The recent British Columbia Securities Commission (“BCSC”) panel decision regarding Canaco Resources Inc. (“Canaco”) has provided insight into determining the materiality of assay results from infill drilling by a junior resource exploration company. In its decision, released August 7, 2013, the BCSC dismissed allegations that Canaco, three of its directors, and its CEO and President had breached securities laws by failing to immediately disclose new infill drill results in a press release and file a material change report.

The central issue in the Canaco decision was whether new infill drill results were material information. In arriving at its determination, the BCSC panel reviewed the law applicable to the test for materiality, and received expert reports of two professional geologists as to the nature of the drill results. It found that that the new drill results were not “material”, as they would not reasonably have been expected to significantly affect the market price or value of Canaco’s shares. Based on this determination, the panel dismissed all of the allegations.

Background
From September 2009, Canaco had been issuing a steady stream of press releases announcing results from an extensive drill program at its Tanzania gold mining project. The allegations in question relate to the materiality of assay results from an eight holes drilled in fall 2010. All eight holes were “infill” holes drilled in between or otherwise nearby to previous drill holes. More than 80 other holes had been drilled.

Canaco and its CEO received the assay results for all eight holes no later than Monday, November 29, 2010. In their emails, the directors and officer referred to the results as “just beautiful”, “spectacular”, and “fantastic news”. Before any of the drill results were announced, Canaco granted options to management and the directors based on the closing price on December 2nd. Canaco then staggered disclosure of the results in a series of news releases dated December 6th and 9th. On December 22nd, the Exchange required Canaco to re-price the options upwards, and to disclose the remaining drill results.

Decision
The primary issue was whether Canaco failed to timely disclose material information. In finding in favour of Canaco, the BCSC concluded that the drill results were not material for three primary reasons. First, the drill results came from holes that formed part of Canaco’s “infill drilling” program, intended to further define and confirm existing known mineralization rather than extend the boundaries of mineralization. Second, investors acquainted with the existing “story” from Canaco’s disclosure history would have seen the new drill results as consistent with existing expectations. Third, the geological reports relied upon by Canaco found that the new drill results did not results would not “appreciably” or “significantly” affect a mineral resource estimate, and that any anomalies reflected in the new drill results would likely be eliminated by “top-cutting” (an industry-standard data analysis practice). Consequently, the results would not impact the price that a reasonable investor would be willing to pay for Canaco shares.

It is notable that management’s opinions that drill results were “spectacular” were deemed to be irrelevant. The BCSC found that these were the management’s subjective opinions of assay results that would not have impacted the price that an objective investor would pay for Canaco’s securities.

Analysis
Canaco offers guidance on assessing materiality generally, with some specific guidance for junior resource issuers evaluating assay results. Infill drilling is by nature designed to confirm facts relating to existing drill holes, which would generally suggest that infill drill results are less likely to be material. However, materiality determinations are very fact specific, and context is important. Some take-away points from Canaco:

  • Drill programs that are “infill” or otherwise confirmatory in nature may still be material.
  • Results that represent a substantial change in the value of the deposit (e.g. by expanding the boundaries of the deposit or adding to the understanding of its continuity) are more likely to be material.
  • Materiality depends on whether the information would change the price that a “reasonable investor” would pay for the company’s shares; it is important to take an objective approach.
  • When determining whether drill results are material, management should consider (i) the overall context of the property and the issuer’s overall business, and (ii) the other facts which have previously been disclosed over time by the Issuer.

Consider what the results add to the “story” of the deposit: results that are consistent with previous disclosure and do not appreciably alter the existing “story” are less likely to be material.

NOTE: This publication is intended to provide information to clients on recent developments in provincial and national law. Articles in this newsletter are not legal opinions and readers should not act on the basis of these articles without first consulting a lawyer who will provide analysis and advice on a specific matter.