The 2017 SME Guide for Reporting Exploration Results, Mineral Resources, and Mineral Reserves has been adopted by the Society for Mining, Metallurgy, and Exploration, Inc. (SME) and is therefore strongly recommended to be used by members of this organization.
The Guide is recommended as a minimum standard for reporting Exploration Results, Mineral Resources and Mineral Reserves for public and private purposes. In terms of the Guide, Public Reports are reports prepared for the purpose of informing investors or potential investors and their advisers on Exploration Results, Mineral Resources or Mineral Reserves.
RISK UNDERVALUATION IN MINERAL PROJECTS
Reporting to markets should (have to!) be complete, independent and competent.
Risk is a key factor; in most cases, along with commodity price, the most important variable defining a project’s value. The importance of a good estimate of the risk measure (the discount rate in DCF models) cannot be overemphasized.
Yet, something is wrong, very wrong:
- In most cases (in a sample of 77 documents reporting pre-feasibility, feasibility studies and valuation exercises of operating assets), the magical discount rates used in DCF are 5% and 8%, accounting for 26% and 27% of the cases (10% accounts for 17%). In 75% of the analised cases, the used discount rate is ≤ 8%. Let’s say you are an investor, would you accept a lower than 8% rate in most mineral projects?
- The 5% magical number is pervasive in gold projects. A new rule can almost be written; IF gold THEN 5%.
- Reports include countless pages of technical minutia and detail of doubtful utility for the average investor; yet only a handful of them has any discussion or justification of the chosen discount rate.
- Country risk is irrelevant; I will grant that the 77 sample is relatively small but the anecdotal evidence shows that the same risk is attributed to projects in the US and Canada or in Burkina Faso and Colombia.
Please bear in mind these are preliminary results; as more data is compiled, new trends may develop. Although I tried to have a random sample, diamond and gold projects may be overrepresented (20 and 21 out of 77, respectively).
I will present these and other results at SME’s Mining Finance Conference in NYC on May 1 and 2, a little more than a week from now. If you are attending, I would like to discuss in person the reasons behind this and how should this (can it?) be remediated – or shouldn’t reporting to markets be complete, independent and competent?
Being a member of SME and of the Society of Economic Geologists – SEG I will try to discuss this issue within these professional organisations. Your comments (in person or through online fora) are always welcome.
I will be in Maputo (Mozambique) next week (Monday to Wednesday, the 4th to the 6th April), focused on the country’s mineral industry. It’s a short stay and, unfortunately, limited to Maputo but it’s an opportunity to meet an talk about exploration and mining projects and opportunities (especially about, but not limited to, gems and diamonds, tantalite and other pegmatite deposits). Drop me a line to email@example.com to set up a meeting.
Num retorno há muito desejado, estarei em Maputo (Moçambique) na próxima semana (segunda a quarta, 4 a 6 de Abril), focado na indústria mineira do País. É uma estadia muito curta e, infelizmente limitada a Maputo, mas é uma oportunidade para falar sobre projectos e oportunidades no de prospecção e mineração (especialmente em, mas não limitadas a, gemas e diamantes, tantalite e outros jazigos pegmatíticos). Contacte-me através do meu email para combinarmos uma reunião: firstname.lastname@example.org.
Two years ago I was involved in a very interesting tantalum project in the Republic of Congo (Brazzaville) – photo gallery here. I have since then followed with attention this metal’s market news (and its idiosyncrasies, being one of the 3TG minerals – subject to control under the conflict minerals framework).
USGS just published a report on the evolution of this metal’s market and production structure and origin in the last 15 years. It’s well worth reading (thanks to USGS for publishing the report) – you can get it here.
“The exploration sector continues to face a challenging capital raising environment with no signs of a turnaround.”
If the opening statement of the PDAC’s mid-year financing review doesn’t discourage you, read the full document: mineral-financing-mid-year-review-(core–fall-2015).
Keep fighting. What else?
Diamonds mined in 2013 total 14 bn USD. How do they compare with other mineral commodities?
Rather than using somebody else’s compilations, I prefer to check values published by (commodity) specialised international organisations or public companies (OPEC, World Gold Council, KPCS, USGS, etc.). After some work, I have arrived to the estimates presented in the table to the left.
Is the ranking surprising? Any obvious error on the table’s values? Comments and suggestions (always) welcome. Yes, reality changed a lot since 2013 (only 18 months ago).