How to interpret mining company resources, reserves, and drilling results

Australia truly is the lucky country! We've been gifted with some of the largest and globally significant mineral deposits in the world. As a result, we also have some of the biggest and most successful mining companies in the world.

Quite simply: Aussie investors love their mining companies. I bet you own a few. I bet every investor you've ever chatted with owned a few, too. Put simply, Aussie investors' love affair with mining companies is as strong now as it was when Poseidon Nickel hit it big in 1969.

If you love mining companies, then you are going to love this article. I'm going to break down the complex jargon usually associated with mining company news announcements. The jargon is complex because there are so many ways mining companies can describe the stuff they're doing, and the stuff they hope they have in the ground.

There are also very clear stages of development a mining company must go through to take them from exploration to production. There’s so much to go through on this topic, I’ll break this into a 2-parter.

Today, I’ll discuss everything you need to know about understanding a company’s resources and reserves, as well as their drilling results. In the next article, I'll provide you with a comprehensive guide to the stages of mining company development.

Let's dive in!

Resources & Reserves

• "Resources" - Minerals of interest in the ground vs "Reserves" which is a defined economic resource

• Resources can be "Measured", "Indicated", or "Inferred" based upon the level of confidence in the geology of the resource. Best practices for these definitions are defined by the Joint Ore Reserve Committee Code ("JORC" Code). In all instances below, a "JORC Compliant" resource or reserve is more valuable than a non-compliant one.

• Measured Resources - Resources with the highest confidence with respect to quantity, grade (i.e., quality), and physical characteristics such as shape and density. Detailed exploration has taken place to assess these characteristics with sufficient confidence. A measured resource may be converted to either a "Proved Ore Reserve" or a "Probable Ore Reserve". Proved is more economically significant than Probable.

• Indicated Resources - Resources with lower confidence than Measured, and may only be converted to a Probable Ore Reserve.

• Inferred - Resources with the lowest confidence, and cannot be converted to a Reserve.

• "Ore Reserve" - The part of the resource which you intend to mine, often determined by a "Feasibility Study" (discussed in Part 2). Can be Proved (higher confidence) or Probable (lower confidence).

• Measured Resources/Proved Ore Reserves - Lower risk and lower cost compared to Indicated and Inferred/Probable Ore Reserves, which each generally carry higher risks and may require expensive extensive drilling and analysis to progress them to Measured Resources/Proved Ore Reserve.

• Contiguous - A single, large resource offers better economics than a resource with several, smaller deposits spread over a wide project area.

• Depth - Shallower is easier, and therefore cheaper to dig out compared to deeper.

• Open - You will often hear "open at strike" or "open at depth", or both. This former means drilling has not yet discovered the boundary of the deposit along the predicted direction the deposit is expected to run, while the latter means drilling has not yet found the deepest boundary of the deposit.

• Location (location, location!) - Assets located in stable countries with strong rule of law are preferred. There are several examples of governments nationalising a mineral resource. It is not impossible in these scenarios for shareholders to end up with nothing! Also, look out for the phrase "close to infrastructure". Important infrastructure includes road, rail, ports, water, and power - each is essential to achieve low cost, low hassle, quick-to-market production!

Understanding drilling results

• Grade - Refers to the concentration of the mineral you're looking for in the ground in which you're looking, and it depends on which mineral your mining company is exploring for.

• What’s a good grade? - A comprehensive study of grades is beyond the scope of this presentation as there are many mitigating factors, but as a super-broad rule of thumb:

  • Gold: For Shallow deposits, as low as 1-2 g/t is considered a good grade, whereas for deeper deposits, you'd prefer to see at least 4-5 g/t

  • Copper: Greater than 1.0% is commonly used as the threshold for high-grade copper deposits.

  • Lithium: 1.5-2% is commonly considered to be a good grade

  • Uranium: Resources are usually quoted in U3O8, commonly known as Yellowcake, which is roughly 85% elemental uranium. A grading of 0.10% of U3O8 (i.e., 1000 parts per million) is typical of currently mined uranium deposits. Anything over 1% uranium is considered high grade.

• Intercepts - Are lengths over which the grade of mineral was indicated in the drill core sample. So, you might see "20 metres at 2.5g/t Au from 100 metres" in a gold exploration company's drilling report. This means gold was detected in the stated concentration (i.e., grams per tonne) for a 20 metre span from a depth of 100 metres underground. Generally, the bigger and shallower the intercept, and the higher the grade, the more valuable the drill result.

Next time…

That’s enough information for today. In Part 2, I’ll investigate the key stages of development a mining company must progress through to go from exploration to production. I’ll also point out how to interpret the complex valuation framework for project economics, as well as several tips to ensure your favourite mining company is on the right track.

While you’re waiting for Part 2, perhaps grab an ASX announcement from a mining company you’re interested in which discusses its project reserves, or its drilling results. I trust you’ll now be conversant with the jargon, and hopefully, you’ll also have a better understanding of how to compare one mining company to another.