Excerpted with permission from Brent Cook’s Exploration Insights newsletter
Before discussing the recent results published by Rubicon about its Phoenix project, it is important to state that every mineral resource estimate has risks associated with its accuracy. Most informed investors know that some of these risks are highlighted by placing the estimated tonnage of mineralization into one of three categories; Measured, Indicated, or Inferred. What is less understood, is that the risks associated with a mineral resource estimate will vary considerably depending on the nature of the mineralization being estimated. This risk can, in many instances, be paramount to understanding the potential commerciality of a mineral resource. To evaluate this risk, requires a far more detailed analysis of the underlying project data.
In most cases the required project data is readily available in the form of reported drill results which, in our opinion as an absolute minimum needs to include collar location, azimuth, dip and downhole assay location. In some instances this basic information is not provided by issuers and this can create serious barriers for the public to evaluate the risk for themselves. Even worse, drill data can be released in a manner that makes it very difficult, if not impossible to interpret, rendering it deficient, if not misleading.
The lack of adequate drill hole information being available to investors prevents investors from understanding the true risks of the project they are invested in. Furthermore, people with privileged access to this project data are not restricted from trading after the publication of the issuer’s 43-101 report. This can potentially create an un-level playing field between certain insiders and the public. The reason for this is that 43-101 reports are considered to provide a qualified and independent interpretation of drill data and as such the data itself is no longer considered material. This in our opinion represents a weakness in our regulatory scheme and in many cases gives a significant trading advantage to those with privileged access to that data.
We believe changes are needed to strengthen the quality of drill data reporting. The changes we recommend will provide investors with better information to assess the risk of making investments in resource issuers as well as help further level the playing field between persons who are privy to complete drill data and the public who are not.
The Case of Rubicon
When our work began on Rubicon, the initial review of the company’s 43-101 highlighted a number of immediate concerns about the risks associated with its resource estimate. Our concerns centered primarily around the number of zero value assay composites included within the wireframe, combined with the extremely high grade variability, expressed as the coefficient of variation (COV), of those same composites. A high COV often means a high risk that the higher grade intercepts are allowed too much influence over lower grade regions but, we needed cross sections to confirm this. To put it simply, it implied to us that the resource was essentially unconstrained even though, according to the SRK Engineering 43-101, a number of wireframes had been drawn around the mineralization. The real problem however was our inability to gain access to the basic information required to assess for ourselves as investors what the real risks associated with this project might be.
Since Brent Cook’s article (see EI October 11, 2015) clearly describes the major red flags outlined in both our original review and his own interpretations of the F2 resource, our focus here is more on the issues surrounding why it was difficult for us to assess Rubicon’s project.
The fundamental problem was our inability to access the company’s basic drill data. On the company’s website, in the projects section, there is an assay table that contains a summary of assay results from 626 drill holes from both surface and underground drilling (link). Instead of the common “from” and “to” that most companies report to define where the assay is along the drill hole, the company only reports “depth to center of intercept” for almost all holes. This is a confusing figure, as it does not mean depth down hole as you might expect, but instead refers to the vertical depth from surface. In other words, you could theoretically use trigonometry to roughly estimate the real location of some of the intercepts but only on the steeply dipping holes. This method is virtually useless for holes that have a shallow dip, which includes almost all the underground drilling. Ironically, and importantly, because of the nature of the mineralization, it is these shallowly dipping underground holes that should provide the most valuable information.
We did find some drill hole data in the appendix to Geoex’s 2011 resource estimate. This table, however, had no collar locations and the data was incomplete because it did not contain all reported intervals when cross referenced with other drill tables previously discussed. Perhaps the company’s basic drill information is located somewhere we failed to look, and if so we will stand corrected, but we did undertake a diligent search through many historic press releases and found almost all intercepts reported in the same incomplete fashion.
Of the 820 drill holes used in the mineral resource estimate, we were able to find assays for 626 holes. Of these, only 146 had collar locations with azimuth and dip and we were able to find “from” and “to” information on only select intercepts (by piecing data together from different sources). There were some old press releases with from and to information, but they were missing collar data. No doubt, if we spent weeks digging through old releases we might have found more drill data, but the point is clear, we found it impossible to reconstruct a single complete cross section of the deposit using public information. If a company’s drill data has been made public, it should be required to compile it into one file in an easy to access location.
The only cross sections we could find about Rubicon’s Phoenix project were ones selected and published by the company. In nearly all instances, the cross section data suffered, in our opinion, from important deficiencies. The inability to view or reconstruct a single representative cross section of the deposit made it impossible for us to draw informed conclusions much beyond those outlined in our initial review. As a result, until we see some of the supporting drill data, our hypothesis still stands that Rubicon’s resource is probably highly overstated, and the results released yesterday are probably not fixable by further detailed drilling.
Although unclear, there appears to be a clause in Rubicon’s loan agreement that places them in default if mining operations deviate from the development program. As a result, the company will mostly likely run into more significant financial problems once the lenders tune into the reality of these issues, especially if they cannot raise more capital. Because of the nature of the mineralization at Phoenix, it is easy for small errors in the underlying assumptions to cause massive errors in the estimated resource. Our opinion could, however, be changed if the company simply supplied the market with adequate drill data. Had this data been available sooner, the public would have been able to view their own independently drawn cross sections and it may have been more difficult to raise the required capital to construct the mine.
If you agree that access to basic drill data would have made a material difference to the public’s ability to evaluate Rubicon’s Phoenix project, two questions arise: Why is this information not required to be released? Should those who have privileged access to this information when the public doesn’t, be permitted to trade on it even if a 43-101 report has been filed? In answering these questions, we readily acknowledge that it is a legitimate interest of issuers to be able to maintain a certain level of confidentiality about their technical results. Furthermore, larger companies should not be burdened with the responsibility of releasing a constant stream of thousands of drill results from their production drilling. Acknowledging a need to balance these competing interests, how should securities regulators draw the line to best serve the public interest? To answer that question we need to look at where the line is currently drawn.
We are not lawyers, and what we are about to explain is our best attempt to interpret the governing rules. In Canada, public companies without advanced projects need to make available all drill data used to support their resource estimates. Some years ago, this data had to be appended to the end of the 43-101 technical reports but in the spirit of keeping the reports shorter this is no longer required. Instead, the information can be removed from the appendix and the company simply has to make the supporting drill data available upon request. This is fine, however, once a project is considered advanced a company no longer has to supply the supporting drill data. A project is considered an advanced project when it files a 43-101 compliant PEA. After a company publishes a PEA, the public loses their prior right to demand an issuer’s drill data. This includes the previously available data for older resource estimates that should really have been appended to the end of the 43-101 in the first place.
In the case of Rubicon, when the company was contacted to get its relevant drill data, it refused (as it was lawfully entitled to do), relying on its right not to have to provide it. The changes we propose are relatively straightforward. Either require issuers to make available the drill data used to support old resource estimates, or redefine the definition of “advanced project” to mean a project with a minimum of a 43-101 compliant feasibility study. Each change has its separate issues and before either is considered, a full discussion and period of public comment would be required.
We understand that it is not reasonable to expect a company to release all of its project data. The marketplace is simply too competitive to expect that level of public disclosure. What we are proposing is that companies be required to release basic drill data that includes collar location, azimuth, dip, from, to and assay values clearly, and in one place, until the project is advanced. Furthermore, when a project attains the status of being advanced, a company should not be allowed to withhold data that would have been previously available to the public.
The ability to raise capital in the resource sector is almost entirely dependent on the confidence of the investors within that sector. The success of today’s resource capital markets are very much dependent on finding the most efficient way to marry non-technical investment funds with the complicated science of mining and geology. To this end, there needs to be a balance between adequate and timely public disclosure and preserving a fair and competitive landscape for all stakeholders. We believe that the regulatory changes we have proposed strike the right balance and will serve to enhance market efficiency at very little cost or competitive detriment to issuers. Rubicon will not be the last company to have these types of problems and perhaps as these issues become more apparent, more attention will be paid to finding ways of empowering investors through increased transparency.
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