Clearing Up Mineral Resources and Mineral Reserves

POSTED ON December 14, 2012 BY Occam Papers
CATEGORY Africa, Australia, Mining, South Africa,

This is a guest post from the Occam Papers, a new blog by three Canadian mining engineers we know and trust.

I recently had a discussion with a friend of mine who is just getting into resource investing. She was rather confused about how companies report the size of their mineral deposits (i.e. the resource and reserve categories) and asked me to explain what it all means. I realized that some of our readers may benefit from a brief explanation as well, so here goes:

MRMR tells you about the quality, quantity and confidence level of a mineral deposit. Obviously this is very important information to make decisions regarding investments. I am not going to get into the history and development of the MRMR guidelines and definitions, but for those interested in more detailed information, you can find it here:

http://web.cim.org/standards/MenuPage.cfm?sections=177&menu=178

Canadian public companies are required by law to report their resources and reserves according to the CIM (Canadian Institute of Mining) definitions. Australians use JORC(Joint Ore Reserve Committee) and South Africans use SAMREC (South African Mineral Resource Committee) definitions. These three definitions are very similar but I will focus on CIM.

What you will see in a company’s news releases or technical reports regarding MRMR will be reported in up to five different categories. These consist of three Resource categories and two Reserve categories:

Here is a diagram commonly used to explain the relationship between the categories:

You can think about it this way:

Mineral Resources is the domain of geologists. When geologists explore a mineral deposit they want to better understand what is actually in the ground. So, as the level of confidence about the deposit increases, the Resource category moves from Inferred to Measured. i.e. Inferred Resources are less well known (or understood) than Measured Resources, and Indicated Resources is in between.

Mineral Reserves is the domain of engineers. Once the geologists have defined an Indicated and/or Measured Resource (M&I Resource), the engineers come in and design a mine around it. The portion of the M&I Resource that can be profitably mined becomes the Reserve. Generally the Indicated Resources move to Probable Reserves and the Measured Resources move to Proven Reserves.

It is important to remember that even if you have a Measured Resource, there is absolutely no guarantee that it will become a Reserve. Resources only tell you about the confidence level of what is in the ground. Reserves tell you if it can be extracted for a profit.

Sometimes you will see companies report grade and tonnage with a little asterisk and note stating that:

*This resource is not NI 43-101 compliant (or something along those line)

This means that sufficient work has not been done to place the deposit in any of the CIM categories (not even Inferred). So basically the company still has to spend a lot of money to classify their deposit.

Here are some implications when looking for investments:

If you see a project with a large Inferred Resource and little or no M&I Resources, it means they have to still spend a lot of money on in-fill (or definition) drilling to increase the confidence level.
If a company already has a large M&I Resource, they need to start spending money on engineering to move the Resource into a Reserve. If they keep spending on exploration to increase their Resource – be wary! – It might mean they don’t believe the deposit can be profitably mined, so they keep increasing the Resource in hopes to boost the share price and get out.
If you see a large M&I Resource along with a relatively small Reserve, you need to do some homework. If the Reserve is based on the entire M&I Resource, it means that a large portion of the Resource cannot be profitably mined. Remember that Reserves have to come from Resources and that not all Resources become Reserves. But it can also be that the company has not applied engineering to their full Resources, in which case they need to spend more on engineering.

MRMR definitions were put in place to protect investors from scandals such as Bre-X. It might seem like a dry topic – especially when reading the actual definitions and looking at all the different tables in company reports – but it is necessary knowledge for successful resource investing.

By Occam Papers, See Also: Thoughts on Kaminak Gold

Occam Papers

philip.f.dutoit@gmail.com

Occam Papers

philip.f.dutoit@gmail.com

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