On Estimating Rare Earth Reserves


"The NI 43-101 approach to mineral-resource classification provides greater transparency on the early stages of project development with a rigorous reporting framework that is missing under the SEC guidelines."

On Monday Molycorp announced that the estimated proven and probable reserves at its Mountain Pass rare-earth deposit in California have increased by 36%, based on the SEC's Industry Guide 7 for making such estimates. The company reported that its mining consulting firm estimates that the Mountain Pass ore body now contains the equivalent of 1.3 Mt in reserves of in-situ rare-earth oxides, with an ore grade of 7.98%.

The company's press release included the following statement:

The SEC Guide 7 standard of measurement used by SRK measures proven and probable reserves. This standard differs from the NI-43-101 standard, used by virtually all other rare earth companies, in that the NI-43-101 standard measures a potential ore body in terms of "measured, indicated and inferred resources." Under SEC Guide 7, "inferred" material is treated as waste and is not included in the measurement of reserves, while NI-43-101 standard allows for the inclusion of inferred material as part of a potential resource.

The press release goes on to state:

Inferrred [sic] resources is typically a much larger number in these estimates than measured and indicated resources.

A few comments:

  • While it is indeed the case that Canada's NI 43-101 standard uses the terms "measured," "indicated" and "inferred" with relation to mineral-resource estimates, it also includes guidelines with regard to mineral-reserve estimates, providing for such estimates to be placed into the "proven" and "probable" categories, similar to those used under the SEC's Industry Guide 7.
  • Measured and indicated resource estimates (referred to collectively as 'demonstrated' resource estimates) may be converted to proven and probable reserve estimates if the parts of the mineral deposit that they describe, are found to be economically viable after rigorous investigation and analysis. Inferred resource estimates may not be included in the calculations used to convert demonstrated resource estimates into reserve estimates.
  • Australia's JORC code has similar guidelines for estimating mineral resources and reserves.
  • Inferred resource estimates are indeed typically larger than demonstrated resource estimates, because the latter require more extensive drilling and subsequent analysis so that they can be determined. Indicated resource estimates give interested parties a higher degree of confidence in the associated data; measured resource estimates greater still.
  • It is the case that there are very few rare-earth deposits out there with a mineral-reserve estimate that conforms to a recognized standard. In addition to Mountain Pass, the only others of which I am aware, at the time of writing, are Bear Lodge (owned by Rare Element Resources), the Dubbo Zirconia Project (owned by Alkane Resources), Mount Weld (owned by Lynas Corp) and Nechalacho (owned by Avalon Rare Metals).

Companies trading on the Toronto Stock Exchange (TSX) are required to use the NI 43-101 guidelines when publishing their reports, and such reports are required to enter the public domain within a certain time period. Other companies operating in the junior-mining sector, but not listed on the TSX, may voluntarily write technical reports to the NI 43-101 standard; a number do, in order to enhance the credibility of their efforts. Molycorp has in the past had its consultants produce high-quality technical reports that would meet the NI 43-101 standards, which included mineral-resource estimates.

I have always preferred the NI 43-101 approach to mineral-resource classification over that of other schemes, because it seems to provide greater transparency on the early stages of mineral-resource project development, via a rigorous framework for the reporting of mineral resources that is missing under the SEC guidelines. I also prefer NI 43-101 to the Australian JORC Code, which companies trading on the Australian Securities Exchange (ASX) use for mineral-resource classification. This is not because of the technical standard for JORC (on which much of the original NI 43-101 was based), but because companies on the ASX are not required to publicly disclose the associated technical reports.

I've long felt that the SEC should amend its guidelines to incorporate language relating to mineral-resource classifications, similar to that contained within NI 43-101, to give US investors valuable early visibility into new projects.

Disclosure: at the time of writing, Gareth Hatch is neither a shareholder of, nor a consultant to, any of the companies listed above.

Gareth Hatch, Resource Investor

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