Do “Spectacular” Infill Drill Results Require Disclosure?


A British Columbia Securities Commission (“BCSC“) decision earlier this year should be of interest to junior mining issuers, though we suggest that the decision should be followed with extreme caution. We note that this decision relied on specific facts and circumstances and should not be taken as standing for the proposition that infill drill results are not, per se, material.

In April, 2012, the executive director of BCSC alleged that Canaco Resources Inc. (“Canaco“), a TSX Venture Exchange (“TSXV“) listed company, together with its President and three other directors, failed to promptly disclose assay results from eight drill holes, that these results constituted a “material change”, and that the failure to make prompt disclosure violated Section 85 of the Securities Act (British Columbia). The executive director also alleged that the directors of Canaco failed to act in the company’s best interest when they issued stock options to officers, directors and consultants after they became aware of the undisclosed drill results but before they were published, and in so doing they acted contrary to the public interest.

Both sets of allegations were based on the assumption that the assay results from the eight drill holes were material. All of these holes were “infill” holes – that is, holes drilled in the spacing between previous drillholes, or otherwise nearby to previous drillholes.

Canaco and its chief executive officer received the assay results for all eight holes by no later than Monday, November 29, 2010. Canaco disclosed the drill results in news releases dated December 6, 2010, December 9, 2010, and December 22, 2010. In the opinion of the directors, the results were “spectacular”, “just beautiful”, “fantastic news” and “big results”. Canaco “delayed and staggered” disclosure of the results, announcing them in three separate news releases on December 6, 9 and 22, 2010. In one of these news releases, Canaco described the results as “spectacular new drill results”. The directors granted the stock options at an exercise price equal to the closing price on December 2, 2010.

The central issue was whether the drill results were material.

The section 85 allegations could stand only if the executive director succeeded in proving that the drill results were a “material change”. The public interest allegations could stand only if the executive director succeeded in proving that the drill results were a “material fact”. In defending themselves against the executive director’s allegations, Canaco and the other respondents took the position that the results were not material. The executive director therefore had to prove that the infill drill results were material or, put differently, that they would reasonably be expected to have a significant effect on the market price or value of Canaco’s securities.

In determining whether the drill results were material, the BCSC first considered the drill results’ effect on the value of the specific deposit.

The BCSC concluded that the evidence showed that the eight holes in question would not affect the value of Canaco’s shares from a geological perspective. The holes were infill drilling. They did not alter the known boundaries of the deposit. They did nothing more than add to the understanding of the continuity of the deposit. To the extent the results contained high grades, these would not affect a mineral resource estimate because their impact would have been neutralized through top-cutting (grade cutting).

Canaco was a junior exploration issuer with no revenue and the specific property at issue was its main exploration focus. For an issuer with this profile, information associated with drill results is more likely to be material than for a larger issuer with more properties and more diversity to its business.

An important factor in this case was that Canaco’s drilling program was well advanced before the eight drill holes were drilled. Canaco had been issuing news releases steadily since its first release in September 2009 and, as of December 2010, had disclosed the results of 82 drill holes. The eight holes in question merely confirmed what management and the market already knew about the property. These holes were all drilled in close proximity to previous drillholes and, as we have cited above, the drill results for the drillholes were all consistent with the information that Canaco disclosed in the news releases relating to the previous drillholes.

The results were consistent with the existing “story” about the company and, as the geologist experts found, would not “appreciably” or “significantly” affect a mineral resource estimate.

In reaching its conclusion, the BCSC noted that the test for materiality is objective and that the language in the Canaco news release (that the results were “spectacular”) was not relevant to the determination. It noted that the executive director did not introduce any evidence that the results were material and that the internal opinions expressed by the directors (in emails), that the results were “spectacular”, “just beautiful”, “fantastic news” and “big results” were also ‘not relevant’ to the objective determination of materiality. BCSC noted that these descriptive terms appeared to have been used in an effort by the President to raise money at higher share prices and, if anything, that sort of conduct was more in the nature of market manipulation, but the executive director had made no allegation of this and had presented no evidence of it.

It should be noted that the TSXV required Canaco to announce the remaining undisclosed drill results on December 22, 2010. In addition, the TSXV required Canaco to re-price the stock options at issue (but not cancel them).

Please do not hesitate to contact any member of Clark Wilson’s Corporate Finance & Securities Group for guidance on disclosure obligations. This article contains general information, not legal advice, and may not apply to you.