Analysing the impact of the resource-to-reserve processes on financial viability in mining projects

Abstract

South Africa has immense mineral resources, historically and contemporarily engendering the mining industry an integral part of the Country’s economy. Considerable quantities of money are expended on the evaluation, implementation and eventual extraction of economically valued minerals, for instance gold, platinum, etc. The requisite massive expenditure renders mining houses unable to finance these ventures alone, thus involving financiers, which include, inter alia, banks; venture capitalists and major investment entities, both domestic and foreign. Every operational mine is required to conform to the laws, rules and regulations of the country in which their undertakings occur, thereby involving governments. Furthermore, mining ventures involve multiple diverse, local and international organisations, groups and communities, along with myriad alternate entities and individuals. The number and diversity of stakeholders makes it crucial to ensure a common nomenclature and taxonomy, i.e. a universally understood, shared language, facilitating that everyone comprehends the terminology, lexicon and logic utilised throughout the mining lifecycle. The literature review revealed, however, that this constitutes a major challenge, with a clearly apparent lack of standardisation. Globally, in actuality, multiple dissimilar, varied and distinct international standards and categorisations are utilised. The Committee for Mineral Reserves International Reporting Standards comprises an international entity that regulates processes involving Mineral Resources and Mineral Reserves. However, this entity is not a regulatory body, with participation and compliance optional. Locally, the South African Code for Reporting of Mineral Resources and Mineral Reserves (SAMREC Code) conforms to this Committee. Companies listed on the Johannesburg Securities Exchange are compelled to comply with the SAMREC Code. The code governs the application of definitions and processes required when reporting Mineral Resources and Mineral Reserves in South Africa. In addition, it endeavours to define and consider the conversion from a Mineral Resource to a Mineral Reserve, termed the resource-to-reserve process. The resource-to-reserve process is dependent on the application of several modifying factors. However, the SAMREC Code, by design, is vague vis-à-vis the actual defining of these modifying factors. The application of modifying factors is left to the interpretation of a Competent Person (CP), who must employ their experience, judgement and logic in the application thereof. Accordingly, each CP will arrive at a different Mineral Reserve. This study focuses on this discrepancy, attempting to identify and establish an enhanced, ameliorated understanding and method for the resource-to-reserve process. The applied modifying factors may appear in the form of percentages or values. Throughout the resource-to-reserve process the available, mineable materials have the potential to either increase or decrease in quantity and/or quality. Two additional topics of interest, identified for this research comprise: financial modelling and sensitivity analysis. Financial modelling has been established in the study as augmenting the innate uncertainty present in the resource-to-reserve process. As a measure of project’s financial viability, Net Present Value (NPV), is deemed as the most suitable and superior. Analogously, research conducted has ascertained that sensitivity analysis constitutes an advantageous and effective method by which to evaluate the impact, of each modifying factor, on the NPV. A simplified, streamlined case study, utilising an open pit gold deposit is employed to examine and demonstrate the resource-to-reserve process; extending from the development of the geological model, through to the establishment of the financial model and ensuing sensitivity analyses. During this resource-to-reserve conversion procedure, four mining modifying factors are isolated for further investigation, viz. mining losses; dilution loss; oversize; and plant yield loss. By applying sensitivity analysis three of these factors are identified as controlling parameters (factors that significantly impact the project’s NPV), constituting plant yield loss; mining loss; and oversize. Subsequently, the resultant reserve engenders the creation of a mine plan, which is consecutively utilised as the input for the financial model. An additional four economic modifying factors, requiring extended exploration, are established in the formulation of the financial model, viz. variable mining cost; variable processing cost; royalties; and discount factor. Similarly, the application of sensitivity analysis thereto, reveals a significant impact on the NPV. From the case study, it is concluded that modifying factors from various domains can considerably influence the NPV, denoting that these should be ascribed, implemented and assigned with precision, profound attention and assiduousness. However, the approach adopted in the SAMREC Code renders it extremely challenging to determine the exact manner by which these modifying factors should be applied. Consequently, an added, significant finding arising from this research concerns emphasising auditability. This would facilitate enhanced and augmented straightforwardness, ensuring it being relatively uncomplicated and considerably more effective, when analysing, interpreting, understanding and replicating work performed during the resourceto- reserve process, financial modelling and, ultimately, reporting.