September 19, 2017

Mining on solid ground: don’t guess at resources and reserves

Andrew van Zyl, SRK Consulting partner and principal consultant

EXCLUSIVE African Mining Brief – Q&A on mineral resource and reserve estimation with SRK Consulting Africa, a multidisciplinary entity.

The ore body is the principal asset of any mining company, so the accurate estimation of its worth and its structure is a core function that creates the foundation of everything that the business does. But what is required to get it right?

To gain some insights, African Mining Brief spoke to leading experts from SRK Consulting, the global network of consulting engineers and scientists that focus on integrated solutions in mining and other sectors. Marcin Wertz is an SRK partner and principal mining engineer, Andrew van Zyl is a partner and principal consultant, Mark Wanless is a partner and principal resource geologist, and Roger Dixon is a corporate consultant.

AMB:    What are some of the operational risks that can result from flawed mineral resource and reserve estimates?

SRK: Clearly a key element of estimation is to accurately determine the value of the orebody, in the light of various modifying factors, as this guides investors on whether a mining project is economically viable. But defining the structure of the orebody correctly is also crucial to an efficient mining process; if the shape and size of the orebody is not well understood, this can cause operational delays in reaching the ore and complications in developing access to it. Longer implementation usually then means higher-than-budgeted start-up and operational costs.

Project developers are generally under pressure to start mining as soon as possible, so many are tempted to take short-cuts in the work they do to define the resource. This leads to inaccurate estimation of orebody shape, size, grades and tonnages – and this undermines the ability to be selective about how mining is conducted.

An orebody model that is wrong – due to insufficient up-front drilling, investigation and analysis – will lead to a design of the mine, plant and all other infrastructure that is sub-optimal. The result, at best, will be ongoing inefficiencies and extra costs to fix this situation; at worst, this could threaten the very survival of the project.

All the projections in a project plan – such as the build-up rate, the ultimate capacity, the rate of production and the run-of-mine grade – will be put at risk and may never be achieved, if they are based on a model that does not accurately reflect what is in the ground. In the end, this affects the rate of return that the project has promised to its shareholders.

In addition to defining a volume of ore and the  grade, the density also needs to be understood; this allows the volume to be translated into tonnage – and is particularly important in minerals like iron ore. The density is dependent not only on the lithology but also on the grade and the extent of weathering of the portion of deposit.

Mining companies can usually engineer their way out of many of the problems caused by inaccurate resource estimation, but it is far more cost-effective and operationally efficient to get the geology and the estimate right first time. The experience of even the larger companies in the mining sector is that any expenditure saved early in the project by over-hasty or sub-standard geological studies will demand much more expenditure later on re-doing the project plan – or worse, replacing the mining equipment or processing infrastructure. The value of quality assurance and quality control in the exploration phases can never be over-estimated.

Marcin Wertz, SRK partner and principal mining engineer

AMB: If an independent audit shows glaring inconsistencies in the reserve and resource estimation or flaws in geological data collection and processing, what is the advisable step for the client to take?

SRK: Any inconsistency in the exploration phase will have serious implications for the other aspects of the project down the line, so the client must be made aware immediately so they can resolve it as quickly as possible. As consultants, we also need to offer recommendations to the company on the impact of the issues, as well as potential measures to remediate the issue. If the issue cannot be resolved by the auditor and the originator of the data, then it is advisable to bring in a relevant, independent expert.

With a public report – say, regarding a mining transaction – the consultant is really acting as an auditor on behalf of the shareholders (not just the company executives). If, for any reason, the company is not prepared to act on the recommendations of the auditor, then this needs to be highlighted in the report so that shareholders are fully aware.

AMB: When it comes to the process of mineral resource and reserve estimation itself, what is required to achieve reliable results?

 SRK: Due to the importance of ensuring accuracy in exploration results, the reports generated must comply with internationally accepted reporting codes. These include: the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the JORC code) in Australia; the South African Code for the Reporting of Exploration Results, Mineral Resources and Mineral Reserves (SAMREC); and the Canadian Institute of Mining, Metallurgy and Petroleum (CIM) standards. There is also the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) that coordinates the solid minerals industry on issues relating to the classification and reporting of mineral assets; CRIRSCO provides an international reporting template on which prospective members can base their own national reporting code.

These codes require that a ‘competent person’ (CP) must be accountable for resource and reserve estimations.  A total of 10  countries  now regulate that this must be done – ensuring transparency, materiality and professionalism in the exploration results, mineral resources and mineral reserves on which investors will base their financial decisions. In a very real sense, these codes are vital to the sustainability of mining, as they help uphold the investor confidence that keeps finance flowing into new or expanding mineral projects.

In terms of the codes’ definitions, a CP is a person who is registered with recognised professional organisations that has an enforceable disciplinary process – including the powers to suspend or expel a member. The competent person must also have a minimum of five years of relevant experience in the style of mineralisation or type of deposit under consideration and in the activity which that person is undertaking.

The scope of the resource and reserve study should be defined by the CP; ideally, there should be one CP responsible for resource estimation (this person is usually specialised in geology) and another responsible for reserve estimation (which usually brings mining engineering expertise). Ultimately one person is held responsible for the overall report.

AMB:   What are the uncertainties that typically arise when estimating mineral resources and reserves, and in projecting potential future rates of mineral production?

SRK: Based on an analysis of drilling results, the mineral resource is determined and the ore body’s structure is outlined. Converting this resource into a reserve requires a range of uncertainties to be considered; they are the ‘modifying factors’ that affect whether that ore body can commercially be exploited. Remember that a mineral reserve is the economically mineable part of a mineral resource, so it must take into account all those factors – be they mining-related or non-mining factors – that affect the cost and feasibility of achieving a saleable product.

Traditionally, the main modifying factors relate to technical issues in mining the ore body and treating it in a metallurgical plant – so these include aspects such as geotechnical and geohydrology, mine design and scheduling, metallurgical processing and recovery, and project infrastructure. One particular uncertainly which is often understated is the level of mining dilution; mining plans often predict ambitious grades being achieved, with mine call factors in gold mines often particularly optimistic and not based on reliable data. A related issue is the mine’s understanding of the selectivity and variability of their ore body, as this can have a profound impact on grades mined; it is not enough simply to average out the variations and predict mining output on these averages.

Modifying factors also include broader issues – on and off the mine site – that affect the mine’s sustainability. These include the market conditions (which affect commodity prices and contracts), environmental studies, legal compliance and permitting, the taxation regime, the mine’s social or community impact, and the cost of mine closure. The non-mining aspects are becoming increasingly important in determining the viability of a mining project, especially where governments and communities are looking for new ways to share in mining’s benefits.

AMB: What are the criteria for choosing the tools applied in mineral resource and reserve estimation, and what are the most universally accepted tools?

 SRK: There is a range of mining software on the market; we generally recommend that the choice of expert to do the work should come first, and then that person chooses the software tools with which they are most comfortable. This is because most of the tools are capable of determining resources and reserves – while some are better at certain aspects than others. An experienced person will optimise the use of the particular tools that they choose.

In choosing tools for mining scheduling, for example, the criteria would generally be ease-of-use and the ability to integrate with the geological and geo-statistical model; it would also be important that the data should be easily auditable.

Most of the big software packages in this field will cover all the main aspects from exploration through to mine planning – while specialised packages may deal just with specific stages. Results from each of these tools are usually transferrable to other platforms, even if this is not always seamless.

The complexity of the projects will also affect which tools should be chosen from the suite available; there is no universal tool that is correct for every ore body.

Roger Dixon, SRK corporate consultant

AMB: What independent third party reviews are required to arrive at result that is compliant?

SRK: A review is conducted by a team of competence persons (CPs), each specialised in the relevant aspects of the project under review; for example, it will include experts in mining, mineral processing, geology, economic modelling, tailings, surface water management, groundwater management, geotechnical engineering and environmental and social science.

The secret here is to ensure that the project has the right competencies involved on the first independent review; in particular, the reviewers should have established track records in the mineralisation under consideration. A competent and independent reviewer will give a result based on sound technical knowledge and experience, and they will not be influenced by the client when it comes to their findings.

From a governance perspective, it is also in a mining company’s best interests to regularly rotate the consultancies that they use for independent reviews – in the same way that they rotate their financial auditors. Some companies even rotate annually, while others adopt a three-year to five-year cycle. It is important to avoid complacency in the checking of the client’s work, and to avoid a ‘cosy’ relationship from developing – where serious issues go undetected or not commented on.

AMB: Have you observed any impact that low commodity prices have on mineral resource and reserve estimation?

SRK: Raising finance for projects is difficult when commodity prices are low, so there is a tendency for companies to be even more optimistic in the estimation of resources and reserves in order to get projects to fly. Also, in the implementation of these projects, the finance raised is often not as much as the project managers would have liked, so the project has to be implemented with thinner budgets.

Under these conditions, people are under pressure to make projects work, as there are not the employment alternatives that might exist in a buoyant minerals sector; over-optimism can therefore become an issue, as does the possibility of ‘cutting corners’ just to keep a project moving forward.

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