Efectos extraprocedimentales (ad extra)

The reporting of the discovery of mineralisation to the Stock Market has been fraught with issues over many years that stem from the ability of company management to fabricate, exaggerate or place out of context encouraging drill results with a consequence of an unwarranted share price appreciation.

The Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the ‘JORC Code’ or ‘the Code’) was established in 1989 to provide minimum standards, recommendations and guidelines for public reporting in Australasia of exploration results, mineral resources and ore reserves. Revised and updated editions of the Code were issued in 1992, 1996 and 1999. The 2004 edition supersedes all previous editions (ASX 2004).

The 2004 edition includes changes to the reporting of exploration results and includes the reporting of exploration targets (Stoker 2005). While the reporting of exploration results now requires the involvement of a competent person, the ability to

report exploration targets has now addressed a major deficiency in the JORC code prior to 2004.

In particular, historical reserves and resources were not allowed to be reported in announcements to the ASX under the original guidelines despite the fact that many were conducted by competent geologists and would meet JORC compliance had the code been around at that time. This created a variation in information levels across the market as company releases to the ASX would not contain a specific non-JORC compliant resource while it may have been included in presentations to the

investment community if it was deemed a material aspect of the company’s projects. Historically these presentations were not released to the market and created an unlevel ‘investment playing field’ but continuous disclosure requirements now mean that these presentations must be disclosed to the market (Bartrop, 2009).

Clause 18 in the 2004 JORC Code also now provides the capacity to report

exploration targets (ASX 2006). In summary, the terms ‘resource’ and ‘reserve’ must not be used in this context and any statement referring to potential quantity and grade of the target must be expressed as ranges and must include:

• a detailed explanation of the basis for the statement, and

• a proximate statement that the potential quantity and grade is conceptual in nature, that there has been insufficient exploration to define a mineral resource and that it is uncertain if further exploration will result in the determination of a mineral resource.

However, despite over twenty years of development of the JORC code, in early 2009, the ASX reported that after reviewing 5,200 announcements by mining entities, 6 per cent were found to contain a total of 333 instances of non-compliant reporting by 246 entities. There are around 800 mining entities listed on the ASX (ASX 2009).

The consideration in resource company M&A activity is the reliability of exploration data as well as the context in which is it is presented to the market which may impact the share price of the company. Share price bubbles are discussed in Chapter 2, but it

is worth reviewing the Poseidon Nickel NL share price run as it is often cited as a significant reason for the creation of the JORC code (Stoker 2005).

Poseidon Nickel NL announced on 1 October 1969 that drilling had intersected 40 feet grading 3.56 per cent nickel and 0.55 per cent copper along with other lower- grade intersections at Windarra, Western Australian (Sykes, 1978). The share price increased dramatically from below $2.00 prior to the announcement to peak at $280 per share in the following February (see Figure 4).

Figure 4. Poseidon Nickel NL Share Price

From Simon (2003)

Based on the data presented by Sykes (1978) and Simon (2003), the cause of the rise in share price represented a number of factors including the increasing importance of nickel and stainless steel production at that time, the low market capitalisation of the company at the time of the announcement (it was around $2 million in the period before the announcement), the presence of short selling with positions that had to be covered, director and management/consultants purchasing shares and potentially

unquantified information leaking from the field. Stoker (2005) highlights the ambiguity in the consultant geologist’s statement associated with the release of the assays as a key impetus for the introduction of the JORC code as follows:

“The Consulting geologists, Burrill and Associates Pty Ltd quote that the mineralised

zone has an indicated length of 1000 ft and a minium width of 65 ft”.

However, a statement in this manner defining observable mineralisation trends is not unlike many statements reported now and it is probable that Burrill and Associates Pty Ltd would be deemed competent persons under the current JORC code had it been present at the time. What Poseidon Nickel NL and many other companies with similar but not so grand, speculative share price runs demonstrate is the attraction to investors of junior explorers with the first hints of a potentially huge discovery.

This contrasts with intent to deceive as demonstrated by Canadian junior, Bre-X Minerals Ltd with its discovery of the Busang Gold deposit in Indonesia. Busang was purchased in 1993 and significant gold intersections were announced in October 1995. The estimate of the project and hence, the company’s value increased over time; in 1995 it was 30Moz, in 1996 it was 60Moz, and finally in 1997 it was reported at 70Moz. The Bre-X share price increased to C$280 per share by 1997 (split adjusted) and at its peak the company had a market capitalisation of US$4.4 billion (Wikipedia, 2009). In 1997 as part of a development program involving Freeport McMoRan Inc., Freeport conducted check core assays and subsequently announced the discovery of insignificant amounts of gold. Later work by

independent consultants confirmed the presence of ‘salting’ including the addition of shaved jewellery.

The Bre-X fraud is an extreme case highlighting the level of due diligence required in remote but high-value projects. However, the willingness of investors to speculate will always remain a concern in early exploration success irrespective of JORC code reporting standards, and this represents a challenge in negotiating fairly priced M&A activity for companies involved in early stage discoveries.