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Resource and Reserve
For all property types, asset value is a joint product of any potentially extractable mineral resources located under the earth’s surface and any invested capital that is used to extract this mineral resource. In order to perform a fundamental valuation of a mining company the amount of mineral reserves must be estimated. Given the importance to the mining industry to distinguish the definitions of Mineral Reserve and Mineral Resource, definitions are given here in full.
Mineral Resource is a concentration or occurrence of material of intrinsic economic interest in or on the Earth’s
crust in such form and quantity that there are reasonable prospects for eventual economic extraction. Portions of a deposit that do not have reasonable prospects for eventual economic extraction should not be included in a Mineral Resource. The location, quantity, grade, geological characteristics and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence and knowledge.
Mineral Resources are sub-divided in order of increasing geological confidence, into inferred, indicated, and measured categories as it is shown in Figure 4:
Mineral Resources can be estimated on the basis of geo-scientific information with input from relevant disciplines. The main message to take away from these definitions is that the most uncertain category of resources, Inferred Resources, is so uncertain and so unlikely to transfer one for one into more certain resources that no income projections can reasonable be made. The Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC) determine the chance of 10% or greater that mineralization is there for Inferred Resources. Indicated Resources would mean 50% or greater that mineralization is there and Measured Resources 90% or greater. As a result, Inferred
Resources have highly speculative value and are worth little per unit until upgraded to the Indicated or Measured categories through additional exploration work.
Mineral Reserve is the economically mineable part of a Measured or Indicated Mineral Resource demonstrated by at least a preliminary feasibility study. This study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate (at the time of reporting) that economic extraction can be justified. A mineral reserve includes diluting materials and allowances for losses that may occur when the material is mined.
See the text definitions of resources and reserves in Appendix 2
The JORC Code and Guidelines, found at http://www.jorc.org/jorc_code.asp, accessed date 12.06.2010
Mineral Reserves are sub-divided in Probable and Proven Mineral Reserves. The definitions of them are given in the Figure 5:
Mineral reserves, which are a modified sub-set of the indicated and Measured Mineral Resources (shown with the dashed outline in Figure 5), require consideration of factors affecting extraction, including mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors, and should in most instances be estimated with input from a range of disciplines.
Figure 6 is reflecting the relationship
between Mineral Resources and Mineral Reserves.
South African Mineral Resource Committee, found at http://www.geolsoc.org.uk/webdav/site/GSL/shared/pdfs/Fellowship/South%20Africa%20Code.pdf, accessed date 13.03.2010
In general, before an extraction program can begin, Resources and Probable Reserves must be “proven up” to the category of Proven Reserves, the most geologically certain category. This requires additional cost - expenditure on drilling (information gathering) at the site, which will make assets in the category of Resources and Probable Reserves less valuable then Proven Reserves. There is a significant premium paid for operating mines, where reserve and cost uncertainty has been reduced. According to major gold property acquisitions during the 1990s, Proven and Probable Reserves are valued at a 44% discount, Measured and Indicated Resources at an 83% discount, with no value being attributed to Inferred
Resources. The uncertainty surrounding the estimate of extractable reserve is called reserve risk.
Mining companies may also commence production from a deposit with only a small amount of reserves, in the hope that additional reserves will be discovered as mining proceeds. The Dome mine, owned by Placer Dome (and now Goldcorp) is a good example: it has now been mined continuously for 88 years and it has never had more than about 3 years mine life. As the mine has progressed underground, more of the vein has been opened up for mining; consequently the life of the mine has been extended.
Valuation of Metals and Mining Companies
Author: Svetlana Baurens in collaboration with the University of Zürich, Swiss Banking Institute and Prof. Dr. T. Hens