A Basic Guide to Becoming a Gold-Digger in the 21st Century: Part 2 of 3

In part 2 of 3, Jennifer Schell an Investment Advisor at CIBC outlines some standard terms you will come across when evaluating a mining project.

By Jennifer Schell, B.Comm, MBA

Investment Advisor

Some Dig it, We Drill it!

I’m frequently asked why I have such a youthful glow to my skin.  “What’s your secret?”: they always inquire.  To the horror of ‘helicopter’ parents everywhere, I explain that my Dad is a geotechnical engineer and he designed mining tailings sites.  Back in the day, he used to bring my sister and I to his site visits, regularly.  Before toxins and pollution were of major concern, we used to play in the giant tailings, sand dunes which were comprised of uneconomical waste rock.  Therefore, I guess you could say that I was “resourceful” with my skincare regime.  

The objective of a junior mining company is to convert Mineral Resources to Mineral Reserves. With every step, when new data and research is obtained, the resource is modified into the next stage of the process.  

Mineral Resources: Geological Evidence and Sampling has been done to confirm that solid material exists to be economically interesting to extract from the Earth. Mineral Reserve: Mineral Resources that have been converted to reserves by doing more detailed and extensive studies, under the blessing of the Qualified Person.
Inferred Mineral ResourceThere is some evidence to support grade and quality but more exploration is needed for confirmation.   Needs more work to morph into the next category.

 *Only used in the Pre-Economic Assessment (PEA)

Indicated Mineral ResourceThe physical characteristics, such as density and shape are modelled. This is where the qualified person (QP) comes in.  At this stage, the resource can be used for the Pre-Feasibility Report. Probable ReservesIt’s economical, but there are some reservations or “unknowns.”  These have to be explained by the QP.
Measured Mineral ResourceAt this point, you have enough information to start designing a mine. Proven ReservesIt’s predictably economical!

 

Every time a mining company publishes news to the public regarding their Mineral Resources, Mineral Reserves and Mining Studies, they have to be up to the Standards of Disclosure for Mineral Projects, called the (National Instrument 43-101).  1 The National Instrument 43-101 is a Canadian set of rules and guidelines to ensure that mining companies report their results in a transparent way to the capital markets.  It ensures that proper scientific methods and that “Qualified People” (QP) assess the results.  These people are the overlords of the mining project and they are generally geologists and engineers with professional designations and are qualified with over 5 years’ experience.  This technical reporting is a big deal.  It verifies the validity of the resource to ensure that sneaky people don’t shave down their ex’s gold jewellery and melt it onto a core sample.  

Good news makes the stock price rise and so you should be on the lookout for the following events to occur within the mining pipeline:

A Series of Fortunate Events: Mining Pipeline
Environmental Study In Canada, mining and the resource industry in general, are very important economic drivers for the economy.  It’s also very important that these companies operate in a socially responsible way. Although there is always room for improvement, as a country, we are lucky to have some of the highest environmental and safety standards and there are many benefits to the communities surrounding these projects. Before the project can begin, the team must consult with the First Nations communities and provide the ministry of environment with a satisfactory plan that any pollutants will be managed and contained. Licensing and permitting are also obtained during environmental due diligence.  
The Pre-Economic Assessment The PEA accompanies Mineral Resources.  It’s a pre-economic study to see if the project is worthwhile pursuing before the real spending begins.  The Pre-Economic Assessment discusses everything in terms of Resources and this is the only report where you are allowed to include the Inferred Resources into your calculations.

Proven Reserves are actually there, Probable Reserves are most likely there given the calculations and data, while Inferred Resources  are there in an ideal world.  If you find more resources than the inferred estimate, the stock price can rise but keep in mind that technical reports must be validated by the qualified person before they can become actual “Mineral Reserves.”   

The success of the mining project depends on the assets that are in the ground and how capable management is to assemble a process to make its extraction cost effective.  After, there is a feasibility study to discuss the capital costs involved in the development of the project into a mine.

Drilling

Companies will usually have a colourful map of their property with a legend showing their drill holes, often represented by  red dots.  The good ones with the most probability for gold are called “targets.”  They also draw horizontal and vertical lines through the holes. When they drill, they often drill on an angle.  Drill holes, although they seem quite simple in theory, are actually very pricy and can cost about $100,000 to drill one hole of core.  So, you have to be very precise where you choose to drill, or you could spend millions of dollars for nothing.

Metallurgy Report   

This section often gets overlooked, but it is very important.  You can have the best gold reserves in the world, but if you can’t separate the gold effectively from the rest of the surrounding rock, then the project may no longer be feasible.  

For clarification, rocks are made up of minerals, which are inorganic, naturally occurring solid substances. In mining, ore refers to minerals (such as metals) that are economically valuable and can be extracted profitably. The ‘gangue’ minerals are everything else.  They are essentially economically worthless minerals that surround the ore.

Once chemicals have been used to separate the gold from the other minerals, there is often heavy metal waste.  Also, some naturally occurring toxic elements exist with the gold in the earth’s crust, such as arsenic.

Fortunately, new technologies are being developed because mining is crucial for the inputs to create all that we love: including cell phones, cars, planes buildings etc.  There is a very cool science called 2bioremediation,  “that uses bacteria to remove the noxious ions from the environment.”  If you’re environmentally conscious, I encourage you to look into it.  

For gold recoveries, consensus prefers a rate of recovery of 75% or better.

Resource Estimation

Calculating the Production Rate for your Discovery

The economic feasibility of the project depends on the Production Rate of the project.  

Some Notable Benchmarks:

  1. Drill Results: a grade of +2.00 g/t over at least 1 metre in diameter. There is some method to the madness of drilling.  Usually, the geologist plots drill holes to identify the structure of the deposit.  There will be an average grade over a series of metres and this should also be 2.00g/t.
  1. Depth: An open-pit resource should ideally be located 200 metres or less and an underground mine should be no deeper than 500 metres.  There are some successful mines that are deeper, but they require additional construction and this will reduce the cost effectiveness of the operation.
  1. At least 500,000 ounces of recoverable gold (Au) over the life of the project. The reports usually break down the tonnes (t) and the grams per tonne (g/t).  You might have to calculate the ounces (oz) yourself.  This is how you do that:

The Formula is:

Tonnes (Mt) X Grade (grams/tonne) / Conversion factor to Troy Ounces  31.1035  = Ounces (Moz)

  1. Ideally, the mine life should be at least be 5 years at a minimum.
Pre-Feasibility Study also called (Preliminary Feasibility Study) 1This is the minimum prerequisite for the conversion of mineral Resources to Mineral Reserves.  At this point, management has determined the preferred mining method – either open pit or underground mining and pit configuration.  The mineral processing method is also established, meaning that the way they extract the gold from the ore will be identified.  There is also a financial analysis to assess the costs of the operation.  Everything has to be ready so that a “Qualified Person” can take a look at the work and rightfully determine if these Mineral Resources are worthy of conversion to Mineral Reserves.  
Feasibility Study 1The feasibility study is highly technical and has a lot of economic studies done to determine the appropriate development option for the mineral project.  It determines if it is worth the investment in the ground, for additional drill holes and eventual development to make the project feasible to sell into the market.  At this point, things get real and the resource is essentially audited by a professional to confirm that all of the resources are actually there as stated.  This stage is imperative so that they can get institutions to provide them with financing, which requires sound capital structure.

 

These figures were provided by the mining executives that I’ve met over the last couple of years and can be used as a reference point for evaluation.  All projects are unique, so there is likely to be some deviation from the benchmarks.   When necessary, further research into the project may be required.

References:

1 www.cim.org,  The Canadian Institute of Mining, Metallurgy and Petroleum

CIM DEFINITION STANDARDS – For Mineral Resources and Mineral Reserves,

Prepared by the CIM Standing Committee on Reserve Definitions, Adopted by CIM Council on May 10, 2014, 10/18/2017

 

2 Muibat Omotola Fashola,1 Veronica Mpode Ngole-Jeme,2 and Olubukola Oluranti Babalola1,*

Yu-Pin Lin, Academic Editor,  Heavy Metal Pollution from Gold Mines: Environmental Effects and Bacterial Strategies for Resistance, 13(11): 1047., Int J Environ Res Public Health. 2016 Nov; PMCID: PMC5129257; Published online 2016 Oct 26. doi:  10.3390/ijerph13111047; P.2,10/18/2017

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