A nuts-and-bolts look at Gold Mining investing...
NOW IS the time for investors to brush up on their knowledge of NI-43-101-compliant resources and deposit grades with one of the world's foremost experts. In this interview with The Gold Report, Andrew Richmond, a principal at geological consulting firm Martlet Consultants in Brisbane, Australia, discusses the importance of grade, selectivity and size in establishing the economic value of deposits.
The Gold Report: Andrew, you do a lot of work vetting deposits. You have worked on epithermal gold, copper-gold porphyries, iron and coal deposits—just to name a few. We're here today to help retail investors gain a better understanding of NI-43-101-compliant resources and deposit grades. Let's start with resource classifications.
Andrew Richmond: The Canadian Institute of Mining, Metallurgy and Petroleum (CIM) defines an "Inferred mineral resource" as that part of a mineral resource for which quantity and grade or quality can be estimated on the basis of geological evidence, limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through techniques from locations such as outcrops, trenches, pits, workings and drill holes.
An "Indicated mineral resource" is that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters to support mine planning and evaluation of the economic viability. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations that are spaced closely enough for geological and grade continuity to be reasonably assumed.
A "Measured mineral resource" is that part of a mineral resource for which quantity, grade or quality, densities, shape, and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters to support production planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations that are spaced closely enough to confirm both geological and grade continuity.
TGR: What's the difference between a mineral reserve, a Probable mineral reserve and a Proven mineral reserve?
Andrew Richmond: The CIM defines a mineral reserve as the economically mineable part of a Measured or Indicated mineral resource demonstrated by at least a preliminary feasibility study (PFS). This study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate that economic extraction can be justified. A mineral reserve includes diluting materials and allowances for losses that may occur when the material is mined.
A Probable mineral reserve is the economically mineable part of an Indicated and, in some circumstances, a Measured mineral resource demonstrated by at least a PFS. This study must include adequate information on relevant factors that demonstrate that economic extraction can be justified.
A Proven mineral reserve is the economically mineable part of a Measured mineral resource demonstrated by at least a PFS. This study must include adequate information on factors that demonstrate that economic extraction is justified.
TGR: Who qualifies as a qualified person (QP)?
Andrew Richmond: A qualified person is an engineer or geoscientist with at least five years of experience in mineral exploration, mine development or operation or mineral project assessment, or any combination of these, who has experience relevant to the subject matter of the mineral project and the technical report; and is a member or licensee in good standing of a professional association.
TGR: What's the difference between a PFS and a feasibility study?
Andrew Richmond: If you were to do a survey of mining experts, you'd come up with responses indicating that a prefeasibility study could have a margin of error anywhere between plus-or-minus 15–25%. A feasibility study, which used to be known as a bankable feasibility study, could be within plus-or-minus 5–15%. The feasibility study is more detailed. It's the final study that's done before the directors of a company will give the go-ahead for a project to proceed.
TGR: Is a PFS the same as a preliminary economic assessment (PEA)?
Andrew Richmond: No. A PEA can pre- or postdate a PFS. A PEA can make assumptions about some of the criteria and parameters that go into the study. At that point, some of the studies may not have been done. For example, one of the things that is often done late for an open-pit deposit is special geotechnical drilling where the pit walls are going to be to determine what the slope angles may be. But until you've done a feasibility study, a company can't work out where the pit walls are going to be and do that type of drilling. Whereas if you get to the PFS and the final feasibility study, the technical studies that are required for sign-off on a mining project are all done.
TGR: What are some common mistakes technical personnel make when preparing reports?
Andrew Richmond: If I'm looking at an acquisition, merger or even just a joint-venturing project for a client, I work under the following three principles. First, I assume nothing. Second, I check everything. Third, and it may not sound very good, but I trust no one. I follow up on everything and a number of times people try and pull the wool over my eyes. It happens regularly.
These studies are often rushed to make corporate deadlines. But they may have underestimated the amount of time it takes and these studies are almost invariably late. A study arriving to market late could be good or bad. It may mean that the economics are not stacking up, so they're looking at different ways of mining it. There may be some metallurgical issues that need fine-tuning.
Companies often use optimistic commodity prices and capital expenditure (capex) costs. If these are in the lower-quartile cost curve for the region, type of project and commodity, I look for a good justification for those assumptions. Sometimes there is no risk analysis, or it's extremely limited.
My area of expertise is resource estimation, so I look for whether the resource-modeling techniques consider the geology adequately and whether they also suit the proposed mining methods. A very simple test is to use the average grade of the samples that have been used to estimate the block model. Are they the same or within 5–10%? The average grade of the samples in the drill holes must be the same as the average grade of the block model.
In precious metal deposits, I look for companies not cutting the extreme grade values. If the average grade of a deposit is, say, 2 grams per ton (g/t), there may be one or two samples that are over 100 g/t. Those samples need to be treated very carefully. Otherwise, they have the potential to increase the average grade of the block model quite substantially.
TGR: What are the differences between rapid air blast (RAB) drilling, reverse circulation (RC) drilling and diamond drilling?
Andrew Richmond: RAB and the RC drilling are percussive-type drilling techniques, which means that they break the rock sample up. RAB drilling is a technique that tends to be used mostly for scout drilling to test near-surface material. There can be the potential for contamination because the sample comes up between the rod and the edge of the drill hole.
With RC drilling, the sample comes up an annulus in the outside of the drill hole, so there's far less potential for contamination. RC drilling can also go down to roughly 1,000 meters (m).
Diamond drilling is the only one that returns core samples. In general, diamond drilling is better. There are a few instances where the mineralization may be preferentially washed out during diamond drilling, because it uses water to keep the drill bits cool at the base.
RC drilling is a lot cheaper and quicker, but diamond drilling tends to provide better samples.
TGR: Grade is very important in the overall scope of a deposit. But is it the most important thing when you're looking at drill results?
Andrew Richmond: Grade is king in a deposit. But, in reality, it's the relationship between grade, tons, geometry and depth of the mineralization that indicate if it could potentially be extracted economically. It may well have a high-grade intercept, but it may be so narrow that it's not going to make a deposit, or there may be insufficient tons to justify the capital of a plant and other infrastructure.
TGR: When it comes to gold deposits, what are some mineralized systems you favor?
Andrew Richmond: There are several different types of mineralized systems for gold. The higher-grade ones often tend to be epithermal deposits, known normally as high- or low-sulfur epithermal deposits. Both types can be extremely high grade, but they tend to be narrow zones that can be mined favorably underground. Porphyry systems can have significant amounts of gold, in some instances more gold than copper. They can have billions of tons and still be economic even if it's only 0.5 g/t.
TGR: Just because of the economies of scale?
Andrew Richmond: Yes, definitely because of the economies of scale, but also because they probably have low stripping ratios, which means that there's very little waste for the amount of ore.
TGR: Do you have a preference for how deep epithermal deposits are?
Andrew Richmond: As close to surface as possible, but there are gold deposits in excess of 4 kilometers (km) deep being mined in Witwatersrand, South Africa.
TGR: In northern Ontario, too. Maybe not 4km, but thereabouts.
Andrew Richmond: The deeper you go, the higher grade the deposit has to be. It's a tradeoff.
TGR: What would you consider a high-grade epithermal gold deposit?
Andrew Richmond: Normally, 30 g/t or more if it's small tonnage. If it's bigger than 100 million tons (Mt), even 2 g/t could be considered good with the current Gold Price. Anything above 5 g/t for this size would be considered an excellent deposit. There are very few of those around the world.
TGR: What's high grade at a copper-gold porphyry deposit?
Andrew Richmond: As they tend to be several 100 Mt or more than a billion tons, anything where the combined copper and gold is above 2%. Copper and gold are both significant economic contributors in those types of deposits.
TGR: Let's get to those byproduct credits. How important can those be to the economics of a deposit?
Andrew Richmond: They can be extremely important. First, there's the economic benefit. However, there are also other elements in the core that need to be assayed because they may have environmental impacts that require a costly remediation, such as pyrite, or have penalties associated with them during concentrate sales.
TGR: Is that something you like to see in technical reports or feasibility studies?
Andrew Richmond: Definitely. If there's a lot of pyrite in the drill core, a company has to manage the disposal of that in some way. If there were nothing in the feasibility study about that, it would be a red flag that the company hasn't done the work appropriately.
TGR: What percentage of projects reach their life-of-mine potential outlined in the feasibility study?
Andrew Richmond: They should all reach the life-of-mines potential, but that's theory. In practice, because these studies are based on assumed commodity prices and that tends to be the biggest risk, the commodity price with the lowest potential downside would be the one that most often reaches its planned potential. Normally, that's the bulk commodities.
Probably 60 to 80 iron ore projects out of 100 may do well. Some actually go well beyond the original life potential, because commodity prices tend to go up over time and the cutoff grade can drop, so the deposit is reassessed every five years. One of the problems with looking at it that way is that those projects may be the ones with the lowest potential downside, but they also can miss out on the potential for the greatest upside price movement.
TGR: Should investors ever buy a stock based on a drill result?
Andrew Richmond: Definitely, but especially if they have a high-risk tolerance. If they want to get the big payoff, buy after even just one drill result. A series of drill results would be safer, but they've probably lost some of the potential upside. Maybe 1 in 20 exploration companies will eventually pay off. But the payoff for getting in early at the initial drill hit could be 50- to 100-fold. There's a reasonable chance of getting a good return on average.
TGR: You're talking about an intercept in excess of maybe 100m and maybe a few grams of gold.
Andrew Richmond: If I saw 100m at 2 g/t on the first drill hole into a project, I'd be buying.
TGR: You're a specialist in the South Pacific area and have worked on some deposits there. Which deposits do you find particularly interesting?
Andrew Richmond: The South Pacific is an area a lot of investors may not be familiar with. It's got some specific issues related to landowners. It does tend to be high risk, high reward. It's also got high exploration costs. For example, a lot of projects in Papua New Guinea are done all by helicopter. On some of the other islands, there's political risk related to being able to keep the equity in the projects.
TGR: Do you really believe that deposits on the bottom of the ocean can be economically mined?
Andrew Richmond: I think so. Oil companies have led the way on deep-ocean and deep-sea drilling and production.
TGR: Parting thoughts?
Andrew Richmond: Investors need to be skeptical of stock exchange announcements and read between the lines. Every exploration company is trying to get funding, but not all of their projects are going to go ahead. Investors need to pay close attention to stock exchange announcements and pick companies carefully.
TGR: Thanks for sharing your depth of knowledge with us today.
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