Categories: General Market Commentary
Topics: General Market Commentary

The Abstract Art of Resource Estimation

By Joe Mazumdar

Recent news of problems with the grade reconciliation at Pretium Resources’ (PVG.T, PVG.NYSE) Brucejack underground gold project in northern British Columbia prompted us to figure out why investors in the mining sector are repeatedly faced with the nightmare of a problematic resource estimate.

In this article, with help from our friends at Lions Gate Geological Consulting Inc. (link here) and others that shall remain nameless, we delve into the much-maligned art of Mineral Resource Estimation and we offer some advice on how to avoid falling for all-too-common underperforming assets. If Bill Murray can do it, so can we.

(Reliving the nightmare waiting for Punxsutawney Phil)

As mentioned above, our review was motivated by the latest news from Pretium Resources which revealed disappointing ore grade reconciliation (75-80%) and production numbers at the Valley of the Kings deposit—within its wholly-owned Brucejack gold project—in northern British Columbia, Canada.

[Reconciliation is the process of comparing what was actually mined versus what was estimated. It can be both positive or negative; but the important issue is the magnitude of the difference.]

The news dropped the share price by ~40% and excised ~C$950 million from its market capitalization. Unfortunately, this is not an isolated case. There is no shortage of examples of resource estimates falling short of expectations despite the fact that reserves had already been declared.

In our discussion on Fatal Flaws in September 2016 (link here), we noted that resource estimates are a critical component of a project’s valuation and pose a technical risk that can kill a project if not properly carried out.

The calculation of a mineral resource is a fundamental part of a project’s evaluation and, ultimately, determines the worth of the company that owns it. The goal of the exercise is to generate a plausible depiction of how the economic fraction of the metallic mineralization is distributed in the ground by combining geology, or at least the interpretation of it based on limited information, laboratory results (assays), and statistics, (Fig. 1).

(Figure 1: Is that a hat or a snake that swallowed an elephant? Case in point: what’s going on with the gold mineralization at Eleonore?, Source: The Little Prince by Antoine de Saint Exupery and Goldcorp)

An independent Qualified Person (QP) is the person in charge of calculating the resources which are then categorized according to standards established by a governing body (in Canada, it’s the Canadian Institute of Mining or CIM) as Inferred (lower confidence, higher risk), Indicated (higher confidence, lower risk), or Measured (highest confidence, lowest risk). Only the two latter can be converted to reserves (Probable and Proven), which then form the basis of a pre-feasibility (PFS) or feasibility study (FS), whereas the former can only be used in Preliminary Economic Assessments (PEA), (Fig. 2).

(Figure 2: Relationship between mineral resources and mineral reserves, Source: CIM Standing Committee on Reserve Definitions [link here])

Easy enough; so, why all the mistakes?

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