The recently completed initial public offering by Nexa Resources S.A. (formerly, Votorantim Metais) on the Toronto Stock Exchange (the TSX) and the New York Stock Exchange has received considerable attention from capital markets participants and the financial press for its size (US$570 million, including the exercise of the over-allotment option) and for the large and impressive underwriting syndicate. Nexa’s IPO was the largest mining IPO on the TSX of a Latin American company, it was Canada’s 3rd largest mining IPO ever and the largest mining IPO in Canada over the last decade! The IPO is also noteworthy for its regulatory achievements, from both technical and securities law perspectives, including managing the regulatory authority and stock exchange approvals for an issuer with a dozen existing material projects (and the related dozen technical reports which had to be summarized in the prospectuses, and reviewed and accepted by the regulators and stock exchanges). There were also several technical elements to the disclosure included in the U.S. and Canadian prospectuses that are potentially useful to other issuers and their advisors going forward.
Exemption Obtained for Resource Disclosure in the U.S. Prospectus
Considering the size of the company and the size of the IPO, Nexa decided to go public simultaneously in Canada and the U.S., and therefore had to concurrently disclose technical information in accordance with Guide 7 in the U.S. and National Instrument 43-101 (NI 43-101) in Canada. However, given the discrepancy between disclosure requirements contained in Guide 7 and NI 43-101, relief from certain restrictions was required in order for desired disclosure to be included, and for investors on both sides of the border to receive the same information.
As a result of various discussions and written submissions, the U.S. Securities and Exchange Commission (the SEC) permitted Nexa to include in its U.S. prospectus all of the NI 43-101 reserve and resource disclosure which was to be included in its Canadian prospectus. The U.S. prospectus also, of course, included the required Industry Guide 7 disclosure of reserves, and a discussion of the differences between NI 43-101 and Industry Guide 7 methodologies and requirements.
While there are exemptions available under U.S. securities laws which allow NI 43-101 based information in certain circumstances, no such express exemptions were available to Nexa, such that discretionary permission from the SEC was required. The Nexa IPO is believed to be the first offering in which such permission was granted by the SEC.
Exemption Obtained for Resource Disclosure in the Canadian Prospectus
As a long time “producing issuer”, Nexa has owned its various operating mines for many years, and has a history of replenishing (and growing) its estimated resources and reserves through normal course mining activities and ongoing mineral exploration. Given the nature of the mineralization of certain of its projects (narrow vein or tabular bodies), the most efficient (cost and mine development) strategy has been to simply carry out its mining operations and have its staff geologists prepare periodic estimates of reserves and resources. And, of course, the estimated mine lives reflected in Nexa’s independent technical reports only reflected the current estimates, and did not take into account the likelihood of resource replenishment.
It was considered important for the success of this IPO to be able to disclose Nexa’s history of successfully replenishing its reserves and resources at its operating mines. To do so, it was necessary to be able to disclose “prior estimates” in order to show that (i) despite the significant mining activities carried out over the years, the current estimated reserves and resources (the NI 43-101 compliant estimates included in the current independent technical reports for these projects) reflected the replenishment; and (ii) the company had a significant history of increasing the lives of its mines. The challenge was that, although NI 43-101 provides considerable latitude to disclose “historical estimates” (without complying with all technical requirements – independent qualified person technical reports and otherwise – for estimates under NI 43-101), these “prior estimates” prepared by Nexa’s personnel did not fit within the definition of “historical estimate” in NI 43-101 because Nexa already owned the projects when these prior estimates were prepared.
After discussions with, and written submissions to, the Canadian securities regulatory authorities, exemptive relief was obtained from the Ontario Securities Commission (on behalf of all of the Canadian securities regulatory authorities) to allow the inclusion of the “prior estimates” in Nexa’s prospectus.
The valuable take-aways for mining companies and their legal and capital markets advisors include:
- the importance of determining the desired project related disclosure as early as possible, and whether exemptive relief will be needed to allow the disclosure, and
- the importance of collaboration of legal counsel with internal and external qualified persons (and other management personnel) to see if the particular characteristics of the project or the particular circumstances of the issuer provide compelling grounds for the securities regulators to grant the required relief.
As Canadian counsel to the underwriting syndicate, we co-authored the written submissions to the SEC, and participated in the discussions with, and co-authored the written application to, the Ontario Securities Commission.