Scoping studies are a valuable tool in project evaluation but over the past 5 years the publication of their results has become a lot more difficult, especially for smaller development companies. The guidance released by the ASX in 2016 places a much greater burden on companies to highlight material assumptions, driving the question of whether the extra effort required gives a suitable return in value for shareholders?
Last year I did a scoping study for an ASX listed junior development company where this exact question was tested. We started by looking in detail at the ASX guidelines to define what needed to be done. The Resource needed to be upgraded to Measured and Indicated status, so a drilling program was initiated, but it appeared that there was a reasonable basis for the other key aspects. We pulled together the metallurgical test work, developed a conceptual flowsheet and generated preliminary costs and modelling. When the resource estimate was complete and we were ready the results were submitted for release to investors. The study was reviewed by ASIC and we were told that despite our efforts the Forward Looking Statements and Production Targets were not objectively reasonable. Almost a year later this scoping study still hasn’t been published. This is a story that is happening more and more in the junior mining sector and I wanted to share some of the experience we gained to help others get clarity on what is required.
I have put together my views on how the scoping study guidelines are interpreted to help developers get clarity on what is required and reduce the risk that shareholder’s money is spent on activities that are doomed to provide no result. These views are my own and shouldn’t be considered as legal interpretations. Several Legal firms presented their opinions when the ASX guidance was first released, including: Gilbert and Tobin, Corrs, Chambers and Westgarth, and King and Wood Mallesons.
Scoping studies are tools for developers to assess whether a mineral resource has potential for development into a mining project. The purpose of a good scoping study is to examine a range of options and see which, if any, should be explored further. This is typically an order of magnitude study. Used well it can provide an effective tool to quickly and cheaply identify whether a project is worth pursuing, narrowing down the options to investigate further. Over time scoping studies have also taken on a role in driving investment in potential projects. They naturally provide more information than a Mineral Resource. But investors must understand that the information contained in a scoping study is built from very broad assumptions. This is fine for making comparisons of options, but the results of a scoping study should never be considered as a definition of what the final project will look like.
To protect investors markets have gradually moved to regulate and provide guidelines on what can be published in a scoping study. For the TSX equivalent of a scoping study, the Preliminary Economic Assessment (PEA), there is an established template and requirement for it to be completed by Competent Persons.
In November 2016, the ASX, in conjunction with ASIC released guidelines for publication of scoping study results. These guidelines place a strong emphasis on supporting any forward-looking statements with material assumptions and ensuring that it is very clear to potential investors where assumptions have been made. The spirit of these guidelines is to protect investors, but they place additional requirements on companies to increase the confidence in the scoping study outcomes past what would have been the case.
The impact in publication of scoping study results can be seen in Figure 1. In a snapshot of 22 studies published between January 2018 and June 2019, 64% of them were accepted for publication in full, while the rest were published as Lite Scoping Studies, with no financial or production target results included. In addition, we know of at least 4 scoping studies that were published and then forced to be retracted by the ASX after review.
In this article I will explore some of the key aspects of these guidelines and outline some of the experiences that we have had with completing ASX compliant scoping studies.
The interim guidance released by the ASX in November 2016 was developed with ASIC and JORC to provide a framework around disclosure of scoping study results. The guidelines mainly provide clarification around how to interpret various listing rules and clauses within the JORC code, although in several instances the guidelines exceed the requirements of JORC.
In this article I won’t run through every one of these guidelines, rather I will try and pick out the ones that in our experience have been issues for junior companies completing scoping studies.
You can read the full guidance presented by the ASX here.
A quick summary of all the guidelines includes:
The guidelines highlight that considerations are to be made based on requirements from the ASX listing rules, JORC Code 2012 and under the Corporations Act. These have been used to provide the basis for interpretation of the guidelines.
The requirements for reporting on scoping studies are focused on introducing cautionary language and establishing limits on assumptions designed to reduce risks to potential investors. This moves the purpose of the scoping study away from a tool to evaluate options and more towards a statement of what the project will likely be. A company can still follow the approach of undertaking a simple comparative evaluation of project options but should be prepared to just report that a positive (or negative) outcome was achieved, and not report financial information or production targets.
The guidelines, especially from the ASX, state that if a company wishes to use the scoping study to drive investment in the project by stating financial and production targets there are additional requirements on establishing that the material assumptions used are objectively reasonable and the project has a likelihood to proceed.
The ASX guidelines on scoping studies highlight areas that require additional rigour in assessment of the reasonable basis for material assumptions. But they fall short of defining any actual limits. We collected a range of scoping studies published on the ASX between January 2017 and June 2018 and analysed the conditions that were accepted for publication of full results. In this snapshot of 22 studies you can see from Figure 1 that 64% were published as full studies.
The important conditions that we identified included the positioning of cautionary statements, the proportion of Indication and Measured Resources and the ability of the company to finance the capital for the project.
The position of the cautionary statements is a very important consideration. The requirement is to have the statement start on the first page of the release and be prominent. This means that the statement should be in the same font size as the document text and clearly marked as a cautionary statement. There is also an expectation that the language of the document will be generally cautionary and not have an overly ‘marketing’ focus. There are additional requirements for cautionary statements around resource tables, that are clearly outlined in the ASX guidelines.
A critical requirement is that the proportion of Indicated and Measured Resources can provide reasonable confidence in the resource. The general rule of thumb is that an absolute minimum of 70% of the Resource should be in the Indicated category and preferably >80%, with some proportion in Measured. Unless there is a very good reason, 100% of the Resource should be in the Indicated category for the payback period of the project.
Figure 2 shows a chart of scoping studies in our snapshot and their proportion of Indicated and Measured Resources. Of the scoping studies we examined, those that were accepted as compliant averaged 78% planned production from Measured and Indicated Resources. For the Lite Scoping Studies, only an average of 64% planned production was from Measured and Indicated Resources.
In Figure 2 you can see that some studies were accepted with less than 70% M&I resources but these were all from earlier in 2017 when more leniency was allowed in adherence to the guidelines. There were also several instances where the resource conditions were acceptable, but the company did not publish the results. For these, Oz Minerals (ASX:OZL) is a mid-tier company and less inclined to publish the full details, King River Resources (ASX:KRR) didn’t comply with some of the other conditions (see below) and it is unclear why Battery Minerals (ASX:BAT) chose not to publish the full study results.
The ability of the company to progress the project through to development is considered a material factor and a reasonable basis that funds will be available must be proven. The right language should be used in discussing the capability for the company to raise the required funds. But, the ratio of Project Capital to company market capitalisation is a measure that appears to be important.
This one is a bit nebulous but the indicative information is that if the Capital required for the project is more than 5-10 times the company’s market capitalisation there is not a reasonable basis that the company will be able to finance the project.
Figure 3 shows the ratio of project capital to market capitalisation for the studies in our snapshot. It can be clearly seen that the two studies where large capital projects were presented from small companies were not considered to have a reasonable basis for publishing forward looking statements. In fact, the Caravel Minerals (ASX:CVV) scoping studies was originally published but was later retracted by the company.
For micro and small-cap development companies this requirement places an effective ceiling on the size of project that can be examined.
Overall, the assessment showed that the following rules of thumb should be followed to allow publication of scoping study results on the ASX:
There may be exceptions to these rules of thumb but when applied in conjunction with the ASX check list they should provide a good place to start.
So, if you are considering undertaking a scoping study for your project, I encourage you to enter the process with your eyes open. Consider what’s been presented here and familiarise yourself with the guidelines before making the final decision.
The market where you want to publish results is an important consideration. The ASX has really strengthened its stance over the last 4 years, TSX has the well-established guidelines of NI 43-101 reporting, while other markets rely more on strong competent persons statements.
Start planning early! Many companies have been caught by focusing late exploration drilling on further expanding the Inferred Resource and then having insufficient Indicated and Measured Resource to support Production Targets in the scoping study. This results in the company needing to complete more drilling or only being able to publish a ‘Lite’ scoping study containing no production or financial results.
Finally, for small companies it may be prudent to target a smaller project in the scoping study.
Gone are the days when a scoping study can be put together quickly and simply. There is still value in going through the process, but we encourage you to get the right help to ensure that the work adds value to shareholders and the project and isn’t wasted.