Imperial Canada Inc.. Alain Deneault
down into the subcategories of “probable” and “proven” reserves. The difference between the two lies in the affirmative nature of the conclusions of a study. In the case of “probable mineral reserves,” it is asserted that exploitation “can be justified,” whereas in the case of “proven mineral reserves,” exploitation “is justified.”12
However, the problem is precisely the continuity between deductions regarding quantity made based on “resources” and the groping preliminary statements made based on “reserves,” and this is what has raised concern among international investors. What do statements about reserves really mean? Are they supposed to indicate that we know when, where, and how minerals can be effectively extracted in a profitable manner? But so many factors are involved, and are liable to change, that in fact no judgment is possible. Estimates must continuously be adjusted to take into account real extraction costs, the real mineral content of soils, and above all, the commodity’s price fluctuations.
Consequently, the boundary between what are really estimated reserves and what should be viewed strictly as resources constantly shifts. Scott Wright, online analyst for Zeal Intelligence and an expert on this issue, admits he has had problems sorting out the wide spectrum of data provided by gold-mining companies. “Maybe this land was surveyed and/or tested in the past, but the market price of gold was so low it was not as economically feasible to extract as it was for the mine next door. But with the rising price of gold, and because the juniors believe gold prices will continue to rise, this deposit is now feasible or will be in the near future … The price of gold now or in the near future will pay for us to dig a little deeper.”13
These contingencies not only make it impossible to come up with sound empirical assessments; they also tend to muddle definitions, as what may be categorized as inaccessible resources one day, depending on price speculation or on certain technological costs, the next day may be listed as reserves that “may justify” exploitation. So much uncertainty makes all such notions highly unreliable when it is time to evaluate a project’s potential. The estimates provided in the valuation letters of experts and geologists − little better than modern-day letters of exchange − are highly subjective. We find ourselves in the realm of circumstantial “opinions” used to justify the broadest possible interpretation of the word “reserves” as subsumed under the term “resources.” These kinds of shifting calculations have enormous potential to generate false or misleading results.
In addition, scientific consulting firms that establish or validate estimates are as completely governed by the profit motive as the mining companies themselves. How, at the risk of losing future contracts, could such consultants ever possibly publish unsatisfactory conclusions? As a result, the consulting firms hired by mining companies may respond first to the requirements of the market, rather than on honest and objective science.
While some investors may be unaware of the confusion between the terms “resources” and “reserves,” or may hope to profit from it, others – including some of the canniest – are made uneasy by, and are particularly wary, of the Toronto Stock Exchange, which they see as a market that plays on ambiguity. “Resources are a loose and thorny word in the mining industry. Measured and indicated resources are a commonly stated way of reporting resources among mining companies globally. Different governing bodies assign this different merit though. Canadian regulations not only require but also recognize these terms as a legitimate base for the potential future bankability of ore reserves in their filings, but the Securities and Exchange Commission (SEC) in the United States does not. Because of this you will find that many of the juniors today trade primarily on foreign stock exchanges, where guidelines are less stringent than those of the SEC.”14 In fact, in the United States, regulatory agencies have shown that it is possible to tackle speculation: they prohibit the publication of any data other than reserves. SEC regulations are “intended to reduce the speculation associated with initial in situ, estimated resources, which are invariably greater than the reserves.”15
In Canada, to these questions of contingency is added a sociological factor − the conflict and scientific debate between geologists and mine planners. Geologists are interested in the potential of given soils, while mine planners focus on production costs. Subcontractors argue with each other within each of these groups, and so many questions arise in the process of establishing the data that, in the final analysis, it is a good deal less than dependable. The methodological preferences of either party can lead to asset over-valuation; and the often gaping discrepancies between pre-feasibility studies and the real costs of project implementation are further evidence of the data’s unreliability. Virginia Heffernan states the obvious when she writes: “Attaching a price tag to a mine property is never easy.”16
Thierry Michel’s documentary Katanga Business (2009) underlines the weakness of the “scientific” precautions certain financial players claim, either naively or abusively, to be taking. The film focuses on a copper mine being reactivated by a group consisting of Canadian investors, George Forrest (the Belgian potentate of the Congo), and Gécamines, the Congolese state mining corporation carved up by Canadian and other companies in the mid-1990s in the course of a massive privatization initiative supported by the World Bank. The company that emerged from this process, Katanga Mining, is listed on the Toronto exchange, where it looks for risk capital. “Risk” would appear to be an accurate description: the documentary film closes with the statement that the recent financial crisis has severely affected mining companies in Katanga, with the price of copper dropping by 60 percent and share prices by 80 to 97 percent.17 Though the film presents multiple points of view − detailed expert assessments from an engineer in good standing, the opinion of an investor (presumably Canadian) who praises what he sees as a “world-class opportunity” for those he represents, and the opinion of George Forrest, who describes copper as a “stable” resource − what is most clear is that valuation has nothing to do with science. It is impossible to ascribe a precise value to a potentially extractable mineral. Stock-market speculation is no less risky than it has ever been. Moreover, the questions raised fall squarely in the public domain, given that pension-fund managers and others whom we hear in the film are actively investing Canadian assets in Katanga.
The Oxymoron: “Self-Regulation”
The new supervisory measures adopted in the early 2000s for Canadian financial markets, such as the standards set out in National Instrument 43-101 Standards of Disclosure for Mineral Projects (NI 43-101),18 have not met with unanimous approval. Though many different mining investors are now more accountable for their activities, some professional groups in the mining sector continue to resist and to challenge the new rules. According to Keith Spence, who co-chaired the committee to develop national standards in Canada, “one of the main challenges of developing valuation standards in the mining business … is the friction between real estate appraisers, who have traditionally dominated the valuation field, and mining professionals, who sometimes resent the use of real estate principles to value mining assets.”19 As a result, years after the Bre-X scandal, some people still express concern about the future impact of these measures, in turn enabling others to advocate a return to greater freedom for the experts who assess deposits. Critics also oppose making experts liable to either civil suit or criminal prosecution based on their recommendations, even though in Canada the risk of legal action against experts is slight. Mining-industry professionals shy away from standardized methodologies, pointing to the deficient nature of the formal procedures currently in force. The proposal to allow experts greater methodological leeway is a way of presenting arbitrariness, which critics pretend to oppose, as the best way to solve the problem of a deficient methodology. The taboo that has lain hidden at the heart of the debate for decades is that of “self-regulation.” Mining-industry professionals and investors are unanimous in their hostility to any government involvement in the valuation process, with constant praise for the key concept of “self-discipline”; and the professional corporations to which experts