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Mineral Reserves
National Instrument 43-101, Standards of Disclosure for Mineral Projects (NI 43-101), a rule adopted by the Canadian Securities Administrators (CSA) and legislated into law in Canada’s major securities jurisdictions, came into force on February 1, 2001. Following enactment of NI 43-101, much attention was focused on the disclosure of scientific and technical information in the mining industry, particularly mineral resources and reserves, and Micon received a number of queries about its application. One of the more interesting is the question of when is a reserve a reserve, or, in other words, when is something “economically mineable” for the purpose of reporting a mineral reserve?

NI 43-101 requires that issuers incorporated or organized in Canada, and with properties in Canada, report their mineral resources and mineral reserves using the Canadian Institute of Mining, Metallurgy and Petroleum (CIM) Standards on Mineral Resources and Reserves, Definitions and Guidelines as amended (the CIM code). The most recent version of this code was adopted by the CIM council on May 10, 2014. Other foreign issuers (issuers incorporated or organized in a foreign jurisdiction or organized in Canada with properties located in a foreign jurisdiction) may report their resources and reserves using the categories of the Australasian JORC Code, or other codes as set out in Section 1.1 of NI 43-101, provided that a reconciliation of any material differences to the mineral resource and mineral reserve categories of the CIM is filed with the Technical Report and certified by a Qualified Person.

The current CIM code definition of a mineral reserve states: “A Mineral Reserve is the economically mineable (emphasis added) part of a Measured and/or Indicated Mineral Resource. It includes diluting materials and allowances for losses, which may occur when the material is mined or extracted and is defined by studies at Pre-Feasibility or Feasibility level as appropriate that include application of Modifying Factors. Such studies demonstrate that, at the time of reporting, extraction could reasonably be justified.” The CIM code states that “Modifying Factors are considerations used to convert Mineral Resources to Mineral Reserves. These include, but are not restricted to, mining, processing, metallurgical, infrastructure, economic, marketing, legal, environmental, social and governmental factors.”

Beyond requiring the use of acceptable resource/reserve reporting codes, NI 43-101 provides little specific technical direction regarding the methodology for the estimation of mineral resources and mineral reserves. It is a set of standards covering disclosure of technical information, not a set of rules that tells professionals, in detail, how to perform their jobs. The onus is placed on the Qualified Person to conduct, his or her work as they see fit but adhering to professional and generally accepted industry standards.

The CIM provides general guidance on the interpretation and application of its code, but again is somewhat vague in order to allow the engineer and/or geologist the freedom to use his or her professional judgement. The CIM has published exploration and mineral resource and mineral reserve estimation best practice guidelines. The CIM code states: “Qualified Persons are encouraged to provide information that is as comprehensive as possible in their Technical Reports on Exploration Information, Mineral Resources and Mineral Reserves. The Mineral Exploration Best Practices Guidelines, the Estimation of Mineral Resource and Mineral Reserve Best Practice Guidelines provide, in a summary form, a list of the main criteria which should be considered when reporting Mineral Resources and Mineral Reserve estimates.”

In the companion policy to NI 43-101 the CSA notes “The Instrument does not specifically require the qualified person to follow the CIM best practices guidelines. However, we think that a qualified person, acting in compliance with the professional standards of competence and ethics established by their professional association, will generally use procedures and methodologies that are consistent with industry standard practices, as established by CIM or similar organizations in other jurisdictions. Issuers that disclose scientific and technical information that does not conform to industry standard practices could be making misleading disclosure, which is an offence under securities legislation.”

As to the question of what is economically mineable there are essentially two distinct (or end member) situations to consider: the existing mining operation facing no significant new capital expenditures, and a new project requiring substantial investment.

For an existing mining operation with already sunk capital costs (whether or not all of the capital investment has been paid off), the discovery of new mineral reserves defers closure expenditures and increases the life over which sunk capital can be amortized. The discovery of a new lens of mineralization may only require a short drift to access it, or a small amount of stripping or new push back to operate a satellite or expanded pit, using existing infrastructure and mobile equipment. Under these circumstances, the incremental capital investment may be minimal and the cut-off grade for reporting these mineral resources as reserves (after consideration of the Modifying Factors) will likely be the fully diluted grade that meets the full cash cost of production.

On the other hand, for a new project where significant capital expenditure is required and involving new environmental or legal liabilities, different decision criteria may apply. Most companies will want the new project to make a return on investment significantly higher than its cost of capital, and exceeding the returns available through investments associated with a similar degree of risk. These firms typically evaluate potential projects by discounted cash flow (DCF) techniques and generally have a target that the internal rate of return (IRR) from a project must meet. This ‘hurdle’ rate can vary greatly depending on the firm’s cost of capital and corporate philosophy. Hurdle rates can range between 5% and 15% in real terms.

For a new project, the cut-off grade used in a feasibility study to determine the mineable portion of the mineral resource will be the same as for an existing mining operation, that is, that grade that provides sufficient recoverable metal to pay the full cash cost of production, after consideration of the Modifying Factors. This ‘mineable portion of the mineral resource’ will be subjected to an economic evaluation and analysis. If, during an evaluation performed to at least a pre-feasibility level, DCF analysis shows that the project has a positive IRR that is above the hurdle rate, then the mineable portion of the mineral resource can be considered a mineral reserve.

But, what if the DCF analysis shows a positive IRR that is below the required hurdle rate? Can the mineable portion of the mineral resources determined in the study be called a mineral reserve?

NI 43-101 provides little guidance as to the economic criteria that should be used by mining companies when making an investment decision, although most stock exchanges have regulations about good corporate governance. Micon is of the opinion that if the IRR for a new project is positive, but below the particular company’s hurdle rate (that is, the company decides against the investment needed to proceed to production), then the term reserve should not be used. In marginally economic cases, a slight change in one of the assumptions (say, commodity price, process recoveries, treatment charges or exchange rates) can make the difference to the IRR. That being the case, the company may invest further in an attempt to improve the project economics. Alternatively, if the IRR of a project is below that company’s hurdle rate, but above the known or suspected hurdle rates of others, the project may be sold. What constitutes a reserve to one company may not be a reserve in the hands of another company, and if the new owner has a lower cost of capital, the project could achieve that lower hurdle rate and consequently be reported as a mineral reserve.