CHAPTER 12 VALUATION OF A MINERALS EXPLORATION PROGRAM
| Jurisdiction | United States |
(Apr 1980)
VALUATION OF A MINERALS EXPLORATION PROGRAM
Dept. of Applied Earth Sciences Stanford University
Stanford, California
Careful valuation of a minerals exploration program is essential for many purposes. Some of the more obvious uses are consideration for future mining, buying, selling or leasing a property, buying or selling shares in a company, determining a tax base, dissolving partnerships, reorganizing companies, and mergers. A geologist or engineer making such valuations must keep in mind the necessity of the redemption of capital in a wasting asset.
Before attempting to determine the feasibility of developing a property or to evaluate information obtained from an exploration program, a clear understanding should be had of the differences between resources and reserves. To many laymen these terms are synonyms, but in the minerals industries they have quite distinct meanings. A resource is defined as the total amount of an element or mineral that exists in an area, whether or not the material can be recovered at a profit. A reserve, on the other hand, is the amount of mineral that can be profitably recovered. For example, a few years ago when gold was selling at $35 an ounce, a mineralized body that contained 0.1 ounce of gold per ton was worth $3.50 a ton. It was a resource and could not be mined at a profit. At present, with the price of gold about $500 an ounce, such material is worth at least $50 a ton and in places it is recoverable at a profit. Many other examples of this type of change can be given. Copper has long been known in the hills south of Tucson, but the grade was too low to permit mining during the first half of this century. Only since mining equipment has been improved and is now capable of handling cheaply large amounts of ore have several of the properties become profitable. The former copper resource is now a reserve.
These examples point up the fact that as economic conditions change and as equipment and methods of mining improve, the waste rock of today becomes the ore of tomorrow. Generally a mine that has had some past production should not be considered as abandoned; it is simply idle or inactive.
Reserves are classified as proven or positive, probable, and possible (figure 1). In an underground mine proven ore is considered to be the material exposed on three sides, that has been adequately sampled, and that mey be recovered at a profit. Probable ore is exposed on two sides and has been partly sampled and may have been drilled. Ore exists in the judgement of experienced geologists and mining engineers. Possible ore is material that, again in the judgement of experienced explorationists, may reasonably be expected to be present and to be of minable grade. Generally only proven ore is considered in evaluating reserves, though at times probable ore is also assessed. In a body of mineralized rock that is of the type that persists for long distances with only slight changes in grade, closely spaced drill cores or cuttings may be considered adequate for preliminary valuation,
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—Partially developed vein, three ore categories.
After U. S. Forest Service
Figure 1
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though many such deposits should be subjected to additional inderground exploration before a final decision is made to proceed with development.
It must be emphasized that no two orebodies are identical. They will differ in size, shape, grade, location, depth, character of the ore and the surrounding rocks, and rock structure. The valuation, development, and mining of each orebody is therefore a separate problem. Consider the differences between a large low grade porphyry copper deposit and a five foot wide vein of high grade gold ore. Exploration drilling may possibly be relied upon to present a reasonable value of the copper ores and preliminary valuation may proceed on the assumption that a specified tonnage of an established grade of ore is present. On the other hand, gold distribution in a high grade vein is generally spotty and unpredictable. Drilling results are indicative only. In order to determine the value of the ore underground development and sampling are usually required. Possibly a shaft will be needed and considerable exploration along the vein required before a satisfactory determination of value and extent can be made.
In the valuation and development of any mineral property a great deal of personal judgement is required. For this reason two separate appraisals by competent geologists will seldom reach the same valuation. The items are so variable that seldom can a mathematical formula for valuation be used with confidence. Rather companies have come to depend upon the broad experience of their senior employees. Some companies prepare large charts with lists of the many items to be considered and when a property is submitted for valuation by the exploration department this chart must be completely filled in. Rare indeed is the mine these days that will withstand much mismanagement or with an orebody so rich that costs are not worrisome. Rather the norm is an orebody so close to the economic limit that sound judgement is continuously required to make it a success.
The field geologist who submits a property for valuation should be required to give his idea of what percentage chance the property has of becoming a mine. A 2% chance means that one of every 50 similar properties might become profitable. This is optimistic and these days to find one mine in 1000 examinations is an excellent attainment.
Many other factors must be considered before a satisfactory valuation can be made. Does the surface area under company control adequately cover the mineralized areas and is the title clear? Are rents or royalties involved and if so how much are they? All contracts must be carefully reviewed. If an option is desired what option payments are involved? If the deposit is a vein or a vein system, what is the apex situation and what are the extralateral rights?
Where is the mine relative to transportation — roads and railroads — and to centers of marketing? Is labor plentiful and good? The differences between a mine in the Tucson area and one in the jungles of central Africa or the Amazon Basin is obvious. I recall an
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exploration for iron ore in the jungle of central Africa...
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