Investors beware: mining resource estimation methods give inconsistent results

Posted on | July 27, 2012 | No Comments

After the Bre-X scandal in 1996, when fake measurements of gold wiped out billions of dollars in shareholder value of the Canadian mining company, the mining industry developed new standards for measuring mineral resources. While they are a vast improvement, the words and methods the industry uses to describe resources still leave room for the un-initiated to be misled.

Resources are determined by independent geologists called Qualified Persons, or QPs, according to the standards.  They describe the “measured,” “indicated” and “inferred” resources.  The trouble is, different Qualified Persons, can come up with very different numbers.

In April this year, Endeavour Silver purchased the El Cubo mine from Aurico Gold.  Shortly afterward Endeavour looked at Aurico’s data and updated Aurico’s resource estimates (see Aurico’s 2011 annual report). There were significant drops in Endeavour’s estimates of measured, indicated and inferred resources compared to Aurico’s, using the same data.

The words “measured,”, “indicated,” and “inferred” can be misleading because, although they rely on measurements, are not themselves measurements.  They are estimates based on measurements, or more accurately, they are inferences, in the sense that a scientist makes an inference based on data and background information.  Furthermore, different QPs can use different techniques to make their inferences.

The three ways of describing the mineral resources divide up the resource into portions. A “measured” resource is that part of mineral resource in which a QP estimates the quantity, density, shape, and grade of a mineral with a high level of confidence.  It is based on the resources’ geological and grade continuity. An “indicated” resource is estimated with a reasonable level of confidence. The spacing of the mineral samples is insufficient to confirm geological and grade continuity, but good enough to assume it.   An “inferred” resource is estimated with a low level of confidence because of the lower quality information about grade continuity.

The Canadian Institute of Mining says that the “industry practices employed by qualified persons vary since different qualified persons will estimate and classify a mineral resource estimate for the same mineral project using different techniques.”

The measurements that go into these estimates depend on the drilling and sampling density, the drilling and sampling methods, assay quality and many other factors. So no two QPs will have the same set of data from which to estimate the resources from two different mines.  This makes perfect consistency between mines hard to achieve.

What about consistency for the same mine? A desirable feature of scientific inference is that two people, with the same data and background information should make the same inference with the same confidence.  Probability theorist E.T. Jaynes said that an ideal inferential robot should always reason consistently, meaning that with the same evidence and the same state of knowledge in two problems, it will reach the same conclusions.

When Endeavour looked at Aurico’s data, it used more “conservative estimation parameters,” consistent with those it used in some of its other mines, than the parameters used by Aurico.  They got the different results shown in the table.

No matter how qualified they are, QPs do not reason like an ideal inferential robot. The new standards of disclosure are an improvement, but investors should be sure they know what they mean.

© 2012 Greenbridge Management Inc.

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