Issue link: http://resourceworld.uberflip.com/i/318453
j u n e / j u l y 2 0 1 4 www.resourceworld.com 43 the cycle should react by selling the stocks that stubbornly keep their valuation too high because of employing outdated high commodity prices. At the same time they should be buying stocks in companies that are able to economically produce and/or have mineral reserves estimates calculated at commodity cycle trough prices. Some of the QPs use a consensus price that is derived from analyzing the opinions of a large body of industry professionals or they would employ commodity prices used by peer professionals in mineral resource estimations. In the case of certain bulk commodities (or even precious metals) the commodity price used in mineral reserves estimation could be based on long term contract prices which might be different from the present day market price. This is a low risk scenario that presents the investors with a simple way of valuing the mineral resource company. In these cases, the only variables that investors need to check on would be the capex and the operational costs which had to be kept under control by an experi- enced but conservative management team. The interplay of multiple parameters that had to be considered by specialists necessi- tates interpretation and extrapolation which cannot be 100% performed by computers, therefore is mostly based on the QP's knowl- edge and experience. After all, the QP is the one to decide if mineralization has reason- able prospects to be economically mined. And this is when one has to consider Andy Rooney's 50-50-90 rule: "Anytime you have a 50-50 chance of getting something right, there is a 90% probability you'll get it wrong!" To err is human. Here are a few recent examples that highlight some of the pitfalls that are inherent in this high-risk/ high-reward type of business. A junior explorer and small scale miner published a new resource estimate that was millions of ounces of gold higher than everyone expected. The stock went through the roof but the resource estima- tion was immediately challenged by the regulators and the company was slapped with a cease trade order. The outcome was that the stock dropped significantly and stayed there for a long period of time. Investors should not buy into the hype generated by the release of an extraordi- nary high resource estimation based on the work of a single consultant; therefore, in these cases, the investor would want to see if the estimation was prepared and is being backed by a reputable consulting group before deciding to invest. In an attempt to provide support for a feasibility study, a well managed company proceeded to bulk sample their structurally controlled nuggety gold deposit. One of the consulting group companies walked away considering that the wide-spaced nature of mineralization does not have economic prospects and as a result the stock dropped significantly. The other consultant group decided to continue the processing of the whole bulk sample which is a good way of getting the exact amount of gold that exists and can be recovered from that specific vol- ume of rock. The results came in positive and the value of the stock increased. While this case might be confusing for lay inves- tors, it might be a good idea to always stick with good management and consultants and to not panic and sell the stock. Drill results coming from a precious metals project located in South America received more than a fair share of atten- tion and publicity and as a result became a coveted investment target. A well-known investment group also advanced them millions of dollars and that only made them further look like a safe investment. The pitfalls in this case were the poor understanding of the hydro-geological parameters by the junior and the lack of any resource estimation. The rule of thumb is that investors should not spend their money on projects that claim to be fast tracked to production if they lack mineral reserves. Investment groups are notorious for making poor bets but they have the ability to digest a loss. Unfortunately, that is not the case for retail investors who have only limited capital available. Following are a few other simple things to consider before making an investment decision. • Because size matters, the rule of thumb is to multiply mineral resources by 60-70% in order to get your personal mineral reserves estimation and then try to figure out if the newly computed figure is good enough to make mining possible in that specific envi- ronment and challenging location. • The company's website has to feature all commodity prices used in the mineral resources estimation. The lack of these prices could mean that they are higher than present day prices and the project is uneconomic. Nevertheless, the price assumption could be found in the technical report which is sup- porting the mineral resource estimation and is usually featured on their website. Sometimes companies present their estimates in a table that would feature dif- ferent cut-off grades, therefore indicating the sensibility of their project to different commodity prices. As required by regula- tors, one of them would be highlighted but a prudent investor would want to check on higher cut-off grades (which always translate in fewer ounces or pounds) to see if the project would still be economic at lower commodity prices. In the case of mineral resources estimation, the fine print reads that the economic cut-off grade is unknown so investors should make their own pick based on cut-off grades used at other similar regional mines. Also, make sure that you like the commodity prices that had been used in the calculation of the copper equivalent CuEq (a composite index) cut-off grade. The under-sampling of some of the multiple commodities present in a mineral deposit and of the waste rock could also create specific confidence problems in the accuracy of the mineral resource estimate. Make sure that by-products receive the same attention as the main products as they are important in establishing a bottom line. As grade is king, grade continuity is a more important factor than the press releases' well advertised geological conti- nuity. Geological continuity means that the targeted rocks or fault structure that are favourable to hosting mineralization could be extending for kilometres but economic mineralization would be found in only a few zones/pockets of limited extent within which there is an assumed good grade con- tinuity. Use the 3D Corebox tool (Corebox. net) to see if the mineralized zones