More mining companies are listed on the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSXV) than on any other stock market in the world. Each year, more equity capital is raised in Canada for mining exploration and development than in any other capital market.
This is the case even though many of the companies listed in Canada have all or nearly all their mining and exploration activities outside Canada. Canada's mining capital markets are comprised of Canadian issuers with projects in Canada and abroad, and foreign issuers with projects in Canada or with no affiliation to Canada other than their Canadian listing. Canada is where the world comes to finance mining exploration and development.
As an overview of the Canadian securities regulatory system, in general, regulatory standards imposed by Canadian securities regulators and stock exchanges are typically comparable to US standards (although when it comes to mineral disclosure, Canada and the United States have very different rules). The most important thing to understand about the structure of the Canadian securities regulatory framework, however, is that it is largely the responsibility of the governments of Canada's 10 provinces and three northern territories. While there have been efforts to create the equivalent of a national securities regulator with responsibility over a single set of national securities laws and regulations, certain provinces have resisted on constitutional grounds. As a result, Canada does not have a national securities law or a national securities regulator. Rather, the laws themselves are provincial and territorial, and many substantive aspects of securities regulation, such as registration and prospectus requirements, and exemptions and continuous disclosure requirements, are harmonised through the use of 'national instruments' or 'national policies', which are adopted by each of the provincial and territorial regulators. In addition, the national electronic filing system (SEDAR) and the passport system encourage regulators to delegate responsibilities to one another, effectively creating a system of 'one-stop shopping' for issuers and registrants for most issues.
As the home jurisdiction for the TSX and the principal regulator for a majority of Canadian reporting issuers, the Ontario Securities Commission (OSC) has generally taken a more active role in the development of securities law in Canada through the introduction of various regulatory instruments, policies and rules. As such, the OSC tends to exercise a very broad regulatory and disciplinary jurisdiction, and is arguably the nearest equivalent in Canada to the Securities and Exchange Commission in the United States. Given the importance of mining in the Canadian capital markets, the OSC is active in the formulation and application of mining disclosure rules in Canada. In addition, given that many mining and exploration companies are based in Vancouver, the British Columbia Securities Commission is also active in this area.
Canada's mining capital markets benefit from the presence of a large community of bankers, lawyers, engineers and other professionals with deep experience in mining activities.
II CAPITAL RAISING
i General overview of the legal framework
Capital raising in the Canadian capital markets is governed in particular by the securities laws and regulations of each of the provinces and northern territories of Canada, the rules of the stock exchange applicable to listed companies and the corporate law applicable to the issuer.
Prospectus offerings and private placements
The securities laws and regulations provide that distribution of shares, debt securities and other securities must be preceded by the filing of a prospectus to be cleared with the principal securities regulator of the issuer, which is typically the regulator of the province where the head office of the issuer is located. Subsequent to an initial public offering or listing, issuers can proceed with follow-on offerings in an efficient manner through the use of short-form prospectuses that incorporate by reference the latest financial statements and other continuous disclosure documents of the issuer. Issuers in the Canadian capital markets have also made extensive use of a public offering financing method known as a 'bought deal', whereby underwriters commit to purchasing an entire offering at a fixed price immediately before the offering is announced and before any marketing efforts, thereby providing a quick and efficient method of raising capital without execution risk.
There are exemptions from the prospectus requirements of Canadian securities laws that allow capital to be raised on a private placement basis. These are applicable whether or not the issuer is based in Canada. For example, distributions of securities to investors who qualify as 'accredited investors' and purchases of securities, by investors who are not individuals, for cash at a purchase price of at least C$150,000 are exempt from the requirement to file a prospectus.
In addition to prospectus requirements, any individual or entity who is in the business of trading in securities must be registered as a dealer, subject to exemptions. There are exemptions that apply to, among other circumstances, distributions in Canada of securities of non-Canadian entities by non-Canadian dealers who are registered in a similar capacity in their jurisdictions.
In addition to obtaining a listing in connection with an initial public offering, mining projects can also obtain a listing through a reverse takeover, pursuant to which an existing listed shell company acquires a mineral project in consideration for the issuance of a number of shares that results in the existing owners of the project controlling the listed company.
Continuous disclosure requirements
Once a company completes an initial public offering by way of a prospectus filed in a province of Canada, or lists its shares on a Canadian stock exchange, the company becomes a 'reporting issuer' under applicable securities laws and is subject to continuous disclosure requirements.
The OSC has stated that, as a general principle, the purpose of continuous disclosure is to promote equality of opportunity for all investors in the market. Disclosure achieves this by advising the investors, promptly, of all the material facts that might reasonably affect an investment decision. The filing of a prospectus is the first link in the chain of disclosure, but it must be followed up with the continuous reporting of information and developments that might affect investment decisions.
Two kinds of reporting are required under Canada's continuous disclosure regime: periodic and timely. Periodic reporting requires the reporting issuer to prepare and file continuous disclosure documents such as financial statements, management discussions and analyses, proxy circulars and annual information forms. Timely reporting provisions require the reporting issuer to disclose material changes as they occur through press releases and material change reports. Reporting issuers are also required to file business acquisition reports and material contracts in a timely fashion. 'Reporting insiders', a category that includes members of senior management or the board, key personnel and significant shareholders, must also report to the reporting issuer any trades in the reporting issuer's securities, and interests in related financial instruments and changes in economic exposure, generally within five days.
Disclosure for mineral projects
Although the Canadian capital markets, the TSX and TSXV, continue to lead global mining equity finance, this pre-eminent position could have been permanently ended by the infamous Bre-X scandal in 1997. In an effort to restore confidence in Canadian capital markets following Bre-X, the Canadian securities regulators, stock exchanges and mining industry participants worked together to introduce new regulatory standards. The result was National Instrument 43-101 – Standards of Disclosure for Mineral Projects (NI 43-101), which provides specific rules for mining disclosure. Canadian and foreign mining companies accessing the Canadian capital markets, whether by way of a public offering or through the exempt market, are of course subject to the general regime of securities laws applicable to all issuers, but in addition they must adhere to NI 43-101. Accordingly, in this chapter we will deal primarily with NI 43-101.
NI 43-101 applies to all disclosure, written and oral, made in Canada by every issuer (all private and public companies) with respect to a 'mineral project' on each property that is 'material' to the issuer. A 'mineral project' means 'any exploration, development or production activity, including a royalty interest or similar interest in these activities, in respect of diamonds, natural solid inorganic material, or natural solid fossilised organic material including base and precious metals, coal and industrial minerals'.
The disclosure regime under NI 43-101 is founded upon three fundamental pillars:
- disclosure standards: rules prohibiting certain mineral disclosure and prescribing mineral disclosure standards;
- qualified persons: rules requiring that a 'qualified person' (who, in many circumstances, must be 'independent', but for established producing issuers need not be independent) prepare or supervise all of an issuer's disclosure of scientific and technical information relating to each mineral project on a property that is material to the issuer. In most instances, the qualified person must certify the disclosure and will be liable for any misrepresentations; and
- technical reports: the requirement that all scientific and technical information relating to a mineral project on each property that is material to the issuer and contained in a prospectus (or another type of disclosure document set out in NI 43-101) be based upon and supported by a technical report in prescribed form (a technical report) authored and certified by a qualified person (who, again for established producing issuers, need not be independent).
Under NI 43-101, the general principle is that an issuer may only make disclosure of a quantity and grade of mineralised material if the disclosure describes the material within certain categories of either 'mineral reserves' or 'mineral resources'. Mineral resources are defined within categories based upon the level of confidence and certainty as to the quantity and grade of the material being described, where 'inferred resources' are the least certain, 'indicated resources' reflect greater confidence based upon more extensive exploration results and 'measured resources' are most certain based upon even more comprehensive results and data. Mineral reserves are mineral resources to which feasibility-level economic analysis has been applied, such that on the basis of at least a 'preliminary feasibility study', the mineral resources have been shown to have economic feasibility. Mineral reserves are defined in two categories – probable reserves and proven reserves – again relating to the level of certainty of the material being described.
The introduction of these categories resulted in a level of standardisation in mineral disclosure from one company to the next. On the other hand, it is important to recognise that all such categorisations are, nonetheless, the result of determinations made by the qualified persons generating the disclosure, having regard to all relevant factors in light of the given facts, including geology, metallurgy and a host of other considerations. As a result, while there may be some level of comparability (for example, comparing indicated resources of silver at one deposit to indicated resources of silver at another), a variety of factors may also make any comparison one of apples to oranges, rather than apples to apples.
In general, disclosure of quantities and grades can only be made if stated with an attribution to any of the five categories of reserves and resources.
There are disclosure exemptions, one of which is for 'exploration targets'. This exemption is very narrow and must follow the strict guidelines set out in NI 43-101. An issuer may make disclosure of a potential quantity and grade of a mineral deposit that is to be the target of further exploration if:
- the issuer expresses the estimate of the quantity and grade in terms of ranges for both quantity and grade;
- the issuer explains how the estimate was made; and
- the disclosure includes a statement to the effect that 'the potential quantity and grade is conceptual in nature, there has been insufficient exploration to define a mineral resource and it is uncertain if further exploration will result in the exploration target being delineated as a mineral resource'.
Another exemption is that issuers may make a disclosure of mineral reserves and mineral resources in accordance with certain sets of disclosure standards accepted in other countries. While certain international codes, such as the JORC Code,2 are very similar to NI 43-101 and typically require little to no reconciliation, other codes are less similar and reconciliation with NI 43-101 is more complicated.
NI 43-101 introduced the requirement that all disclosures of a scientific or technical nature (including resources and reserves) made by an issuer in respect of a mineral project on any of its material properties be based on information either prepared by, or the preparation of which has been supervised by, a qualified person. Under NI 43-101, a 'qualified person' means an individual who:
- is an accredited engineer or geoscientist;
- has at least five years of experience in mineral exploration, mine development or operation or mineral project assessment;
- has experience relevant to the subject matter of the mineral project and the technical report in respect thereof;
- is in good standing with a self-regulatory professional organisation acceptable under NI 43-101; and
- in the case of a professional organisation in a foreign jurisdiction, has a certain minimum membership designation.
If the disclosure described above is a written disclosure, the qualified person must be identified in the disclosure and must disclose how he or she verified the data.
Technical reports are required to be prepared by or under the supervision of one or more qualified persons, and the qualified persons are required to sign and file with the securities regulatory authorities a certification and consent. In addition, in connection with the preparation of a technical report, at least one qualified person responsible for preparing or supervising the preparation of the technical report must complete a current personal inspection of the property that is the subject of the technical report.
Qualified persons must complete certifications and consents (addressed to the applicable securities regulatory authorities) to each technical report before it is filed on SEDAR. When filing a technical report, if the information in the technical report is also included in a disclosure document, the qualified person must also complete and file a consent confirming that the qualified person has read the disclosure, and that it fairly and accurately represents the information in the technical report.
The general rule in NI 43-101 is that qualified persons are required to be 'independent' of an issuer, but a non-independent qualified person is entitled to act for a 'producing issuer'. A producing issuer is one that has had gross revenues derived from mining of at least C$30 million in its most recently completed financial year and at least C$90 million aggregate in the three most recently completed financial years. For the purposes of NI 43-101, a qualified person is 'independent' of the issuer 'if there is no circumstance that could, in the opinion of a reasonable person aware of all relevant facts, interfere with the qualified person's judgement regarding preparation of the technical report'.
Technical reports are of fundamental importance, as the information they contain will form the basis of the whole of the issuer's disclosure about its material mineral projects. Subject to certain narrow exemptions, technical reports are required to be prepared by qualified persons who are independent of the issuer (and, accordingly, the preparation of technical reports can have a significant impact on the timeline of any listing or financing transaction).
An issuer is required to prepare and file a technical report in the circumstances set out in NI 43-101. In general terms, NI 43-101 requires an issuer to file a technical report to support disclosure of scientific or technical information in any of a number of public disclosure documents, notably:
- a long-form prospectus;
- a short-form prospectus that contains (1) a first-time disclosure of a preliminary assessment, mineral reserves or mineral resources on a property material to the issuer and where the disclosure constitutes a material change in respect of the affairs of the issuer, or (2) a change in a preliminary assessment, mineral reserves or mineral resources on a property material to the issuer and where the disclosure constitutes a material change in respect of the affairs of the issuer;
- an annual information form;
- a management information circular in which the information is presented and describes a transaction in which securities are to be issued; and
- a takeover bid circular in which a first-time disclosure is made of a preliminary assessment, mineral reserves or mineral resources in respect of a property material to the offeror and in which the offeror is offering its securities as consideration in the bid.
Usually, the technical report must be filed not later than the time the disclosure document containing the information it supports is filed or made available to the public.
An issuer is also required to prepare and file a technical report to support the disclosure in a press release or other written disclosure if the disclosure is either:
- a first-time disclosure of a preliminary assessment, mineral reserves or mineral resources on a property material to the issuer and where the disclosure constitutes a material change in respect of the affairs of the issuer; or
- a change in a preliminary assessment, mineral reserves or mineral resources on a property material to the issuer and where the disclosure constitutes a material change in respect of the affairs of the issuer.
However, an important distinction to be made in respect of press releases is that the technical report is to be filed within 45 days of the issuance of the press release.
The form and content of technical reports are prescribed in Form 43-101F1. All technical reports are required to follow exactly the form requirements (headings, contents). Additionally, technical reports are required to be prepared for a mineral project on each property 'material to an issuer'.
A key issue in respect of the technical report requirement is the meaning of the phrase 'material to an issuer'. Essentially, the determination of what is 'material' to an issuer is to be made by management of the issuer and not by a securities regulator. It is a determination to be made 'in the context of the issuer's overall business and financial condition, taking into account qualitative and quantitative factors, assessed in respect of the issuer as a whole'. In other words, materiality in the context of technical reports will clearly be specific to a given issuer and its own circumstances – what would be material to one issuer may not be material to another.
In the context of public offering transactions by way of a prospectus, the securities regulatory authority or regulator (each a 'securities commission') in the relevant Canadian jurisdictions will review and may comment upon the preliminary prospectus. The contents of technical reports will also be subject to a detailed review and comment by the securities commissions. Geological and mining engineers with significant expertise and experience in mineral disclosure matters on staff with certain securities commissions in particular will examine, in detail, an issuer's technical reports and mineral disclosure. An issuer will be required to file an amended and restated technical report to address all comments, and, given that the issuer's prospectus disclosure will be based upon the technical report, significant amendments and restatements can result from a review. Typically, legal counsel who are experienced regarding NI 43-101 will be engaged directly with the qualified person and the issuer in the preparation of the technical report well in advance of filing it with the securities commissions and applicable stock exchange, to minimise regulatory comments and issues, deficiencies and time delays.
Corresponding with the high level of activity by exploration and mining issuers in the Canadian capital markets, the securities commissions and stock exchanges have also increased their own levels of activity. As mineral disclosure reviews and comments are occurring at an unprecedented level of frequency and detail, it is important that issuers focus on NI 43-101 and the quality of their mineral disclosure from the outset in connection with all their continuous disclosure filings, and when preparing for any Canadian capital markets or public company transaction.
The direct acquisition of control of a Canadian mining business by a World Trade Organization (WTO) investor that is not a state-owned enterprise (SOE) would be reviewable under the Investment Canada Act if the enterprise value of the investment is above a certain threshold. In June 2017, this threshold was set at C$1 billion. Since 2019, the threshold is adjusted annually according to a formula based on the change in Canada's nominal gross domestic product. As part of the implementation of the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union, the threshold for review is expected to be increased to C$1.5 billion in enterprise value for non-SOEs from CETA and other trade agreement investors.
The review threshold for the direct acquisition of control of a Canadian business by a WTO SOE is based on the book value of the assets of the target (C$379 million in 2017). The thresholds for direct and indirect acquisitions where neither the investor nor the persons who control the vendor are from WTO countries are also based on the book value of the target's assets but are considerably lower (C$5 million and C$50 million, respectively). Indirect acquisitions of control of a mining business by or from WTO investors are exempt from review.3
ii Market overview
Canada's two principal stock exchanges, the TSX and the TSXV, cater to the needs of domestic as well as foreign mining concerns. The TSX is Canada's stock exchange for large capitalisation issuers, and the TSXV attracts companies with smaller capitalisations. There are also alternative trading systems and smaller stock exchanges providing a certain level of competition to the TSX and TSXV.
The investors that are generally active in the Canadian capital markets include institutional money managers, pension funds, exchange-traded funds, mutual funds, hedge funds and arbitrage funds. A number of these funds are focused solely on the mining and resource sectors. In addition, retail investors are actively involved in Canada's capital markets and public offerings. Canadian underwriters will typically allocate to retail investors a relatively significant proportion of a public offering compared to the established practice in other markets such as the UK or US capital markets.
iii Structural considerations
Structural considerations relating to capital raising in Canada will typically revolve around the choice of a debt or equity investment, with an evaluation of the tax residency of the issuer, and the resulting application of withholding taxes on any dividends or interest being paid to the non-Canadian investors. The different treatment of debt and equity investments and related Canadian tax rules pertaining to deduction of interest and taxation of dividends, capital gains and interest payments in the hands of the recipient is outside the scope of this chapter. However, summary information relating to withholding taxes on interest payments and dividends by Canadian mining companies to non-Canadian residents is discussed below.
In addition, important structural considerations apply at the time of the acquisition of a publicly listed Canadian company, which can be achieved by acquiring the shares of the company from its shareholders or by acquiring all or a portion of the project and other business assets from the company.
The principal non-tax reason for preferring an asset purchase in Canada is the ability to choose the assets to be acquired (although tax attributes cannot be purchased from the company) and the liabilities to be assumed (although certain liabilities may flow by operation of law to the buyer, such as environmental liability, which generally flows with the land and, in most jurisdictions, collective agreements relating to unionised employees). Share sales also have a number of non-tax advantages, including simplicity from a conveyancing perspective, fewer third-party consents and simplicity in dealing with employees.
The sale of all or substantially all the assets of a Canadian company will require prior shareholder approval. Accordingly, it is typical for the acquisition of a publicly listed Canadian company to be effected through the purchase of its stock through a takeover bid made to its public shareholders, or a plan of arrangement, the Canadian equivalent of the UK 'scheme of arrangement'.
iv Tax considerations
Mining exploration is fraught with risk and mining production is capital intensive. To compensate for this, the Canadian tax system has adopted a number of measures designed to provide tax relief to companies engaged in the mining sector, including:
- favourable deduction of Canadian exploration expenses and Canadian development expenses;
- accelerated depreciation for certain types of tangible property;
- tax credits for certain intangible property expenses;
- a 20-year operating loss carry-forward period; and
- indefinite carry-forward for capital losses.
In addition, tax advantages are provided to investors in Canadian resources companies. In particular, flow-through shares, a form of equity financing, allow an issuer to issue new shares to investors at a higher price than it would ordinarily receive for similar shares. While there are a number of requirements and conditions to be satisfied, essentially the investors and the company agree that the investors will purchase flow-through shares, the company will incur expenditure on Canadian exploration expenses within a specific period, and the company will renounce those expenses in favour of the investors, for their use. Investors are paying a premium for flow-through shares because they acquire and deduct some of the company's Canadian exploration expenses (and in some cases Canadian development expenses), thereby reducing their Canadian taxes. Flow-through shares financing is typically conducted by companies that do not have taxable income and therefore have no immediate need to deduct the expenses.
In addition, a number of relevant tax structuring considerations apply to the acquisition of a Canadian mining company. From a tax perspective, a share purchase is the sole means of permitting a buyer to preserve significant tax attributes of the target company, such as tax-loss carry-forwards and other tax accounts. The share purchase will result in (1) a change of control for income tax purposes and will thus trigger a taxation year-end and an obligation to file a tax return in respect of that year, and (2) restrictions on the use of certain tax attributes of the company in the future. An asset purchase transaction, on the other hand, will permit the allocation of the purchase price among the purchased assets: inventory (full deductibility); depreciable capital property and tax goodwill (partial deductibility through 'tax depreciation'); and non-depreciable capital property (e.g., land).
In either case, a foreign purchaser will typically establish a subsidiary company incorporated in a Canadian jurisdiction to act as the acquisition vehicle. The use of a Canadian acquisition vehicle is beneficial for three basic reasons:
- to facilitate the deduction of any interest expense associated with the bid financing against the Canadian target's income;
- in most cases, to maximise the amount of funds that can be repatriated from Canada to a foreign jurisdiction free of Canadian withholding tax; and
- in the event of a share acquisition, to possibly accommodate a tax cost step-up of the Canadian target's non-depreciable capital property (e.g., shares of a subsidiary company and other capital assets).
Canada does not provide for tax returns on a consolidated basis (as in the United States) and does not otherwise provide group relief. Accordingly, if the Canadian acquisition vehicle is capitalised with any interest-bearing debt (either third-party debt or debt from within the corporate group), the Canadian acquisition vehicle and Canadian target company are often amalgamated immediately following the completion of the acquisition so that the interest expense on the debt can be used to offset or shelter the income generated by the business.
To this end, Canadian thin-capitalisation rules restrict or limit the deduction of interest paid by Canadian companies to 'specified non-residents' to the extent that the ratio of interest-bearing debt owed to specified non-residents exceeds equity (basically retained earnings, contributed surplus and capital) by more than a prescribed threshold.
A non-public company may generally return or repatriate cross-border capital to a non-resident shareholder free of Canadian withholding tax and there is no requirement that income be returned before capital. However, any such return of capital is subject to applicable corporate solvency tests and may affect thin-capitalisation limitations (see above).
There is no Canadian withholding tax on interest paid by a Canadian resident to foreign arm's-length lenders (provided the interest is not participatory). Interest paid to a non-arm's-length lender is subject to Canadian withholding tax at a rate of 25 per cent, but this rate may be reduced under the terms of an applicable income tax convention or treaty (the withholding tax rate on interest is typically reduced to 10 per cent under the terms of a majority of Canada's international tax treaties).
A dividend paid by a Canadian company to a non-resident shareholder is subject to Canadian withholding tax at the rate of 25 per cent, which may be reduced under the terms of an applicable income tax convention or treaty (the withholding tax rate on dividends is typically reduced to 5 per cent in circumstances where the non-resident shareholder owns a significant or controlling interest in the Canadian company paying the dividend).
The majority of Canada's reciprocal tax treaties provide favourable tax withholding rules in respect of distributions and other payments received from Canadian companies, and possibly relief from capital gains tax upon a disposition of the shares of a Canadian company that derives its value principally from real property interests situated in Canada where such property is property in which the business of the Canadian company is carried on. Therefore, a foreign investor, after considering its broader multinational network of companies, may wish to consider structuring its investment in Canada through a jurisdiction that has a favourable tax treaty with Canada.
1 Erik Richer La Flèche, David Massé and Jennifer Honeyman are partners at Stikeman Elliott LLP.
2 Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves.
3 Additional information relating to the Investment Canada Act and foreign investment restrictions in Canada is provided in Section V of the Canada chapter in Part I: Mining Law of this book.