Ore reserve estimates can cause tons of confusion

There is, perhaps, nothing more fundamental to mining than ore reserves, yet, at the same time, there is no other single item in mining that causes so much argument, disagreement and outright confusion. Imagine a new mine with detailed engineering, extensive research and design of a processing facility, involved in the lengthy process of permitting and negotiating financing of hundreds of millions of dollars and yet being unclear about its ore reserves.

Yet, this is not an uncommon scenario; when The Coopers & Lybrand Consulting Group staff members are called upon to examine a mining operation that has run into trouble, they frequently find that the projected tonnage is not being produced and/or the grade of the mined material is less than was anticipated in the design of the process plant.

Not enough tons and lower grade — the bane of any mining operation. Since the ore reserves on which the enterprise was based stated definite tonnages and associated grades, what went wrong? Clearly, there is a lack of understanding of what is an ore reserve.

What are ore reserves? The concept has been an evolving one, the major problem being differing meanings of the term “ore reserves” to different users of the term. As early as 1945, S. G. Laskey had a clear concept of the problem:

“To the executive heads of the (mining) industry reserves represent the store of natural raw material upon which profitable enterprise might be built; but to the mine superintendent, or other person whose job it is to mine a specified number of tons a day, reserves are more tangible stuff, occupying specified positions in space and embodying daily problems of mine operation. To the tax agency reserves are primarily a special kind of taxable property. To the commonwealth at large, ore reserves represent a basic resource necessary to our national welfare and safety. To the government, which represents and puts into operation the dominant political philosophy of the time, reserves are this and something more as well; and to different individuals within the government they represent specifically as many different things, almost, as there are different commodities perhaps or different fields of interest.” Understanding the concepts

Today, we have much better tools to determine ore reseves, but somehow our understanding of the concept has not advanced nearly as much.

Definitions of ore reserves abound, and the various ones in use as promulgated by securities commissions, government agencies and other organizations, will not be listed here. Simply put, the current understanding of ore reserves from an industry point of view is “mineral-bearing material that can be profitably extracted or produced”.

An ore reserve, therefore, is the tonnage and grade recoverable by mining from a mineral deposit. As such, it must include an allowance for mineralized material that will not be extracted from the ground for various technical and other reasons such as support pillars, barriers, limitations of the particular mining method, etc. Ore reserves, from a practical standpoint, therefore, compromise recoverable material. This reduces the geologically h calculated “in-situ” resource tonnage.i

Similarly, it is practically impossible to mine in such a fashion as not to, include material of lower or barren grade adjacent to or within what is desired to be extracted. Thus, the ore grade must include an allowance for dilution in order to provide the correct grade of the material leaving the mine to be fed to the processing facilities. (Obviously, too, dilution increases the tonnage.) Reserves are cost determined

Assuming technical feasibility, ore reserves are essentially cost determined. To calculate ore reserves, all costs to produce a saleable product must be considered. These costs include capital costs (investment, operating capital, debt servicing etc.) and operating costs (mining, processing, waste disposal, etc.) as well as marketing and reclamation. Only if a unit of mined material can support all these costs and produce an excess of revenue, can it be part of the ore reserve.

One function to be considered in the determination of ore reserves, often given insufficient attention, is marketing. Not only is there a cost associated with selling the mined commodity (whether it be raw ore, concentrate, metal or some other form), but the ability to sell the product at the forecast price is vital. There is no sense in producing something, even at very low cost, if no one wants to buy it. Being able to produce tons pounds, has no point. A corresponding factor that must always be kept in mind is that significant new sources of any commodity tend to lower market price.

The effect of price on ore reserves has been dramatically demonstrated during the recent prolonged period of depressed commodity prices. In the case of base metals, one wonders how many mines in North America actually have any ore reserves] A practical illustration of the ore reserve-price relationship can be seen in the South African gold mining industry where government regulation requires a mine to extract ore at the average grade of its ore reserves. Thus, when the price of gold drops, the ore reserves will shrink and the average grade of these reserves will increase. Conversely, a rise in the price of gold causes ore reserves to expand but the average grade thereof decreases.

In summary, “ore reserves” is an economic term. It must include consideration of mining recovery and mining dilution factors, as well as processing, marketing and other considerations. All costs involved in producing a saleable mineral commodity must be included in the calculation. These costs include such often ignored items as waste disposal and reclamation.

The following definition of ore reserves, proposed by the writer in 1983 (and the subject of much heated discussion]) goes a long way towards a clarifying what ore reserves are. It should reduce much of the technical and f financial grief of concern to all interested in the maintenance of a i profitable and viable mining industry:e

Reserves … That which, at the time of determination and under defined investment assumptions, could be economically extracted and treated to s produce a marketable product. Reserves imply that a mining plan, at least on m a conceptual basis, has been applied and found feasible; that the amount of n reserves and the grade thereof include mining extraction losses and mining dilution; that the technology for extraction and treatment exists; and that o all the technical aspects and costs of production to a marketable product l have been considered. Mr Grace works for Robertson & Associates, Toronto. This article is reprinted from The Mining Letter, published by the Coopers & Lybrand Consulting Group.