Resources: Inferred Mineral Resource

The first step is to complete an inferred mineral resource, this is where you're trying to get an estimate of the quantity and the quality (i.e. the grade of a body of rock), which is based on relatively limited geological evidence. For an inferred mineral resource, you need to have the evidence to imply but not verified geological and grade continuity. These are definitions that you can look up in the CIM, including all the JORC standards. Essentially, we're trying to demonstrate that by taking a sample at point A, which shows mineralisation at a certain grade, and I've taken a sample at Point C, a few 100m away of few, and that is mineralised at a certain grade, thus, by implication, between the two, at point B, that is also mineralised.

The distance between point A and point C that you can infer with confidence that point B is an average of those two grades will vary enormously depending on the type of geology. For example, if you're looking at a coal scene, the spacing between the points that you study can be 100ms apart. Once you've demonstrated that this has good lateral continuity, they can even be kms apart. Thus, if you find 3m of this material here and 3m of this material over there, the gap between them can be huge and you can predict that in between them it will be the same grade. Perhaps kms is an exaggeration, but certainly 100ms apart.

However, depending on the geology, you might be on a highly variable gold structure which is nuggety, thus if you put your sample point in at point a, you get one Gold grade, you put your sample point in at point C and you get a different grade. In this situation it is almost impossible to predict what you will find in between the two at point B, because you might hit a nugget with very high grade, or you might just hit some barren coarse with very low grade. The sample spacing will vary enormously between your geological types, and this is where the expertise from a QP is relevant, it's also where the expertise of your management team is relevant. You need to have people who understand the relative variability over distance of different mineralising types. You also need to try and ascertain what you're looking for, as quite often, there's a difference between the capital market imperative, which is to put out as much good news as possible, and the geological imperative which is to understand the envelope of mineralisation that you're trying to define.

Remember that one of the first objectives from a technical basis is to put an envelope around your mineralised body and over time, improve the quality and understanding of each ton within that envelope, however, the capital markets might only want to see growth. When we talked about the cycles, we've seen that the greatest way to add value to a share price is to put out more and more high value, or good-grade results. Thus, an exploration company which is trying to define an envelope of mineralization and actually improve the understanding and the confidence that one has for every ton inside that envelope, and reduce the risk associated with each of those tons, is in conflict. It is easier to expand the drilling, to step out further away to increase that envelope and grow your potential resource base by continuously stepping out, but there comes a point when teams will choose an area to advance, they can't continue exploring and trying to grow the boundaries but instead, to focus on a smaller area and try and get that higher up the confidence curve. They need to de-risk this further, take these few exploration targets to the point of actually drilling a resource out, then they go from inferred, then reduce the sample space to improve confidence that they can predict the gaps between sample points to say, this actually will be great, or this will be this kind of mineral. The aim here is to get more information about each ton of rock at each intersection until you reduce the gaps between the minerals. Therefore, you increase the density of your sampling.

Management teams will always have this challenge between understanding the scale of the system and the cost of a full drill out. For example, if your resource is easy to drill out and you have a relatively low-cost operating base, i.e., you're not flying in and out in helicopters in an ultra-difficult icy or swampy area, you might as well keep drilling until you have a really decent resource base on which to work. Typically, you want to have at least 8 years of mine life, so management teams will throw out these thresholds and hurdles. They may say: ‘Wouldn't it be nice if we were able to produce enough Gold, to mine at a certain rate for x number of years with a target of 100,000oz/year.’ This target will typically be for more than 7-years and not much more than 10-years. The reason for that is when it comes to economic analysis, you need between 7 and 10-years of discounted cashflow to pay back all the capital and generate money for shareholders. The reason why you are not that interested in going beyond 10-12-years is because in a discounted cashflow, the future cashflows are reduced to much smaller contributions so actually, it doesn't really change your NPV by drilling out years 10-20.

Management will often aim for around 10-years of mine life, if they want to produce at 100,000oz/per annum, they will say, that's a 1Moz target. They say: let's start with a 1Moz target. They produce geological maps, they do the analysis and the preliminary work, including mapping, soil sampling, sometimes geophysics, sometimes trenching and pitting or underground mapping, reviewing old data, putting everything into 3 dimensions and coming up with a series of targets, which they will then focus on. Interestingly, management teams will always drill their best targets. Why wouldn't you? What happens if you hit your best target? That's really interesting because that means that almost everything else that comes after that will not be as good as your first intersection, which can then take some time for the market to adjust to. Secondly, if a management team doesn't hit with their first drill hole on the best target then a recalibration needs to happen.

Quite often, let's say one starts off with a generic, and I will keep talking about Gold because it's useful to get one's head around it, if one is looking for a generic 1Moz target, what happens is that facts start to emerge that actually, it isn't all that easy to drill out a gold resource. It requires lots of drilling. When an exploration company says that they've got a high value or high priority target to drill, the market will expect great results very quickly, in the first few holes because the management team has promoted the potential of the area because they want to install confidence to the market, they want to get money out so they can forward to drill it, thus, they've said we've got great potential here. They drill it and it isn't always easy. You don't always hit a deposit with your first hole, and in fact, many of the great deposits, if you actually speak to the geological team in there, the discovery hole can be quite a long way into the drilling process.

I've worked on a project where we hit it on the fourth hole, which was fantastic. But equally you can speak to the geological team at Centamin, who said they hit it on the 138 holes. The discovery of Olympic Dam is famous because they drilled 100s of holes in the area and that pretty much killed the project, and the geologist in charge was instructed to wrap up the program, and he took it upon himself to drill 1 last hole, and of course, that was the discovery hole, but they'd been drilling for years.

Making a discovery certainly isn't easy and it can require lots of drilling. What's even crazier is that the market doesn't really understand that that once some good mineralization has been hit, that isn't the end of the story either. In a Gold system, it can take up to 40-50 holes before one’s even sure that one is drilling in the right direction.

Building a resource is all about trying to understand the structure, understanding what controls the distribution of mineralisation. It can start small and change with different geology. Some inferred resources hang together really easily, and you can get them quite quickly, others are much harder to put together. Interestingly, for example, if you do manage to find a well-mineralised porphyry deposit, as it's a bulk style of geology and is mineralised in 3 directions, you can actually drill across it in different directions and straight down. If the whole thing is mineralised, you can actually build up your tons very quickly. In theory, it is possible to drill out a 200-300Mt porphyry with as few as 10-12m of drilling. The tricky thing with a porphyry, of course, is finding enough decent grade, but if you've got decent grade, the tons can build very quickly.

When you are trying to put together a mineral resource, starting with an inferred resource, you're trying to wrap an envelope around your known body of mineralisation. The first thing you do is to begin with the best-known anomalies and then step out. If you have continuity, you'll step out again and you might go down-dip to build up your knowledge of what you’ve got.

Coming back to the hypothetical target of finding 1Moz, you can develop this at 100,000oz per annum, or whatever the geometry and the mineralogy permits. Quite often, the facts change around you: you might find an oxide body at the top with different physical properties, different metallurgical properties. It's less hard. You don't need to blast it. There could be free digging and then you come into a transition zone with more complexity, or you come into a higher grade and zone at depth. What happens here is that the management team has to respond and adapt to the reality of the situation. It may transpire that the ore body starts shaping up and that it might work better being mined at 50,000oz per annum. They may think actually, we will probably only find 500,000oz-600,000oz during this first phase and you can start planning a Scoping Study around these parameters as your initial inferred mineral resource starts coming together.

It all comes back down to the scale of the system, the cost of drilling it out and the management team’s appetite for either advancing a known body towards production through the study phase or whether management team actually just wants to drill out. Remember that the bigger the company, the bigger the resource is required for it to be meaningful or relevant. Hence, if you are an exploration company with the strategy of finding resources that cannot be ignored by mid-tier and major companies, you'll want to find a large body, so you'll be very focused on growth, but at some point, you will have to focus on quality because the mining companies simply want a de-risked proposition in front of them. They vehemently dislike the implication that the spacing between the sample points is too great and there are doubts or concerns about the quality of the resource.

There are so many aspects when considering the quality of the resource: the minerals that hosts the value metal - are those minerals reactive? For example, do they contain carbon which can affect the cyanide leech. Is there carbonate in there which can buffer acids? It's not just about the metal content. We start getting into the whole nature of the mineral itself and the fracture systems within rocks. Is this friable? Is the Gold encapsulated within silica or within the matrix of sulfide? I'll do another session on mineral processing as well. But when one is looking to try and take something through the inferred into the indicated category, you need to have an understanding of other elements that apply to it any ton of rock.

For example in the inferred category, you are just trying to imply an estimate of geology and grade continuity. Inferred resources are a really valid goal for exploration company, but they don't take you very far down the technical analysis of a resource base. As soon as you want to start putting on a PFS or feasibility study, you will have to look at the modifying factors of each ton of rock. You've got to understand the nature and the characteristics of every block within your resource model that is included in the mine-planning and economic evaluation. Your data has to be adequately detailed and based on reliable exploration. It has to be sampled and tested and to be of greater confidence about grade and continuity, about structural integrity, metallurgical response. And again, this all has to be signed off by your competent person.

When you are trying to go from an indicated resource to a measured mineral resource, again, you need more information about every ton or block within your resource model. You need to understand not just the quantity and the grade, but you also need to understand the density, shape, all of the physical characteristics, and they have to be sufficiently understood so that you can apply these modifying factors in order to get a detailed mine plan and final evaluation of economic viability.

Each stage of the resource definition gets more and more onerous, more expensive and less and less fresh news comes out, therefore, it gets more and more boring from a market perspective.

Finally, the level of data required to define a mineral reserve; you go from a probable reserve to a proven reserve, you start putting in allowances for dilution and this has all of the technical factors required to make an investment decision on whether this will come out of the ground or not. When looking at reserves, you have to know whether each block in the results model will become saleable product, and to reach that level of understanding you will need lots of infill drilling, hydrological studies, you need to understand the permeability, you need to do more geo-tech drilling for pit stability, and you may need to carry out bulk metallurgical samples. All through this process, you will have had feedback, hopefully from an early stage, from a metallurgist talking about what actually do you need to get out of there? What products do you need to turn this into a viable resource?

Sometimes when you're looking at a resource, you don't need to actually define it on how much material is in the rock, but on how much material you can get out of the rock. Let's say you have a grade of a Copper mineral and if you're trying to use an acid leech on your Copper rock, what you might find is that because you've got elements in that mineral form of the Copper and the mineral form of the rock in which the Copper is hosted, you may not get similar recoveries across your orbit deposit, even though the actual Copper content may be constant. In an area where your leaching acid is being consumed by carbonate material you might have less free acid in contact for short amounts of time with your Copper minerals, thus, you might recover less Copper in those zones.

In such cases, rather than doing a grade map across your deposit, it may be relevant to conduct a recovery map or recoverable metal map. This is metallurgical mapping across the resource. All of these things need to be considered when you first start your evaluation project, which is why it's important you've got a sensible exploration team who is appropriately experienced and knows what it's looking for. The management team also has to be sufficiently adaptable to change its approach when the facts about the emerging geology vary.

I keep coming back to this this requirement to have judgment when it comes to the risk and reward of growth versus understanding and improvement of your confidence in the per ton within a resource base. One is always trying to work out: do I just want to define the first 1Moz, or am I going to test along the trend to show that this resource has multiple centres and opportunity for many other deposits to come on board? Most companies typically like to show growth potential by keeping 1 exploration rig or some exploration activity ongoing to test along the trend, to test new targets. That can be quite a significant program, or it might be quite a small program, but at the same time, they are trying to develop their core project and take it up the value curve by going through the stages of initial exploration through to inferred resource, towards an indicated mineral resource.

Remember: you cannot include any inferred mineral resources in a PFS. Most companies typically want to get the resource up to a sufficient scale where they think it will have relevance in the market, before trying to study that version of the resource, and at that point, the investment will be made to try to take it from an inferred resource up to an indicated resource. The key element here is getting more information per ton of rock, using every drill hole, sucking out all of the information from each drill hole and increasing the density of those drill holes or the underground workings. It's all about reducing the risk and increasing confidence that this project has continuity between sample points, not just of grade but of physical properties, metallurgical properties and chemical properties, so you can say, yes, this ton of rock will behave in the way that we expect it to.

As resources are geologically driven, they are primarily led by geologists, and when it comes to a mining company that wants to develop it, they are principally driven by engineers, whether they're process engineers, mining engineers or finance people, but they often have a different understanding or approach to the geologist. Where things can fall between the gaps is often on the physical properties and the metallurgy. For example, with metallurgical mapping, an iron ore project in Northern Australia which went through the inferred mineral resource, through indicated to measurement, and it was just at the mineral reserve point of definition, it had been drilled out for years and years and they realised: this is behaving differently metallurgically, and they hadn't done appropriate representative sampling of their product and so they have to go right back and remap the whole thing based on metallurgical criteria rather than just pure grade criteria.

Representative sampling is another important aspect of resource definition. If you have very variable grade in a deposit, and I'm thinking of Gold in particular, I've said that between the sample points you need to have the confidence that the distance between your 2 sample points is sufficiently close to estimate what the grade will be at the halfway point between the 2 of them. With highly variable material, it becomes almost impossible to reduce your spacing sufficiently to be able to predict whether you have a Gold nugget or not. A way to get around that is to increase your sample size and, you end up trying to do bulk sampling, ensuring that you're sampling at each point is representative.

Let's say you want to work out the grade of a Gold deposit: you need to take in each sample enough to capture a few of the nuggets so that the barren part equates out with a nugget so that you get an average grade across the whole deposit. Representative sampling in mineral deposits is a science in itself and there are hugely complex approaches to sampling theorem, grade estimation and it's used in Gold deposits, diamond deposits, in every kind of deposit. The aim here is to have the confidence to predict that at a given point away from your sample point, you can say what the grade will be.

That is the fundamental principal of all metal’s calculations, and the inferred category is just an implication. The indicated category is a good enough level of confidence so that you can actually start mine planning and economic evaluations and include it into a Feasibility Study. When you finally get into your mineral reserves, this is the point where you understand your sample density, the geology, the metallurgical, physical and chemical characteristics of your rock sufficiently well so that you can do detailed planning and base an investment decision on that.

Conclusions

By way of a conclusion, resources are not the same as technical reports, but resources do comprise about a third to a half of any technical report, whether it’s a Scoping Study, a PEA, PFS or Feasibility Study, and increasingly, there's this integration; you can't go that far away from a technical report before you start getting into a resource, and you can't advance your resource understanding without putting economic criteria and real-life data in there.

A geologist’s and exploration team’s first goal is to define resources. This is their primary role. Another key point is that boards need to judge the risk/reward of growth versus the quality of any given target area. This is absolutely key and so much depends on their judgment. It depends on the capital markets and the deposit type.

Resources can take a lot of time and money to evaluate, but good growth and grade are almost always worth chasing so that you can understand the size, the optimum extraction rate and also the potential of the area.

Finally, remember that inferred resources are an excellent starting point, but they do need further de-risking and they are just a kind of implied confidence between sample points. If you want to take your asset on up the value chain, which is so important in the sector, to a PFS or Feasibility Study you need to do at least indicated resources and probably mineral resources. So, you're talking about measured and indicated. It's a critical de-risking and confidence building step.

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