A Tightening Of Reporting Standards Is Required To Help Investors Avoid The Geese That May Never Fly.
www.minesite.com
David Hall, executive director of Stratex, and non-executive chairman of Horizonte Minerals, argues in favour of a more rigorous application of reporting standards to help investors sort the geese from the swans.
At the end of last year, Charles Wyatt wrote, here on this website, that demand for metals and minerals should stay high in 2011, and that as a result, there would likely be a spate of takeovers and new listings. He sounded a word of warning, too, though. "A number of these IPOs will be geese dressed as swans in order to maximize profits for the founders in the shortest possible time. Investors who avoid the geese; are wary of rare earths; and keep a look-out for political risk should make money in 2011."
I believe there should be some fundamental changes in reporting to help investors with only a modicum of knowledge of the mining sector to work out which projects will truly fly as swans. The application of reporting standards does help, yet these for the inexperienced are hard to follow mainly because of the science/rationale behind them.
In my view there are three ways to improve the situation, and to show the pitfalls that may arise for investors: outlawing the use of metal equivalents, providing greater clarity in results as to the relative breakdown of oxide, transition, and sulphide ore, and the restricting the application of economic studies to inferred resources.
Assays released by companies as metal-equivalents are misleading and can imply a greater value than the true value. Using silver to make gold-equivalents and gold to make copper equivalents does not necessarily show true economic potential. Why? Because metallurgical recoveries can vary dramatically from deposit to deposit. Quoting a gold-equivalent based on silver and gold can be misleading if gold recoveries are 90% but silver only 50%. Likewise with copper-equivalents, whether it is a gold-copper-moly system or copper-gold only, the recoveries are highly unlikely to be the same.
But for many projects at the exploration results stage, metallurgical recovery information may not be available. That's why the JORC code states that "for many projects at the exploration results stage, reporting in terms of metal equivalents may not be appropriate.". My view is that it is not appropriate.
Next to assist in the evaluation process is the breakdown of results into oxide versus sulphide. As we know in the industry, there can be a huge difference in the metallurgy, the recoveries and the costs depending on whether you are dealing with an oxide ore or a sulphide ore. This is especially true of gold systems.
Many sulphide gold ores are refractory, or at least considerably more costly. It is standard to log bottom of oxide, and top of sulphide when logging drill core, and given that this is a matter of material importance to the viability of any mineralised system, this should be reported. The Pan-European Reserves And Resources Reporting Committee (PERC) code does state in reporting of exploration results that "should indicate the variability of each important mineral within the deposit." Surprisingly, though, the reporting of oxide versus sulphide is not a categorical clear requirement under current reporting standards, although in practice most gold companies do differentiate when they are reporting.
Lastly, there should be a far more rigorous approach to the application of scoping studies on inferred resources. Time after time we read of companies undertaking scoping studies using assumptions that would be far more appropriate for reserves, but applying them instead to inferred resources that may never even convert or at least only in part to indicated and measured resources, let alone reserves. Inferred resources are that part of a mineral resource for which tonnage, grade and mineral content can be estimated with a low level of confidence. It is inferred from geological evidence and assumed but not verified geological and/or grade continuity.
The PERC Code states: "inferred mineral resources may only be included in mine design, mine planning and/or economic studies provided that there exists a mine plan and a statement of mineral reserves".
It goes on to state: "for avoidance of doubt, it is reiterated that caution should be exercised if this category [inferred] is considered in technical and economic studies. At the discretion of the Competent Person, a Company may include all or part of its Inferred Mineral Resource for the purpose of internal planning, scoping or strategic studies. Any such reliance on Inferred Resources should be made clear in the report. In such circumstances, the results are not considered to be sufficiently reliable to ensure that all of the Inferred Resource will eventually become a Mineral Reserve".
The JORC Code states, "confidence in the estimate of Inferred Mineral Resources is not usually sufficient to allow the results of the application of technical and economic parameters to be used for detailed planning. For this reason, there is no direct link from an Inferred Resource to any category of Mineral Reserve. Caution should be exercised if this category is considered in technical and economic studies".
So the message here is: treat with extreme caution. But would it not be better just not to allow such studies? Even though the goose may be white and look like a swan there are many reasons why it may be the ugly duckling for ever. Unfortunately, even the use of Competent Persons Reports does not fully inform the market as to whether the project is a goose or a swan.
They should do. But can anyone claim to have seen a negative CPR report or, for that matter, a negative 43-101? No, because they can be equally geese disguised as swans as long as you pay the "fancy dress" fee.
In conclusion there is still a lot the relevant authorities can do to protect the investor. Investors can also help themselves seriously looking at the directors and management and the company structure to see if the founders are setting it up to list and run, and leave some unwary shareholders holding a "dead duck".
