Earlier today Molycorp announced that the estimated proven and probable reserves at its Mountain Pass rare-earth deposit in California have increased by 36%, based on the SEC’s Industry Guide 7 for making such estimates. The company reported that its mining consulting firm estimates that the Mountain Pass ore body now contains the equivalent of 1.3 Mt in reserves of in-situ rare-earth oxides, with an ore grade of 7.98%.
The company’s press release included the following statement:
The SEC Guide 7 standard of measurement used by SRK measures proven and probable reserves. This standard differs from the NI-43-101 standard, used by virtually all other rare earth companies, in that the NI-43-101 standard measures a potential ore body in terms of “measured, indicated and inferred resources.” Under SEC Guide 7, “inferred” material is treated as waste and is not included in the measurement of reserves, while NI-43-101 standard allows for the inclusion of inferred material as part of a potential resource.
The press release goes on to state:
Inferrred [sic] resources is typically a much larger number in these estimates than measured and indicated resources.
A few comments:
- While it is indeed the case that Canada’s NI 43-101 standard uses the terms “measured“, “indicated” and “inferred” with relation to mineral-resource estimates, it also includes guidelines with regard to mineral-reserve estimates, providing for such estimates to be placed into the “proven” and “probable” categories, similar to those used under the SEC’s Industry Guide 7.
- Measured and indicated resource estimates (referred to collectively as ‘demonstrated’ resource estimates) may be converted to proven and probable reserve estimates if the parts of the mineral deposit that they describe, are found to be economically viable after rigorous investigation and analysis. Inferred resource estimates may not be included in the calculations used to convert demonstrated resource estimates into reserve estimates.
- Australia’s JORC code has similar guidelines for estimating mineral resources and reserves.
- Inferred resource estimates are indeed typically larger than demonstrated resource estimates, because the latter require more extensive drilling and subsequent analysis so that they can be determined. Indicated resource estimates give interested parties a higher degree of confidence in the associated data; measured resource estimates greater still.
- It is the case that there are very few rare-earth deposits out there, with a mineral-reserve estimate that conforms to a recognized standard. In addition to Mountain Pass, the only others of which I am aware, at the time of writing, are Bear Lodge (owned by Rare Element Resources), the Dubbo Zirconia Project (owned by Alkane Resources), Mount Weld (owned by Lynas Corp) and Nechalacho (owned by Avalon Rare Metals).
Companies trading on the Toronto Stock Exchange (TSX) are required to use the NI 43-101 guidelines when publishing their reports, and such reports are required to enter the public domain within a certain time period. Other companies operating in the junior-mining sector, but not listed on the TSX, may voluntarily write technical reports to the NI 43-101 standard; a number do, in order to enhance the credibility of their efforts. Molycorp has in the past had its consultants produce high-quality technical reports that would meet the NI 43-101 standards, which included mineral-resource estimates.
I have always preferred the NI 43-101 approach to mineral-resource classification over that of other schemes, because it seems to provide greater transparency on the early stages of mineral-resource project development, via a rigorous framework for the reporting of mineral resources that is missing under the SEC guidelines. I also prefer NI 43-101 to the Australian JORC Code, which companies trading on the Australian Securities Exchange (ASX) use for mineral-resource classification. This is not because of the technical standard for JORC (on which much of the original NI 43-101 was based), but because companies on the ASX are not required to publicly disclose the associated technical reports.
I’ve long felt that the SEC should amend its guidelines to incorporate language relating to mineral-resource classifications, similar to that contained within NI 43-101, to give US investors valuable early visibility into new projects being operated by US companies.
Disclosure: at the time of writing, Gareth Hatch is neither a shareholder of, nor a consultant to, any of the companies listed above.
Dr Robert Olson
Hi Gareth… Thanks for helping address the confusion that arises from looking at any one project through different regulatory regimes. I’m afraid that the terms themselves sometimes get in the way, and I get warier when superlatives such as ‘strictest of best’ are later applied.
Can I infer from your remarks (or MCP’s at least) that we’re maybe comparing resources under NI 43-101 with reserves under SEC Industry Guide 7. SEC reserves under Industry Guide 7 would be similar to mineral reserves under NI43-101 (using CIM Definition Standards), and as I understand NI43-101 does not permit inferred resources to be converted to reserves.
Any further guidance would be appreciated…. ian
@Dr. Robert Olson: thanks.
@Ian London: I think that we should first note that Mountain Pass has had proven and probable mineral reserves for a long time, having been first developed so long ago, compared to the rest of the non-Chinese rare-earth sector which has developed only relatively recently. The fact that of the three dozen or so rare-earth projects out there with mineral-resource estimates (based on either NI 43-101 or JORC guidelines), only five also have estimated mineral reserves, is a reflection of this fact – not an indication of some sort of limitation or deficiency in the NI 43-101 reporting system.
As you know, it takes time and money for inferred mineral resources to be upgraded to indicated and measured resources. It takes more time and money to be able to apply the economic dimension to those resources, to convert them to mineral reserves. But in time, these reclassifications do occur.
As for inferred resources – yes, inferred resources may not be directly converted to reserves. They must first be converted to indicated or measured mineral-resource estimates (i.e. more drilling, at higher densities) before such resources can be considered for conversion to reserves.
As always, thanks for sharing your insights.
A couple lines of thought and associated questions:
1) What do you make of the 36% increase? Did I understand the P.R. correctly that this is new information, based SRK’s completing its analysis of new drilling done in 2010? If so, it would seem that strictly from a “stuff in the ground” viewpoint (ie. ignoring Molycorp’s vertical integration efforts), the value of the Mountain Pass mine has significantly increased?
2) It seems to me obvious that a mine developed in the USA by a USA company would be measured using the USA’s (SEC) standard, rather than the one typically used by Canadian companies. We see NI 43-101 used frequently simply because Canadian (TSX-listed, or aiming to be) companies are developing most projects. Rather than intending to denigrate NI 43-101, maybe Molycorp merely tried to provide a simple comparison – and a bit of boosterism crept into their language. Can you see any evidence contradicting this line of thought and interpretation?
@G H: on your questions:
1) Increases in mineral-reserve estimates are of direct value, by the very nature of what a mineral reserve actually represents, compared to, say, a similar increase in a mineral-resource estimate, which only has indirect value. A mineral resource gives no indication of the economic viability of the deposit – only a mineral-reserve estimate can do that.
I think the only thing that surprises me about the reserve update from Molycorp is that they (or their consultants SRK) have maintained the same, relatively high cut-off grade as in the past. Given current technology, and the present value of rare earths, I might have expected them to lower the cut-off grade, which would probably have given them even higher reserves.
Mark Smith, Molycorp’s President & CEO, does however make a powerful point in the press release when he said that “[i]t is noteworthy that the cutoff grade of 5% used by SRK far exceeds the head-grades of most other known rare earth projects around the world, which underscores the unique richness of our ore body“. Mountain Pass is indeed a rich ore body.
One other comment on this: it is my understanding that companies may be taxed on their reserves, since they may be considered as real, tangible assets, so companies won’t want to get too carried away with upgrading resources to reserves.
2) You’re right of course, that it is to be expected for an NYSE-traded company to be measuring reserves to SEC standards. But if the intent was to “provide a simple comparison“, then clearly such a comparison fails, for the reasons stated above.
If the news release had simply referred to the fact that the vast majority of other leading projects have mineral-resource estimates only, and don’t have estimates of mineral reserves, then we wouldn’t be having this conversation. Such statements would be factually correct, and would demonstrate, as I commented earlier, just how well-established Mountain Pass is in comparison to other non-Chinese rare-earth projects.
What is it with the USA?
They always want it their way.
Then force companies to adopt their ways and their systems.
Frankly, from Moly I would not listen. They always seem to be looking for the edge. Why not just get on with it and produce REE’s and stop all the chest beating. LIKE China does!
For me the press release muddled the differentiation between “resources” and “reserves”. I am not familiar with SEC standards but it sounds the same in that inferred resources cannot be converted to any kind of reserve in both systems 43-101 does not allow inferred resource to be converted to reserves. You would have to drill inferred into at least indicated resource to be used in a reserve calculation.
One cannot compare resources to reserves. Presumably Molycorp has the rigorous economic studies (feasibility study level) completed to allow the conversion of the additional tonnage into reserves. It would be interesting to understand if their resource base has increased or if they have achieved more reserves by converting existing “inferred” resource into a higher classification (indicated or measured) by more detailed drilling.
I too ponder why they could not be operating at a lower cutoff. It is not misleading to report resources at varying cutoffs and as metal prices change companies can legitimately re-assess reserves if the economics allow it.
Perhaps the greatest difference between reporting in the US versus Canada is the level of disclosure required… not that Molycorp is doing anything wrong in this regard but quite frankly if the securities commissions don’t require you to report more fully then why would you? Focus on production rather than filing reports on Sedar! I do believe the Canadian disclosure requirements serve investors far better in this regard.
Gareth, in my judgment Molycorp is wrong in their emphasis that they use the highest standard. SEC Guide 7 (attached) is essentially the same standard but without allowing the designation of “inferred” resources, so it is a more restrictive standard, not a higher standard. The Guide 7 definitions of Proven (Measured) Reserves and Probable (Indicated) Reserves are essentially the standard industry definitions and the same as JORC or CIM (NI 43-101). Guide 7 does defer to state law or foreign law and, through general industry practice, has allowed the use of the term “mineralized material” (the SEC does not like the term “resources”), which is often generally the same as “inferred resources”, or, in more advanced projects, can include measured, indicated and inferred resources. Guide 7 is silent on any guidance as to how to define and classify the mineralized material. NI 43-101 rules guided by the CIM guidelines and definitions are the same as SME guidelines, which only allow proven and probable reserves to be derived from measured and indicated resources (a portion of the mineralized material). SEC Guide 7 is too limited in scope and the JORC or NI 43-101/CIM rules are definitely more valuable for investors. SME has attempted to influence the SEC to adopt its Guidelines for Estimating Mineral Resources and Reserves, which are essentially the same as JORC and CIM, but maybe because the US mining industry is such a small portion of the US GDP, there has not been any motivation for the SEC to do so.
Molycorp uses a cutoff grade of 5% TREO, and used a 4% cutoff previously. The cutoff grade is usually the economic cutoff, so it is puzzling that they either cannot or do not report reserves at a lower cutoff grade. Are their recoveries so low or costs so high that the lower grade material below 5% is not economic, or have they not completed adequate metallurgical testing on the lower grade material? These would be logical questions based on SRK’s reserves report.
Clear, concise and cogent contrasting of the codes. I sense that in the next few quarters a tipping point will become apparent separating the wheat from the chaff. Continuing the agrarian metaphor, as the frustratingly still low hanging fruits ripen, can you provide your insights on interpreting PEA’s, BFS’s and scoping studies with an eye to: “there’s never been a negative PEA”?
As to Don Ranta’s question in comment 8 about Molyorp’s use of 5% cutoff: Does this keep down the size of the reserves and thus taxes?
Jack, what do you think about the short attack in GW?
Jack, what do you think about the short attack on GW? Owen
Jack, what do you think about the short attack on GW?
Gareth, thanks for highlighting the issue of mineral resources vs mineral reserves. Responses by Don Ranta and others are quite correct. Most mining professionals (including, I suspect, the individuals at SRK who produced the recent MCP reserves calculations) would disagree that US SEC’s “Guide 7” is the world’s most rigorous standard. Guide 7 is, in fact, quite ambiguous compared to Canada’s NI 43-101, Australia’s JORC, RSA’s SAMREC and equivalent guidelines, which amongst other differences require endorsement of the reserves/resources estimates by a “competent person(s),” i.e. qualified mining professionals.
Mountain Pass has likely been drilled out and evaluated to the extent that most of its inventory of “resources” has either been qualified as economic reserves or classified as uneconomic. Thus, SEC’s non-recognition of resource classifications benefits MCP in comparison to its competitors whose less-advanced projects have not been investigated sufficiently to make the reserves/resources distinction. An over-simplified explanation of that difference is that “resources” must be adequately drilled (trenched, etc), analyzed for mineral content, geologically and statistically modeled to essentially a positive feasibility status, then integrated into the life-of-mine plan in order to be classified as “reserves.” However, for mining professionals and investors alike, a project’s resources are also vitally important, since those are the basis for the operation’s future ore reserves, subject to technical and economic parameters.
Most mining firms, even those based in the US with projects located only in the US, have already adopted NI 43-101 or equivalent standards in their reporting of resources and reserves, including only “reserves” in their required reports to SEC (e.g. 10-K’s) but including both in their other public technical documents. US professional organizations like SME and MMSA have recognized the inconsistencies in SEC’s guidelines relative to those of other industrialized nations and are actively lobbying SEC to catch up to their international peers.
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