By far the majority of my personal investments are in mineral exploration companies and I spend a considerable amount of time traveling around the world looking at exploration and mining projects. I often travel with Brent Cook, a trusted friend and experienced geologist who assists me in my evaluations. Brent is also a regular contributor to my investment newsletter in which I discuss the companies Brent and I invest in (click here for more details).
The quality of mineral reserves and resources is a crucial part of our evaluation process and is of paramount importance when deciding whether to buy or sell a particular company – assuming it has reserves and resources, of course. In light of how important this topic is, and considering how often reserve and resource statements are misunderstood by private investors, we thought it would be a good idea to write something on the subject. Below is a report that Brent recently completed and if you invest in mining or exploration stocks I would suggest you read it.
by Paul van Eeden
Changes in reporting regulations
The St. Petersburg Times reported in 2004 that Altai’s top geologist, Anotoly Zaitsev, believed ‘undiscovered reserves’ in southern Altai could exceed 160 million ounces of gold. The ingenious juxtaposition of limitless potential ‘undiscovered’ with cold hard fact ‘reserves’ is perfect in rendering any economic assessment of the claim impossible. Although Mr. Zaitsev could potentially be correct, so am I in claiming that there are hundreds of millions of ounces of ‘undiscovered gold reserves’ in the ocean I am looking at from my office window (water temperature 70 degrees with swell increasing over the weekend).
And I submit that finding these undiscovered ounces off the Southern California coast is a much more pleasurable and equally rewarding proposition than trudging across the bitterly cold and desolate Siberian wastelands looking for those ‘undiscovered reserves’ of Mr. Zaitsev’s. Looking back a few years, some of you may recall a Mr. John Felderhof who made a similar claim when he reported to have found 200 million ounces of gold in Borneo while working for a company named Bre-X.
As a direct result of the ensuing fiasco caused by the bogus reserve announcements in Borneo, a number of new laws, regulations and guidelines were enacted to define and qualify reserve and resource statements by Canadian and Australian public companies (Russia seems to fall outside these regulations). Most significant among these is Canadian National Instrument 43-101, a rule developed by the Canadian Securities Administrators, and administered by the provincial securities commissions, that governs how scientific and technical information about mineral projects is disclosed to the public. Essentially, NI 43-101 requires that resources and reserves be reported by a ‘Qualified Person’ who is a licensed geoscientist sufficiently competent in the mineral deposit being reported on. Furthermore, the requisites for claiming reserves and resources were generally outlined with the intention of conveying a level of confidence that the mineral deposit can be mined economically.
Reserves and resources: definitions
Very generally, a mineral ‘resource’ is no more than a concentration of mineralization that has been defined by sampling and might be of economic interest. Terms such as ‘might’ and ‘economic interest’ are important qualifiers here. The three resource sub categories, in increasing order of confidence are inferred, indicated and measured, with measured offering the most certainty that there is sufficient geologic, drill hole and sample data to confirm the continuity and grade of mineralization.
A mineral ‘reserve’ is the economically mineable part of the resource, as set out by the incorporation of mining, metallurgical, processing and other relevant economic factors at stated metal prices, which is reported in at least a preliminary feasibility study. Reserves are broken down into two sub categories as well: proven and probable. Proven reserves represent the highest confidence level and are derived from measured resources that show economic viability. Probable reserves are comprised of measured and indicated resources (lower confidence level) that would fall into the proven category if they are confirmed to exist as expected.
There is no guarantee that a resource will ever become a reserve and judging by the number of mines that never make money, there is no certainty that a proven and probable reserve will actually be economic. In fact, a good friend of mine who does reserves for a living estimates that over a mine’s life, 40 percent of all mines lose money, 50 percent basically trade dollars and 10 percent are bullet-proof to ‘mis’-management. This exclusive 10 percent actually make enough money to cover all the frivolous and wasteful activities that make the mining sector so much fun.
How to judge a company’s resources
Getting back to what is important to investors: somewhere between an ocean full of gold and hard and fast mineable reserves is where we stand to make the most money, providing we can see through the murky waters. An investor needs to bear in mind that not all resources or reserves are of the same quality. One company’s two million ounce measured, indicated and inferred resource may ultimately convert to proven and probable reserves whilst the next company’s two million ounce resource may end up as no more than an interesting anomaly to be revived during each successive minerals boom. Likewise, Qualified Persons are not all equally qualified and the quality and veracity of any resource estimate is no better than the integrity of the data supplied and person reporting.
What brings this all to mind now is that some of the resources I have reviewed over the past few years will probably never, and could never, become economic. Although the resource category is specifically intended to convey the low confidence level and lack of sufficient data to apply economics, there is a tendency among investors to assume these resources will become economic reserves with just more work. Each property is unique and drill hole spacing, geology, depth, mineral continuity, property location and strip ratio are some of the things you have to keep in mind when looking at published resource figures.
For example, and without naming names, the inferred (and sometimes the indicated) resources might consist of widely scattered drill holes or trenches that have been assigned tonnage and grade and incorporated into a global resource. These individual ‘resources’ may be comprised of only a few drill holes representing very limited geologic information unconfined by geologic realities. There might be five or ten of these separate resource bodies separated by hundreds of meters that are bulked into what could appear to be a significant total resource, when in fact they represent no more than interesting but small and scattered anomalies.
Sometimes a large portion of a total resource may be represented by a single, exceptionally good drill hole, whilst nearby holes would indicate it is unrealistic to expect that much ore is actually there. It is always worthwhile asking what percentage of the resource is contained in what percentage of the drill holes used in the resource calculation. There are also examples of significant resources being inferred on statistical and interpreted geological bases with very little hard drill data to back them up.
Reserves and resources: investor beware
The point of this commentary is not to dissuade you from assigning value to a company’s resources. Indeed, there are companies with projects out there whose resources stand a good chance of becoming economic and whose stock therefore offers good value. Just keep in mind that the NI 43-101 resource and reserve classifications do not guarantee economic viability, nor do they eliminate the possibility of scams within the industry.
Brent Cook is an independent geological consultant and active private investor in the mineral exploration industry. He advises private investment companies, brokerage firms, mineral exploration companies and is a regular contributor to Paul van Eeden’s investment newsletter.
First published on Kitco.com (www.kitco.com)
Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website (www.paulvaneeden.com). If you would like to read more from Paul, you can sign up to get his weekly commentary at https://www.paulvaneeden.com/commentary.php.