listing Rules. Despite the VALMIN Code being mature and time tested, it is a poor cousin to the JORC Code and lacks the enforceability of the latter because of its omission from the Listing Rules. As a consequence, some of the issues raised in the ASX/JORC Committee consultation papers are the result of the lack of a formal bridge between the very technical (JORC Code) and broader (ASIC’s RG) reporting requirements. This is a role which the VALMIN Code could play.

The current drawback of the VALMIN Code is that its use is largely restricted to regular use by mining industry consultants. The scope of the VALMIN code can be broader so as to facilitate more efficient and standardised communication across a wider section of the mining and investment community. Indeed, the current limited use of the VALMIN Code could easily fixed by changing the wording of the code to be more inclusive. This may include broadening its scope to include the non-core JORC Code issues, with particular reference to in-situ values, production targets and detailed modifying factors.

A way forward

Returning to the issues outlined in the recent consultation paper, the topic specific items of in-situ values, production targets and detailed modifying factors, are more naturally suited to the VALMIN Code which frames the issues better and leverages off existing guidelines and regulation.

As both the JORC and VALMIN Codes are currently subject to review and update, it is an ideal time to clarify the purpose and scope of the JORC Code, incorporate some of the issues highlighted during the JORC Code review process and provide a better bridge for interaction with the Corporations Act and ASIC’s RG. It is in facilitating communication between these two very different worlds that the VALMIN Code could play a vital role.

To effect such changes, the author considers that the VALMIN Code should be incorporated in the ASX Listing Rules. Such inclusion would provide a more efficient means of addressing the grey area of interaction between the technical reporting requirements of the JORC Code and the overarching reporting and financial requirements of the ASX and ASIC. Furthermore, it would give the VALMIN Code a greater degree of enforceability. For this to work, it may be prudent to develop an oversight committee to ensure that the mandate of the JORC and VALMIN Codes are clearly defined and maintained, akin to SAMCODES system.

The existing JORC and VALMIN Committees could form a joint oversight committee and have members common to both committees. In this way, the strengths of each committee are harnessed to create a more comprehensive, co-ordinated system that protects investors, and ensures greater consistency with ASIC regulations and the Corporations Act. In the author’s mind this would be a more efficient evolutionary path to take than what may result as an unintended consequence of the proposed changes to the scope of the JORC Code.

*Jonathan Bell is managing director of Perth-based mining advisory firm, Alexander Research Pty Ltd.

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