The idea for this blog comes fresh from reading a recently disclosed scam-nabulous 43-101 Technical Report for mineral resources. Watching how the stock ticker started moving up two days before the public release, I asked myself, how is it that such a poorly documented and misleading study, completely lacking validation, is so within the bounds of all the statutes, rulings and guidance promulgated not just by Canada, but by all of the world’s codes? It is two things, I think. One is the vague and squishy language guiding QP work, subject of my previous blog on mineral resources. The second is the inherent predisposition on the part of company management to table a favorable result—an ever larger, higher-grade resource. Pressure is tremendous to always increase resource size and grade in order to obtain multiple financings and avoid excess equity dilution. Which consultant, A or B is likely to deliver the best result? Consultant A works in a consulting firm and signs off on work delegated to junior members who may not be QPs themselves. Production is the goal—production of scoping and feasibility studies. Consultant B has some of his career working in operations and understands the difference between virtual and real orebodies from hard lessons learned. If I am the CEO, I am tempted to pick Consultant A who is likely to produce the least complicated and most optimistic result. I think we can understand the concept of a “buy-side” consultant and may know one or two. It’s pretty easy to blow up grade or volume estimates for a virgin orebody. Who’s going to prove it’s overly optimistic since there are almost no hard-and-fast rules in this game? By the time the scoop pulls muck from the first stope, the original investors are likely gone and the management, too–off to cook up another wonderful story. Accountability is rare.
But neither does 43-101 serve the QP. If I write a technical report I have to rely on management for a lot of things, and they may be selective about what I see. I should be able to sniff out anything fishy in my little area of resources, but I am only allowed to disclaim a handful of things—legal, environment among them—and I have to sign off on the whole document. I am accepting responsibility that the other contributors are QPs for their areas and “that such persons are provided adequate documentation”, whatever the latter stipulation means. Anyway, how should I know? I’m a QP for resources, not process and tailings. Why do the company and the regulatory agencies get to put so much responsibility on me for the few dollars I get for this job? Isn’t the company management supposed to be expert in what they are peddling dearly to the public? The company enabled, at least, the inaccurate and misleading technical report in question. I, as QP, should be responsible to management, not the public. If the public has a beef, they should go after the guys who provided me this information to work with in the first place and published my horrible report. If I mess up, then management has a beef with me, but if the report is misleading or inaccurate because of bad or incomplete information provided to me, I don’t think management will have much of a leg to stand on.
I think we all understand that the idea of the QP was that this person would provide investors assurance of competence, and when required, independence. Because the statutes and companion policies almost completely avoid any detailed prescription for how the QP work is done, leaving so much to the judgment and experience of the QP, and by the fact that QPs are remunerated by the issuer, neither condition is assured. We would have to set this up so we QPs worked for an independent monopoly company called something like QP, Inc., “24-Hour Service, Monday-Friday”. I bet no one would like it but that gets rid of the inherent conflict of interest. The current system effectively offloads a good bit of liability from management to the QP. And the shareholders? How’s it been working out for them in the last 20 years?