It is well known that investing in resources companies can be risky. Resources company shares frequently display a higher level of volatility in comparison to industrial companies and accordingly; investors rely heavily on information disclosed by resources companies to make informed investment decisions.
In order to minimise this risk and ensure that resources companies do not mislead potential investors, resources companies are required to comply with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (JORC Code) which is incorporated in the Listing Rules of the Australian Securities Exchange (ASX) and New Zealand Stock Exchange. The purpose of the Code is to ensure that resources companies disclose all information which investors and their professional advisers would reasonably require, and reasonably expect to find, for the purpose of making a reasoned and balanced judgment regarding the Exploration Results, Mineral Resources or Ore Reserves being reported.
In recent times, the ASX has expressed concern that a number of resources companies have not been complying with the reporting requirements set out in the JORC Code. In particular, the ASX has noted instances where resources companies have reported that they hold large mineral deposits without disclosing to the market, amongst other things:
- that they're confident in their estimates of those deposits; or
- whether they have considered whether the deposits are impossible or unprofitable to develop.
As a response to these concerns, the Australasian Joint Ore Reserves Committee (JORC) and the ASX released Companies Update 03/08 (Update) on 18 March 2008. The Update clarifies some of the reporting obligations of resources companies and is considered below.
JORC Code and Inferred Resources
Under the JORC Code, when a company reports on the presence of a raw resource deposit, it must state its level of confidence regarding the tonnage, grade and mineral content of that deposit. This level of confidence is reflected by indicating whether the Resource is either 'Inferred' (low confidence), 'Indicated' (reasonable confidence) or 'Measured' (high confidence).
An 'Inferred Mineral Resource' is that part of a Mineral Resource of which tonnage, grade and mineral content can only be estimated with a low level of confidence. It is inferred from geological evidence and assumed but not verified geological and/or grade continuity. Further, it is based on information gathered from locations such as outcrops, trenches, pits, workings and drill holes which may be limited or of uncertain quality and reliability.
When a company reports on an Inferred Mineral Resource, the Code requires it to provide sufficient information to enable an investor to evaluate and assess the economic viability of the resource. Designating a deposit as an Inferred Mineral Resource means that there is considerable uncertainty as to that deposit's extent, grade and mineral content.
Increased reporting of 'in-ground value' or 'in situ' value
During the December 2007 quarter, the ASX identified a number of resources companies reporting the "in ground" or "in situ" dollar value of undeveloped mineral deposits. These deposits commonly included large portions of "Inferred Mineral Resources".
The ASX has emphasised that reporting the "in ground" or in situ" value of undeveloped mineral deposits may be misleading because undeveloped mineral deposits do not necessarily translate to marketable minerals. For example, it may be impossible to extract the minerals from their 'in ground' location or economic constraints may exist which make it difficult to market the relevant minerals. If this is the case, investors that are only provided with the "in ground" value of the mineral deposit are not given an accurate assessment of the economic value of a company's mineral assets.
In an attempt to stamp out this practice, the ASX have reiterated in the Update that companies must consider certain factors known as "Modifying Factors" before they report on the economic value of their mineral reserves. These factors include mining, metallurgical, economic, marketing, environmental, legal, social and governmental considerations, and when taken into account, may affect how much economic value a company can attribute to or extract from a given mineral deposit. These Modifying Factors would take into account, amongst other things, the matters discussed above i.e. whether it is viable to extract the minerals from their 'in ground' location or whether economic constraints exist which make it difficult to market the relevant minerals.
The Update also reiterates that companies must not use the words 'ore' and 'reserves' to describe estimates of mineral resources unless they have considered all of the Modifying Factors and still believe that the resource is economically viable. The JORC Code provides that an 'Ore Reserve' is the economically mineable part of a Measured and/or Indicated Resource and accordingly, the term implies "technical feasibility" and "economic viability". Companies should also be reminded that Inferred Mineral Resources (resources where the tonnage, grade and mineral content can only be estimated with a low level of confidence) cannot be converted to 'Ore Reserves'.
What does it mean?
The Update serves as a warning that the ASX expects resources companies to understand and comply with their reporting obligations under the JORC Code, particularly where the economic value of a particular resource isn't clear.
If you would like more information about the reporting obligations under the JORC Code or other matters relevant to mining or exploration, please ensure that you are on our mailing lists. Otherwise, please contact either Liz Allnutt on (08) 9426 3214 or Natasha Vyrnwy-Jones on (08) 9426 3419 if you have any queries.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.