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In 1995, Bre-X Minerals publicly announced that they had discovered a gold deposit containing about 200 million ounces, or about 8% of the world’s reserves. The deposit was in Indonesia, and the ruling dictator’s son decided that he should have a piece of the action. He forced Bre-X into a joint venture with himself and the mining company Freeport-McMoran (owner of the giant Grasberg mine in Indonesia, i.e. a friend). Naturally, Freeport-McMoran wanted to do their due diligence and drilled right beside Bre-X’s holes. Bre-X’s chief geologist was in Toronto, Canada accepting the “Prospector of the Year” award (the holy grail of junior mining) when he got the call that Freeport-McMoran’s holes were bone dry, every single one of them. Bre-X’s field geologist had “salted” the drill core with gold panned from nearby streams (or so it is thought).
In response to Bre-X, Canada created National Instrument 43-101, entitled “Standards of Disclosure for Mineral Projects.” In this document, which is federal law, a “Qualified Person” must certify the existence of mineral deposits and the public claims made by junior mining companies. A Qualified Person is defined as a licensed professional engineer or geologist with several other qualifications.
Most of the world, including the small part of the mining industry that does not do business in Canada, adheres to the National Instrument. Quality Control at the field level has been strictly regulated and public statements are strictly enforced.
For the average investor, the following things are the key points to know about NI 43-101:
A company cannot claim it has a gold reserve until it has performed a “preliminary feasibility study” or greater on the deposit. Thus, an engineer has designed the mine plan, investigated mining rates, recoveries, grades, and every other cost item sufficient to nail down the mine cost to around plus/minus 10%, and concluded the deposit has a positive rate of return.
Of course, an engineer carries out the feasibility study but investors, or a mining company, must decide to build the mine. These are two different things, but if the engineer has put their engineer’s stamp on the deposit with a positive rate of return, the company can claim it has reserves.
If the deposit is not a reserve, it must be called a resource (or deposit, or whatever).
National Instrument 43-101 establishes five confidence levels of a mineral deposit, but for investment’s sake they can be divided into three:
Every deposit will have some metal in each category (unless the whole thing has been drilled and analyzed to a proven and probable reserve level).
The greater the confidence level in the deposit, the greater the share price that is justified for the owning company per ounce of deposit.
The Junior Gold blog