As the impacts of NI 43-101 regulations flow through the system, gold companies may be revalued

There are many opinions about the value of gold in the ground, some of which have changed through time.

As people become more familiar with the NI 43-101 regulations, investors have come to distinguish between resources, proven reserves, and measured and indicated ounces. As a consequence, company prices no longer react much to raw results; investors now wait to see the result of a formal technical report to see if more ounces are discovered or upgraded to proven reserves.

The value of gold and the ground will depend on the price of gold. For some of the examples above, the value of proven and probable reserves was set at about one-quarter to one-fifth of the spot gold price. Other authors place a lower value on such gold.

There is a problem with the model for gold exploration. There does not appear to be enough money in it to make it worthwhile.

Value of gold discovered per dollar of exploration through time. 

From Muller and Frimmel (2010).

In the face of a rising price of gold, the payback on gold exploration appears to have fallen alarmingly. The idea that an exploration company's price will rise tenfold on a discovery may have been valid forty years ago, but with the level of success indicated on the above table, such a payback would leave nothing for the poor developer of the eventual mine.

It is possible to infer from this chart that we are running out of gold to discover. Here at the World Complex, our view is that a significant factor in this decline is the increased level of regulatory complexity a company must navigate in order to officially "discover" an amount of gold. In particular, the amount of drilling required to define one million ounces of gold is much greater at present than was the case in, say, 1960.

Ultimately, the extra money is not wasted. The additional definition of the resource may not have been necessary to "prove" the deposit in years past--but it would have been done to define the reserve during the planning stages of the mine. So the effect of recent regulation has been to shift some of the spending burden from the mine developers to the junior explorers.

In effect, the increase in cost defining resources is mitigated somewhat in the development phase. In principal, it should cost slightly less to develop a mine after the definition of the mineral reserve than would have been the case in the distant past, suggesting a net benefit to developers and producers. I have not pulled together enough data to study whether the share price of producers has improved with respect to typical metrics (reserves or production) to see if this shift can be separated from the impact in the rising price of gold.

It may be that there is another revaluation to come for mining companies.

Regulatory creep(s) in the Canadian mining sector?

I use the term regulatory creep to describe the process by which regulations in an industry are expanded through time to increase the level and scope of control through casual application rather than by formal change. Apparently there is debate over whether this process is inevitable (it is in our current "everyone must be safe" regime). I intend this to describe a process, not the individuals responsible.

Last year I wrote an NI 43-101 qualifying report for some properties held by a client. The report went to the securities commission for approval. The client wished to float another company with the goal of exploring the properties described in the report. The report was reviewed by the commission, and came back with a deficiency--the client had not spent the requisite amount ($100,000) on the property.

This was a surprise, because according to the budget filed with the commission, the client had spent considerably more than $100,000 on the property. However the commission had disallowed a number of expenses without explanation leaving a final amount of approximately $90,000 spent on the properties. Good grief!

This result was so perverse that I had the urge to laugh when I saw it, despite the immediate impact on my livelihood.

The intent of that rule was not to exclude properties that had fallen $200 short of the $100,000 limit. The intent of that rule was to prevent people from digging a couple of holes in their backyards, spending $200 on assays, and then bringing that property to market. It was not meant to exclude properties which have previously been the subject of extensive soil and trench geochemical surveys coupled with significant drilling program which admittedly failed to define a resource--but evidently the properties were good enough that public companies had attempted to define a resource in the past.

It's possible that this would have been nothing but an annoyance had not the government of Sierra Leone subsequently cancelled the licences without explanation. The full story is not pieced together but it appears that there is another large company involved which somehow received technical details of the properties from an unknown source (the regulators, perhaps?)

Some thoughts on NI 43-101

In mining work, dishonesty can have obvious rewards. Some of the scandals that occurred in the fairly recent past—Bre-X, Golden Rule, have led to an increasingly onerous set of regulations on reporting.

Some standardization in the rules of reporting mineral exploration results is a welcome step and the agencies which initiated these steps should be congratulated for their attempt to bring clarity to the market.

Nevertheless, it is important that while bringing clarity we don't make the entire system opaque. One problem with the NI 43-101 setup is in the review of reports. Many of the reviewers do not have expertise in geology--in fact, they are lawyers and accountants, and they expect the document to read like a legal acounting document. This places a burden on the poor geologist writing the report, and favours instead larger geological consulting companies who have legal and accounting staff to vet reports prior to submission.

It is a truism that when the major players in an industry feel threatened by smaller upstarts, the most certain way to overcome such competition is through enacting industry standards.

Additionally, geology is not like most of the other "hard" sciences. There is, of necessity, a great deal of interpretation of observations. Simply reporting observations is only part of the science--the interpretation is the key area. Much of this interpretation follows from previous experience. Consequently, it is common for geologists to make a key interpretation about a project on the basis of previous experience. But this is not something that translates easily into an accounting or legal document.

Two geologists may make the same observations about a project and arrive at different conclusions. This is a reflection of the nature of geology, and is not something that is helped by needless quantification. 

The rules of reporting on mineral properties make it very difficult for a geologist to express certain reasoned opinions which have arisen from interpretations of observations in light of past experiences. This means that a great deal of the value that a geologist can bring to a property is no longer reportable, and the exploration progress on a property must be reduced to the reporting of a series of dry numbers. The flavour is lost.

Consider this--in 1897, the Ashanti Mine began production. It was financed by the issuance of shares, at 100 pounds apiece, on the London Stock Market. How was it promoted? The founders of the company simply reported that they had visited the site in Ghana, and that the valley was full of artisanal miners recovering gold from rich seams within the bedrock.

Early this year I wrote an NI 43-101 report on a property in Sierra Leone--a report which is still bouncing back and forth between myself, the company in question, and Canadian securities regulators. One of the earlier issues, since resolved, was my contention that the number and extent of artisanal mining operations on the property meant that it would be reasonable to assume some chance of successfully exploring the property for gold.

The securities regulators took exception to that conclusion. I had no specific numerical measurements of the gold recovered by the miners. There were no numbers to report. So the observation had to be withdrawn, or at least, very heavily discounted.

Were the Ashanti Mine property being explored for the first time today, it is highly doubtful that it could be brought into production. The actual structure of the gold shoots are like long, thing, curving cylinders that plunge steeply near the surface, and gradually level out at depth. The gold-bearing zones of the shoots are only a few m in diameter, but they are perhaps 3 km in length, and each one carries 2-4 million ounces of gold.

A cylinder is very difficult to find, let alone completely define, by drilling. The only way they could have been found and mined was the way it was done. Artisanal mining was observed at the surface, and so a proposal is made to start at the surface and mine down. No drilling, just start mining. But in today's environment, it would be impossible to raise the financing for such a venture (what are the numbers?), and it would be practically impossible to define a resource using the normally accepted methods (which are more suitable for bodies with a tabular geometry).