MINER DETAILS; Hole 109 and the Pezim case (May 25, 1992)

Exploration is risky business. Take Calpine Resources’ famous hole 109 drilled in 1989 at Eskay Creek. International Corona later did more drilling to test this target located separate from and in a lower horizon than the main contact ore zone.

Hole 109 turned out to be a geological freak in that Corona was unable to duplicate the spectacular results of Calpine, which probably drilled down a mineralized fault. A small and lower-grade tonnage will likely be assigned to the area, but Corona doesn’t know yet if it will be minable. But this turn of events isn’t why British Columbia’s Court of Appeal overturned the 1990 decision of the province’s Securities Commission in the Pezim case. Although allegations of improper insider trading and breach of fiduciary duty were rejected, the commission found that Murray Pezim, Lawrence Page and John Ivany breached obligations of timely disclosure of material changes imposed under s.67 of the Securities Act.

But the court ruled the commission erred in matters of law to reach this conclusion. While the commission viewed assay results (raw or plotted) as constituting a “material change,” the court decided that assay results may be a “material fact” (capable of affecting share price either positively or negatively), but do not constitute a change in an asset even though they might create that perception.

This doesn’t mean assay results do not have to be disclosed. The court clearly noted a duty to disclose material facts that are known, and insiders can’t trade securities using knowledge of either a material fact or a material change. But the court said s.67 imposes no duty to “inquire” about material facts, or to find them out, and not to engage in securities transactions if there are any material facts that could have been found out. This means Pezim, Ivany and Page — all non-geologists — could rely on a “Chinese Wall” system insulating them from knowledge of raw assays until made ready for public release by geological staff.

Some argue the decision will undermine national policy with higher disclosure standards, but the need for policy changes is a separate issue. Others say it hampers the commission to act “in the public interest.” This is a vague and subjective concept which should not immunize its findings from legal scrutiny. What the court does appear to be saying, is the commission must base its decisions in law. This makes sense, for how else can justice be served to Murray Pezim the same as to anyone else.