LETTER TO THE EDITOR — Run for ounces leads to downfall of mines

Having been involved in one of the recent mine failures — Grouse Creek in Idaho — mentioned in the excellent article by James Whyte (“Recent history reveals trend in mine failures,” T.N.M., Sept. 28-Oct. 4/98), and being personally familiar with several others of those mentioned, I would like to add to the author’s poignant observations.

This article, and another in that issue, discusses the use of geostatistics in ore reserve estimation, and how its application possibly leads to mistakes in minability decisions. Any application of geostatistics must be based on an accurate understanding of the geology of the deposit.

In the case of Grouse Creek, this obviously did not happen. Despite five ore reserve audits from independent, non-involved consulting firms and despite getting the expected results from an expensive drilling program designed to test the ore reserve estimate, it later became obvious that we did not understand the discontinuous nature of key mineralized zones.

Mr. Whyte also accurately points out the role of “ounces, ounces, ounces.” From the time Grouse Creek was acquired, it was known to have a thin profit margin at prevailing gold prices. For a project where only a 10% change in commodity price or ore grade would destroy the profitability of the venture, a positive decision was made and sold to the board of directors.

From the first ore reserve estimate, on which the project’s acquisition was based, to the decisive one, exploration efforts increased the contained ounces markedly, but at the expense of grade. The profit margin per ounce decreased accordingly, therefore the financial risk increased. The decision to construct was fueled by ounces, and not deterred by the risk inherent in the low profit margin from an estimated grade. Even though this mentality was pointed out, the pressure to produce ounces prevailed.

In this case, obvious risks in a low margin venture were outweighed by the company’s attitude toward ounces, which were demanded by investors whose views have an impact on share price. I am sure this has occurred elsewhere, also.

We evaluated many of the other projects the author named, and the ore reserve estimate problems were obvious to us. Yet we walked willingly into our own embarrassment because the drive for ounces clouded our judgment.

High among the lessons from this mine failure is to remember the third word in the phrase “ore reserve estimate,” and to choose your risk tolerance accordingly.

Ralph Noyes

Hayden, Idaho