GoldMinerPulse Blog, September, 2009
Date: September 21, 2009
A recent comment on Talk Back asked a question about scoping studies and how a scoping study differs from a feasibility study.
That is a very interesting question. This blog considers the question of scoping study versus feasibility study in the context of MAG Silver (MAG), who has recently released a scoping study, completed by Wardrop -- see Valdecañas Scoping Study Results Reviewed.
The key differences between a scoping study and a feasibility study have to do with:
stage of the project -- scoping study is limited to early stage projects
usage of inferred resources -- a scoping study, with strict disclosure requirements, may use inferred resources. A feasibility study would be restricted to Proven and Probable reserves plus Measured and Indicated resources.
Given that Inferred resources have a greater uncertainly associated with them, a scoping study relying on Inferred resources in going to have a much higher degree of uncertainty associated with it than a feasibility study limited to reserves and Measured + Indicated resources would have. Perhaps, it was the uncertainty associated with Inferred resources that caused Fresnillo to release Statement re MAG Silver announcement of Valdecañas scoping study on September 14, 2009 (viewed September 2009) which states:
The Management of Fresnillo plc has concerns about a number of the assumptions on which the results of this scoping study are based. This scoping study is a hypothetical development scenario and is based on preliminary information and therefore must not be mistaken for a pre-feasibility study.
Supporting rational for caution with respect to the reliance of Inferred resources is provided by disclosure history of the Valdecañas deposit. A quick check at www.sedar.com confirms that the Mineral Resource Estimation Valdecañas Silver-Gold Project Zacatecas State, Mexico NI 43-101, July 25, 2008 report by SRK Consulting showed an Inferred resource of 7.3M tonnes with gold at 2.06 g/t, silver at 1,011 g/t, lead at 2.31% and zinc at 3.94%. The next NI 43-101 TECHNICAL REPORT ON THE MINERAL RESOURCE UPDATE FOR THE JUANICIPIO JOINT VENTURE, ZACATECAS STATE, MEXICO, April 8, 2009 report by Scott Wilson Roscoe Postle Associates Inc. reports:
At a net smelter return (NSR) cut-off of US$50/t, Indicated Mineral Resources are estimated to total 2.95 million tonnes of 879 g/t Ag, 2.22 g/t Au, 2.39% Pb, and 4.15% Zn (including the Valdecañas and the Hanging Wall veins). Inferred Mineral Resources are estimated to total 7.21 million tonnes of 458 grams g/t Ag, 1.54 g/t Au, 1.89% Pb, and 3.14% Zn (including the Valdecañas, Footwall, and Hanging Wall veins and the Stockwork zone).
Between these two reports, the 7.3M tonne with silver at 1,011 g/t changed to 2.95M tonnes at 878 g/t and 7.21M tonnes with 458 g/t. Clearly, Inferred resources are subject to substantial changes such as 50% drop in grade which would have an obvious impact on an economic analysis relying on the original grade.
Canadian securities laws are currently governed at a province level making selection of authoritative sites challenging. Which province's rules apply? For example, Ontario Security Commission states there mandate as:
We administer and enforce securities legislation in the Province of Ontario. Our mandate is to:
• Provide protection to investors from unfair, improper and fraudulent practices; and
• Foster fair and efficient capital markets and confidence in capital markets
The British Columbia Securities Commission lists their mission as:
Our mission is to protect and promote the public interest by fostering:
• A securities market that is fair and warrants public confidence
• A dynamic and competitive securities industry that provides investment opportunities and access to capital
MAG Silver is headquartered in British Columbia and MAG Silver has used the Ontario Security Commission in matters related to its joint venture partner, Fresnillo. For example, MAG Silver Provides Update on Fresnillo "Take-Under" Bid, May 8, 2009:
MAG has also asked the Ontario Securities Commission to enjoin Fresnillo from proceeding with its announced "take-under" bid if Fresnillo refuses to comply with any document production order so as to finally put an end to this take-over bid threat that has persisted for over five months.
Therefore if it is probably reasonable to rely on the Ontario Securities Commission and the British Columbia Securities Commission for definitions on scoping study, feasibility study and related disclosure requirements.
NATIONAL INSTRUMENT 43-101 STANDARDS OF DISCLOSURE FOR MINERAL PROJECTS, documented viewed September 2009 at the Ontario Securities Commission web site states:
1.7 Preliminary Assessments - The term "preliminary assessment", commonly referred to as a scoping study, is defined in the Instrument. A preliminary assessment may be based on measured, indicated, or inferred mineral resources, or a combination of any of these. The CSA considers these types of economic analyses to include disclosure of forecast mine production rates that may contain capital costs to develop and sustain the mining operation, operating costs, and projected cash flows. A preliminary assessment must be either in the form of a technical report or be supported by a technical report. In some cases the technical report must be independent.
Although preliminary assessments can provide important information to the market, because of the early stage of the project the information has
a high degree of uncertainty. An issuer may mislead investors if it does not disclose this information properly. Under general securities laws,
an issuer must disclose a preliminary assessment that is a material change in its affairs. In so doing, an issuer may trigger a technical report u
nder section 4.2(1)(j) of the Instrument. When an issuer discloses the results of a preliminary assessment, section 3.4(e) of the Instrument
requires a cautionary statement. If the preliminary assessment includes inferred mineral resources, an issuer must provide the cautionary statement
required by section 2.3(3)(b) of the Instrument. The purpose of these cautionary statements is to alert investors to the limitations of the
information. We expect the issuer to include these cautionary statements in the same paragraph as, or immediately following, the disclosure of the preliminary assessment.
Identical wording is provided by the British Columbia Securities Commission -- see p. 4 of 15 in Companion Policy 43-101CP to National Instrument 43-101 Standards of Disclosure for Mineral Projects
The Ontario Secuirties Commission documentation, Section 2.3 states:
2.3 Prohibited Disclosure
(1) An issuer must not make any disclosure of the
(a) quantity, grade, or metal or mineral content of a deposit that has not been categorized as an inferred mineral resource, an indicated mineral resource, a measured mineral resource, a probable mineral reserve or a proven mineral reserve; or
(b) results of an economic analysis that includes inferred mineral resources.
(2) Despite paragraph (1)(a), an issuer may disclose in writing the potential quantity and grade, expressed as ranges, of a potential mineral deposit that is to be the target of further exploration if the disclosure
(a) includes a statement that the potential quantity and grade is conceptual in nature, that there has been insufficient exploration to define a mineral resource and that it is uncertain if further exploration will result in the target being delineated as a mineral resource; and
(b) states the basis on which the disclosed potential quantity and grade has been determined.
(3) Despite paragraph (1)(b), an issuer may disclose a preliminary assessment that includes inferred mineral resources if
(a) the results of the preliminary assessment are a material change or a material fact with respect to the issuer; and
(b) the disclosure
(i) includes a statement that the preliminary assessment is preliminary in nature, that it includes inferred mineral resources that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as mineral reserves, and there is no certainty that the preliminary assessment will be realized; and
(ii) states the basis for the preliminary assessment and any qualifications and assumptions made by the qualified person.
An identical, Section 2.3, is provided by the British Columbia Securities Commission -- see p. 7 of 19 in National Instrument 43-101 Standards of Disclosure for Mineral Projects.
Also see slides from a 1 day seminar on the 43-101 for more discussion: February 29, 2008 Mineral Project Disclosure Standards: Understanding NI 43-101, Sponsored by OSC, PDAC, APGO, TSX.
NATIONAL INSTRUMENT 43-101 STANDARDS OF DISCLOSURE FOR MINERAL PROJECTS, viewed September 2009 at the Ontario Securities Commission web site, states in its definition section:
"feasibility study" means a comprehensive study of a mineral deposit in which all geological, engineering, legal, operating, economic,
social, environmental and other relevant factors are considered in sufficient detail that it could reasonably serve as the basis
for a final decision by a financial institution to finance the development of the deposit for mineral production;
"preliminary assessment" means a study that includes an economic analysis of the potential viability of mineral resources taken at an early stage of the project prior to the completion of a preliminary feasibility study;
"preliminary feasibility study" and "pre-feasibility study" each mean a comprehensive study of the viability of a mineral project that has advanced to a stage where the mining method, in the case of underground mining, or the pit configuration, in the case of an open pit, has been established and an effective method of mineral processing has been determined, and includes a financial analysis based on reasonable assumptions of technical, engineering, legal, operating, economic, social, and environmental factors and the evaluation of other relevant factors which are sufficient for a qualified person, acting reasonably, to determine if all or part of the mineral resource may be classified as a mineral reserve;
NATIONAL INSTRUMENT 43-101 STANDARDS OF DISCLOSURE FOR MINERAL PROJECTS, viewed September 2009 at the Ontario Securities Commission web site, in the CONTENTS OF THE TECHNICAL REPORT section lists:
Item 19: Mineral Resource and Mineral Reserve Estimates - A technical report disclosing mineral resources or mineral reserves must
(i) use only indicated mineral resources, measured mineral resources, probable mineral reserves and proven mineral reserves when referring to mineral resources or mineral reserves in an economic analysis that is used in a preliminary feasibility study or a feasibility study of a mineral project;
(j) if inferred mineral resources are used in an economic analysis, state the required disclosure set out in subsection 2.3(3) of the Instrument;
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