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CIM Los Andes September 21, 2009

Mineral Reserve Estimation in the Real World: A Review of Best Practices and Pitfalls

Marcelo Godoy, Ph.D.Ore Evaluation ServicesGolder Associates

Overview

Introduction CIM definition standards CIM definition standards Technical disciplines Modifying factors check list Modifying factors check list Commodity price and cut-off grade Mineral Reserve Statement Audit trail Risk Assessment References

September 22, 2009 3

Where in the world was the gold?

Viewpoint


CIM Definition Standards

The CIM Definition Standards provide standards for the classification of Mineral Resource and Mineral Reserve estimates into various categoriesg

The Mineral Resource and Mineral Reserve definitions were incorporated by reference in National Instrument 43-101incorporated, by reference, in National Instrument 43 101Standards of Disclosure for Mineral Projects

For the CIM Definition Standards a Technical Report is defined as a For the CIM Definition Standards a Technical Report is defined as a report that contains the relevant supporting documentation, estimation procedures and description of the Exploration Information, or the Mineral Resource and Mineral Reserve estimateResource and Mineral Reserve estimate


Qualified Person

A Qualified Person means an individual who is an engineer or geoscientist with at least five years of experience in mineral exploration or operation or mineral project assessment, or any combination of these; p p j , y ;has experience relevant to the subject matter of the mineral project and the Technical Report; and is a member in good standing of a professional association.


Mineral Resource

A Mineral Resource is a concentration or occurrence of natural, solid, inorganic, or fossilized organic material in or on the Earths crust in such form and quantity and of such a grade or quality that it has reasonableform and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics, and continuity of a Mineral Resource are known, estimated or interpreted from specific geological evidence andknown, estimated or interpreted from specific geological evidence and knowledge.

Mineral Resources are sub divided in order of increasing geological Mineral Resources are sub-divided, in order of increasing geological confidence, into Inferred, Indicated and Measured categories.


Mineral Resource 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

d t il d d li bl l ti li d t ti i f ti th d th h i ton detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to confirm both geological and grade continuity.

An Indicated Mineral Resource is that part of a Mineral Resource for which quantity grade or quality 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 of the deposit. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumed.

An Inferred Mineral Resource is that part of a Mineral Resource for which quantity and grade or quality b ti t d th b i f l i l id d li it d li d bl d b tcan be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but

not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes.


Mineral Reserve

A Mineral Reserve is the economically mineable part of a Measured or Indicated Mineral Resource demonstrated by at least a Preliminary Feasibility Study. This study must include adequate information onFeasibility Study. This study must include adequate information on mining, processing, metallurgical, economic, and other relevant factors that demonstrate, at the time of reporting, that economic extraction can be justified. A Mineral Reserve includes diluting materials and allowances for losses that may occur when the material is mined.


Mineral Reserve

A Probable Mineral Reserve is the economical part of an Indicated, and in some circumstances a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility Study. This Study y y y y ymust include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting that economic extraction can be justified.

A Proven Mineral Reserve is the economical part of a Measured Mineral Resource demonstrated by at least a Preliminary Feasibility y y yStudy. This Study must include adequate information on mining, processing, metallurgical, economic and other relevant factors that demonstrate, at the time of reporting that economic extraction can be justified.


Resource and Reserve Classification

Mineral Resources Mineral Reservesc

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Inferred

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Application of economic, financial, regulatory, legal, social, environmental impacts to mining, processing, and commercial parameters


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Mining Project Life Cycle

EXPLORATION Discovery of mineralisation PELIMINARY ASSESSMENT Development drilling Development drilling PRE-FEASIBILITY STUDY Further drilling, testing, design FEASIBILITY STUDY Construction Production Closure


Preliminary Assessment (PA)

A PA means a study that includes an economic analysis of the potential viability of mineral resources taken at an early stage of the project prior to the completion of a preliminary feasibility study

Back of the envelope calculations Desktop studiesp Formal studies based on untested assumptions The quality of the available data limits the validity of the results Such studies provide a guide to further work Such studies provide a guide to further work


Preliminary Assessment

Identifies key issues:

Market Strategic opportunities Tonnage / Grade / Contaminantsg Land tenure issues Infrastructure and logisticsg Environmental baseline Unanswered questions


Preliminary Feasibility Study (PFS)

A PFS is a comprehensive study of the viability of a mineral project that has advanced to a stage where the mining method, in the case of underground mining, or the pit configuration, in the case of an open pit, g g, p g , p p ,has been established, where an effective method of mineral processing has been determined, and includes a financial analysis based on reasonable assumptions of technical, engineering, legal, operating, and economic factors and evaluation of other relevant factors which are sufficient for a QP, acting reasonably, to determine if all or part of the Mineral Resource may be classified as a Mineral Reserve

The first serious test of the project viability Define the likely mineable material and the impact of various styles and

scales of mining and processing Provides targets and justifies further drilling, metallurgy test work, etc. The PFS often raises further questions


Feasibility Study (FS)

A FS means a comprehensive study of a mineral deposit in which all geological, engineering, legal, operating, economic, social, environmental and other relevant factors are considered in sufficient d t il th t it ld bl th b i f fi l d i i bdetail that it could reasonably serve as the basis for a final decision by a financial institution to finance the development of the deposit for mineral production.

Provide a detailed analysis of all the factors affecting a project's viability Enable determination of a go or no go decision Have become an aid in obtaining financial backing Have become an aid in obtaining financial backing


Reserve Estimation

The requirement for economic viability implies determination of annual cash flows and inclusion of all relevant economic parameters.

Orebody Model Modifying Factors Financial Forecasts

Cashflow & Recovered Au

$500M

$600M

$700M

$800M

$900M

$1000M

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7Moz

8Moz

9Moz

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11Moz

12Moz

13Moz

14Moz

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Cumulative Rec. Au - BASE CASE

NPV 10% - BASE CASECumulative CashFlow - BASE CASE

Total Movement and Ore Tonnes

60Mt

70Mt

80Mt

90Mt

100Mt

110Mt

120Mt

130Mt

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8Mt

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11Mt

12Mt

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$100M

$200M

$300M

$400M

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

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1Moz

2Moz

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4Moz

5Moz

6Moz

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20Mt

30Mt

40Mt

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Year

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1Mt

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Total Movement - Base Case Ore Tonnes - Base Case


Technical Disciplines

Estimation of Mineral Reserves is a team effort involving a number of technical disciplines, and should be based on input and information from a multidisciplinary team under the direction of QP(s).p y Q ( )


Mineral Reserve Classification

The category assigned to a Mineral Reserve estimate depends on: the level of confidence in the geological information available the quality and quantity of data available on the deposit the quality and quantity of data available on the deposit the level of detail of the technical and economic information the interpretation of the data and information

The classification of the Mineral Reserve allows the QP to identify technical risk


Modifying Factor Check List

Mining Processing

Data to determine appropriate mine parametersMining methodProduction rate scenariosCut-off gradeDilution

Geotechnical Hydrological

E i t l

DilutionRecovery with respect to the Resource modelWaste rock handlingFill management (underground mining)Grade control methodOPEX and CAPEX

Environmental Location Infrastructure Marketing Factors

Sustaining capital cost

Baseline studiesTailings managementWaste rock managementAcid rock drainage issues Marketing Factors

Legal requirements Revenue

Acid rock drainage issuesClosure and reclamation planPermitting schedule

Product specification and demandOff-site treatment terms and costsT t ti tRevenue

Costs Social Issues

Transportation costs

Sustainable development strategyImpact assessment and mitigationNegotiated cost/benefit agreementCultural and social influences


Selection of an appropriate commodity price

Commodity prices are used in the estimation of Mineral Resources and Mineral Reserves and in the economic analysis of a property. In times of rapidly changing commodity prices, or when prices are at the extreme ends p y g g y p , pof a commodity price cycle, the QP has a difficult job in selecting an appropriate commodity price.

The selection of appropriate technical variables, including commodity price, is the responsibility of the QP. The QP must describe the reasons for selecting these variables, including price, in the technical report.

The definition of a Mineral Resource contains the wording reasonable prospects for economic extraction, therefore, a QP must select economic parameters incl ding commodit price that ill res lt in an estimate ofparameters, including commodity price, that will result in an estimate of Mineral Resources and Mineral Reserves that have reasonable prospects for economic extraction.


Commodity Price

Commodity price is usually the most sensitive and important factor in the development of a mining project.

Resource companies are price-takers with little control over international prices. Commodity price forecasting has a poor success rate.

Methods for the selection of commodity price: Current commodity price Three-year moving average Long term historical averages (10 to 20 years) Margin over Cash Cost of Production Margin over Cash Cost of Production Consensus Prices Contract Pricing


Cut-off Grade

Cut-off grade is a unit of measure that represents a fixed reference point for the differentiation of two or more types of material. Owing to the complexity of Mineral Reserve estimates, numerous cut-off grades may p y , g ybe required to estimate a Mineral Reserve

The cut-off grade(s) should be clearly stated, unambiguous and easily d t d C l i li t d d tunderstood. Complex ores may require complicated procedures to

determine cut-off grades and to define the Mineral Reserve.

Consideration should be given to the problems associated with selective g pmining where the cut-off grade is set high relative to the average grade of the Mineral Resource.


Mineral Reserve Statement

Mineral Reserve statements should be clear and sufficiently detailed for a knowledgeable person to understand the significance of, for example, cut-off grade and its relationship to the Mineral Resource. g p

In the case of open pit Mineral Reserve estimates, the strip ratio should be clearly stated.

There should be an obvious linkage of the Mineral Reserve estimate to the Mineral Resource estimate provided in a disclosure document. Best practice includes documentation of those linkages (e.g. dilution and p g ( gmining recovery) that were used.


Audit Trail

The Reserve estimation process needs to be documented in such a way that the results can be exactly reproduced.

Information should be easily retrievable readily available and catalogued in a Information should be easily retrievable, readily available and catalogued in a manner that allows easy assessment of the history of the evaluations carried out and records the location of all relevant information/reports/etc.

The test of economic viability should be well documented as part of the MineralThe test of economic viability should be well documented as part of the Mineral Reserve estimation process. The requirement for economic viability implies determination of annual cash flows and inclusion of all the parameters that have an economic impact.

The classification methodology should be well documented and easily understood. Best practice includes providing a narrative description of the qualitative reasons behind the classification selection.

The procedures used to establish the cut-off strategies should be well documented, easily available for review, and clearly stated in disclosure statements.


A Definition of Risk

Risk has two aspects: Uncertainty the state of not knowing Uncertainty - the state of not knowing

Consequence - measure of the effect of a variable on a project

Risk = Uncertainty x Consequence

eg: taxes have high consequence but because they are well known littleeg: taxes have high consequence but because they are well known little uncertainty. Therefore risk is low.

Project Risk Assessment

While the classification of the Mineral Reserve allows the QP to identify technical risk in broad terms, best practice includes the establishment of a methodology to identify and rank risks associated with each input of gy y pthe Mineral Reserve estimate. This will provide an understanding of the technical risk associated with the Mineral Reserve estimate.

What can we do to reduce risk?

We may decrease uncertainty using knowledge, drilling, test work y y g g , g,and studies.

We may be able to impact consequence with more planning, more design, more money.


Risk Profile

Residual Risk

Technical Risks

Resource - tonnage, grade, location, mineralogy

Completion cost overruns under achievement delays Completion - cost overruns, under-achievement, delays

Operational - operating costs, production rates, equip/manpower

Management - suitable for operation Management suitable for operation

Environmental - cost, publicity, extra constraints

Catastrophe/Force Majeure p j

Geological Risk

Geological risk is known to be a major contributor to not meeting project expectations.

Geological risk is the effect of geological uncertainty to project performance. It arises because geological information is obtained from a limited number of samples.

Assessing Geological Risk

Probable models of the deposit

Response 1

Response Parameter

Mining

Transfer FunctionResponse 1

Response 2

Response mgProcess

Parameters of interest

Response Distribution

David,1988; Journel,1992; Armstrong and Dowd,1994; Rossi and Van Brunt,1997; Dimitrakopoulos, 1998,2000

Response Distribution


Assessing Geological Risk

7 000 000

9,000,000

First 2 years of productionCS realisations

5,000,000

7,000,000

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First 2 years of production

Final year likely to be negative cash flow

1,000,000

3,000,000

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-1,000,000

-5,000,0000 2 4 6 8 10 12 14

Production Period (1/4 Year)


References

CIM Definition Standards - On Mineral Resources and Mineral Reservesadopted by CIM Council on December 11, 2005

CIM Estimation of Mineral Resources and Mineral Reserves Best Practice Guidelinesadopted by CIM Council on November 23, 2003

NI 43-101 - Standards of Disclosure for Mineral Projects - (December 30, 2005)

Questions resulting from CSA-CIM Committee Meetings (April 14, 2008)

Available on the CIM website:http://www.cim.org/committees/guidelinesStandards main.cfmp g g _

For information about Golder Associates go to www.golder.com


www.golder.com

Marcelo Godoy, Ph.D.Principal Mining EngineerPrincipal Mining EngineerOre Evaluation Services

Golder Associates S.A.Av.11 de Septiembre 2353 - Piso 2, ProvidenciaSantiago, ChileT: +56 2 594 2080 | F: +56 2 594 2001 | C: +56 9 8233 1209 [email protected]


DATA MANAGEMENTDatabase managementDigital data capture systemsIntegration of legacy dataQuality control and assuranceData analysis and validationSoftware development

GEOLOGICAL MODELLINGGeological modellingSampling studiesGrade control studies3D geotechnical modelling

GEOSTATISTICAL ANALYSISResource estimationResource classification studiesDrill spacing studiesReconciliation studiesConditional simulationRisk assessmentGeometallurgical modelling

MINING ENGINEERINGStrategic mine planningMineral reserve estimationScoping, pre-feasibility and feasibility studiesEconomic evaluation and risk analysisCapex and Opex estimationMine optimisationDesign of underground and open pit minesMine equipments designCut-off grade and stockpile optimization Mining method selectionOptimisation of unitary operationsOperational diagnosticsWast dump designDesign of materials handling systemsUnderground ventilation design

Around the world Under the earth Above & beyond

Golder Associates provides integrated services from project inception to mine closure for mining clients around the world.

In South America, Golder Associates provides experience across the full range of geological, mining, geotechnical, civil

engineering, hydrogeological and environmental services.

TECHNICAL AUDITING & COMPLIANCEResources and reserves auditsCompetent Person reportsNational Instrument 43-101 (Canada)JORC Code (Australia)SAMREC (South Africa)PERC (Europe)SEC Requirements (USA)

GEOTECHNICAL ENGINEERING AND ROCK MECHANICS

Geotechnical and geomechanical investigationRock characterisationPit slope stability analysisNumerical modellingStability analysis and design of underground mines Pit slope and ground support designGeotechnical monitoring

MINE WASTE MANAGEMENTGeotechnical investigation and site selectionGeotechnical and hydrogeological characterisationStability analysis of tailings damsTailings management plans and dam designDesign of slurry, thickened paste and filtered tailings depositsConstruction managementQuality control and assuranceClosure planning

MINE WATER MANAGEMENTOpen Pit and underground mine dewateringSlope depressurization assessmentSurface and groundwater modellingWater balance studiesHydrogeology and hydrology studiesField investigation and monitoring programsSite characterisationFlood studiesSurface and groundwater managementHydraulic designWater supply studiesGeochemistry studiesAcid rock drainage - ARD

ENVIRONMENTAL SERVICESBaseline studiesEnvironmental impact studiesPermitting master plansClosure planningSite evaluation and risk assessmentMonitoring and modellingSustainability studies

South America

ORE EVALUATION SERVICES

Data ValidationValid data is the basis for all sound resource estimation, for which Golder can provide assistance in evaluating the accuracy, precision and representativity of the quantitative data inputs as well as the appropriateness of legacy data.

Geological ModellingGeological interpretations need to be transformed into a robust three dimensional geological model that characterises all the needs of mining and processing, including grade, density, material types, geotechnical features, and geometallurgical aspects.

Grade EstimationGrade estimation is carried out using advanced geostatistical techniques with consideration of the deposit style and mining method.

Mineral ReservesThe estimation of a mineral reserve (also known as an ore reserve) requires a robust resource model, economic parameters, mine planning and design, metallurgical recovery and consideration of all relevant modifying factors.

Rock MechanicsOpen pit and underground mine designs must be prepared using robust parameters that reflect the expected rock mass conditions and behaviour. The mine design must consider methods to ameliorate adverse conditions, improve stability and increase productivity.

MetallurgyThe requirement for a mineral reserve is that all the geological, mining and metallurgical technical aspects have been defined by appropriate studies. Golder uses in-house expertise and contracts specialist technical experts to ensure that the metallurgical testing, scale-up issues, mill recoveries and geometallurgical models are adequately defined.

Environmental AspectsKey environmental issues need to be addressed in any mining operation or project including identifying key sources of environmental information, identifying key stakeholders that will be integral to the social component and identifying any obvious potential fatal flaws and issues of concern associated with development of the project.

COMPONENTS OF A MINERAL RESERVE REPORTEvery deposit is different and thus deserves an experienced and open-minded approach to estimating mineral resources and reserves. Golder uses a multi-disciplinary approach in preparing Competent Person or Qualified Person reports and technical audits. Each report includes a detailed review of vital aspects of mining including:

OTHER MODIFYING FACTORSTo define a mineral reserve it is expected that all economic, social and legal obstacles have been identified and appropriately addressed. Golder produces reports that clearly identify the work carried out and where appropriate makes recommendations to improve future studies.

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