1. Management of mineral exploration risks
a balancing act for mineral resource companies
This series of granite boulders illustrates five things a mineral resource
company should do or have, in order to eventually acquire a bankable
feasibility study for its mining project. Cormac Lloyd
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2
3
4
5

2. Five layers of investor confidence in a mineral deposit
Inferred
Mineral
Resource
no ore reserve
Indicated Mineral
Resource
Probable Ore
Reserve
Measured Mineral
Resource
Proved
Ore Reserve
Work
programmes
Feasibility study which can form the
basis for a final decision by a
financial institution to finance the
development of the ore deposit for
mineral production
Highest degree of confidence
in the exploration data is
achieved through the
exploration expenditure and
elimination of uncertainties
surrounding a mining project
Economic Viability
Phase III report
on geo-scientific
confirmation work.
Technical
feasibility
Grant of exploration
licence
Phase I report
on geological
Investigation
Phase II report
on geological
exploration
…using mineral resource and ore reserve estimation under the JORC Code
reliable exploration
sampling and testing
information gained at
locations so spaced that
mineral resource
continuity and grades
are confirmed.
reliable exploration
sampling and testing
information gained at
locations so spaced that
mineral resource
continuity and grades
can be assumed
gathering information
from or in records of
samples at locations
such as outcrops,
trenches, workings, pits
and drill holes. This
data may be limited or
have uncertain
reliability.
exploration expenditure to build
confidence in the mineral resource
and its continuity, with initially
more restrictions on reporting
development expenditure to establish the grades and
tonnage of ore reserve, by eliminating modifying factors.
Reports based on technical and economic parameters
can be made.
• cut off grade, likely
mining dimensions,
location and continuity of
resource
• mineral processing
recovery factor uncertainties surrounding a
project are factored in but
not eliminated
Phase I $ Phase II $ Phase III $

3. Step 1: Examine the regulatory framework for carrying out
works programmes and pursuing a mining project
o Check the licence documentation issued against the form in which it is held in its office of origination.
o Check that the published version of the licence is the same as the licence issued.
o Consult an expert lawyer on mining title issues e.g., if exploration rights are granted, what are the
future rights of the licence holder to apply for and obtain exploitation rights.; position when grant/
renewal of licence has not been published in the prescribed manners or other errors 9such as co-
ordinates given in the grant
o Consider the period of the licence and the expenditure commitments on the licence holder e.g., the
amounts and periods for budgeted exploration expenditure may not comply with them.
o Consider the range of issues affecting continuing validity of the licence (including anti bribery
legislation in the country of incorporation of the licence owner’s parent companies, before and after
an acquisition) and the impact of conditions of the licence on an estimation of an ore reserve
“Defect in Mining Title” means any circumstance , without limitation to circumstances leading to enforcement of regulations by the authority issuing
the Licence, caused in whole or in part by a matter occurring on or before Completion and which, applying the test of a reasonable possibility at any time
on or before Completion, may then or thereafter:
(a) invalidate, reduce or adversely modify or the Licence, its area or boundary, its terms and conditions or its period in relation what is set out in the
form thereof set out in Schedule 1;
(b) prevent the Group enforcing or impair its right to enforce any right or power conferred on the Licence holder; or
(c) cause:
(i) a forfeiture, cancellation, compulsory acquisition or seizure of the Property; or
(ii) an involuntary transfer or creation for any third party of any direct or indirect interest in the Property or
the Project or
(iii) the holder of the Licence:
(A) not to become entitled to exercise; or
(B) not to be entitled to obtain by application to the relevant authority,
rights to carry on Mining within or in relation the Licence Area; or
(d) bring about a Material Adverse Change to the basis of the assessment (as set out in the Disclosure Letter)
by the Consultant Geologist of the [Proved and/ or Probable Ore Reserves] within the Licence Area.
A decision by a competent adjudicating authority or enactment of legislation by a governmental authority having the same or
other similar effect to any of the above shall be sufficient proof of the existence of such matter, whether it occurs before, on or after the date
Completion, provided it arises from a matter in existence at or before Completion

4. Difference between a mineral resource and an ore reserve
A conversion of a mineral resource into an ore reserve makes a deduction to eliminate metallurgical losses and other “above
ground” uncertainties.
.
o The “Australian Code for Reporting Exploration Results, Mineral Resources and Ore Reserves”
2004 (the “JORC Code”) defines an ore reserve as “an estimated tonnage and grade which in the
opinion of the geoscientist making the estimates can be the basis of a viable project, after taking
account of the relevant modifying factors”. These are uncertainties arising from mining,
metallurgical, economic, marketing, legal, environmental, social and governmental factors.
o An ore reserve is a different thing to a mineral resource: (i) The mineral resource gives an
estimate (with one of three progressing degrees of confidence) of the tonnage and grade that has
“reasonable prospects for eventual economic extraction”. (ii) The ore reserve assesses at the
date of reporting the economically mineable part of a corresponding mineral resource, with
allowances for diluting or contaminating materials and losses which may occur when material is
processed on the surface, and for other modifying factors. (iii) “Mining” is a wider term than
“extraction”, because in addition to taking a mineral resource from ground it involves “producing,
beneficiating, handling, milling, smelting, refining or other processing of mineral products and the
performance of all reclamation obligations in respect thereof”. (iv) The dilution of the mineral
resource tonnage in a statement of a proved ore reserve MUST proceed from an elimination of
the uncertainties imported by the modifying factors.
o Option analysis of alternative beneficiation projects falls outside the capability of most
professional geologists. Other disciplines such as mining, metallurgical or chemical engineering
need to be involved in estimating a proved ore reserve. In an estimate of a probable ore reserve
the report must address the extracted ore dilution, contamination or loss factors common to the
range of mining methods available for a project. Otherwise it is not obligatory for this report to
resolve the uncertainties introduced by modifying factors to a statement of a probable ore reserve.
o When an inferred ore resource is estimated, there is an insufficient degree of confidence in
delineation of the mineral resource to site a mining project. An ore reserve, therefore, can never
be identified from an inferred (but not indicated) mineral resource. Equally a proved ore reserve
cannot be extracted from an indicated mineral resource. It is possible, however, for a probable ore
reserve to be extracted from a measured mineral resource, provided that part of the tonnage in
the mineral resource is not also transferred to a proved ore reserve.

5. Case study on the effect of modifying factors
The following great dyke mining project involved a very expensive failure to count rock fissures
appearing in drill cores, and to report on the economic impact of likely rock conditions, for
consideration in the context of licence negotiations.
• Within the great dyke in Zimbabwe platinum group minerals occur within a saucer
shaped sulphide zone, which has a vertical cross section about the same size as
a large hand span. Unlike chrome seams this mineralisation is not visible to the
human eye. As a result all the rock blasted in a new trial mine had to be brought
to the surface, for all of it to be processed through a base metal refinery and
converter which had just been installed (with a smelting plant to follow).
• Great care was taken by the operator, as the world’s largest mining company, in
designing the trial mining methodology, because it had not worked an
underground mining project for many years. About two miles away, along the
outcrop of the sulphide zone, an incline shaft had been opened 20 years earlier,
which was closed after 150 meters, because of falling rock conditions.
• Consultants in the region produced a mining plan to use vertical shafts and then
access stopes, where blasting would create overhangs with enough space for
miners to enter in a squatting position. The mining engineers examining this
proposal must have looked at drill cores to get a view of rock conditions along the
sulphide zone below the trial mine. They assumed the ore would be concentrated
at the surface and exported in a matte to South Africa for further beneficiation, to
produce platinum, rhodium and palladium.

6. • The operator of the trial mine company did not follow the normal route to obtain mining title.
Instead it took over a year to negotiate with the terms of a special mining lease with the
Zimbabwe government . The government’s condition for granting special fiscal incentives for the
mining operation was the maximum possible expenditure commitment. This involved
commissioning a new base metal refinery, converter and platinum smelter, so that no
beneficiation of mineral products from the mine would take place in South Africa.
• By the time trial mining was in progress, nearly US $290 million was spent, mainly in installing
plant To the consternation of the project’s geologists, twice the amount of rock reached the
surface to what they expected from the mining study. The increase in operating costs meant
that the expensive beneficiation project became uneconomic. As a result the plant was
eventually moth-balled and the operator withdrew from the project, with no recovery of a huge
capital outlay.
• Applying the JORC method of estimation the statement of mineral resource for the project was
sound, because one of the two mutually exclusive routes for beneficiation would lead to
economic extraction. The probable ore reserve, however, was dependent on which of those
routes was followed. When the special mining lease was granted, the estimation of an ore
reserve disappeared, because the licence only allowed for local beneficiation of extracted ore
and its mineral products.
modifying factors…

7. Relationships set out in the IMMM Reporting Code
prepared by the Institute of Materials, Minerals & Mining - UK and Ireland, October 2001
Exploration Results mining study
Mineral resources
reported as potentially mineable
mineralisation
Mineral reserves
reported as mineable
production estimates
(i) INFERRED
(ii) INDICATED PROBABLE
(iii) MEASURED PROVED
consideration of mining, metallurgical, economic,
marketing, legal, environmental, social and
governmental factors affecting extraction
modifying factors
increasing
level of
geological
knowledge
and
confidence

8. Step 2 : Fix the works programme and select an appropriate reporting expert
in order to fulfil the applicable reporting objective
A geoscientist practises the art of building confidence in a statement of a mineral resource having
a reasonable prospect of eventual economic extraction and then eliminating uncertainties in a
statement of ore reserves, though a pre-feasibility report for a project to mine a mineral resource.
o Reporting of estimates occurs in stages, in step with completion of programmes of work and with
different levels of confidence in the estimate produced by a report. Programmes of work should not
be prepared simply to report exploration results, but make an expert estimation of an mineral
resource within a licence area and/ or an ore reserve for a mining project (see the second slide).
o Different types of investigation, exploration and confirmation are required, depending on what
should be reported on at the end of a work programme. It would not been a sound practice to incur
expenditure on reducing the spacing of exploration locations (in order to report an indicated mineral
resource based on reasonable assumptions taken as to the mineral resource continuity) when no
report has been made of a consulting geologist’s estimate of the inferred mineral resource.
o Using a geologist with local experience and knowledge of historical data is a sound policy when the
target is to estimate an inferred mineral resource (before economic viability is considered in the
next phase). This does not necessarily remain the case during the next phase of work, when
continuity of the mineral resource needs to be worked on. During this second phase, better quality
information should be obtained from more closely spaced locations, via reliably controlled sample
handling and laboratory facilities.

9. Step 3: Confidence in the quality of experience and organisation of
teams collecting data, analysing exploration results
and undertaking a mining study
Quality of experience = awareness of problems affecting data reliability and risks posed by
modifying factors, through a competent person with a minimum of
five years experience relevant to the type of mineralisation and
deposit involved.
Quality of organisation = clear division of responsibilities under leadership of a
project leader with communication lines and a budget controller
exploration results + analysis of those results + work on modifying factors
Mining study
Resource estimation
process
Collecting data Licence work
overall responsibility
budget responsibility

10. Step 4 : Have a realistic budget prepared which is funded for the current works
programme
o An investor in a mineral resource company will only decide that past expenditure has added value
to its investment, when a report is made which uplifts the resource in terms of its qualities and/or
quantity. The trading stock of such a company is the cash it has or can raise to achieve its next
reporting objective. Like any other current asset this financial resource must be sufficient to
effectively complete the current work programme.
o Being able to complete a works programme and uplift the quality and quantity of the mineral
resource is an essential element of a proposal by a mineral resources company to raise funds.
Following a share placement, the company should have access to sufficient working capital for its
next twelve months of operation. Without preparation of a budget to forecast the exploration
expenditure requirement, investors will not be prepared to invest matching amounts of cash.
o In a dead-locked joint venture, where parties have different exit strategies, a difficult situation may
develop, with one party wanting to sell its equity share in the value of an inferred mineral resource,
whilst the new investor intends to uplift the value to that of an indicated mineral resource. The best
solution, at the outset, is to avoid conflict over funding works programmes, through an agreement
for the new investor to fund an earn-in budget, which the other owner will not have to contribute to.

11. Step 5: Discipline and transparency in reporting
o All the codes for reporting exploration results, mineral resources and reserves emphasise discipline
and transparency when reporting, through use of standardised terminology and practices.
Country (ies) website address Key features
Australia www.jorc.org/ JORC was the first and is regarded in the southern
hemisphere as the leading reporting code. Guides are given
as to what is meant by “eventual economic “ extraction.
There is no fixed definition of the phrase “economically
mineable”.
UK and Europe www.geolsoc.org.uk/ Definitions on the levels of confidence for indicated and
measured resources are based on forensic standards of
proof e.g., there must be no reasonable doubt for a
statement of a measured resource.
Canada www.bcsc.bc.ca/ There was greater concern in the Canadian Code (which is
about to be replaced) over establishing resource and grade
continuity.
US www.sec.gov/divisions/co
rpfin/forms/industry.htm
The SEC’s Industry guideline 7 is the most concise reporting
code. The only categories recognised for reporting purposes
are proved (or measured ) reserves and probable (or
indicated) reserves. A distinction is drawn between
exploration companies, development companies and
production companies.
South Africa http://www.venmyn.co.za/f
iles/samrec.pdf
The SAMREC Code follows JORC. It has more specific
definitions of coal resources.

12. … reporting
o In November 2009 The London Stock Exchange imposed a £600,000 fine on an AIM admitted oil and
gas exploration company for failing to take “reasonable care to ensure that the information it notified
during the relevant period regarding a prospect was not misleading, false or deceptive and did not omit
any information likely to affect the import of the notifications”.
o The AIM Disciplinary Committee mentioned that one of the breaches of AIM Rule 9 had arisen from
” focusing on the higher end of expectations, without adequate explanation of this fact”. Because
geologists are most of the time involved in programmes designed to a reach a lower level of
expectation in estimation of a mineral resource (before embarking on the next programme to achieve
the higher level) publicly traded mineral resource companies are exposed to this reputational risk.
o Section 18 of the JORC Code and section 20 of the SAMREC Code give the following guidance on
reporting of data and information generated by exploration programmes before the mineral resource is
reported on :
“It is recognised that it is common practice for a company to comment on and discuss its exploration in
terms of target size and type. Any such information relating to exploration targets must be expressed so
that it cannot be misrepresented or misconstrued as an estimate of Mineral Resources or Ore
Reserves. The terms Resource(s) or Reserve(s) must not be used in this context. Any statement
referring to potential quantity and grade of the target must be expressed as ranges and must include (1)
a detailed explanation of the basis for the statement, and (2) a proximate statement that the potential
quantity and grade is conceptual in nature, that there has been insufficient exploration to define a
Mineral Resource and that it is uncertain if further exploration will result in the determination of a
Mineral Resource.”