Reasonable prospects for economic extraction

Greg Gosson and Larry B. Smith - Dec 2007

These are heady times for the mining industry, with strong metal prices, investor enthusiasm for the junior explorer and ready access to finance for mineral projects. Many projects were shelved in the past because of technical deficiencies — insufficient tonnes or grade, metallurgical problems, the deposit was too deep or too narrow, or the project was physically or economically under water. With the possibility of sustained metal prices, now is the time for those previously “challenged” projects to be re-evaluated and financing sought for continued development. The question is, do these deposits have reasonable prospects for economic extraction, as required by all mineral resource reporting codes?

NI 43-101 defines a mineral resource as that portion of the mineral inventory that has reasonable prospects for economic extraction. However, a mineral resource is not simply an inventory of all blocks above a given cut-off grade. The spatial distribution and geological and grade continuity must also be considered. The qualified person (QP) must consider factors significant to project economics at the mineral resource estimation stage, and not just when qualifying mineral reserves.

CIM Best Practice Guidelines for estimating mineral resources require the factors significant to project economics be current, reasonably developed and based on generally accepted industry practice and experience. In establishing the cut-off grade, it must realistically reflect the location, deposit scale, continuity, assumed mining method, metallurgical processes, costs and reasonable long-term metal prices appropriate for the deposit.

Variations within the resource model (rock characteristics, metallurgy, mining methods, etc.) may necessitate more than one cut-off grade or economic limit in different parts of the deposit model. There must be sufficient knowledge of the metallurgical characteristics of the deposit, which should be supported by preliminary metallurgical test results.

For deposits amenable to open-pit mining methods, a Lerchs-Grossman (LG) pit of measured, indicated and inferred confidence categories (not an optimized and operational pit outline) captures the required considerations of location, deposit scale, continuity and assumed mining method, metallurgical recovery, operating costs and reasonable long-term metal prices. Blocks captured within the pit shell meet the test of “reasonable prospects for economic extraction” and can be declared a mineral resource. Material outside of the pit shell remains as a quantity and grade of a potential mineral deposit, but should not be considered a mineral resource.

An LG pit is not a regulatory requirement, but it quickly captures all of the required inputs under CIM Definition Standards for mineral resources. It is an efficient means by which to assess the reasonable prospects for economic extraction of material that can be mined by open pit methods, as long as the inputs of operating costs, metal prices and metallurgical recoveries are reasonable. Resource geologists without the mine software capabilities can establish an average cut-off grade using preliminary metallurgical recoveries and reasonable operating costs, and then plot the blocks that meet this cut-off grade and visually assess their continuity and mineability. This can be done by visually estimating the maximum depth for an open pit that allows an acceptable strip ratio, with a higher cut-off to  cover the cost of mining both ore and waste.

The grade shell method is sometimes the only reasonable approach for mineralization that can be mined underground. If it is a discrete vein, then the resource may be the material in this vein shape that is above the economic cut-off and sufficiently contiguous and thick enough to be mined. Isolated blocks, which could clearly not support underground development to access the blocks, should be removed from the resource inventory.

The important thing is to be reasonable (not conservative, or excessively liberal) in the choice of parameters. The resource estimator should try to identify that material that has “reasonable prospects” but may not be reserves at this time.

Finally, a qualified person estimating mineral resources cannot completely ignore capital costs to develop a mineral deposit when assessing reasonable prospects for economic extraction. Economic extraction implies a repayment of capital, at least on a going forward basis. In our opinion, the qualified person should determine the prospects for sufficient revenues from the deposit to cover capital costs, which can be estimated from similar operations. This point is the subject of much active discussion between the members of most resource code committees and will likely will be resolved and codified in the near future.

To accommodate the dynamics of the mining industry, the definition of mineral resources under the reporting codes was chosen to be principle-based and not prescriptive. This allows resource estimators the freedom to make appropriate, experienced-based decisions, but also imposes a responsibility to explain and justify their basis for determining reasonable economics.

About the Authors

Greg Gosson is technical director, geology and geostatistics, AMEC Americas Limited, and Larry B. Smith is group manager, Mining & Metals Consulting, AMEC