How the JORC and Valmin codes work
Steve Gemell*, 15 December 2011
THERE is movement at the station with respect to the JORC Code, as has been evidenced by the recent discussion documents provided by the JORC Committee and the ASX initiatives on related matters. There are changes afoot with the VALMIN Code too, as evidenced by recent seminars. With the publication of his article in HighGrade, Dr Graham Lumley has made a timely contribution. No serious practitioner is unaware of the error introduced to ore reserve estimation by underestimating costs.
And yet costs have been, and are being, continually (but not universally) underestimated. Because these estimates are “back-fed” into ore reserve estimates, they in turn suffer from collateral damage. Or do they? Well, that depends on timeframe.
Ore reserve statements can be divided into two broad subsets: those applying to existing operations, and those applying to proposed future operations.
Provided no major change is likely to occur with respect to site conditions (including production rate), cost estimates for the first group should be reasonably accurate given the wealth of recent historical data. Ore reserves are re-estimated at the end of each reporting year, and detected costing errors are eliminated from the process. Very often the elimination of these errors is obscured by the very significant changes resulting from revised commodity prices. Does the existence of these errors result in an “incorrect” ore reserve over a one year period? No, it does not. The basic requirement of an ore reserve estimate at an operating mine is that it accurately predicts anticipated ROM production. Mine staff will continue to work to the mine plan with its unrecognised errors. Eventual recognition of the errors may, however, lead to a more substantial longer term impact.
It is with the second subset, in which I include major expansions/contractions and transitions from openpit to underground, that we see most of the estimation errors come to light.
Dr Lumley describes a mine plan that used a figure of 18 million tonnes per annum for Hitachi EX5500 hydraulic excavators. Although not directly stated, I assume that this is the production rate applied to a single unit without the downtime capacity provided by a spare machine, as that figure is then compared with production rates of individual machines. His comparison concludes that the median production rate of these machines is 13.5 million tonnes per year, and that only 20% of these units achieved the 18 million tonnes-per-year rate. Not only is the median position significantly less than the target, but the range is very broad.
And here is where I assume the temerity to expand upon Dr Lumley’s position. Given the very wide range of experienced production rates, it is obvious that the estimator cannot simply review industry norms but must look carefully at the site-specific conditions. A median position reflects a planning position only where site-specific or even regional-specific information is not available. It is a good starting point, but does not substitute for a more careful examination.
To use the EX5500 example, specific ground conditions would be important in assessing loading times, moisture content and bucket fill factors; the matched truck estimates would influence other cycle time components; bench and pit configuration influences non-productive time requirements; local labour conditions affect not only productivity but available operating time; and logistics issues impact upon machine availability. Physical location (eg, high elevation above sea level) is also relevant.
Many projects use local contracting rates for inclusion in cost studies. For the higher-level feasibility and detailed engineering studies, these would involve site inspections by one but more often several potential contractors so that they could appraise conditions themselves before providing estimates. For lower-level exercises, such as conceptual or scoping studies, regionally-based contract mining estimates can be applied and varied according to the estimator’s knowledge of ground conditions, particularly interfaces between free-dig, paddock blasting and full drill-and-blast horizons. In all of these cases, equipment performance expectations are accommodated in the contract rates, but on a site-specific rather than industry-norm basis. As identical figures are (or at least should be) used in the adjusted Lerchs-Grossmann determination of openpit ore reserves, equipment performance is also therefore intrinsically incorporated into the ore reserve estimate.
Of course, this does not apply to either contract fleet or owner-operator fleet estimates where a failure of competence and lack of attention to detail of the type illustrated by Dr Lumley occurs. However, the range of risks which can materially affect costs is not limited to equipment performance but extends across a myriad of mining issues, the vast majority of which require site-specific assessment at some level. Furthermore, it applies not just to mining issues, but extends to processing and other economic activities associated with the production process.
But the question that should be posed is: should the Valmin Code (or JORC Code) deal with these issues? Is this yet another example of someone expecting JORC and VALMIN to be “how to” codes, when in fact they are nothing of the sort. To make these codes “how to” they would become prescriptive and detailed, and users would need to ensure that all possible cost-affecting issues are covered. As it stands now, the valuer has to exercise his or her judgment across the entire range of likely impacts without limitation in order to provide information to the investor/reader.
Is any “how to” manual capable of warning every practitioner of every risk on every project? Isn’t this why the JORC Code relies on the Competent Person and the VALMIN Code on the Expert? These “principles based” codes require the Competent Person/Expert to take responsibility that all material factors are considered. If they don’t, then they can be subject to reprimand by their peers via the AusIMM’s Ethics Committee.
There are possibly a half-dozen applicable valuation methods, plus their variants, for mineral properties. Only a few of these involve cash flow analysis. Consequently, the attention to detail which would be required for a prescriptive write of a “how to” version of the VALMIN Code for the cash flow methods would need to be extended to all other methodology.
Furthermore, valuations required under the Valmin Code, by their very nature, must be completed very quickly. Responses to shareholders must be produced within stipulated regulatory timeframes, and delays caused by the independent expert or specialist are deemed unacceptable if access to people, data and sites has been unrestricted. This is no different to the time limitations placed on an unpublished valuation for commercial purposes, where a “fast deal is a good deal” and in fact may be the only deal. It is not for the valuer to re-work a feasibility study (the requisite time is simply not available), but it is the valuer’s responsibility to critically assess all perceived influences to not just costs, but also probability of occurrence and timing of material impacts, and to adjust findings (and value) accordingly. In this manner, the valuer reporting publicly emulates the valuer confidentially appraising a commercial deal, thus maintaining the lynchpin of the assessment: “the fair market value”.
So perhaps it is not appropriate for the codes to address the issues raised, although I would be keen to know if fellow practitioners, users or regulators think otherwise. Nevertheless, the issues raised by Dr Lumley are important to recognise, and are particularly appropriate to cost estimation activities. The apparent lack of “how to” emphasis provided within the codes does not relieve the valuer or competent person from considering the impact of material site conditions and – amongst many other influences – equipment performance on ore reserves and likely future outcomes.
*Steve Gemell is a member of the Valmin Committee and has more than 35 years’ experience in the Australasian and global mining industry. He has been principal of Gemell Mining Engineers, an independent multi-discipline consultancy, since its formation in Kalgoorlie, Western Australia, in 1984. His experience includes operational management in underground and openpit mining and supervision of CIP/CIL, flotation and alluvial plants. He has held executive and non-executive directorships with a number of listed mining companies.
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