COMMENTARY –Reserve and resource estimation, Part 2

When considering investing in junior mining stocks, potential backers are strongly advised to query mining promoters and company officials on the calculation of reserve estimates. Among the questions that should be asked are the following:

*Have only indicated and measured resources been utilized in the process of reserve engineering? The international mining community concurs that indicated and measured resource classes should be used in the conversion to reserve status. Moreover, banks and finance houses will only accept business plans that involve proven and probable resources.

* Has dilution been taken into account in the final statement of reserves? The often dramatic effect of dilution on mill head grades and on revenue and unit costs must be taken into account. Any statement of reserves that excludes dilution raises questions of confidence.

* What classes of feasibility studies have been undertaken? The type of feasibility study performed will indicate the level and accuracy of the engineering work. Types of feasibility studies, in order of rigorousness and accuracy, include: techno-economic; preliminary; opportunity; and ranking-rejection. Much greater faith, for example, can be placed in a full techno-economic study than in an opportunity report. Studies should be detailed for investors in terms of engineering performed, probable error in cost estimation, and documentation supporting the cost of equipment and material.

* What level of testwork has been carried out to support the metallurgical recoveries utilized in the calculation of revenue and unit costs? Data typically required to ensure a profitable mining venture with respect to metallurgical processes include: mill, smelter and refinery recoveries; work index of ore and diluted materials; rate of usage of consumables and reagents; and the existence of impurities and their effect on metallurgical recovery.

Ordinarily, processing testwork passes from the bench or laboratory level through to the pilot scale and on to the final plant. An increase in confidence in the predicted recoveries and associated unit costs could be expected with each stage.

* Have geotechnical data been collected, analyzed and utilized in engineering assessments of construction and operating costs? Geotechnical and hydrological data can play a major role in determining the viability of mining projects.

Planning an open-pit slope without engineering appraisal of rock mass strength and the loads that could be potentially applied by natural and man-Made causes is analogous to flying in an aircraft that has been made of untested materials.

Mining investors should not rule out investing in projects other than those at the bankable feasibility stage, as grassroots projects have definite merit. Considerable — and honest — fortunes have been made in the past by astute investors, and the acquisition of substantial wealth from greenfields prospects will no doubt continue.

Investors must align themselves with the level of risk with which they feel comfortable. All things being equal, risk should decrease as detailed engineering information becomes available. Thus, mutual funds and banks generally invest only in projects that have passed a full techno-economic feasibility study. At the other end of the spectrum, grassroots projects with a resource base classified largely as inferred and indicated, and without the benefit of reserves engineering, will attract investors willing to accept high risk in exchange for the potential of high gains.

The final judgment that must be made in the investment process is with respect to the caliber of the professionals working for the promoting company; the skills of geologists and metallurgical and mining engineers do make a difference. For example, experienced professionals might be able to convert resources into recoverable reserves after other specialists have failed. The converse is also true, however, in that badly engineered reserves should remain resources. The frequent collapse of mining ventures too readily demonstrates this failing within the industry.

— The author is a mining consultant with British-based Seltrust Associates.