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RECOMMENDATIONS

CONCERNING

ESTIMATION AND REPORTING OF

MINERAL RESOURCES AND MINERAL RESERVES

Prepared for Submission to


The United States Securities and Exchange Commission
by
The SEC Reserves Working Group / SME Resources and Reserves Committee
of
The Society for Mining, Metallurgy, and Exploration, Inc.

8307 Shaffer Parkway


Littleton, Colorado 80127
Phone: (303) 973-9550
Fax: (303) 973-3845
E-mail: sme@smenet.org

April 2005
FOREWORD

This document summarizes recommendations made by the SEC Reserves Working


Group / Resources and Reserves Committee of the Society for Mining, Metallurgy, and
Exploration, Inc. (SME) concerning specific issues related to the public reporting of
mineral resources and mineral reserves.

Questions or comments should be addressed by mail or electronically to:

Electronically:

General and technical comments:


J.M. Rendu, Chairman, Resources and Reserves Committee
JMRendu@aol.com

Financial and accounting comments:


Dick Graff, CPA, Co-chairman, Resources and Reserves Committee
Rgraff303@aol.com

By mail:

Jean-Michel (J.M.) Rendu


Chairman, Resources and Reserves Committee
Society for Mining, Metallurgy, and Exploration, Inc.
8307 Shaffer Parkway
Littleton, Colorado 80127
U.S.A.

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TABLE OF CONTENTS

Foreword
Table of Contents
1. Introduction and Executive Summary
1.1. Introduction
1.2. Executive Summary
2. Background
3. Formation of the SEC Reserves Working Group
Table 1: Composition of SEC Reserves Working Group
4. Review Process
Table 2: Composition of Coal Review Group
5. Relationship between Reserve Reporting and Financial Reporting
6. Objectives and Governing Principles
6.1. Objectives
6.2. Governing Principles
6.3. Document Outline
7. Issue A: Commodity Pricing Guidelines
7.1. Issue
7.2. Current Requirements and Practices
7.3. Discussion
7.4. Working Group Recommendations
7.5. Additional Remarks Concerning Use of Standardized Prices
7.6. Text to be Included in the 2005 SME Guide
7.7. Supplemental Information: Price Cycles
8. Issue B: Publication of Mineral Resources
8.1. Issue
8.2. Current Requirements and Practices
8.3. Discussion
8.4. Working Group Recommendations
8.5. Justification of Recommendations
8.6. Text to be Included in the 2005 SME Guide
9. Issue C: Technical and Economic Study Requirements
9.1. Issue
9.2. Current Requirements and Practices
9.3. Discussion
9.4. Working Group Recommendations
9.5. Justification of Recommendations
9.6. Text to be Included in the 2005 SME Guide
10. Issue D: Permitting and Legal Requirements
10.1. Issue
10.2. Current Requirements and Practices
10.3. Discussion
10.4. Working Group Recommendations
10.5. Justification of Recommendations

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10.6. Text to be Included in the 2005 SME Guide
11. Issue E: Competent Person
11.1. Issue
11.2. Current Requirements and Practices
11.3. Discussion
11.4. Working Group Recommendations
11.5. Text to be Included in the 2005 SME Guide
12. Coal, Industrial Minerals, Diamonds and Other Gemstones
12.1. Introductory Remarks
12.2. Reporting of Coal Resources and Coal Reserves
12.3. Reporting of Mineral Resources and Mineral Reserves for Industrial Minerals
12.4. Reporting of Mineral Resources and Mineral Reserves for Diamonds and Other
Gemstones

APPENDIX 1: U.S. Securities and Exchange Commission, Division of


Corporation Finance, Industry Guide 7.

APPENDIX 2: The 1999 SME Guide: A Guide for Reporting Exploration


Information, Mineral Resources, and Mineral Reserves.

APPENDIX 3: The 2005 SME Guide for Reporting Exploration Results,


Mineral Resources, and Mineral Reserves.

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1. INTRODUCTION AND EXECUTIVE SUMMARY

1.1. Introduction

In the U.S., public reporting of mineral reserves is subject to rules specified by the
U.S. Securities and Exchange Commission (SEC). For a number of years, the mining
industry has recognized a need to clarify these rules. In 2003, the Society for Mining,
Metallurgy, and Exploration, Inc. (SME) met with SEC staff in Washington, DC, to
determine how SME could best assist the mining industry in reaching this objective.
It was established that SME should develop industry recommendations and submit
them to the SEC for its consideration. In 2004, the SME formed the SEC Reserves
Working Group / SME Resources and Reserves Committee (the Working Group) to
achieve the following objectives:

Develop an industry position with respect to the following five issues


concerning the public reporting of mineral resources and mineral reserves:
- Issue A: Commodity Pricing Guidelines: Which assumptions should be
made to determine the commodity price applicable to the estimation of
publicly reported mineral reserves?
- Issue B: Publication of Mineral Resources: Should mineral resources be
publicly reported, in addition to mineral reserves?
- Issue C: Technical and Economic Study Requirements: What level of
study should be completed before a reserve is reported?
- Issue D: Permitting and Legal Requirements: Which requirements should
be satisfied before a reserve is reported?
- Issue E: Competent Person: What should be the role of a Competent
Person in estimating and reporting mineral resources and mineral
reserves?
Update the 1999 SME Guide for Reporting Mineral Resources and Mineral
Reserves, taking into account the reporting requirements of the U.S.
Securities and Exchange Commission and other international reporting
standards. The updated guide is referred to as the 2005 SME Guide.
Present the industry position to the U.S. Securities and Exchange Commission
for its consideration.

1.2. Executive Summary

The recommendations made by the Working Group are included in the 2005 SME
Guide (Appendix 3) and are summarized in the following five tables. In each table,
the Working Group recommendations are compared with current SEC interpretations
of Industry Guide 7, with other international standards, and with generally accepted
accounting principles.

The following tables only outline key recommendations. No conclusion should be


drawn concerning the merits of these recommendations without first reading the
additional information, justifications and guidelines contained in the rest of the report.

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Issue A: Commodity Pricing Guidelines
Comparison of Recommended 2005 SME Guide with Industry Guide 7, other International Guidelines, and Accounting Practices
Recommended
U.S. SEC Generally Accepted Accounting 2005 SME Guide for Reporting
International Codes and
Interpretation of Principles Exploration Results, Mineral
Guidelines
Industry Guide 7 (U.S. GAAP) Resources and Mineral
Reserves
If applicable historical prices The reserves which must be used in the
are available, a standardized calculation of depreciation, depletion Managements reasonable and
price must be used, equal to and amortization are those estimated by supportable forward looking
the average price which the reporting entity according to estimates should be used to
prevailed during the last three Industry Guide 7 for SEC registrants. estimate reserves. Justification of
years. U.S. GAAP does not prescribe the prices must be documented.
Managements reasonable
method to be used in the calculation of Disclosure of the price
and supportable price
If applicable historical prices depreciation, depletion and assumptions is recommended but
forecasts are accepted by
are not available, reasonable amortization. However, absent such not obligatory. Reasons for non
Canadian, U.K.,
forward looking estimates guidance, non-public companies disclosure must be given.
Australian, South African
must be used justified by generally adhere to the requirements of
and Chilean regulators.
available information, such as Industry Guide 7 for financial reporting If applicable historical prices are
Disclosure of the price
current sales contracts. purposes. available, a Reserve Sensitivity
assumptions is not
Test must be performed based on a
required.
The SEC recommends that Managements long-term outlook, Test Price equal to a three-year
prices be published. The SEC including reasonable and supportable historical price average. The test
also recognizes that there can price forecasts, must be considered in is on cash flow only. Test results
be valid reasons why purchase price allocation in a business and Test Price must be publicly
publication should not be combination, and in impairment testing disclosed.
required. of mining assets.

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Issue B: Publication of Mineral Resources
Comparison of Recommended 2005 SME Guide with Industry Guide 7, other International Guidelines, and Accounting Practices
Recommended
U.S. SEC Generally Accepted Accounting
International Codes 2005 SME Guide for Reporting
Interpretation of Principles
and Guidelines Exploration Results, Mineral
Industry Guide 7 (U.S. GAAP)
Resources and Mineral Reserves
Mineral Resources can be published
Estimates other than proved U.S. GAAP recognizes value beyond
and must be classified as Measured,
and probable reserves must proven and probable reserves (VBPP).
Indicated or Inferred. Classification
not be disclosed unless (a) Economic value exists in a mining asset
is the responsibility of the
such information is required beyond proven and probable reserves.
Mineral Resources Competent Person. Disclosure is
to be disclosed by foreign or VBPP includes mineral resources and
can be published and recommended.
state law, or (b) such exploration potential. VBPP must be taken
must be classified as
estimates have been into account in allocating the purchase price
Measured, Indicated New definitions are introduced that
previously provided to an of a business combination, and testing a
or Inferred. are designed to clarify and be more
entity that is offering to mining asset for impairment There is no
Classification is the restrictive than both those used
acquire, merge, or authoritative U.S. GAAP guidance relating
responsibility of the abroad for mineral resources and
consolidate with, the to the publication of mineral information
Competent or those used by the SEC for other
registrant or otherwise to other than the requirements of Industry
Qualified Person. mineralized material. A Mineral
acquire the registrants Guide 7 for SEC registrants
Identical definitions Resource must show reasonable
securities. The term
are accepted by prospects for eventual economic
resources cannot be used. There are no authoritative GAAP
Canadian, U.K., extractions. Such reasonableness
Material other than reserves pronouncements that specifically cover the
Australian, South must be documented according to
can be reported as other reporting of reserves or the use of reserve
African and Chilean specified guidelines. Whenever a
mineralized material. This estimates in financial reporting by mining
regulators. Mineral Resource is published, a
term is not defined but is companies. Industry Guide 7 provides
statement must be made that no
generally understood to be guidance for SEC registrants on various
assurance can be given that the
equivalent to a Mineral matters including the definition and
Mineral Resource will eventually
Resource. disclosure of proven and probable reserves.
convert to a Mineral Reserve.

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Issue C: Technical and Economic Study Requirements
Comparison of Recommended 2005 SME Guide with Industry Guide 7, other International Guidelines, and Accounting Practices
Recommended
U.S. SEC Generally Accepted
International Codes and 2005 SME Guide for Reporting
Interpretation of Accounting Principles
Guidelines Exploration Results, Mineral
Industry Guide 7 (U.S. GAAP)
Resources and Mineral Reserves
A reserve is that part of a A Mineral Reserve is the economically
A Mineral Reserve is the
mineral deposit which could mineable part of a Measured or
economically mineable part
be economically extracted or Indicated Mineral Resource. The type
of a Measured or Indicated
produced at the time of the of study which must be completed must
Mineral Resource. The type There are no authoritative
reserve determination. For be determined by the Competent
of study which must be GAAP pronouncements that
new projects, a feasibility Person.
completed must be specifically cover the
study is required. When
determined by the reporting of reserves or the
reserves are added to an A Mineral Reserves Declaration
Competent/ Qualified use of reserve estimates in
existing project, a mine plan Report must be completed before a
Person. financial reporting by
and cash flow analysis may reserve is declared. The report is the
mining companies. Industry
be sufficient. Requirements result of a properly defined, adequately
In Canada, NI 43/101 Guide 7 provides guidance
vary with the mineral being scoped, and professionally executed
specifies that a pre- for SEC registrants on
mined. study of the viability of the project.
feasibility study is sufficient various matters including the
The Competent Person is responsible
to declare a reserve. NI 43- definition and disclosure of
The term feasibility study is for the content of the report. A non-
101 specifies the content of proven and probable
not defined by the SEC. To prescriptive checklist is supplied to
the technical report which reserves.
clarify these terms the SEC assist the Competent Person in
must be completed to
has referred to checklists determining which technical and
support declaration of a
published by consulting economic criteria may need to be taken
reserve.
companies. into account.

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Issue D: Permitting and Legal Requirements
Comparison of Recommended 2005 SME Guide with Industry Guide 7, other International Guidelines, and Accounting Practices
Recommended
U.S. SEC Generally Accepted
International Codes and 2005 SME Guide for Reporting
Interpretation of Accounting Principles
Guidelines Exploration Results, Mineral
Industry Guide 7 (U.S. GAAP)
Resources and Mineral Reserves
Legally enforceable mineral title
A reserve is that part of a
sufficient to allow exploration,
mineral deposit which could
development and extraction is
be legally extracted or
controlled by the reporting entity at the
produced at the time of the
time of determination. If the reporting
reserve determination.
Permitting and legal There are no authoritative entity is leasing or sub-leasing the
Permitting and legal
requirements must be taken GAAP pronouncements that mineral, the lease or sub-lease should
requirements are not
into account when specifically cover the be from an entity which controls the
specified but are understood
determining whether a permitting and legal required mineral title.
to include reasonable
reserve can be declared. requirements.
expectation that all permits,
There must be a reasonable expectation
ancillary rights and
that all permits, ancillary rights and
authorizations required for
authorizations required for mining and
mining and processing can be
processing can be obtained in a timely
obtained in a timely fashion.
fashion.

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Issue E: Competent Person
Comparison of Recommended 2005 SME Guide with Industry Guide 7, other International Guidelines, and Accounting Practices
Recommended
U.S. SEC Generally Accepted
International Codes and 2005 SME Guide for Reporting
Interpretation of Auditing Standards
Guidelines Exploration Results, Mineral
Industry Guide 7 (U.S. GAAS)
Resources and Mineral Reserves
Reserves must be estimated
The name of the person
by a Competent Person (a
estimating the reserves must There is no requirement for a Reserves and resources must be
Qualified Person in Canada)
be included in the report. Competent Person within estimated by, or under the supervision
defined as an engineer,
U.S. GAAS with respect to of a Competent Person defined as an
geoscientist or other mining
The SEC has not ruled the determination of proven engineer, geoscientist or other mining
professional who is a
whether Section 404 of the and probable reserves. professional who is a member of an
member of an approved
Sarbanes-Oxley Act of 2002 Auditing standards in the approved institution with an
institution with an
applies to information U.S. recognize that the work enforceable code of ethics, having a
enforceable code of ethics,
supplementary to financial of specialists, including minimum of five years experience
having a minimum of five
statements. However, geologists may be used by which is relevant to the style of
years experience which is
adequate internal controls the independent auditor in mineralization and type of deposit
relevant to the style of
over the preparation of the audits of financial under consideration and to the activity
mineralization and type of
supplementary information, statements prepared in which that person is undertaking.
deposit under consideration
which includes reserves, are conformity with GAAP.
and to the activity which that
required.
person is undertaking.

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2. BACKGROUND

Over the last few years many changes have occurred in the mining industry and the
regulatory environment, which affect the public reporting of exploration information,
mineral resources and mineral reserves. These include:

Globalization of the mining industry with most large and many small mining
companies operating and being publicly listed in more than one country.
Changes in the U.S. regulatory environment resulting in changing
interpretations of the Securities and Exchange Commission (SEC) Industry
Guide 7.
Increased requirement by the SEC for adequate procedure and internal controls,
not only over financial reporting (as stated in Section 404 of the Sarbanes-
Oxley Act of 2002), but also over the preparation of supplementary
information, including mineral reserves.
Development of international definitions and standards for the estimation and
reporting of exploration information, mineral resources and mineral reserves.
These definitions have been accepted by the regulatory agencies of Canada,
Australia, South Africa and Chile, and are being reviewed by regulators in the
United Kingdom. The definitions have also been accepted by the United
Nations Economic Commission for Europe (UN-ECE).
The International Accounting Standards Board (IASB) research project on
accounting in the extractive industries. This research project will address
reserve and resource definitions and standards and their use in financial
reporting.

These relatively recent changes have only increased a long-recognized need to clarify
the conditions which must be satisfied before mineral resources and mineral reserves
that are subject to SEC regulations can be reported.

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3. FORMATION OF THE SEC RESERVES WORKING GROUP

In the U.S., public reporting of mineral reserves is subject to rules specified by the
SEC, including Industry Guide 7 (see Appendix 1). Under generally accepted
accounting principles (GAAP) the reporting of mineral reserves has generally
followed the guidelines established by the SEC. In contrast, the guidelines for
reporting oil and gas reserves were established by the Department of Energy and
adopted by both the SEC and the Financial Accounting Standards Board (FASB), the
authoritative body in the United States that establishes (GAAP).

In 1991, the Society for Mining, Metallurgy, and Exploration, Inc. (SME) developed
and adopted A Guide for Reporting Exploration Information, Mineral Resources,
and Mineral Reserves. This Guide was last updated in 1999 (see Appendix 2) and is
generally compatible with other international codes and guidelines. However, in
some key areas the recommendations made in the 1999 SME Guide differ from
current SEC interpretations of Industry Guide 7.

To assist the mining industry in resolving current issues concerning public reporting
of mineral resources and mineral reserves, the SME accomplished the following:

In 2002: Informal survey of the mining industry to determine current issues of


concern to the mining industry.
April 2003: Meeting of SME members with SEC staff, Washington, DC, to
determine how SME could assist the SEC and the mining industry in resolving
issues of mutual concern.
October 2003: Organization of international conference on Reporting Mineral
Resources and Reserves, Reston, Virginia. U.S. and international regulators,
company managers, legal, financial and technical experts, investment bankers
and analysts participated in this conference where the issues faced by the
mining industry were further discussed.
March 2004: Formation of the SEC Reserves Working Group, a group of
mining and consulting companies whose members are the SME Resources
and Reserves Committee. The mission of the Working Group is to define the
mining industry position with respect to key issues concerning the reporting of
mineral resources and mineral reserves, and to present these positions to the
SEC for its consideration.
May 2004: First meeting of Working Group, Scottsdale, Arizona.
August 2004: Second meeting of Working Group, Toronto, Ontario.
September 2004: Meeting of coal stakeholders, St. Louis, Missouri.
October 2004 to April 2005: Development of recommendations by the
Working Group, including submission of Working Group recommendations
for review by entities other than those represented in the Working Group.
April 2005: Submission of recommendations to the SEC.

The composition of the Working Group is summarized in Table 1. Participating


organizations represented all sectors of the mining industry, and included mining,

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consulting and accounting entities. U.S. and international experience and interests
were both represented. Committee members included senior company representatives
with worldwide responsibilities for estimation and reporting of Mineral Resources,
Mineral Reserves, and financial information.

Table 1: Composition of SEC Reserves Working Group

Chairman: Jean-Michel (J.M.) Rendu, Mining Consultant


Co-chairman: Richard P. Graff, CPA, The Graff Consulting Group, LLC.

Mining Companies:
Anglo American Plc
AngloGold Ashanti
Arch Coal
Barrick Gold Corporation
BHP Billiton
Freeport-McMoran Copper & Gold Inc
INCO
Kinross Gold Corporation
Newmont Mining Corporation
Peabody Energy
Phelps Dodge Mining Company
Placer Dome Inc
Rio Tinto Plc

Consulting Companies:
AMEC Inc., Mining & Metals Consulting
Behre Dolbear & Company, Inc.
Independent Mining Consultants
John T. Boyd Company
Pincock, Allen, & Holt

Accounting Firm:
PricewaterhouseCoopers LLP

The project was funded by the thirteen mining companies listed above, and by
PricewaterhouseCoopers. The De Beers Group contributed to writing the section on
diamonds and other gemstones.

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4. REVIEW PROCESS

The companies and agencies which participated in the September 2004 St. Louis
meeting of coal stakeholders are listed in Table 2.

Table 2: Composition of Coal Review Group

Chairman: Jean-Michel (J.M.) Rendu, Mining Consultant


Co-chairman: Richard P. Graff, CPA, The Graff Consulting Group, LLC.

Government Agency:
U.S. Geological Survey

Mining Companies:
Alliance Coal
Arch Coal
Massey Energy
Natural Resource Partners
Peabody Energy
Alpha Natural Resources

Consulting Companies:
John T. Boyd Co.
Marshall Miller & Assoc.
Behre Dolbear & Company, Inc.
Pincock, Allen & Holt

In addition to the mining and consulting companies listed in Tables 1 and 2, members
from other national and international organizations and regulatory authorities were
invited to review and comment on the Working Group recommendations. Opinions
expressed represent those of the reviewers and not necessarily those of the
organizations with which they were associated. A list of these organizations follows:

The Staff of the Financial Accounting Standards Board


Accounting Firms:
- Deloitte & Touche
- Ernst & Young
- KPMG
- PricewaterhouseCoopers (as member of Working Group)
Investment Banks.
Financial Analysts.
Standard & Poors. Corporate Value Consulting.
Other Mining and Consulting Companies.

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The Combined Reserves International Reporting Standards Committee
(CRIRSCO).
Members of international resource/reserve reporting committees, including
those of Canada, Australia (JORC), South Africa (SAMREC), the United
Kingdom, and Chile.
University Professors.

The recommendations made by the Working Group were also presented to, and
discussed with, the SME membership during the 2005 SME Annual Meeting in Salt
Lake City, Utah (February 27 March 3, 2005). Significant changes were made to the
original draft to take into account comments received. Before being sent to the SEC,
the revised draft was submitted for review to approximately 170 mining professionals
who had expressed interest in being part of the process.

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5. RELATIONSHIP BETWEEN RESERVE REPORTING AND FINANCIAL
REPORTING

The Working Group was formed as a natural convergence between an ongoing effort
by SME to help the mining industry resolve issues raised by the SEC when reserves are
reported, and the separate formation by the accounting community of an SEC Mining
Industry Working Group and an Emerging Issues Task Force (EITF) Mining
Industry Working Group of the Financial Accounting Standards Board (FASB) to
address GAAP-related issues. The activities of the EITF Mining Industry Working
Group resulted in the establishment of GAAP guidance for the mining industry by the
EITF and related amendments to existing FASB pronouncements.

The relationship between financial reporting and reserve reporting was taken into
account by the Working Group in its deliberations. Consistency between GAAP and
the reserve reporting recommendations made by the Working Group was considered
integral to improve financial reporting. Both technical delegates (managers, geologists,
mining engineers, and consultants responsible for resource and reserve estimation and
reporting) and financial delegates (accountants, controllers, chief financial officers,
external auditors) participated in all the Working Group activities.

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6. OBJECTIVES AND GOVERNING PRINCIPLES

6.1. Objectives

The Working Group was formed to achieve the following objectives:

Develop an industry position with respect to the following five issues


concerning the public reporting of mineral resources and mineral reserves:
- Issue A: Commodity price: Which assumptions should be made to
determine the commodity price applicable to the estimation of publicly
reported mineral reserves?
- Issue B: Mineral Resources: Should mineral resources be publicly
reported, in addition to mineral reserves?
- Issue C: Technical and economic study requirements: What level of study
should be completed before a reserve is reported?
- Issue D: Permitting and legal requirements: Which requirements should
be satisfied before a reserve is reported?
- Issue E: Competent Person: What should be the role of a Competent
Person in estimating and reporting mineral resources and mineral
reserves?
Update the SME Guide for Reporting Mineral Resources and Mineral
Reserves, taking into account SEC and other international reporting
requirements. The updated guide is referred to as the 2005 SME Guide.
Present the industry position to the U.S. Securities and Exchange Commission
(SEC) for its consideration.

6.2. Governing Principles

For its recommendations to be meaningful, the Working Group recognized that they
should take into account the mission of the U.S. Securities and Exchange
Commission (SEC) which is to protect investors and maintain the integrity of the
securities markets. As stated on the SEC website, all investors, whether large
institutions or private individuals, should have access to certain basic facts about an
investment prior to buying it. The SEC requires public companies to disclose
meaningful financial and other information to the public, which provides a common
pool of knowledge for all investors to use, to judge for themselves if a company's
securities are a good investment. Only through the steady flow of timely,
comprehensive and accurate information can people make sound investment
decisions. To meet the SEC's requirements for disclosure, a company must make
available all information, whether it is positive or negative, that might be relevant to
an investor's decision to buy, sell, or hold the security.

The Division of Corporation Finances mission is to see that investors are provided
with material information in order to make informed investment decisions, both when
a company initially offers its stock to the public and on a regular basis as it continues
to give information to the marketplace.

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The main principles which governed the deliberations of the Working Group and its
recommendations concerning public reporting are transparency, materiality and
competence.

Transparency requires that the reader of a public report is provided with


sufficient information, the presentation of which is clear and unambiguous, so
as to understand the report and not to be misled.
Materiality requires that a public report contains all the relevant information
which investors and their professional advisers would reasonably require, and
reasonably expect to find in a public report, for the purpose of making a
reasoned and balanced judgment regarding the exploration results, mineral
resources or mineral reserves being reported.
Competence requires that the public report be based on work that is the
responsibility of suitably qualified and experienced persons who are subject to
an enforceable professional code of ethics and rules of conduct.

These principles form the basis of all international codes and guidelines. In addition,
the Working Group considers that the following relevant principles should be
satisfied to provide the U.S. and international investor with information needed to
make sound decisions:

Consistency between Financial and Technical Reports: Financial reports take


into account mineral resources and mineral reserves and are based on
assumptions concerning commodity prices and other parameters of
significance. To be clear and unambiguous, technical and financial
information should be published on a comparable basis, making the same basic
assumptions. Where financial reporting makes use of reserve estimates, for
example in depreciation, depletion and amortization calculations, it should use
reserve estimates made in accordance with accepted guidelines. Where
financial reporting makes use of information that is also used in reserve
estimates, such as commodity prices or other particulars of life-of-mine plans,
this information should be consistent with that used in the reserve estimates.
Consistency between Financial Markets: For global companies, transparency
can only been achieved if information is reported on a consistent basis in all
financial markets. Only then can the information supplied to all investors be
identical, clear and unambiguous.
Development of Good Practice Guidelines: In addition, the Working Group
recognized the importance of defining good practice guidelines which take into
account:
- The need for consistent and reliable estimation and reporting of
resources and reserves.
- The increased requirement by the SEC for an adequate procedure and
internal controls in the estimation of mineral reserves.
- The need to assist the SEC in fulfilling its mission.
- The need to support the interests of the shareholders and investors.

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6.3. Document Outline

In the following sections each of the five issues listed above is addressed. Each issue
is introduced and then discussed in terms of current requirements and practices from
the standpoint of the SEC, the 1999 SME guidelines, generally accepted accounting
principles, management practices and other international reporting codes. This is
followed by the Working Groups recommendations and ends with the proposed
wording for the 2005 SME Guidelines.

The last section in this document specifically addresses issues related to coal,
industrial minerals, diamonds and other gemstones.

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7. ISSUE A: COMMODITY PRICING GUIDELINES

7.1. Issue

The SEC Industry Guide 7 does not specify the commodity price to be used for
reserve estimation. However, guidance can be found in presentations made by the
SEC Staff as published in the proceedings of professional meetings, and from
comments addressed to mining companies by the SEC. The SEC requires that
whenever possible the commodity prices used for reserve reporting be based on
historical prices. It is the SECs opinion that this requirement improves
comparability between similar projects and eliminates subjectivity in price
determination. However, it also creates inconsistencies between prices used for
reserve estimation and prices used by management for planning purposes, including
mine development and investment decisions. The SEC requirement also creates
inconsistencies with mineral reserve pricing requirements under GAAP, such as:

Pricing requirements to allocate the purchase price of a business combination


to mining assets under FAS 141 and test a mining asset for impairment under
FAS 144, and
Mineral reserve pricing requirements under SEC guidelines in reserve
determination that impact the calculation and reporting of depreciation,
depletion and amortization for SEC registrants. U.S. GAAP does not prescribe
the method to be used in the calculation of depreciation, depletion and
amortization

Outside the U.S., current codes and guidelines do not specify rigorous methods for
determining the commodity prices that companies should use when reporting reserves.
In Canada, Australia, South Africa, and the United Kingdom, the accepted practice
consists in using reasonable forward looking prices.

There is a recognized need to develop improved guidelines for commodity price


determination to resolve potentially conflicting objectives between technical reporting,
financial reporting, management planning assumptions, and the investors interest.

7.2. Current Requirements and Practices

U.S. SEC

In the SEC Industry Guide 7 (Industry Guide 7), the following references are made to
economic requirements (see Appendix 1):

- Paragraph (a) (1): A reserve is that part of a mineral deposit which could be
economically and legally extracted or produced at the time of the reserve
determination.

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The term economically implies an assumption concerning the price at which the
commodity is expected to be sold. Industry Guide 7 does not define how this price
should be determined. Historically, commodity prices used by mining companies for
the determination and reporting of Mineral Reserves were based on forward-looking
estimates reflecting managements reasonable and supportable expectations based on
all available evidence at the time of the reserve determination. The SEC accepted
reserves reported on this basis.

More recently, the SEC has taken the position that, whenever possible, reserves
should be estimated using the average commodity price which prevailed during the
last three years. For commodities that are mostly sold under long-term contracts (e.g.,
coal, iron ore, some industrial minerals) or where prices are project specific and
dependent on the quality or location of the product, the SEC has accepted price
forecasts based on current contracts and reasonable expectation of future contracts.

Arguments in favor of this approach include increased comparability between mining


companies selling the same product and reduced opportunity for reserve
overstatement when mineral prices are low (as they were when the three-year price
average guideline was introduced). On the other hand, using historic prices can lead
to price fluctuations which can result in material swings in the reported reserves and
related financial disclosures, with the potential of confusing the investor and
misrepresenting the actual risk associated with the project.

In periods of high prices, the SEC requirement that three-year historic prices be used
can result in overstatement of reserves compared with those used in mine plans, and
understatement of depreciation and amortization, creating opportunities for abuse.
Conversely, in periods of low prices, reserves will be understated and depreciation
and amortization will be overstated. The true condition of the business may be
understated, with possible inappropriate consequences, such as breach of bank loan
covenants.

1999 SME Guide

In the 1999 SME Guide for Reporting Exploration Information, Mineral Resources,
and Mineral Reserves (the 1999 SME Guide), the following references are made to
economic requirements for reserve classification (see Appendix 2):

- Section 27: A mineral reserve is the economically mineable part of a


measured and indicated mineral resource Appropriate assessments, which
may include feasibility studies, have been carried out and include
consideration and modification by realistically assumed mining, metallurgical,
economic, marketing, legal, environmental, social and governmental factors.
These assessments demonstrate at the time of reporting that extraction is
reasonably justified.

Mineral Reserves are those portions of Mineral Resources which, after the
application of all mining factors, result in an estimated tonnage and grade which, in

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the opinion of the Competent Person making the estimates, can be the basis of a
viable project after taking account of all relevant metallurgical, economic, marketing,
legal, environmental, social and governmental factors...

The term economic implies that extraction of the Mineral Reserve has been
established or analytically demonstrated to be viable and justifiable under reasonable
investment and market assumptions...

The 1999 SME Guide recognizes the need to demonstrate at the time of reporting that
extraction is reasonably justified. Extraction must be viable and justifiable under
reasonable investment and market assumptions. The term reasonable market
assumptions is generally interpreted as incorporating reasonable price forecasts.
Reference to price cycles is made in Section 26 of the 1999 SME Guide:

- Section 26: [] It is not intended that re-classification from Mineral Reserves to


Mineral Resources should be applied as a result of changes expected to be of a short
term or temporary nature, or where management has made a deliberate decision to
operate on a non-economic basis. Examples of such situations might be a commodity
price drop expected to be of short duration, mine emergency of a non-permanent
nature, transport strike etc.

A price drop of short duration is understood to be one which is not likely to last on
the basis of available information, including market conditions and historical length
of price cycles.

Other International Reporting Guidelines

Because of the international nature of the mining industry, a need for international
standardization has long been recognized. A group of professional societies formed a
committee in 1993, whose mission specifically includes the development of
internationally acceptable guidelines for the definition, estimation and public
reporting of Mineral Reserves. This committee, known as CRIRSCO (Combined
Reserves International Reporting Standards Committee), includes representatives of
the U.S., Canada, Australia, South Africa, the U.K., Ireland, and Chile. Each of the
member countries has developed national guidelines which follow essentially the
same template. These guidelines are similar to those in the 1999 SME Guide and
accept reasonable and supportable price forecasts as the basis for reserve estimation.

Reporting codes and guidelines developed by national professional societies have


been incorporated by reference in the reporting rules applicable in Canada (NI 43-101
and the CIM guidelines), Australia (the JORC code), South Africa (the SAMREC
code), and Chile. Similar guidelines have been developed in the United Kingdom and
Ireland which are accepted but have not yet been formally recognized by reference in
the listings rules of the corresponding regulatory agencies. While these codes and
guidelines do not specify which commodity price assumptions should be made when
estimating reserves, the accepted practice is to use managements best estimate of
future prices. This approach is generally consistent with that used by management for
planning purposes. It is also generally consistent with assumptions made for financial

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reporting. On the negative side, the lack of guidelines gives considerable latitude to
the subjective assessment of future prices, including opportunities for abuses.

Management Practices

Mines are planned and operated by companies, using long-term estimates of


commodity prices. Although current prices often affect near-term production
decisions (which may result in changes to production schedules and operating cutoff
grade, and in extreme cases in temporary shut down), investment decisions,
including opening new mines or permanent closure of existing mines, are made on the
basis of long-term expectations. Using different commodity prices for planning and
for reserve reporting implies that the corresponding mine plans and production
schedules also differ.

Generally Accepted Accounting Principles

The SEC definition of mineral reserves (which are not defined in GAAP) plays a
critical role in financial reporting. For example, SEC guidelines for reporting
companies define the mineral reserves that are to be reported and used in the
calculation of depreciation, depletion and amortization. In other cases, including
purchase price allocation in a business combination and impairment testing of mining
assets, GAAP requires that consideration be given to managements long-term
outlook, including reasonable and supportable price forecasts for its mineral assets.
Additionally, the value assigned to mineral assets beyond proven and probable
reserves (VBPP as termed by the FASB) is based on price estimates likely to be
different from those required by the SEC to estimate the reserve tonnages and grades.
Industry Guide 7 states that, with few exceptions, tonnage and grade estimates other
than proven and probable reserves, and any estimated values of such tonnage and
grade, shall not be disclosed.

7.3. Discussion

Disclosure of ore reserves is required under SEC reporting regulations. Ore reserves
can be a critical consideration for investors in mining businesses as they reflect the
projected life of an individual mining company and the way it is being operated. For
some commodities, such as precious metals, there is a high correlation between
market capitalization and contained metal in reserves.

The quantum of ore reserves has an important influence on accounting results.


Depreciation, depletion and amortization expenses of mining companies are
calculated primarily under the units-of-production method based upon recoverable
mineral reserves. Reserves data, among other factors, is used to allocate the purchase
price in a business combination and test a mining asset for impairment. Mineral
resources must be taken into account where there is sufficient confidence in their
recoverable value.

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Many variables are relevant to the determination of ore reserves. Some of these
variables include: geological data defining the extent and grade of mineralization;
mine design and scheduling; cutoff grade optimization; mining selectivity; processing
methods; metallurgical recovery; deleterious elements; inventories; environmental
and political issues; costs of production (including transport to market and external
treatment and refining charges); investment and sustaining capital; exchange rates;
degree of project risk; rate of return target; and commodity selling prices. The
commodity prices are only one of these variables.

Only a few mining operations have a short mine life. Most mining operations are
long-term investments with lives that are longer than one price cycle, and in some
cases a single mining phase in a large open pit operation can have a life equal to one
full price cycle. Imposition of a standardized price assumption (such as a fixed three-
year historical price or a spot price) fails to take into account the time period over
which each mining asset will be exploited. While it may give some appearance of
comparability, this comparability is likely to be false.

Industry Guide 7 specifies that a reserve is that part of a mineral deposit which could
be economically extracted or produced at the time of the reserve determination.
Historically this was interpreted as requiring the application of best estimates of
future prices. Most recently, the SECs interpretation of Industry Guide 7 has been
that for most metals reserves should be economic when using a metal price equal to
the three-year historic average of exchange or published prices at the time of
reporting. Since all metals have price cycles in a free-market economy, this guideline
can potentially create a significant problem during trough (and peak) price conditions.

The problems related to short-term price averaging are illustrated by the figure below.
On December 31, 2003 the London Metal Exchange (LME) cash price for copper was
$1.05 per pound whereas the three-year average ending that day was $0.75 per pound.
The December 1987 averaged copper price was $1.28 per pound whereas the three-
year rolling average as of December 31, 1987 was only $0.67 per pound. Conversely,
the average copper price in December 1997 was $0.79 per pound whereas the three-
year average as of December 31, 1997 was nearly $1.15 per pound.

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December Prices and Three Year Historical
Averages

Month 3 Year Average

$1.40

$ per pound copper


$1.20

$1.00

$0.80

$0.60
Dec-87 Dec-97 Dec-03

Additional Figures are included in Section 7.7 below, which show changes in yearly
prices for a number of important mineral commodities. Table 1 below compares
average prices for the same commodities, when averages are calculated over the last
10, 15 and 20-years. Contrary to three-year averages, these averages are fairly
constant.

Table 1
Historic Prices for Ten Selected Metal Commodities
Averages in Nominal Dollars

1995-2004 1990-2004 1985-2004


Commodity Unit 10-Yr 15-Yr 20-Yr
Aluminum per lb $0.70 $0.68 $0.69
Copper per lb $0.92 $0.96 $0.95
Zinc per lb $0.47 $0.48 $0.48
Lead per lb $0.26 $0.26 $0.26
Nickel per lb $3.55 $3.45 $3.51
Molybdenum per lb $2.79 $3.90 $3.93
Cobalt per lb $18.41 $18.17 $15.64
Iron/Steel per 100 lbs $18.61 $18.80 $19.21
Gold per ounce $331.53 $343.66 $356.98
Silver per ounce $5.14 $5.01 $5.17

For comparison purposes, Table 2 summarizes the range in prices using a three-year
rolling average. The lowest and highest consecutive three-year averages observed

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during the period 1990 to 2004 are compared with the average price for this 15 year
period.

Table 2
Historic Three-Year Averages During the Past 15 Years (1990 to 2004)
Averages in Nominal Dollars

3-Yr 3-Yr 15-Yr Difference from Averages


Commodity Unit Lows Highs Averages Lows Highs
Aluminum per lb $0.57 $0.91 $0.68 -16% +34%
Copper per lb $0.74 $1.23 $0.96 -23% +28%
Zinc per lb $0.38 $0.66 $0.48 -21% +38%
Lead per lb $0.21 $0.32 $0.26 -19% +23%
Nickel per lb $2.66 $5.44 $3.45 -23% +58%
Molybdenum per lb $2.21 $6.84 $3.90 -43% +75%
Cobalt per lb $8.27 $26.46 $18.17 -54% +46%
Iron/Steel per 100 lbs $17.36 $20.21 $18.80 -8% +8%
Gold per ounce $278 $402 $344 -19% +17%
Silver per ounce $4.11 $5.64 $5.01 -18% +13%

As shown in Table 2, for most commodities the three-year average price can be 20%
(or more) higher or lower than the corresponding 15-year average. Commodities with
higher price variability are those with a limited primary production base and/or a
large source of production as a by-product, or where a significant portion of the
worlds production is from countries with extreme political risks (e.g., Democratic
Republic of Congo for cobalt). Commodities with less variability may indicate that
only a few major players produce the majority of the worlds internationally traded
production, or that transportation costs may be a significant portion of the
commoditys delivered price. Other commodities such as coal, which are not
principally sold under published commodity pricing but are sold under long-term
contract pricing, typically experience pricing cycles similar to commodities noted in
Tables 1 and 2.

During depressed market conditions, the three-year average and spot prices may be
more than 20% below a long-term full-cycle average price. During periods of high
prices, this relationship is reversed. Using these abnormally low or high prices for
reserve calculations could result in severe reserve fluctuations which, in turn, could
impact the reporting of depreciation, depletion and amortization, in both short term
and long term.

As stated previously, most mining companies base reserves on expectations of what


prices will be at the time that output from the ore body is expected to be sold. These
expectations can recognize all of the relevant information available, including
historical trends in supply and demand, historical relationships between prices and

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costs and expected changes in these relationships resulting from likely technological
or other new developments. On this basis, disclosure of reserves should be consistent
with managements assumptions, decisions and policies for evaluation, development
and operations. It should also be noted that during times of trough price conditions, a
mining company has the choice of temporarily curtailing operations and preserving
the asset until commodity prices rise, thereby acting in the best interests of the
shareholders. Thus, the deposit will be economic at the time it will be mined and this
is a reasonable expectation. Other actions that management can undertake in the
event of trough price conditions include high grading and stockpiling of low grade
material, which can mitigate the current impact of lower prices on operations while
preserving reserves. In conclusion, using forward-looking prices for reserve
estimation, that are based on managements expectations of future operating
conditions, is consistent with the way the business is actually run.

7.4. Working Group Recommendations

The Working Group analyzed the various possible approaches which can be used to
define the commodity price for reserve estimation. Two fundamentally different
approaches were compared:

Use a standardized price, equal to the average commodity price which


prevailed during the last few years. The U.S. SEC has requested that a three-
year price average be used for commodities whose price is quoted on an open
market such as the London Metal Exchange. Base metals and precious
metals are such commodities. This approach removes subjectivity from price
determination, and allows some amount of comparability between mining
operations producing the same commodity. However, three-year price
averages can be extremely variable from year to year, resulting in high
variability in published reserves and related financial statements. With few
exceptions such variability overstates the true risk associated with mining
projects, and may have unjustified and costly financial consequences.
During and immediately following periods of high prices, using historical
averages will result in overstatement of reserves. Management decisions and
some accounting practices are based on forward-looking prices which are
likely to be significantly different from three-year historical averages. To
make sound decisions investors need to understand managements plans and
practices, and to have confidence in the reasonableness of such plans and
practices.

Use forward-looking commodity price estimates based on managements


reasonable and supportable short- and long-term expectations. This approach
results in compatibility between published reserves and life-of-mine plans. It
also increases consistency between technical and financial reporting.
Reserves published on this basis show less sensitivity to short-term price
changes, and better reflect the long-term nature of most mining projects and
the investment risk they represent. However, different price expectations

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between companies can result in lack of comparability. Using managements
estimates rather than fixed prices also opens the door for potential abuses.

There are other constraints on the applicability of the various possible methods of
price determination:

There are circumstances when meaningful historical prices are not available.
A distinction may need to be made between exchange-listed commodities
(e.g., base metals and precious metals), for which historical prices are
available, and other commodities such as those that are mostly sold under
long-term contracts (e.g., coal, some industrial minerals, iron ore, etc.) or
whose value is specific to the deposit being mined (e.g., sand and gravel).
There are circumstances when prices used for reserve estimation should not
be made public, or when public disclosure may not be in the best interest of
investors (e.g., contractual obligations, confidentiality agreements, when
bidding for contracts or acquisitions or in other competitive situations, and
for other business, legal or commercial reasons).

In an ideal situation, the method used for price estimation should satisfy the
following potentially conflicting objectives:

Decrease the risk of abuse inherent to subjective price estimates.


Increase comparability between similar mining projects.
Inform investors of the true risk associated with mining projects.
Inform investors of management plans.
Disclose internally consistent technical and financial information.
Give investors assurance that the price estimates are reasonable given all
available information.
Supply investors with critical information concerning the assumptions made
for reserve estimation, including those related to price.
Ensure that price disclosure is not required if such disclosure would be
contrary to investors interests.

To reach these objectives the Working Group recommends the following:

Mineral reserves should be estimated using forward-looking commodity price


estimates. These estimates should reflect managements reasonable and
supportable short- and long-term expectations.
The basis for the selected prices should be justified and supported by
appropriate documentation. The Competent Person responsible for the
reserves should concur with the reasonableness of the price assumptions.
The document justifying the price assumptions need not be a public
document but should be available to auditors or regulators for review on a
confidential basis.
Whenever historical prices are publicly available which reflect the value of
the commodity or mineral being or to be produced, a Reserve Sensitivity Test

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should be completed. This test is conducted based on the realization of a
positive non-discounted forward-looking cash flow at a Test Price equal to
the average commodity price which prevailed during the three-year period
preceding publication of the Mineral Reserve. The Test Price and the test
results should be publicly disclosed. If a positive cash-flow is not realized
when using the Test Price, the price at which such a positive cash flow is
realized should be calculated and publicly disclosed. The Reserve Sensitivity
Test is applicable only if the Test Price is less than the price used when
estimating the reserve.
It is recognized that investors are best informed if commodity prices are
publicly disclosed. However, it is also recognized that there can be valid
commercial, legal or business reasons for non-disclosure. There are
situations where disclosure would be detrimental to the company and
investors. For these reasons, public disclosure of prices should be
recommended but not required. Furthermore when commodity prices are
disclosed there should be an option to state either a single price estimate or a
range of estimates within which no material change in reserves would occur.

For current mining operations, price profiles should reflect current market conditions
and trend up or down toward long-term price assumptions based on managements
expectations. To determine reserves associated with an undeveloped property, it is
recommended that management use a long-term price estimate based on reasonable
and supportable expectations. For commodities that are mostly sold under long-term
contract, price forecasts should be based on current contracts and reasonable
expectations of future contracts. Long-term contracts often have provisions for short-
term adjustments based on negotiations. Such provisions must be taken into
consideration. The basis for the selected short- and long-term prices must be justified
and supported by appropriate documentation.

Pricing and Financial Reporting

The Working Group recommends that commodity prices used for the determination
of reserves should be based on reasonable and supportable short- and long-range price
assumptions. Such a requirement would be consistent with the use of such prices for
impairment testing and business combination accounting as required under U.S.
GAAP.

The Emerging Issues Task Force (EITF) of the Financial Accounting Standards
Board (FASB or FAS) in its EITF Issue 04-3: Mining Assets: Impairment and
Business Combinations (EITF Issue 04-3) stipulates that an entity should (1) include
the effects of anticipated fluctuations in the market price of minerals in determining
the fair value of mining assets in a purchase price allocation under FAS Statement
141 on business combinations and (2) consider those effects when estimating future
cash flows used for determining whether a mining asset is impaired under FAS
Statement 144 on impairment testing. It notes that expectations and estimates of the
effects should be consistent with those of a market participant, and states:

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Generally, an entity should consider all available information including
current prices, historical averages, and forward pricing curves. Those
marketplace assumptions typically should be consistent with the acquiring
enterprise's operating plans with respect to developing and producing minerals.
The Task Force observed that it generally would be inappropriate for an entity
to use a single factor, such as the current price or a historical average, as a
surrogate for estimating future prices without considering other information
that a market participant would consider.

The above considerations are also relevant in the determination of commodity prices
to be used in estimating reserves.

Alignment of commodity pricing requirements for both reserve determination under


SEC guidelines and impairment testing and business combinations under U.S. GAAP
will serve to improve certain aspects of public reporting as it applies to transparency
and materiality.

Role of Competent Person

As defined in Section 11 (Issue E: Competent Person), a Competent Person must be


responsible for the estimation of Mineral Resources and Mineral Reserves. As
defined, a Competent Person must satisfy specific professional requirements, and be
clearly satisfied that they could face their peers and demonstrate competence in the
commodity, type of deposit and situation under consideration. The requirement that
the price assumptions be documented, and that the Competent Person concurs with
these assumptions, will create checks and balances within the reporting entity, and
contribute to reducing differences between assumptions made by companies selling
the same commodity on an open market. It will also address the principle of
competence in public reproting.

Which Mineral Resource can be converted to a Mineral Reserve?

Only that part of a Mineral Resource that has been classified as Measured and/or
Indicated can be considered for conversion to a Mineral Reserve. Under no
circumstance can an Inferred Mineral Resource be converted to a Mineral Reserve
unless it is first converted to an Indicated or Measured Mineral Resource. When
completing production schedules and economic studies for the purpose of
determining whether a Mineral Reserve can be publicly reported, all material other
than Measured and Indicated Mineral Resources must be treated as waste.

It should be noted that, even though Inferred Mineral Resources cannot be taken into
account in the estimation of Mineral Reserves for public reporting, such resources
have value which is recognized in other situations. Economic value is given to
Inferred Resources in the public valuation of mineral properties, during mergers and
acquisitions, when developing operating plans, and for impairment testing.

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Documentation

Information used by the Competent Person to determine and justify the forward price
profiles should be fully documented and readily available upon request by the SEC on
a confidential basis. Which information should be used to document forward looking
price profiles will vary depending on the commodity being sold, the availability of
historical price information or contracts, currency exchange rates where applicable,
and other factors to be determined by the Competent Person. For some commodities,
project location and quality of product must be taken into account.

This price documentation should be included in the Mineral Reserves Declaration


Report either as a whole or by reference, and the Competent Person signing the report
should concur with the reasonableness of the price profile. (The terms Mineral
Reserves Declaration Report and Competent Person are defined below, in Sections
9 and 11 respectively.)

Disclosure

As discussed earlier, there are circumstances where disclosure of long-term price


assumptions can be detrimental to the company and the investors. Therefore,
disclosure should be recommended but not required. If prices are published, the
option should be to publish a single price estimate (the price used to estimate the
reserves) or a range of prices within which no material changes in reserve would
occur. If prices are not published, the reasons for doing so should be documented.
This documentation may be treated as confidential but should be available for review
by auditors or regulators when required.

Whether or not commodity prices used to estimate reserves are published, the overall
methodology used to determine those prices should be disclosed. Such disclosure
should be in a form which helps investors determine whether, in their own opinion,
prices used represent reasonable views of future prices.

Reserve Sensitivity Test

To provide comparability in reserve reporting among mining companies, a Reserve


Sensitivity Test should be conducted using the current reserve mine plan and the
average price which prevailed during the most recent last three years. The three-year
historical price average (the Test Price) should be calculated as of the end of the
financial year of the reporting entity, or within six months prior to the end of the
financial year. This test should be applied and the results reported by mine or
reporting unit consistent with the companys reserve statement.

As discussed earlier, there are situations where meaningful historical prices are not
available. In such circumstances, a Reserves Sensitivity Test will not be required.

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The lack of necessary price information must be documented in the Mineral Reserves
Declaration Report.

The Reserves Sensitivity Test consists in calculating the cash flow that would be
generated by the mine or operating unit if the commodity price was equal to the Test
Price but mine plan and production schedules remained unchanged, i.e. those used for
reserve estimation and reporting. If the non-discounted cash flow is positive, the
company should provide a statement confirming that a positive non-discounted cash
flow was realized at the stated Test Price. If the non-discounted cash flow is negative,
then the potential impact on reserves at the sensitivity test price should be disclosed.
This should be done by stating the price required to achieve a cumulative positive
cash flow over the remaining life of the property. This test should be performed only
if the historic average price is lower than the forecast price used to estimate the
reserves.

Documentation of the Reserves Sensitivity Test must include the average price used
to perform the test and the period used to calculate this average. There is no
requirement that reserves be re-estimated because a positive cash flow could not be
realized when using the Test Price.

When exchange rates must be taken into account to complete the Reserves Sensitivity
Test, the average exchange rate which prevailed during the last three years should be
used.

Discussion of Reserve Sensitivity Test

It should be noted that no regulator, U.S. or otherwise, currently requires completion


of a Reserves Sensitivity Test. Such a requirement is seen as a significant
improvement to current practices, giving additional price information to investors
while recognizing that there are situations when the price used for reserve estimation
cannot or should not be publicly disclosed.

The Reserve Sensitivity Test presents the following advantages:

- During periods of low commodity prices, it measures the sensitivity of the


reserves to such prices.
- It is easy to implement.

However, this test presents the following disadvantages:

- It applies only to companies for which meaningful historical prices are


publicly available, mostly base and precious metal companies.
- It is of little significance during periods of high prices.
- It uses a three-year price average which was shown to be of little economic
significance and fails to take into account the time period over which each
mining asset will be exploited.

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- It does not give any indication of reserve sensitivity to high prices.
- Imposition of a standardized price assumption (such as a fixed three-year
historical price) fails to take into account the time period over which each
mining asset will be exploited. While it may give some appearance of
comparability that comparability is likely to be false.

Alternative tests could be considered. For example, the yearly price averages which
prevailed during the last ten to fifteen years could be statistically analyzed. Upper
and lower test prices could be determined and a test could be performed for both
prices, thus quantifying the reserve sensitivity to high and low prices. However, such
a test would be significantly more complex than the one recommended here. Careful
design and assessment of effectiveness and practicality would be required before a
recommendation could be made for implementation.

As indicated above, reserves are not solely dependent on market prices. For better
disclosure, it might be better to identify the variables to which the estimate of
reserves is most sensitive and provide some qualitative or quantitative disclosures
about those variables, one of which might be the commodity price.

7.5. Additional Remarks Concerning Use of Standardized Prices

Advantages and disadvantages associated with the use of a three-year price average
were discussed earlier. In its deliberations, the Working Group considered alternative
approaches to price standardization, from using spot prices to using long-term
historical averages.

Spot prices can fluctuate considerably in response to short-term factors such as


inventory build-ups, speculative activity, wars, terrorist actions, and other events.
Use of spot prices fails to recognize the cyclical pattern of metal price movements.
Spot prices in the coal industry do not reflect the primary economics of the mining
operation. For example, one major company sells less than 10% of its coal on a spot
pricing basis, their objective being to strive for long-term contracts that provide a
more solid basis for corporate planning. For these reasons, the latest spot prices will
not generally be a reasonable basis for long-term price assumptions.

An alternative basis for prices assumptions is to use historical data. This provides
apparent objectivity, as well as more consistency between businesses. However, the
use of short-term historical averages does not take into account the most current
information regarding future supply and demand and technology changes. To make
rational decisions about investment and divestment, mining businesses need to have
an informed view of the prospects for particular commodities. Short-term historical
prices are unlikely to conform to industry expectations and will not be consistent with
the assumptions on which decisions are made.

Using a short-term historical approach leads to potentially erratic fluctuations in


mineral reserves from year to year. This would misrepresent the true condition of the

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business and may have inappropriate consequences, such as violations of bank loan
covenants, and under- or over-statement of reserves relative to those used for mine
planning. Mining projects are typically long term, frequently twenty years or more.
Price assumptions should, in principle, recognize this and the expected life of the
individual mining project. In practice, it is typical for international mining groups to
set common price profile assumptions to be applied by all of their operations
producing a particular commodity. Exceptions may be made for mineral deposits
with particularly short remaining lives, in which case short-term commodity price
profiles may be used. Normally, however, mineral reserves are based upon price
assumptions that represent the companys expectations of the long-term average price
of the particular commodity, beyond the three-year, short-term viewpoint.

This limitation to the suitability of historically based price assumptions could be


mitigated by using prices averaged over an extended period. For commodities such
as copper, which are actively traded on metal exchanges, that period should be
sufficient to accommodate distortions within the economic cycle. The question of
period length is a variable open to discussion. In addition, the use of real versus
nominal dollars is another contentious issue. Application of a GDP deflator is not
applicable to all commodities. For some commodities such as base metals, prices
may be more a function of current supply-consumption balances. For other
commodities such as gold, inflation may be a significant factor. A historic average of
two cycles may be one appropriate procedure to estimate a long-term average.
However, the use of such an average needs to be tempered with managements long-
term outlook based on anticipated short- and long-term expectations.

7.6. Text to be Included in the 2005 SME Guide

The Working Group recommends that the following text be included in a revised
version of the SME Guide to become effective in 2005 (the 2005 SME Guide).

Mineral Reserves and Commodity Pricing


1. Commodity prices used for the determination of Mineral Reserves should be
based on forward-looking estimates reflecting managements reasonable and
supportable short- and long-term expectations as supported by all available evidence.
The basis for the selected prices must be justified and supported by appropriate
documentation. The Competent Person must ascertain that these prices are consistent
with historical prices or with sales agreements and marketing determinations.

2. For current mining operations, the price profile used for Mineral Reserve
estimation can reflect current market conditions for short-term forecasts, while
trending with time upward or downward toward the long-term price estimates based
on managements expectations. For undeveloped Mineral Reserves, management
should use their long-term price expectations.

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3. For commodities sold under existing contracts, Mineral Reserves should be
determined based on contract terms. For Mineral Reserves whose production would
extend beyond the quantities specified in existing contracts, reasonable and
supportable assumptions should be made to determine the prices applicable for the
estimation and reporting of these Mineral Reserves.

4. To demonstrate the economic feasibility of a Mineral Reserve, the estimated


prices, combined with other engineering parameters and modifying factors, must be
applied to only Measured and Indicated Mineral Resources.

Mineral Reserves being the economically mineable part of a Measured or Indicated Mineral Resource,
appropriate assessments must demonstrate at the time of reporting that extraction is reasonably
justified. This requires that assumptions are made concerning the price of the commodity or product
that will be sold when the mine is in production.

Mineral Reserves are estimated and published to supply information to investors concerning the value
of the deposit and the risk which may be associated with its development. Mineral Reserves are used
by management, in conjunction with Mineral Resources, for short-term, long-term and strategic
planning. They play a critical role in accounting, including impairment testing, fair value accounting,
calculation of depreciation, depletion and accumulated retirement obligation provision rates. To supply
investors with information which is consistent with managements plans and financial reporting,
commodity prices used for the determination of Mineral Reserves should be based on forward-looking
estimates reflecting managements reasonable and supportable expectations as supported by all
available evidence.

Managements price expectations must be reasonable and supportable. Most commodities, whether
sold using publicly quoted prices (e.g., base metals and precious metals) or under long-term contract
(e.g., coal and iron ore), experience long-term price cycles. Price expectations should reflect current
prices as well as long-term trends. Overly optimistic or pessimistic price expectations could result in
significant over or underestimation of reserves. It is the responsibility of management and the
Competent Person to determine whether the prices used for reserve estimation are reasonable and
supportable, given all available information.

During periods of low prices, a mining company may choose to temporarily curtail operations and save
the asset until prices recover. When such actions are taken, this information must be publicly disclosed.
In such circumstances, previously published Mineral Reserves may not have to be written off, provided,
in the opinion of management and the Competent Person higher future prices can be reasonably and
supportably assumed. As discussed below, whenever applicable a Reserve Sensitivity Test must be
performed as part of the Mineral Reserves estimation process, whose results will assist investors in
determining the risk associated with a project in periods of low commodity prices.

5. The forward price profile used to estimate Mineral Reserves, including expected
short-term and long-term prices, and justification of these prices, must be documented.
This documentation must be included in the Mineral Reserves Declaration Report.

It is likely that part or all of the price profile documentation will contain sensitive information which
should be treated as confidential. Where required or requested for the purposes of review or audit, this
information may be released to appropriate bodies such as the U.S. SEC or auditors on a confidential
basis as supplemental information.

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The documentation supporting managements expectations may include: comparison of prices with
historical and current prices and forward curves, contracts and market considerations, currency
exchange rates where applicable, third party sources, and supplemental information.

6. Public disclosure of prices used for Mineral Reserve estimation is recommended


but not required. When commodity prices are disclosed, disclosure can be as a single
price estimate equal to that used for reserve determination, or as a range of prices
within which no material change in reserves would occur. Whether or not commodity
prices used to estimate reserves are published, the overall methodology used to
determine those prices should be disclosed. Such disclosure should be in a form
which helps investors determine whether, in their own opinion, prices used represent
reasonable views of future prices.

It is recognized that in some cases, such as when a product is sold under long-term contract whose
terms must be kept confidential, there can be valid commercial reasons for non-disclosure. There are
circumstances where disclosure of long-term price assumptions used for business planning and reserve
reporting can be detrimental to the company and the investors, such as when bidding for sales
contracts or property acquisitions. If prices are not published, the reasons for doing so must be
documented. This documentation may be treated as confidential but should be available for review by
auditors or regulators when required.

Reserves Sensitivity Test


7. When estimating Mineral Reserves, and if historical commodity prices are
available, a Reserves Sensitivity Test must be conducted. The objective is to
assess and report the sensitivity of the Mineral Reserves to recent fluctuations in
commodity prices. This test is conducted based upon the realization of a positive
non-discounted cumulative forward-looking cash flow at a Test Price equal to the
average commodity price which prevailed during the most recent last three years.
The Test Price must be calculated as of the end of the financial year of the reporting
entity, or within six months prior to the end of the financial year.

If the commodity price(s) used to develop the reserves is higher than the most recent
three-year average price(s), the reporting entity should determine if mining the
reserves at the most recent three-year average commodity price(s) generates non-
discounted, forward-looking positive cumulative cash flow for each operating unit. If
not, the reporting entity should disclose for those operating units (whether in
production, proposed or curtailed) the commodity price(s) that is required to achieve
positive cumulative cash flow.

It is recognized that there are commodities for which historical prices which reflect
the value of the product sold (or to be sold) are not publicly available. In such
circumstances, a Test Price cannot be calculated and a Reserves Sensitivity Test is not
required.

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A Test Price can usually be calculated for base metals and precious metals as such prices are quoted
on international exchanges. There are other commodities for which publicly quoted prices may not be
available or may not represent the value of the product sold or to be sold. In such cases, a Reserves
Sensitivity Test cannot be meaningfully completed. The lack of necessary price information must be
documented in the Mineral Reserves Declaration Report.

If a Mineral reserve is reported using a price lower than the test price, the forward-looking discounted
cash flow must be positive, and the Reserve Sensitivity Test (based on an undiscounted cash flow)
need not be performed.

When applicable, a statement should be made that a Reserves Sensitivity Test was completed, or that
such a test was not applicable. The test results must be included in the Mineral Reserves Declaration
Report. The Reserves Sensitivity Test should be applied to each mine or each reporting unit, in
accordance with the format used in publicly reporting the Mineral Reserves. The test results should be
listed separately for each mine or reporting unit which failed to pass the test. Mines or reporting units
which successfully passed the test can be reported as a group.

If the Reserve Sensitivity Test was applied and failed during the current and previous reporting years,
this should be taken into account to determine whether continued declaration of reserves is justified.
Even if reserves can still be declared, the Competent Person may recommend additional disclosure.

When exchange rates must be taken into account to complete the Reserves Sensitivity Test, the
average exchange rate which prevailed during the last three years should be used. When conducting
the Reserves Sensitivity Test, all prices and costs must be on a constant price (un-escalated) basis.

7.7. Supplemental Information: Price Cycles

The following figures show yearly prices and three-year rolling averages for a
number of commodities, from 1985 to 2004. The three-year average is the average
of the daily closing prices for the three-year period ending on the date of observation,
i.e. the 1991 three-year average is the average of all prices from January 2, 1989 to
December 31, 1991. The three-year average reduces the magnitude of the most
extreme peaks and troughs, but not as significantly as one might expect, the reason
being that the length of the price cycles significantly exceeds three years. The three-
year average shows cycles which are comparable with those exhibited by yearly
prices, except that the peaks and troughs are delayed by one to two years.

RECOMMENDATIONS.doc Issue A: Commodity Pricing Guidelines Page 37 of 87


Alum inum Rolling 3-Year LME
Price Ranges

$1.20

$1.00
LME $/lb Aluminum

$0.80

$0.60

$0.40

$0.20

$0.00
1985

1987

1989

1991

1993

1995

1997

1999

2001

2003
Years

Annual Averages Rolling 3-Yr Averages

Cobalt Rolling 3-Year Metals Week


Price Ranges
$35.00

$30.00

$25.00
$/lb Cobalt

$20.00

$15.00

$10.00

$5.00

$0.00
1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Years

Annual Averages Rolling 3-Yr Averages

RECOMMENDATIONS.doc Issue A: Commodity Pricing Guidelines Page 38 of 87


Copper Rolling 3-Year LME
Price Ranges

$1.40

$1.20

$1.00
LME $/lb Copper

$0.80

$0.60

$0.40

$0.20

$0.00
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Years

Annual Averages Rolling 3-Yr Averages

Gold Rolling 3-Year LME


Price Ranges

$600.00

$500.00

$400.00
LME $/oz Gold

$300.00

$200.00

$100.00

$0.00
1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Years

Annual Averages Rolling 3-Yr Averages

RECOMMENDATIONS.doc Issue A: Commodity Pricing Guidelines Page 39 of 87


Iron Rolling 3-Year
Price Ranges

$30.00

$25.00

$20.00
$/100 lbs Iron

$15.00

$10.00

$5.00

$0.00
1985

1987

1989

1991

1993

1995

1997

1999

2001

2003
Years

Annual Averages Rolling 3-Yr Averages

Lead Rolling 3-Year LME


Price Ranges

$0.45

$0.40

$0.35

$0.30
LME $/lb Lead

$0.25

$0.20

$0.15

$0.10

$0.05

$0.00
1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Years

Annual Averages Rolling 3-Yr Averages

RECOMMENDATIONS.doc Issue A: Commodity Pricing Guidelines Page 40 of 87


Molybdenum Rolling 3-Year Metals Week
Price Ranges
$12.00

$10.00
$/Contained Moly in Moly Oxide

$8.00

$6.00

$4.00

$2.00

$0.00
1985

1987

1989

1991

1993

1995

1997

1999

2001

2003
Years

Annual Averages Rolling 3-Yr Averages

Nickel Rolling 3-Year LME


Price Ranges

$7.00

$6.00

$5.00
LME $/lb Nickel

$4.00

$3.00

$2.00

$1.00

$0.00
1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Years

Annual Averages Rolling 3-Yr Averages

RECOMMENDATIONS.doc Issue A: Commodity Pricing Guidelines Page 41 of 87


Silver Rolling 3-Year LME
Price Ranges

$10.00
$9.00
$8.00

$7.00
LME $/oz Silver

$6.00
$5.00
$4.00
$3.00

$2.00
$1.00
$0.00
1985

1987

1989

1991

1993

1995

1997

1999

2001

2003
Years

Annual Averages Rolling 3-Yr Averages

Zinc Rolling 3-Year LME


Price Ranges

$0.90

$0.80

$0.70

$0.60
LME $/lb Zinc

$0.50

$0.40

$0.30

$0.20

$0.10

$0.00
1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Years

Annual Averages Rolling 3-Yr Averages

RECOMMENDATIONS.doc Issue A: Commodity Pricing Guidelines Page 42 of 87


8. ISSUE B: PUBLICATION OF MINERAL RESOURCES

8.1. Issue

SEC Industry Guide 7 does not permit the disclosure of identified material (defined as
Mineral Resources in the 1999 SME Guide and other international codes) having
potential economic benefit outside of Proven and Probable Reserves, unless (1) this
material is required to be disclosed by foreign or state law or (2) estimates have been
provided to others in the context of an acquisition, merger, or consolidation. When
publication of such material is allowed by the SEC, the SEC has asked that it be
called mineralized material. Use of the term resource is not allowed by the SEC.
This limitation on the conditions under which such material can be published reflects
a view that Mineral Resources are poorly defined and therefore their publication can
be misleading to the investor. Furthermore the terms reserve and resource are
similar and may be perceived as having the same meaning.

There are no authoritative GAAP pronouncements that specifically cover the


reporting of reserve estimates or the use of reserve estimates in financial reporting by
mining companies. FAS Statement 19 on financial reporting and reporting by oil and
gas producing companies, (and literature related to it) applies only to entities engaged
in oil and gas producing activities, although many of the concepts contained in it may
be applicable to mining companies. Industry Guide 7 provides guidance for SEC
Registrants on various matters including the definition and disclosure of proven and
probable reserves and the definitions of exploration, development and production
stages. EITF Issue 04-3 stresses that economic value exists in a mining asset beyond
the Industry Guide 7 definitions of proven and probable reserves.

Specifically, EITF Issue 04-3 requires that mineral resources and exploration
potential (components of the economic value in a mining asset beyond the value
attributable to proven and probable reserves, or VBPP as defined in that
pronouncement) must be considered in (a) allocating the purchase price of a business
combination and (b) testing a mining asset for impairment. The inconsistencies that
exist between GAAP and the requirements of SEC Industry Guide 7 impede financial
reporting disclosures. For example, VBPP is required to be considered as noted in (a)
and (b) above, while the mineral resources that underlie the VBPP are precluded from
being disclosed under SEC Industry Guide 7.

Reporting of Mineral Resources is allowed in Canada, Australia, South Africa and


Chile, as well as in the UK and Europe. These discrepancies in reporting
requirements can result in inconsistencies in material information being voluntarily
disclosed in foreign markets but not readily available to U.S. investors.

The Working Group believes that there is a genuine need for investors to be informed
of the Mineral Resources available to a reporting entity. However, for such
information to be meaningful a stricter definition of the term Mineral Resource is
needed. Modifications should also be made to the U.S. reporting rules to ensure

RECOMMENDATIONS.doc Issue B: Publication of Mineral Resources Page 43 of 87


reliability and accuracy of corporate disclosure as it relates to value beyond proven
and probable reserves.

8.2. Current Requirements and Practices

U.S. SEC

In the SEC Industry Guide 7 (see Appendix 1) the following statement is made:

- Paragraph (b) (5), Instruction 3: Estimates other than proved (measured) or


probable (indicated) reserves, and any estimated values of such reserves shall
not be disclosed unless such information is required to be disclosed by foreign
or state law; provided, however, that where such estimates previously have
been provided to a person ( or any of its affiliates) that is offering to acquire,
merge, or consolidate with, the registrant or otherwise to acquire the
registrant's securities, such estimates may be included.

Under the conditions stated in Paragraph (b) (5), Instruction 3 of Industry Guide 7,
the SEC has allowed companies to report mineralized material which is generally
interpreted as being equivalent to Mineral Resources. The SEC is of the opinion that
only the equivalent of Measured and Indicated Mineral Resources can be published as
mineralized material, while the equivalent of Inferred Mineral Resources should
not be.

Most foreign laws allow, but do not require, disclosure of Mineral Resources. During
the last few years, many companies have been active in mergers, acquisitions or
consolidations, and have provided Mineral Resources to other entities, thus allowing
disclosure of mineralized material.

The SEC does not allow use of the term resources and its subdivisions as
measured, indicated or inferred resources. When allowing publication of
mineralized material there is no requirement that a distinction be made between
measured and indicated material, but inferred material cannot be published.

1999 SME Guide

The SEC considers the term measured reserves as equivalent to proved reserves,
and the term indicated reserves as equivalent to probable reserves. To avoid
confusion in terms, the 1999 SME Guide and other international guides classify
reserves as proved or probable, while only resources can be classified as
measured or indicated (or inferred). The 1999 SME Guide uses internationally
recognized definitions of Mineral Resources and Mineral Reserves (see Appendix 2).
A Mineral Resource is defined as follows (Section 18):

A Mineral Resource is a concentration or occurrence of material of intrinsic


economic interest in or on the Earths crust (a deposit) in such form and quantity

RECOMMENDATIONS.doc Issue B: Publication of Mineral Resources Page 44 of 87


that there are reasonable prospects for eventual economic extraction. The location,
quantity, grade, geological characteristics and continuity of a Mineral Resource
are known, estimated or interpreted from specific geological evidence and
knowledge. Mineral Resources are sub-divided, in order of increasing geological
confidence, into Inferred, Indicated and Measured categories. Portions of a
deposit that do not have reasonable prospects for eventual economic extraction
must not be included in a Mineral Resource.

Key in this definition is the requirement for reasonable prospects for eventual
economic extraction. The Guide supplies guidance on how to interpret these terms.
The last sentence in the definition is also of critical significance.

The Guides recommendations concerning reporting of Mineral Resources and


Mineral Reserves are based on the assumption that these definitions are accepted by
the regulators and that interpretation of these definitions is the responsibility of a
Competent Person with appropriate expertise (1999 SME Guide, Sections 18-26).
Mineral Resources must be classified as Measured, Indicated or Inferred. The 1999
SME Guide indicates that all three categories of resources can be reported (1999
SME Guide, Section 24):

Mineral Resource reports must specify one or more of the categories of


Inferred, Indicated and Measured. Reports must not contain Inferred
Mineral Resource figures combined with either of the other two categories. The
Measured and Indicated categories must be separately reported if this information
is material. A Mineral Resource must not be reported in terms of contained metal
content unless corresponding tonnage and grade figures are also presented.
Mineral Resource figures must not be aggregated with Mineral Reserve figures.

The 1999 SME Guide specifically lists assessment criteria that a mining company
should consider to determine whether a Mineral Resource can be declared. (1999
SME Guide, Table 1: Checklist of Assessment Criteria).

U.S. GAAP

U.S. GAAP specifies that value beyond proven and probable reserves (VBPP) must
be taken into account in (a) allocating the purchase price of a business combination
and (b) testing a mining asset for impairment. Specifically, EITF Issue 04-3 states:
The Task Force reached a consensus that an entity should include VBPP in the value
allocated to mining assets in a purchase price allocation to the extent that a market
participant would include VBPP in determining the value of the asset and the Task
Force reached a consensus that an entity should include the cash flows associated
with VBPP in estimates of future cash flows (both undiscounted and discounted) used
in determining whether a mining asset is impaired under Statement 144.

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Other International Guidelines

Guidelines developed by Canadian (CIM Guidelines as incorporated in NI 43-101),


Australian (JORC code as incorporated in ASX rules), South African (SAMREC code
as incorporated in JSE rules), and European professional societies define the term
Mineral Resources and recognize the importance of material beyond proven and
probable reserves when valuing mining companies and planning mining operations.
These professional societies recommend disclosure of Mineral Resources according
to guidelines set in place to ensure that such disclosure is not misleading.

Canadian, Australian and South African regulators recognize the definitions of


Measured, Indicated and Inferred Mineral Resources set by national professional
societies, and require that these terms be used for public reporting. Most international
codes specify that companies must review and publicly report on their Mineral
Resources and Mineral Reserves at least annually.

8.3. Discussion

Mining Companies subject to U.S. securities and exchange regulations must comply
with Industry Guide 7 when reporting ore reserves. No allowance is made within
Industry Guide 7 for identified material (termed Measured, Indicated, and Inferred
Mineral Resources in other international codes and guidelines) having potential
economic benefit outside of Proven and Probable Reserves, unless (1) this material is
required to be disclosed by foreign or state law or (2) estimates have been provided to
others in the context of an acquisition, merger, or consolidation. All other
internationally accepted reporting codes define and allow the reporting of Mineral
Resources.

Though not explicitly stated in Industry Guide 7, the SEC informally recognizes
mineralized material, which is approximately equivalent to Measured and Indicated
Resources as defined by other international codes. The use of the term mineralized
material is unique to the SEC, as no other regulatory jurisdiction or associated
supporting guidelines have adopted this term. The SECs preference for usage of the
term mineralized material results from its opinion that the average investor is not
well informed about technical mining terms, and that an uninformed investor
perceives a resource as being more readily available than a reserve, thus leading
the investor to assign an equal or even greater value to resources than to reserves.

The SEC does not consider inferred material (Inferred Resources in international
codes) to be part of its mineralized material and has communicated that inferred
material should never be publicly disclosed. This position is based on a perception
that inferred material is not sufficiently defined to be reportable.

This paper discusses the very real need for companies listing on U.S. exchanges to be
allowed by the SEC to report Measured, Indicated and Inferred Mineral Resources.
The paper includes recommendations for revised definitions of Mineral Resources

RECOMMENDATIONS.doc Issue B: Publication of Mineral Resources Page 46 of 87


that are designed to address the SECs concerns about the potential economic
viability of resources as well as to address the misperception that inferred material is
inadequately defined or has insufficient confidence to be considered in economic
valuation. (Inferred Resources cannot be valued in the estimation of publicly
reported Mineral Reserves. However, they are routinely taken into account for other
purposes such as mergers, acquisitions, and business planning.) Also addressed is the
SECs concern with the term Mineral Resources as opposed to mineralized
material. Reporting and disclosure guidance is provided as well as a discussion on
the justification of these positions.

8.4. Working Group Recommendations

General Recommendations

The Working Group recommends that use of the term Resources be recognized by
the SEC and specifically that SEC registrants be allowed to disclose Mineral
Resources in their filings with the SEC, as can be done with the securities exchanges
in all other major international jurisdictions with significant mining company listings
(Australia, Canada, South Africa, and the UK). However, recognizing the SECs
concern arising from the similarity between the terms Resources and Reserves
disclosure of Mineral Resources should always be accompanied by a statement
emphasizing the difference.

Reporting of Mineral Resources is done in two ways outside of the United States:
either inclusive of reserves, meaning that they include all material also reported as
reserves, or exclusive of reserves, meaning they are reported completely separate
from reserves. While the practice of reporting resources inclusive of reserves is
allowed under other international codes (JORC and SAMREC), this can lead to
double-counting by investors, reporters, and analysts who may add published
resource and reserve numbers together (or a factored proportion of the two). Because
of this danger, the working group strongly recommends that resources always be
reported exclusive of reserves (i.e. published resource estimates should not include
reserves). The resources should be disclosed separately under the internationally
recognized classification system of Measured, Indicated and Inferred Resources. The
reporting of contained metal should also be allowed as an option at the discretion of
the reporting company, provided that it is accompanied by tonnage and grade
estimates.

It is recommended that for all public disclosures of Mineral Resources, a statement is


made that, even though there are reasonable prospects for eventual economic
extraction, no assurance can be given that part or all of the Mineral Resource will be
converted to a Mineral reserve. It is also recommended that public disclosure be
made of the reasons why a published resource is not reported as a reserve.

The basis on which Mineral Resources were estimated and classified should be
documented. This documentation should be available to auditors and regulatory

RECOMMENDATIONS.doc Issue B: Publication of Mineral Resources Page 47 of 87


agencies on a confidential basis but public disclosure should not be required. As
determined by the Competent Person, resource estimates can be supported by
documentation of:

- The key assumptions supporting the estimate, which may include commodity
prices and other economic criteria;
- The methods used to determine the estimate, and a statement that sufficient
data exist to estimate resources;
- An explanation of why the published resources are not reported as reserves
(e.g., economic study not yet carried out, insufficient drilling, insufficient
metallurgical testing, legal issues, economics, etc.); and
- The name of the Competent Person responsible for the resource estimate. The
Competent Person is responsible for the content of the document supporting
the estimate and must sign this document.

The Working Group is of the opinion that the definitions and categories of Measured,
Indicated, and Inferred Mineral Resources found in the Canadian, Australian, South
African and European reporting codes, and in the 1999 SME Guide are reasonable.
However, the Working Group also recognizes the concern which the SEC has with
possible misinterpretations of these definitions, including misinterpretation of the
requirement that there be reasonable prospects for eventual economic extraction,
resulting in the public reporting of misleading information.

The current definitions of resources, as accepted by a number of professional


organizations and non-U.S. regulatory agencies, have been developed over time with
the goal of providing investors with more transparent and meaningful information.
The Working Group has further revised these definitions and the accompanying
guidelines. These revisions were made to clarify the meaning of the term reasonable
prospects of eventual economic extraction, to add more rigor to the process of
determining when mineralized material can be defined as a Mineral Resource, and to
improve the classification of Mineral Resource as Inferred, Indicated or Measured.

It was recognized that the confidence with which resources are estimated must take
into account the concept of scale. Because resources are estimated for eventual
conversion to reserves, the confidence with which these resources are estimated must
be assessed not only for the entire area of the deposit within which a resource is
reported (overall estimate) but also for smaller parts of the deposit which are suitable
for development of reliable mine plans and financial analyses (local estimates).

The Working Group is of the opinion that consideration of scale, while implied in
earlier definitions, needed to be clearly stated to clarify the intent of the definitions
and assist the Competent Person in determining whether a Mineral Resource should
be classified as Measured, Indicated, or Inferred. Accordingly modification were
made to the definitions of Measured, Indicated, and Inferred Mineral Resources.
Comments received from international reviewers indicate that these new definitions
are fulfilling a need for clarification which had been recognized but to which a

RECOMMENDATIONS.doc Issue B: Publication of Mineral Resources Page 48 of 87


solution had not yet been proposed. Indications are that similar modifications will
eventually be accepted outside the U.S.

Additional guidelines added for clarification in the estimation of Mineral Resources


include the following:

- The term reasonable prospect implies that Measured, Indicated, and Inferred
Resources are constrained within pit shells or cones for open pit mines, or
constrained to coherent zones which support mining, processing and
development cost estimates for underground extraction. A deposit model is
required, which may be a computer-generated block model or a model based
on cross- or long-sections.
- Economic tests should be documented in technical studies, but the disclosure
of resources should not require formal detailed technical and economic studies
such as those required for reserve disclosure. Economic criteria should be
applied equally to all categories of resources (Measured, Indicated and
Inferred).
- Inferred Resources should exclude material which has little demonstrated
geologic or grade continuity. Inferred Resources are intended to be
sufficiently defined such that overall tonnages, grades and mineral contents
can be estimated with a reasonable level of confidence.
- Commodity prices used in resource reporting should be based on the
companys long-term view of the likely range of commodity prices. If prices
used for resource estimation differ from the companys long-term view as
used for reserve reporting, these differences should be justified and
documented.

Required Documentation

A confidential technical report summarizing all technical work completed and


assumptions used in defining resources must be made available to the SEC upon
request. This report will address all material and applicable aspects of Table 1 in the
2005 SME Guide (Appendix 3). The content of the report must be determined by the
Competent Person. Consideration should be given to the following:

- Commodity price assumptions and marketability assumptions.


- Costs assumptions.
- Technical and economic constraints used to ensure the resource is potentially
economic (e.g., constrained within pit shells or within potential underground
production blocks, mining dilution and processing recovery assumptions, etc.)
- Cutoff grade if applicable.

Recommended Disclosure

The Working Group recommends that reporting of resources be accompanied by


sufficient and transparent disclosure such that investors and analysts can evaluate the

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resources separately from reserves, and inappropriate addition of all resources to
reserves can be avoided when analyzing the companys plans.

The Working Group also recommends that, for international consistency, use of the
term Mineral Resources be allowed. However, recognizing the SECs concern
arising from the similarity between the terms Resources and Reserves disclosure
of Mineral Resources should always be accompanied by a statement emphasizing the
difference.

The following format for reporting of resources is recommended:

1. Resources should be reported exclusive of reserves in all text and summary


tables.
2. Measured and Indicated Resources can be combined only if also reported
separately.
3. Inferred Resources cannot be combined with Measured or Indicated Resources,
and can only be reported separately.
4. Contained metal can be reported only when accompanied by grade and tonnage
estimates.
5. A statement should be made that, while the estimate of Mineral Resources is
based on the Competent Persons judgment that there are reasonable prospects
for eventual economic extraction, no assurance can be given that Mineral
Resources will eventually convert to Mineral Reserves.
6. Price assumptions made when estimating resources should be disclosed along
with resource statements to the extent that this is customary and does not place
the reporting entity at a competitive disadvantage.
7. Reporting of resources should be accompanied by public disclosure of the
reasons why these resources are not reserves.

8.5. Justification of Recommendations

Public disclosure of resources is a logical step towards full disclosure of material


information because 1) resources are material to all investors; 2) residency or
nationality of an investor should not determine what information is disclosed by a
company; and 3) resources are required to be considered in impairment and purchase
price allocation in accordance with U.S. GAAP.

As stated previously, with few exceptions, the SEC does not support disclosure of
resources in annual filings by listing companies. The Working Group contends that
all resource categories (Measured, Indicated, and Inferred) represent identified
potential future reserves. Because resources are the primary source of future reserves,
and if properly reported, reflect the strength and longevity of a mining company, the
knowledge of these resources is meaningful to investors. Most mining companies
include resources within their business plans, include resources in net asset value
(NAV) calculations, and include resources in impairment and purchase price
allocation in accordance with U.S. GAAP. Companies that routinely estimate

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resources believe that the inability to disclose such resources results in failure to fully
inform investors and undervaluation of their assets. Companies that own resources
but not reserves commonly raise funds on the open market and have a market value
and an acquisition value which takes into account these resources, whether Measured,
Indicated or Inferred.

Inferred Resources can comprise a critically important component of a companys


future potential. The Inferred category is intended to cover situations where a mineral
concentration or occurrence has been identified and limited measurements and
sampling completed, but where the data are insufficient to allow the geological and
grade continuity to be confidently interpreted. However, sufficient data exists to
make reasonable estimates of continuity which are sufficient to test the potential
economic viability and judge whether a reasonable prospect for economic extraction
exists.

While there is no reserve category that corresponds to Inferred Resources from a


degree of confidence standpoint, this does not mean that meaningful economic
criteria cannot be applied to Inferred Resources. Most mining companies do include
an often substantial portion of their economic Inferred Resources in life of mine or
business plans (especially at underground operations), and most companies have
sufficient confidence in the Inferred Resources that these are used in impairment
testing. At most mine operations, Inferred Resources reside 5, 10, 15 or more years
out in the mine plan. If the disclosure of Inferred Resources is disallowed, companies
must resort to the premature drilling of this material in order to upgrade it to Indicated
status so that it can be reported. This is especially onerous for underground mines,
where reasonable down-dip or along strike projections of mineralization often cannot
be readily drilled from underground due to access restrictions, and drilling from the
surface at spacing sufficient for Indicated Resource classification can be prohibitively
expensive.

8.6. Text to be Included in the 2005 SME Guide

The Working Group recommends that the following text be included in the 2005
SME Guide.

Reporting of Mineral Resources

1. A Mineral Resource is a concentration or occurrence of material of economic


interest in or on the Earths crust in such form, quantity, and quality that there are
reasonable prospects for eventual economic extraction. The location, quantity, grade,
geological characteristics and continuity of a Mineral Resource are known, estimated
or interpreted from specific geological evidence and knowledge. Mineral Resources
are sub-divided, in order of increasing geological confidence, into Inferred, Indicated
and Measured categories.

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Portions of a deposit that do not have reasonable prospects for eventual economic
extraction must not be included in a Mineral Resource.

The term Mineral Resource covers mineralization (including, in certain instances, dumps and tailings)
which has been identified within reasonable limits and estimated through exploration and sampling and
within which Mineral Reserves may be defined by the consideration and application of Modifying
Factors.

The term reasonable prospects for eventual economic extraction implies a judgment (albeit
preliminary) by the Competent Person with respect to the technical and economic factors likely to
influence the prospect of economic extraction, including the approximate mining parameters. In other
words, a Mineral Resource is not an inventory of all mineralization drilled or sampled, regardless of
cutoff grade, likely mining dimensions, location, or continuity. It is a realistic inventory of mineralization
which, under assumed and justifiable technical and economic conditions, might become economically
extractable.

The term reasonable prospect implies that Measured, Indicated, and Inferred Resources are
constrained within pit shells or cones for open pit mines, or constrained to coherent zones which
support mining, processing and development cost estimates for underground extraction. A deposit
model is required, which may be a computer generated block model or a model based on cross- or
long-sections. Economic tests should be documented in technical studies, but the disclosure of
resources should not require formal detailed technical and economic studies such as those required for
reserve disclosure. Economic criteria should be applied equally to all categories of resources
(Measured, Indicated and Inferred).

When publishing Mineral Resources, a statement should be made that, while the estimate of Mineral
Resources is based on the Competent Persons judgment that there are reasonable prospects for
eventual economic extraction, no assurance can be given that Mineral Resources will eventually
convert to Mineral Reserves. Consideration should also be given to publication of the reasons why a
reported Mineral Resource was not reported as a Mineral Reserve.

Commodity prices used in resource reporting should be based on the companys long-term view of the
likely range of commodity prices. If prices used for resource estimation differ from the companys long-
term view as used for reserve reporting, these differences should be documented and justified.

Publication of Mineral Resources is recommended but not required. It is also recommended that, when
publicly disclosing mineral resources, material assumptions made to estimate these resources are also
disclosed. This may include disclosure of commodity price assumptions to the extent that this is
customary and does not place the company at a competitive disadvantage. It is recognized that in
some cases, such as when a product is sold under long-term contract whose terms must be kept
confidential, there might be valid commercial reasons for non-disclosure. There are also circumstances
where disclosure of long-term price assumptions used for business planning and reserve reporting can
be detrimental to the company, such as when bidding for sales contracts or property acquisition . If
prices are not published, the reasons for doing so must be documented. This documentation may be
treated as confidential but should be available for review by auditors or regulators when required.

Cutoff grades or other quality parameters determined by the Competent Person should be used to
exclude material for which there is no reasonable prospect for eventual economic extraction. Mineral
Resource estimates may include material below the selected cutoff grade to ensure that the Mineral
Resources comprise bodies of mineralization of adequate size and continuity to show reasonable
prospects for eventual application of a feasible mining method.

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Where considered appropriate by the Competent Person, the confidence in estimates of tonnage, grade,
quality, physical characteristics and deleterious elements that may affect the ability to recover,
beneficiate or produce a saleable product must be considered in determining whether a resource can
be reported and in classifying the resource as Inferred, Indicated or Measured.

All material assumptions made in determining the reasonable prospects for eventual economic
extraction must be documented and justified.

Interpretation of the word eventual in this context may vary depending on the commodity or mineral
involved. For example, for some coal, iron ore, bauxite and other bulk minerals or commodities, it may
be reasonable to envisage eventual economic extraction as covering time periods in excess of 50 years.
For many gold deposits, application of the concept would normally be restricted to much shorter periods
of time, but for Witwatersrand gold deposits long periods do apply. Interpretation is the responsibility of
the Competent Person.

Any adjustment made to the data for the purpose of making the Mineral Resource estimate, for
example by cutting or factoring grades should be clearly documented and justified.

Certain reports (e.g., inventory reports, exploration reports to a government and other similar reports
not intended primarily for providing information for investment purposes) may require full disclosure of
all mineralization, including some material that does not have reasonable prospects for eventual
economic extraction. Such estimates of mineralization would not qualify as Mineral Resources by this
definition.

Mineralized stope fill, mineralized in situ remnants, shaft and stope pillars left for ground support
purposes, stockpiles of mineralized material, old dumps and tailings can be considered when reporting
Mineral Resources if they present reasonable prospects for eventual economic extraction.

2. An Inferred Mineral Resource is that part of a Mineral Resource for which the
overall tonnages, grades and mineral contents can be estimated with a reasonable
level of confidence. It is based on geological evidence and apparent geological and
grade continuity after applying economic parameters. It is derived from information
gathered through appropriate techniques from locations such as outcrops, trenches,
pits, workings and drill holes and which in some way is limited or of uncertain quality
and reliability. An Inferred Mineral Resource has a lower level of confidence than
that applying to an Indicated Mineral Resource.

The term overall means within that part of the deposit for which Measured,
Indicated and Inferred Mineral Resources are reported.

The category is intended to cover situations where a mineral concentration or occurrence has been
identified and limited measurements and sampling completed, but the data are sufficient to allow the
inference of geological and grade continuity. Commonly, it would be reasonable to expect that the
majority of Inferred Mineral Resources would upgrade to Indicated or Measured Mineral Resource with
continued exploration/delineation drilling or other sampling. However, due to the uncertainty of Inferred
Mineral Resources it should not be assumed that such upgrading will always occur.

Confidence in the estimate is sufficient to allow the application of assumed but not verified technical
and economic parameters for conceptual planning. However, confidence is usually not sufficient to

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allow the results of the application of these technical and economic parameters to be used for
incremental planning and production scheduling. For this reason, there is no direct link from an Inferred
Mineral Resource to any category of Mineral Reserves (see Figure 1). Caution should be exercised if
this category is considered in technical or economic studies.

Inferred Mineral Resources should exclude material for which there is insufficient data to allow the
inference of geological or grade continuity. Inferred Mineral Resources are intended to be sufficiently
defined that overall tonnages, grades and mineral contents can be estimated with a reasonable level of
confidence.

3. An Indicated Mineral Resource is that part of a Mineral Resource for which


overall tonnages, densities, shapes, physical characteristics, grades and mineral
contents can be estimated with high levels of confidence, and local tonnages,
densities, shapes, physical characteristics, grades and mineral contents can be
estimated with reasonable levels of confidence. An Indicated Mineral Resource is
based on exploration, sampling and testing information gathered through appropriate
techniques from locations such as outcrops, trenches, pits, workings, and drill holes.
The locations are too widely or inappropriately spaced to confirm geological
continuity and grade continuity but which are spaced closely enough for continuity to
be assumed. An Indicated Mineral Resource has a lower level of confidence than that
applying to a Measured Mineral Resource, but has a higher level of confidence than
that applying to an Inferred Mineral Resource.

The term overall means within that part of the deposit for which Measured,
Indicated and Inferred Mineral Resources are reported. The term local means
within selected parts of the deposit related to mining increments which are suitable
for development of mine plans and financial analyses.

A deposit or part of a deposit may be classified as an Indicated Mineral Resource when the nature,
quality, amount and distribution of data are such as to allow the Competent Person determining the
Mineral Resource to confidently interpret the geological framework and to assume continuity of
mineralization. Confidence in the estimate is sufficient to allow the appropriate application of technical
and economic parameters to prepare incremental plans and production schedules and to enable an
evaluation of economic viability. Overall confidence in the estimates is high while local confidence is
reasonable. The Competent Person must recognize the importance of the Indicated Mineral Resource
category to the advancement of the feasibility of the project. An Indicated Mineral Resource estimate is
of sufficient quality to support detailed technical and economic studies leading to a Mineral Reserves
Declaration Report which can serve as the basis for major development decisions.

4. A Measured Mineral Resource is that part of a Mineral Resource for which


both overall and local tonnages, densities, shapes, physical characteristics, grades and
mineral contents can be estimated with a high level of confidence. It is based on
detailed and reliable exploration, sampling and testing information gathered through
appropriate techniques from locations such as outcrops, trenches, pits, workings, and
drill holes. The locations are spaced closely enough to confirm geological and grade
continuity.

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The term overall means within that part of the deposit for which Measured,
Indicated and Inferred Mineral Resources are reported. The term local means
within selected parts of the deposit related to mining increments which are suitable
for development of mine plans and financial analyses.

A deposit or part of a deposit may be classified as a Measured Mineral Resource when the nature,
quality, amount and distribution of data are such as to leave no reasonable doubt, in the opinion of the
Competent Person determining the Mineral Resource, that the tonnage and grade of production
planning and scheduling increments can be estimated within close limits and that any variation from the
estimate would not significantly affect potential economic viability of individual increments. This
category requires a high level of confidence in, and understanding of, the geology and controls of the
mineral deposit. A Measured Mineral Resource estimate is of sufficient quality to support detailed
technical and economic studies leading to a Mineral Reserves Declaration Report which can serve as
the basis for major development decisions.

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9. ISSUE C: TECHNICAL AND ECONOMIC STUDY REQUIREMENTS

9.1. Issue

By definition, a reserve is that part of a mineral deposit which could be economically


and legally extracted or produced at the time of the reserve determination. Industry
Guide 7 does not specify what technical and economic requirements must be satisfied
to demonstrate that economic extraction is feasible. However, it is generally
understood that the SEC expects a feasibility study. The term feasibility study is
not defined by the SEC and is understood differently depending on the entity
reporting the reserve.

More important than terminology is the reason why sufficiently detailed technical and
economic studies should be completed before a reserve is reported. The objective is
to give investors sufficient assurance that the mineral deposit can be economically
and legally extracted or produced. The technical and economic requirements which
must be satisfied to reach a sufficient level of assurance will differ with each project.
However, guidelines are needed to assist the estimator in its determination of whether
a sufficiently detailed study has been completed.

The Working Group recognized a need to specify the technical and economic
requirements which must be satisfied before a reserve can be reported. This
specification would set industry standards, improve investors confidence in the
reserves being published, improve consistency in reporting, and address the concerns
which the SEC has with public reporting of mineral reserves. The Working Group
also recognizes the critical role which the Competent Person must play in ensuring
that requirements specific to each deposit are taken into account.

9.2. Current Requirements and Practices

U.S. SEC

In the SEC Industry Guide 7 (Industry Guide 7) reserves are defined as follows (see
Appendix 1):

- Paragraph (a) (1): Reserve. That part of a mineral deposit which could be
economically and legally extracted or produced at the time of the reserve
determination

The conditions which must be satisfied to demonstrate that the material can be
economically extracted or produced are not defined but can be inferred from the
information which must be supplied, according to Industry Guide 7, Paragraphs (b)
(1), (b) (4), (b) (5), (b) (7), (c) (1), and (c) (2). Most of this information is of a
technical nature, except for Paragraph (b) (7):

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- Paragraph (b) (7): Detailed geographic maps and reports, feasibility studies
and other highly technical data should not be included in the report but should
be, to the degree appropriate and necessary for the Commission's
understanding of the registrant's presentation of business and property matters,
furnished as supplemental information.

It is generally understood that the SEC expects a feasibility study to be completed


before an undeveloped mineral deposit is declared a reserve. Less rigorous
demonstration of economic feasibility may be acceptable when reserves are added to
an operating mine.

1999 SME Guide

In the 1999 SME Guide the following references are made to economic feasibility
(see Appendix 2):

Section 27: A Mineral Reserve is the economically mineable part of a


Measured or Indicated Mineral Resource. [] Appropriate assessments, which
may include feasibility studies, have been carried out and include consideration of
and modification by realistically assumed mining, metallurgical, economic,
marketing, legal, environmental, social and governmental factors. These
assessments demonstrate at the time of reporting that extraction is reasonably
justified.

Table 1 of the 1999 SME Guide gives an extensive checklist of the assessment
criteria that must be taken into consideration when evaluating a Mineral Reserve.
References to capital and operating costs can be found in Section D.1.b (mining
costs), D.2.b (processing costs), and D.4 (environmental costs). Other required
economic considerations are specified in Section E of Table 1:

Section E.1 Feasibility - Other Economic Considerations: Description of


product to be sold. Discussion of whether there exists a ready market for the
product, whether contracts for the sale of the product are in place or expected to
be readily obtained. Justification of assumptions made concerning production cost
and value of product. Transportation, marketing, and other costs should be
considered.

Section E.2 Feasibility - Valuation Methods: Detailed description of the


method used to determine the economic feasibility of the project.

Other criteria are mentioned throughout the 1999 SME Guide, including in Section G
of Table 1:

Section G Other Considerations: No material impediments to the profitable


exploitation of the property should remain. Material uncertainties about the

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geology, extraction, processing, marketing, and legal requirements have been
eliminated.

Other International Guidelines

When specifying requirements for technical and economic study, the Australian,
Canadian, South African and European codes and guidelines use wording similar to
that found in Section 27 of the 1999 SME Guide. Additional definitions can be found
in the Canadian standards of disclosure for mineral projects (NI 43-101), the terms
feasibility and pre-feasibility being defined as follows:

feasibility study means a comprehensive study of a deposit in which all


geological, engineering, operating, economic 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 development of the deposit for
mineral production.

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 which, if an
effective method of mineral processing has been determined, includes a financial
analysis based on reasonable assumptions of technical, engineering, operating,
economic 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.

As stated in the above definition, under NI 43-101 a pre-feasibility study can be


sufficient to declare a reserve. Also stated in NI 43-101 is the requirement that under
certain circumstances (such as in the event of a material change in Mineral Resources
or Mineral Reserves) a technical and economic study must be documented in a
Technical Report whose content is specified in Form 43-101F1.

The Working Group recommends that publication of reserves require completion of a


Mineral Reserves Declaration Report whose content is to be determined by a
Competent Person taking into account the guidelines found in the 2005 SME Guide.

9.3. Discussion

There is a need for greater clarity in defining the conditions to be satisfied before a
Mineral Reserve is reported publicly. Technical and economic standards must be
developed that are applied and accepted consistently within the mining industry and
by regulators. Such improvements would benefit industry, regulators and, most
importantly, investors.

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9.4. Working Group Recommendations

The Working Group recommends that:

- Public disclosure of Reserves should be allowed only after the completion of a


properly defined, adequately scoped, and professionally executed study, with
appropriate levels of internal and/or external reviews.
- The results of this study should be documented in a report defined as a
Mineral Reserves Declaration Report. The study and supporting
documentation would represent a required standard for disclosure of Mineral
Reserves.
- The subjects to be considered in the Mineral Reserves Declaration Report will
be determined by the Competent Person. A check list of assessment criteria is
incorporated in Table 1 of the 2005 SME Guide. It will be the responsibility
of the Competent Person to determine which criteria listed in Table 1 and
which additional criteria should apply to a particular project.
- For public disclosure purposes, an assurance statement shall be provided by
the reporting entity certifying that the standards have been followed in
estimating the reserves.
- Reserve disclosure should be done in a timely fashion to limit the potential for
selective disclosure once it is apparent a Mineral Reserve exists that is
material to the reporting entity.
- The content of a Mineral Reserves Declaration report may remain confidential
to the reporting entity. However, when required for the purpose of review or
audit, the reporting entity will release the report to appropriate bodies, such as
regulators or auditors, on a confidential basis.

Recommendations that are specific to coal, industrial minerals, sand and gravel,
aggregates, diamonds and other gemstones are discussed in Section 12 below.

9.5. Justification of Recommendations

1) Published standards provide consistency and quality assurance on disclosure

The Working Group recommendations would provide more consistent guidance on


Mineral Reserve disclosure requirements and a regulatory environment compatible
with and to an extent more rigorous than that in other countries. These countries
would be encouraged to upgrade their definitions of the study requirements for
reserves disclosure. The recommended improved standards would be beneficial to
investors and regulators.

Guidelines concerning the intent of the Mineral Reserves Declaration Report form a
fundamental part of the 2005 SME Guide. In this guide, Table 1 is designed to give
guidance to the Competent Person while determining what should be the content of
the technical and economic study. The requirements of the 2005 SME Guide are
similar to, but more rigorous than those currently imposed, the objective being to

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ensure that there is a high degree of confidence that a reserve is economic, i.e. it is
highly unlikely the reserve will not be mined.

Clearer definition of the study requirements before reserves are declared promotes
consistency between companies, avoids premature reserves declaration and provides
reassurance to shareholders on the depth and breadth of studies underpinning reserve
disclosures.

Reassurance is further provided to investors by the availability of reporting codes and


guidelines that govern public disclosure of reserves, the requirement for a Competent
Person to be responsible for the reserves estimation process, and publication of the
form and content of the studies that underpin reserve estimates.

2) Corporate governance, procedure and controls

The SEC requires that internal controls be in place, and assessed regularly by
management, not only for financial reporting (as specified in Section 404 of the
Sarbanes-Oxley Act of 2002) but also over the preparation of supplementary
information as needed for financial reporting. The provision of a Mineral Reserves
Declaration Report and supplementary supporting information is intended to satisfy
these corporate governance requirements.

The principle that Mineral Reserve estimates are supported by appropriately detailed
studies that are fully documented is an integral part of good corporate governance.
This requirement also facilitates audits and other independent or internal checks on
the accuracy of reserve estimates.

An important component of good corporate governance consists in defining the risks


and uncertainties inherent in reserve estimates. A Mineral Reserve Declaration
Report must discuss and explain risk (defined as the possibility of loss or failure) and
opportunities, and where possible provide further explanation of how uncertainty
(defined as incomplete knowledge which can result in either risk or opportunities)
will be handled.

Material information concerning project risk may have to be publicly disclosed, and if
so it should be done in terms that the lay investor can understand.

3) Reserve declaration signals economic viability

Objective and reasonable reserve estimates are critical to successful business planning,
and the Working Group believes that no well-managed mining company would
willingly accept the risk of developing a project based on a bad reserve estimate.
Declaration of a Mineral Reserve signals the intent to mine or that a tangible asset has
been defined for potential sale. Conversion of what is mineralization in the ground
into a Mineral Reserve with a demonstrable and valuable mineral product may
materially influence the value of the reporting entity, and there is a legal and ethical
obligation to disclose in a timely fashion. Once a Mineral Reserve has been

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demonstrated, full, open and timely disclosure is required. Selective disclosure is not
acceptable.

4) Reserve declaration issues are similar for new and existing operations, but the
required detail may be different

Mineral Reserve disclosure requires a technical and economic study considering all
aspects of development and production from a mineral deposit. The term used to
describe the study is less important than assurance that the scope is broad and detailed
enough to meet the requirements for high confidence in the reserves. The study
must be prepared in sufficient detail that an appropriately credentialed technical
professional would conclude that development would meet reasonable investment
criteria.

Existing operations have the same requirement for Mineral Reserve disclosure as
undeveloped properties. Specifically this means the corporation has the intent to
mine the Mineral Reserve and the corporations investment criteria have been met.
Often the threshold to invest in existing mines is less than that required for
undeveloped properties, because the former may have an appropriate infrastructure in
place, and can often be funded from cash flow while the latter may require external
funding. This should not mean reserve estimation issues differ or that the standards
for reserve estimation and disclosure are lower.

A history of successful operation will certainly lend confidence to further reserve


disclosures (provided the geological circumstances are equivalent), as many of the
operating criteria and costs will be well established and understood.

5) Reserve declaration issues are similar for all minerals, including metals, coal,
industrial minerals, sand and gravel, and aggregates, but the required detail may
be different

The same general principles apply to all minerals. However, critical factors may
differ significantly, depending on geologic properties, commodity specific market
conditions, legal and permitting conditions and other industry specific practices.
Recommendations that are specific to coal, industrial minerals, sand and gravel,
aggregates, diamonds and other gemstones are discussed in Section 12 below. For
such deposits, geologic similarity with neighboring operations may be usable to
justify declaration of a reserve, and may reduce the extent of the required technical
and economic studies. In such circumstances, the Competent Person must ascertain
that there is sufficient information to demonstrate and document such similarity.
Demonstration of geologic similarity is usually not sufficient to fully demonstrate
technical and economic feasibility as other factors such as access to the deposit,
operating permits, availability of a market, are likely to be project specific.

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6) Requirement for a qualified professional to supervise work

Under most international reporting Codes and Guidelines it is explicitly the duty of
the Competent or Qualified Person, appropriately supported by other suitably
experienced professionals, to determine the reserves and to be prepared to justify the
estimation process and results before his or her peers. This concept establishes
checks and balances for Mineral Reserve disclosure and a consistency of approach,
while allowing for the large range of technical and economic issues that apply to
mineral deposits.

The Working Group fully supports the requirement that corporations be required to
ensure that a suitably qualified and experienced technical professional (a Competent
Person) has acted as the reserve estimator. Such a requirement must be mandated in
the U.S. as it is elsewhere.

Recognizing that reserve estimation is a team effort and that a range of disciplines
must be involved, the Competent Person acts as the leader of the team, but must rely
on and validate where necessary individual team members contributions.

The Competent Person must ensure that, before a Mineral Reserve is publicly
disclosed, it fully meets the requirements of the Mineral Reserves Declaration Report
and that there is no significant reason why the deposit could not be legally and
economically extracted given a set of reasonable assumptions at the time of the
estimate.

9.6. Text to be Included in the 2005 SME Guide

The Working Group recommends that the following text be included in a revised
version of the SME Guide to become effective in 2005 (the 2005 SME Guide).

Mineral Reserves Declaration Report

1. Public disclosure of Mineral Reserves is allowed only after completion of a


technical and economic study whose results and supporting documentation form a
Mineral Reserves Declaration Report. The Competent Person is responsible for the
content of the Mineral Reserves Declaration Report and the supporting
documentation.

The content of a Mineral Reserves Declaration Report will vary depending on the project being studied.
It is the responsibility of the Competent Person to determine that all applicable subjects are taken into
account when preparing the report. A checklist of assessment criteria is given in Table 1. It is the
responsibility of the Competent Person to determine which ones of these criteria and which additional
criteria should apply to a particular project. The relative importance of these criteria will vary with the
particular project and the legal and economic conditions pertaining at the time of determination.

The Mineral Reserves Declaration Report can be a single document in which all assessment criteria
deemed applicable by the Competent Person are analyzed, or a summary document which contains

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supporting documentation by reference only. The Competent Person takes responsibility for the
content of the Mineral Reserves Declaration Report and all supporting documentation included by
reference.

2. A Mineral Reserves Declaration Report is the result of a properly defined,


adequately scoped, and professionally executed study of the viability of a mineral
project. The study must have advanced to the stage where mining and mineral
processing methods are defined, and permitting is determined to be feasible. Realistic
production and/or sales schedules must have been developed for the life of the project,
including estimates of capital and operating costs. For projects with very long life the
study must be sufficient to justify investments needed for current and planned
production, as well as ongoing investments which will be needed to maintain long-
term operations.

For new projects, the study must include a financial analysis, based on realistically
assumed mining, metallurgical, economic, marketing, legal, environmental, social and
governmental factors, that is sufficient for a Competent Person, acting reasonably to
determine if all or part of the Measured and Indicated Mineral Resource may be
converted to a Mineral Reserve.

For addition of Mineral Reserves to an existing operation or project, the study must
be thorough enough to ensure that, in the opinion of the Competent Person, the
previously declared Mineral Reserve combined with the new addition can be reported
as a Mineral Reserves.

In making a Mineral Reserve declaration, it is implicit that the Mineral Reserves Declaration Report and
associated studies conclude that, in the opinion of the Competent Person, the material disclosed meets
the requirements of technical and economic viability and that, in the opinion of the entity reporting the
Mineral Reserves, development of the Mineral Reserves would meet reasonable investment criteria
when compared to alternative investments with similar risk.

In the case of a new mine, the Mineral Reserves Declaration Report will comprise, either in its entirety
or by reference, a comprehensive suite of documents, produced under the supervision of a Competent
Person, which support the reserve estimates being published. It is the Competent Persons
responsibility to ensure that the documentation is sufficiently complete, accurate and cohesive as a
whole to demonstrate the required confidence to enable public disclosure of the Mineral Reserves.

In the case of an operating mine, where existing reserves and mining experience lend greater
confidence to the estimation of contiguous or nearby reserves, ensuring that the work done addresses
all the issues required to establish a Mineral Reserve remains the responsibility of a Competent Person.
The work must be supported by a Mineral Reserves Declaration Report covering, either directly or by
reference, all of the relevant factors but with selective modification and allowances based on operating
data and the inclusion of the new reserves in an overall project mining plan.

In the case of an operating mine or a mine with historical operation, if sufficient data is available, a
reconciliation report should be included in the Mineral Reserves Declaration Report. A reconciliation
report is a report which, for a defined time period or volume mined, compares actual production (as
estimated from ore control, mine production reports, and/or mill production reports) with expected
production as determined from the deposit model used for reserve estimation.

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3. Public reporting of a Mineral Reserve will normally indicate the intent to mine, or
that a tangible asset has been defined for potential sale. Sufficient work should have
been done during the study to confirm with reasonable certainty that there are no
likely impediments, whether technical, economic or legal, to a mining operation being
established.

A Mineral Reserve Declaration Report must discuss and explain risk (defined as the possibility of loss
or failure), and where possible provide further explanation of how uncertainty (defined as incomplete
knowledge which can result in either risk or opportunities) will be handled. If representing material
information, project risk must also be disclosed in terms that the lay investor can understand.

Where Mineral Reserves have been defined but are scheduled to be mined at a date some distance in
the future (as is commonly the case in the coal industry), sufficient assurance should be available on an
annual basis that, in the judgment of the Competent Person, endorsed by the corporation, economic
viability can be demonstrated and the reserves retained in inventory.

Once Mineral Reserves have been defined and disclosed, further optimization may take place together
with other refinements designed to provide sufficiently detailed engineering to establish cost estimates,
define and mitigate risks and determine an implementation plan. However, it is implicit in a reserves
declaration that this phase of optimization will not materially negatively affect the quantity, quality or
economic viability of the Mineral Reserves.

When a Mineral Reserve is published, an assurance statement must be made that the Mineral Reserve
Declaration Report standard was followed.

4. The contents of a Mineral Reserves Declaration Report may include sensitive


information on product pricing strategies, marketing and sales forecasts and as such
may remain confidential to the reporting entity. Where required or requested for the
purposes of review or audit, the reporting entity will release this information to
appropriate bodies such as regulators or auditors on a confidential basis as
supplemental information.

5. Table 1 of the SME Guide provides, in a summary form, a list of the main criteria
which should be considered when preparing reports on Exploration Results, Mineral
Resources and Mineral Reserves. These criteria must be taken into account when
preparing a Mineral Reserves Declaration Report, but need not be discussed in a
public report unless they materially affect estimation or classification of the Mineral
Reserves.

It is not necessary, when publicly reporting Mineral Reserves, to comment on each item in Table 1, but
it is essential to discuss any matters which might materially affect an investors understanding or
interpretation of the results or estimates being reported.

6. In estimating Mineral Reserves, information on assumed metallurgical recovery


factors and processing losses play a critical role. Similarly, information relating to
deleterious elements and physical characteristics that affect the ability to beneficiate
or sell the product is also critical. This information must be discussed in the Mineral

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Reserves Declaration Report and, depending on its materiality, may have to be
publicly disclosed.

7. Only that part of a Mineral Resource that has been classified as a Measured or
Indicated Mineral Resource can be considered for conversion to a Mineral Reserve.
Under no circumstance can an Inferred Mineral Resources be converted to a Mineral
Reserve unless it is first converted to an Indicated or Measured Mineral Resource.
When completing production schedules and economic studies for the purpose of
determining whether a Mineral Reserve can be publicly reported, no material other
than Measured and Indicated Mineral Resources should be considered.

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10. ISSUE D: PERMITTING AND LEGAL REQUIREMENTS

10.1. Issue

There is a need to clarify the permitting and legal requirements which must be
satisfied before a Mineral Reserve can be reported.

10.2. Current Requirements and Practices

U.S. SEC

In the SEC Industry Guide 7 the following references are made to permitting and
legal requirements (see Appendix 1):

- Paragraph (a) (1): A reserve is that part of a mineral deposit which could be
economically and legally extracted or produced at the time of the reserve
determination.

- Paragraph (b) (2): Mining companies must furnish the following information
as to each of the mines, plants and other significant properties owned or
operated, or presently intended to be owned or operated, by the registrant:
a brief description of the title, claim, lease or option under which the registrant
and its subsidiaries have or will have the right to hold or operate the property,
indicating any conditions which the registrant must meet in order to obtain or
retain the property. If held by leases or options, the expiration dates of such
leases or options should be stated.

- Paragraph (c) (3): Mining companies reporting reserves must furnish copies
of all documents such as title documents, operating permits and easements
needed to support representations made in the report.

1999 SME Guide

In the 1999 SME Guide the following references are made to permitting and legal
issues (see Appendix 2):

- Section 27: A Mineral Reserve is the economically mineable part of a


Measured and Indicated Mineral Resource Appropriate assessments, which
may include feasibility studies, have been carried out and include
consideration of and modification by realistically assumed mining,
metallurgical, economic, marketing, legal, environmental, social and
governmental factors. These assessments demonstrate at the time of reporting
that extraction is reasonably justified.

- Table 1, Evaluation Criteria A.4: When reporting exploration results, mineral


resources or mineral reserves, documentation must include description of

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ownership of surface rights, mineral rights, access rights, leases, and other
encumbrances and liabilities.

Both Industry Guide 7 and the 1999 SME Guide recognize that before a reserve can
be reported there is an obligation to take into consideration and document the status
of legal and permitting factors which may influence the right to hold or operate the
property. However, the guides do not specify which legal and permitting
requirements must be satisfied before a reserve is reported.

10.3. Discussion

The ability to develop and mine minerals from a property is dependent upon the legal
right to mine, and the ability to obtain the necessary permits required by the
governmental and regulatory bodies that have jurisdiction over the reserves.

In the United States the legal right to mine is considered to be principally afforded by
valid title in the mineral estate, generally through private ownership, mining claim, or
lease of the mineral property. Minerals are considered real property whose evidence
of title (ownership) is commonly conveyed by deed. The mineral may be owned as
part of the fee simple estate, which would include the surface overlying the mineral,
or it may be severed into separate property. If the ownership is of only the mineral
estate, there may be restrictions on the use of the surface. In the western U.S., the
right to mine certain minerals on federal lands may be obtained by establishing a
mining claim in which the locator obtains a patent whereby the government grants
title to the minerals found within the claim.

Mineral leases are used by both private and government entities. In exchange for a
royalty or other consideration, the mineral owner grants the right to extract the
minerals. Such an estate endures for a specified period of time or, typically, until the
mineral is exhausted, and it creates simultaneous interests for both parties. If the
mineral estate is only controlled by lease, additional interests may be required to
secure use of the surface land for mining.

Elsewhere in the world the legal right to mine is through rights to the minerals and
surface rights. The right to the minerals is either by outright ownership or more
commonly by some form of tenure or mineral lease or license, which usually has an
expiry with some rights to renew. Usually there is a progression of mineral tenure
from exploration through development to mining rights. Surface rights may also be
through outright ownership or by some form of lease or agreement with owners.
Where the legal right to mine has not been obtained and there remain significant
hurdles prior to obtaining clear approval, these facts should be disclosed.

There are some particular difficulties in some countries that do not have an
established mining law or tenure system or where the process to obtain the right to
mine is not clear. In such cases, disclosure should be made to inform the investors of
potential risks.

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Prior to a mineral being extracted all necessary permits and licenses must be obtained.
Typically these licenses and permits are due to government regulations designed to
regulate land use or protect the environment, and the safety of the mine workers.
Generally all permits and licenses are issued in the normal course of business,
however, there may be events or situations, which will delay or prohibit the issuance
of all necessary permits and licenses to allow for mining. Because of cost and limited
term of some permits and licenses, permits are generally not secured until nearer the
time of mining.

Consideration of the legal and permitting requirements in reserve accounting varies


within the U.S. mining industry. The proposed method of mining and the mine plan
may not always accurately reflect the legal mining rights controlled at the time of
reserve determination. It is sometimes assumed that outstanding ancillary rights will
be secured in the future prior to mining. Similarly, it is often expected that required
permits and authorizations will be obtained when needed to commence development.
Thus, reserve statements are commonly prepared before a mineral owner or mining
company has perfect legal authority to mine.

If a company has title in a mineral deposit, which meets all the reserve criteria, and
licenses, leases or subleases this deposit to another entity for economic consideration,
the company may report this as a reserve. Of the total reserves, the reserves that have
been licensed, leased, or subleased, must be disclosed.

10.4. Working Group Recommendations

Before a Mineral Reserve is reported, the reporting entity should demonstrate that:

- It has control of mineral title sufficient to allow eventual extraction of the


mineral being reported.
- There are no known obstacles to mining.
- There is a reasonable expectation that all permits, ancillary rights and
authorizations required for mining can be obtained.

The reporting entity must complete a review of all legal and permitting requirements
and document the results of this review. To demonstrate reasonable expectation that
all permits, ancillary rights and authorizations can be obtained, the reporting entity
must show understanding of the procedures to be followed to obtain such permits,
ancillary rights and authorizations. Demonstrating earlier success in getting the
necessary permits can be used to document the likelihood of success. If permits are
required but there is no defined procedure to obtain such permits, reasonable
expectation of success may be questioned.

Information which materially increases or decreases the risk that the necessary legal
rights or permits will be obtained must be publicly disclosed. It is recognized that the
legal and permitting environment may change over time and that such changes could

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have an impact on reserve determination. If it is determined that obstacles arise or are
eliminated, the reserve estimates must be adjusted accordingly.

It is recognized that some permits cannot be obtained until after a reserve has been
declared. Furthermore, there might be sound business reasons why obtaining some
permits should be postponed. It is also recognized that waiting for all permits to be
on hand could result in critical information not being released to the investors in a
timely fashion.

Special consideration must be given to the situation where a reporting entity (the
lessor) has title in a mineral deposit which meets all the reserve criteria, and licenses,
leases, or subleases the reserves to another entity (the lessee) for economic
consideration. In this case, the Mineral Reserves that have been licensed, leased, or
subleased, must be reported by both the lessor and the lessee. In both reports, these
licensed, leased, or subleased reserves must be reported separately from other
reserves owned by the reporting entities. If the reporting entity is leasing or sub-
leasing the mineral, the lease or sub-lease should be from an entity which has control
of the necessary mineral titles.

10.5. Justification of Recommendations

These recommendations expand on and clarify the definition of legally extracted


presently existing in Industry Guide 7. Documentation must be prepared which
demonstrates that required permits are on hand and that there are reasonable
expectations that all necessary permits can be obtained. It is recognized that some
permits must be obtained before a reserve is reported while others need not be on
hand at the time of reserve reporting.

The recommended practices will result in more consistent reporting between


companies, allowing for better comparison by investors. They will give assurance to
the investors that the legal and permitting issues have been addressed at the time of
reserve determination. Additional disclosure of licensed, leased or subleased reserves
allows for investors to consistently compare mineral holding companies.

10.6. Text to be Included in the 2005 SME Guide

The Working Group recommends that the following text be included in a revised
version of the SME Guide to become effective in 2005 (the 2005 SME Guide).

Permitting and Legal Requirements

1. For a mineral deposit to be considered a Mineral Reserve, it is required that


legally enforceable mineral title sufficient to allow exploration, development and
extraction is controlled by the reporting entity at the time of determination. If the
reporting entity is leasing or sub-leasing the mineral, the lease or sub-lease should be
from an entity which has control of the necessary mineral titles. There must be no

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known material obstacles to mining, such as those which have caused shut down of
mines or processing plants, or failure to get permits to operate. There must be a
reasonable expectation that all permits, ancillary rights and authorizations required
for mining, and to the extent applicable processing, can be obtained in a timely
fashion, and maintained for ongoing operations.

The reporting entity must complete a review of all legal and permitting requirements and document the
results of this review. Local environmental laws and processes must be taken into account. To
demonstrate reasonable expectation that all permits, ancillary rights and authorizations can be obtained,
the reporting entity must show understanding of the procedures to be followed to obtain such permits,
ancillary rights and authorizations. Demonstrating earlier success in getting the necessary permits can
be used to document the likelihood of success. If permits are required, but there is no defined
procedure to obtain such permits, reasonable expectation of success may be questioned.

Information which materially increases or decreases the risk that the necessary legal rights or permits
will be obtained must be publicly disclosed. It is recognized that the legal and permitting environment
may change over time and that such changes could have an impact on reserve determination. If it is
determined that obstacles arise or are eliminated, the reserve estimates must be adjusted accordingly.

It is recognized that some permits cannot be obtained until after a reserve has been declared. There
might be sound business reasons why obtaining some permits should be postponed. It is also
recognized that waiting for all permits to be on hand could result in critical information not being
released to the investors in a timely fashion.

Documentation should include a brief description of the title, claim, lease or option under which the
reporting entity has or will have the right to hold or operate the property, indicating any conditions which
the registrant must meet in order to obtain or retain the property. If held by leases or options, the
expiration dates of such leases or options should be stated. If extension of leases or options will be
needed to mine the reserves, there should be reasonable expectation that such extension will be
granted.

Information relating to this review of legal and permitting issues must be documented in a report. This
report must be included in the Mineral Reserves Declaration Report either in full or by reference. The
content of this report may remain confidential to the reporting entity. However, when required, it may
be released to regulators or auditors on a confidential basis.

2. If the reporting entity has title in a mineral deposit which meets all the reserve
criteria, and licenses, leases, or subleases the reserves to another entity for economic
consideration, the Mineral Reserves that have been licensed, leased, or subleased,
must be reported by the reporting entity (the lessor) as a subset of the entitys total
Mineral Reserves.

If the reporting entity has licensed, leased, or subleased Mineral Reserves from
another entity, the Mineral Reserves that have been licensed, leased, or subleased,
must be reported by the reporting entity (the lessee) as a subset of the entitys total
Mineral Reserves.

This requirement for additional disclosure is particularly relevant to mineral holding companies whose
business is leasing mineral properties.

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11. ISSUE E: COMPETENT PERSON

11.1. Issue

Most international codes and guidelines developed by professional societies require


that exploration results, mineral resources and mineral reserves be estimated by a
Competent Person (Australia, South Africa, United Kingdom, and Ireland), a
Qualified Person (Canada), or a Persona Competente (Chile). The regulatory
agencies of Canada, Australia, South Africa, and Chile, have included this
requirement in their rules, making it mandatory on companies listed on their
respective stock exchanges. The 1999 SME Guide also requires that resources and
reserves be estimated by a Competent Person. The Securities and Exchange
Commission, in its Industry Guide 7, requires that the reserve estimator be named, but
does not contain a Competent Person requirement. The lack of the requirement in the
U.S. that mineral reserves be estimated by a Competent Person is viewed by the
Working Group as a weakness in the regulatory environment. Adoption of such a
requirement would strengthen investor confidence in publicly disclosed Mineral
Reserves and Mineral Resources.

11.2. Current Requirements and Practices

International Requirements

The main objective of any code or guideline for the public reporting of resources and
reserves must be to ensure that these reports contain sufficient information to allow
investors and their advisors to make sound judgments regarding the results and
estimates being reported. Underlying this, the public should have confidence that the
estimates being presented to them have been professionally compiled and represent
mineralization that either has been shown (in the case of reserves), or has a
reasonable prospect of being shown (resources) to be economically exploitable.

To achieve this objective, most international reporting codes require that the
supporting documentation forming the basis for public reporting be prepared by, or
under direction of, a recognized "Competent" or "Qualified" (in Canada) Person or
Persons (from now on referred to in this note as a Competent Person). Not only must
the Competent Person have appropriate qualifications but also he/she must have
appropriate experience that is relevant to the style of mineralization and type of
deposit being reported on. The Competent Person's experience should also be
relevant to the activity which that person is undertaking (reporting reserves, resources
or exploration results).

Regulation of the Competent Person is achieved through the requirement that the
Competent Person belongs to a professional institution that has an enforceable code
of ethics. Furthermore, the Competent Persons must be able to face their peers and
demonstrate competence. As such, the primary allegiance of the Competent Person
must be to his or her professional standing. Other requirements that play a critical

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role in ensuring the success of the Competent Person concept are that the name of the
Competent Person be made available and that he/she approves the form and context
of the information which is publicly released.

In the United States, as in most other jurisdictions, the ultimate responsibility for any
Public Report concerning a companys Exploration Results, Mineral Resources and
Mineral Reserves lies with the company acting through its Board of Directors.

However, regulations in the United States do not require that reserves be estimated by
a Competent Person.

Industry Guide 7

The Securities and Exchange Commission, in its Industry Guide 7 (Industry Guide 7)
makes reference to requirements which persons preparing reserve reports must satisfy
(see Appendix 1):

- Paragraph (b) (5): If proven (measured) or probable (indicated) reserves


have been established, state (i) the estimated tonnages and grades (or quality,
where appropriate) of such classes of reserves, and (ii) the name of the person
making the estimates and the nature of his relationship to the registrant.

- Paragraph (c) (2): Furnish a complete copy of every material engineering,


geological or metallurgical report concerning the registrant's property,
including governmental reports, which are known and available to the
registrant. Every such report should include the name of its author and the
date of its preparation, if known to the registrant.

Therefore, industry Guide 7 requires that the name of the person estimating reserves
be stated, or that the author of specified reports be identified in the report.

SEC Requirements Concerning Corporate Governance and Internal Controls

Adequate internal controls are required by the SEC over the preparation of
supplementary information as needed for financial reporting. Such internal controls
should be in place and assessed regularly by management. This includes procedure
and controls over the determination of Mineral Resources and Mineral Reserves,
which have a material impact on financial reporting in such areas as calculation of
depreciation, depletion, and amortization, impairment testing and allocation of
purchase price in business combinations. A requirement that Mineral Resources and
Mineral Reserves be estimated by a Competent Person, whose minimum
qualifications and professional and ethical obligations are clearly defined, would be
an important step towards satisfying the SEC requirement for internal controls.

The Sarbanes-Oxley Act of 2002 has significant implications concerning the


establishment and maintenance of an adequate internal control structure and

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procedures for financial reporting. At the time this document was prepared, the
SEC was in the process of evaluating whether these requirements for internal controls
also applied to the preparation of supplementary information. Relevant SEC
publications are quoted below.

The Sarbanes-Oxley Act of 2002 was passed by the U.S. Congress to protect
investors by improving the accuracy and reliability of corporate disclosures made
pursuant to the securities laws, and for other purposes. Section 404, Management
Assessment of Internal Controls, reads as follows:

(a) RULES REQUIRED.-The Commission shall prescribe rules requiring each


annual report [] to contain an internal control report, which shall-
(1) state the responsibility of management for establishing and maintaining an
adequate internal control structure and procedures for financial reporting; and
(2) contain an assessment, as of the end of the most recent fiscal year of the
issuer, of the effectiveness of the internal control structure and procedures of
the issuer for financial reporting.

(b) INTERNAL CONTROL EVALUATION AND REPORTING.-With respect


to the internal control assessment required by subsection (a), each registered
public accounting firm that prepares or issues the audit report for the issuer shall
attest to, and report on, the assessment made by the management of the issuer.
[]

A frequently asked question (FAQ) concerning the application of Section 404 to


supplementary information was answered by the Office of the Chief Accountant, SEC
Division of Corporation Finance in the on-line SEC document Management's Report
on Internal Control Over Financial Reporting and Certification of Disclosure in
Exchange Act Periodic Reports, Frequently Asked Questions (revised October 6,
2004). While this question (Question 23) specifically addresses oil and gas issues, it
is relevant when considering other minerals. Selected quotes follow:

Q: The Commissions rules implementing Section 404, announced in Release


No. 34-47986, require management to perform an assessment of internal control
over financial reporting which includes the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Does managements assessment under the Commissions rule
specifically require management to assess internal control over financial reporting
of required supplementary information?
A: Adequate internal controls over the preparation of supplementary information
are required and therefore should be in place and assessed regularly by
management. The Commissions rules in Release No. 34-47986 did not
specifically address whether the supplementary information should be included in
managements assessment of internal control over financial reporting under
Section 404 The Commission staff is considering this question for possible rule
making. Additionally, the Commission staff is evaluating broader issues relating

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to oil and gas disclosures and will include in its evaluation whether rulemaking in
this area may be appropriate. Should there be any proposed changes to the current
requirements in this area, they will be subject to the Commissions standard
rulemaking procedures, including a public notice and comment period in advance
of rulemaking. As a result, internal control over the preparation of this
supplementary information need not be encompassed in managements
assessment of internal control over financial reporting until such time that the
Commission has completed its evaluation of this area and issues new rules
addressing such requirements Until then, registrants are reminded that they
must fulfill their responsibilities under current requirements

1999 SME Guide

In the 1999 SME Guide for Reporting Exploration Information, Mineral Resources,
and Mineral Reserves (the 1999 SME Guide) the following specifications are made
(see Appendix 2, Sections 8-10):

1. A public report concerning an entitys exploration information, Mineral


Resources and/or Mineral Reserves is the responsibility of the entity acting
through its governing board. Any such report must be based on, and fairly
reflect, the content of a report prepared by a Competent Person (or Persons) as
defined below.

In reporting exploration information, Mineral Resources and/or Mineral


Reserves in a public report, an entity may need to edit the report prepared by
the Competent Person. Where such editing takes place, the entity should ask
the Competent Person to give his/her consent in writing to the edited
information in the form and context in which it appears in the public report.

2. Reports detailing Mineral Resource and Mineral Reserve estimates, from


which a public report on Mineral Resources and Mineral Reserves is prepared,
must be prepared by or under the direction of, and signed by, a Competent
Person or Persons.

3. A Competent Person is a person who is a member of a professional society


for earth scientists or mineral engineers, or has other appropriate
qualifications. The Competent Person must have a minimum of five years
experience which is relevant to the style of mineralization and type of deposit
under consideration and to the activity which that person is undertaking. If the
Competent Person is estimating, or supervising the estimation of Mineral
Resources, the relevant experience must be in the estimation, assessment and
evaluation of Mineral Resources. If the Competent Person is estimating, or
supervising the estimation of Mineral Reserves, the relevant experience must
be in the estimation, assessment, evaluation and economic analysis of Mineral
Reserves.

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Additional text is contained in the 1999 SME Guide which clarifies the role and
duties of the Competent Person when reserves are estimated or reported. The
requirements specified in the 1999 SME Guide are similar to those specified in other
international guides (except that the other international guides specify that the
professional society to which a Competent/Qualified Person belongs must have an
enforceable code of ethics. This point is discussed below). The Board of Directors of
SME recommended that the 1999 SME Guide be considered as a minimum standard
for reporting exploration results, mineral resources and mineral reserves.

11.3. Discussion

Advantages of Introducing the Competent Person Requirement

Incorporation of the Competent Person concept would mitigate the need for
regulators to set specific standards in many technical areas. Instead the
responsibilities for these activities would be left to a Competent Person and the
necessary decisions would be left to the professional judgment of the Competent
Person.

At present, the SEC does not require the estimator to have any prerequisite
qualifications or experience. There is an opportunity to formalize this requirement
and define the estimator more broadly as a Competent Person as well as clearly define
his/her role as it pertains to estimation and reporting.

The SEC requires that internal controls be in place over the preparation of
supplementary information needed for financial reporting. It is the opinion of the
Working Group that sound corporate governance should require implementation of
internal control procedures over resource and reserve reporting, with defined
responsibilities to ensure the quality of the information being reported. The
introduction of the Competent Person requirement would give clear and consistent
guidance to mining companies for the implementation of procedure and controls as
required by the SEC.

Other international codes are governed by the principles of transparency, materiality


and competence. Experience in other parts of the world has shown that the
introduction of the Competent Person concept results in significant improvements in
the quality of resource and reserve reporting.

Disadvantages and Other Considerations

The potential legal liabilities and implications for Competent Persons are perceived as
being a significant deterrent to the introduction of the Competent Person requirement.
The companys management is ultimately responsible for public disclosure of
information, but the naming of the Competent Person could result in him/her being
dragged into litigation. A concern expressed by the Working Group is whether
Competent Persons will be adequately insured and whether they will be supported by

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the company that they work for. The onus must be on the company to ensure that all
of their Competent Persons receive support from their employer and that they have
adequate insurance cover.

To be recognized as a Competent or Qualified Person outside the U.S. the person


must be a member of a Recognized Overseas Professional Organization (ROPO). A
ROPO must accept its members primarily on the basis of education and experience
and have an enforceable code of ethics. While there is at least one U.S.-based
professional institution with an enforceable code of ethics for geologists (AIPG, the
American Institute of Professional Geologists), there is as yet no such widely
recognized organization for engineers and other mining professionals.

On February 27, 2005, the Board of Directors of the Society for Mining, Metallurgy,
and Exploration, Inc. (SME) unanimously approved the formation of a new class of
members (Registered Members) which will satisfy the Competent Person
requirements for U.S. and international recognition. New members will be admitted
primarily on the basis of education and experience, and will be subject to an
enforceable code of ethics. Subject to acceptance by other international regulatory
agencies, these requirements will be such that members will be recognized abroad as
belonging to a ROPO. SME expects to start accepting Registered Members not later
than January 1, 2006. The Competent Person requirement could therefore be fully
implemented for public reports submitted as of the end of 2006.

The Working Group recommends that the name of the Competent Persons be made
publicly available on request. This reduces the burden on large mining companies to
publish the names of their numerous Competent Persons in their annual reports. It
may also reduce somewhat the Competent Persons exposure to unwarranted
litigation. However, this requirement is not as rigorous as that contained in other
international codes and guidelines which state that the Competent Persons name
must be publicly disclosed in conjunction with disclosure of resources and reserves.

Public disclosure of the Competent Persons name is seen as a significant deterrent to


negligent and fraudulent behavior. For this reason, the 2005 SME Guide will contain
a recommendation that the name of the Competent Person be publicly disclosed in
conjunction with disclosures of resources and reserves, and a requirement that if not
published this name be made publicly available on request.

Conditions under which the consent of the Competent Person must be obtained before
public disclosure of Mineral Resources and Mineral Reserves was also the subject of
considerable discussions within the Working Group. It was generally recognized that
the Competent Persons agreement should be required when initial public releases of
resources or reserves are made and when material changes to such resources and
reserves are publicly disclosed. Agreement is always required before yearly
publication of resources and reserves.

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With regard to the Competent Person giving written consent as to the form and
context in which a Public Report appears, other international codes require that the
written consent accompany the Public Report. (As defined in the 2005 SME Guide, a
Public Report is a report on Exploration Results, Mineral Resources or Mineral
Reserves, prepared for the purpose of informing the general public.) This would be
contrary to the desire that the Competent Person's name only be required to be made
public on request. Therefore, the wording of the 2005 SME Guide reads "The
issuance of the Public Report requires the written consent of the Competent Person or
Persons as to the form and context in which it appears." It does not specify that this
consent has to accompany the Public Report, but does imply that the written consent
must be available for audit purposes.

When a Competent Person is working for, or representing a consulting company,


responsibility for the report is that of the Competent Person and the consulting
company. The recommended guidelines state that If the Competent Person is an
employee, officer, director or associate of a company, the principal business of which
is the provision of engineering or geoscientific services, the documentation must also
be signed by that company.

There was concern within the Working Group that the introduction of the Competent
Person requirement would impose a very specific and inflexible structure on the
companies, and result in a proliferation of Competent Persons. This is not seen to be
the case as is laid out in the recommended 2005 SME Guide, where a team effort is
recognized as a common requirement for estimation of resources and reserves. The
structure may be flexible but the supporting documentation for exploration results,
resources or reserves, on which a Public Report is based, must be prepared by, or
under the direction of, and signed by, a Competent Person or Persons.

11.4. Working Group Recommendations

It is the position of the Working Group that the concept of the Competent Person
should be incorporated into the public reporting of resources and reserves in the U.S.
Public reporting of resources and reserves should be based on information prepared
by a Competent Person. It is recommended that the definition of the Competent
Person be similar to the definition in other international reporting codes except that
the requirement that the professional organization have an enforceable code of ethics
would initially be waived. Once a professional organization or means of sanction for
engineers as Competent Persons is established, this would be added to the
requirements.

The 1999 SME Guide already includes the Competent Person concept.
Recommendations for updating the guidelines, including those related to the
competency issue, are given below. The main issues discussed by the Working
Group included functions/responsibilities, qualification/skills/experience, affiliation
to an institution, legal implications of naming of Competent Persons in public reports
and nomenclature.

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With regard to nomenclature, the Working Group debated whether the
terms Competent Person (used in the SME Guidelines, JORC, SAMREC and The
Reporting Code) or Qualified Person (NI 43-101) should be used in the U.S. A
further suggestion was to use the term Qualified Expert though it was agreed that
the introduction of another term would potentially add confusion. The term
Competent Person is already in use in the SME guidelines, and the Working Group
agreed to continue with the use of the term Competent Person.

The proposed section on Competence and Responsibility to be included in the 2005


SME Guide is given below. The bases for the rewrite are the 1999 SME Guide, the
2004 JORC Code, the CIM Guidelines as incorporated in NI 43-101, the SAMREC
Code and The Reporting Code.

11.5. Text to be Included in the 2005 SME Guide

The Working Group recommends that the following text be included in the 2005
SME Guide.

Competence and Responsibility


1. Any Public Report concerning an entitys Exploration Results, Mineral Resources
and Mineral Reserves is the responsibility of the entitys management. Any such
report must be based on, and fairly reflect the information and supporting
documentation prepared by a Competent Person or Persons, as defined below.

An entity issuing a Public Report shall make publicly available on request the
name(s) of the Competent Person or Persons, state whether the Competent Person is a
full time employee of the entity, and, if not, name the Competent Persons employer
and its relationship with the entity.

Issuance of the Public Report requires the written consent of the Competent Person or
Persons as to the form and context in which it appears. The Competent Person must
read and approve the entitys public disclosure of information prepared by the
Competent Person, and the use of his/her name in connection with that disclosure.

The requirement for, and the naming of, a Competent Person is aimed at increasing the quality of the
information being released and add to investors confidence. These guidelines only require that the
name of the Competent Person be made available on request. However, whenever Exploration
Results, Mineral Resources or Mineral Reserves are publicly reported, it is recommended that the
name of the Competent Person be disclosed.

2. Documentation detailing Exploration Results, Mineral Resources and Mineral


Reserves estimates, on which a Public Report on Exploration Results, Mineral
Resources, and Mineral Reserves is based, must be prepared by, or under the
direction of, and signed by, a Competent Person or Persons. If the Competent Person
is an employee, officer, director or associate of a company whose principal business

RECOMMENDATIONS.doc Issue E: Competent Person Page 78 of 87


is the provision of engineering or geoscientific services, the documentation must also
be signed by that company.

3. A Competent Person is a Member or Fellow of an approved institution in the


U.S. with an enforceable code of ethics1, or of a Recognized Overseas Professional
Organization (ROPO) included in a list promulgated by the SME from time to time.

A Competent Person is an engineer, geoscientist or other mining professional who


must have a minimum of five years experience which is relevant to the style of
mineralization and type of deposit under consideration and to the activity which that
person is undertaking.

If the Competent Person is preparing a report on Exploration Results, the relevant


experience must be in exploration. If the Competent Person is estimating, or
supervising the estimation of Mineral Resources, the relevant experience must be in
the estimation, assessment and evaluation of Mineral Resources. If the Competent
Person is estimating, or supervising the estimation of Mineral Reserves, the relevant
experience must be in the estimation, assessment, and economic evaluation of
Mineral Reserves.

The key qualifier in the definition of a Competent Person is the word relevant. Determination of what
constitutes relevant experience can be a difficult area and common sense has to be exercised. Different
experience is required to evaluate coal, base metal, industrial mineral, iron ore, sand and gravel, or
gold deposits. Other differences are less obvious. In estimating Mineral Resources for vein gold
mineralization, experience in a high-nugget, vein-type mineralization such as tin, uranium etc. will
probably be relevant whereas experience in (say) a low grade disseminated gold deposit may not be.
To qualify as a Competent Person in the estimation of Mineral Reserves for alluvial gold deposits,
considerable (probably at least five years) experience in the evaluation and economic extraction of this
type of mineralization would be needed. This is due to the characteristics of gold in alluvial systems, the
particle sizing of the host sediment, and the low grades involved. Experience with placer deposits
containing minerals other than gold may not necessarily provide appropriate relevant experience.

The key word relevant also means that it is not always necessary for a person to have five years
experience in each and every type of deposit in order to act as a Competent Person if that person has
relevant experience in other deposit types. For example, a person with (say) 20 years experience in
estimating Mineral Resources for a variety of metalliferous hard-rock deposit types may not require as
much as five years specific experience in (say) porphyry copper deposits in order to act as a
Competent Person. Relevant experience in the other deposit types could count towards the experience
in relation to porphyry copper deposits.

In addition to experience in the style of mineralization, a Competent Person taking responsibility for the
compilation of Exploration Results or Mineral Resource estimates should have sufficient experience in
the sampling and analytical techniques relevant to the deposit under consideration to be aware of

1
On February 27, 2005, SME approved the formation of a new class of Registered Members who
will be subject to an enforceable code of ethics. SME will start accepting Registered Members
not later than January 1, 2006. The Competent Person requirements will become fully effective
for public reports submitted as of December 31, 2006.

RECOMMENDATIONS.doc Issue E: Competent Person Page 79 of 87


problems which could affect the reliability of data. Some appreciation of extraction and processing
techniques applicable to that deposit type may also be important.

4. Persons being called upon to act as Competent Persons should be clearly satisfied
in their own minds that they could face their peers and demonstrate competence in the
commodity, type of deposit and situation under consideration. If doubt exists, the
person should either seek opinions from appropriately experienced colleagues or
should decline to act as a Competent Person.

Estimation of Mineral Resources may be a team effort (for example, involving one person or team
collecting the data and another person or team preparing the estimate). Estimation of Mineral Reserves
is very commonly a team effort involving several disciplines. It is recommended that where there is a
clear division of responsibility within a team, each Competent Person and his or her contribution should
be identified, and responsibility accepted for that particular contribution. However, the definitions have
been specifically written to allow an appropriate degree of latitude for companies to define the
organizational structure in which they apply the role of the Competent Person. If only one Competent
Person signs the Mineral Resource or Mineral Reserve documentation, that person is responsible and
accountable for the whole of the documentation under the Code. It is important in this situation that the
Competent Person accepting overall responsibility for a Mineral Resource or Mineral Reserve estimate
and supporting documentation prepared in whole or in part by others, is satisfied, in its professional
opinion, that the work of the other contributors is reliable.

A Competent Person may be an employee of the entity reporting Exploration Results, Mineral
Resources or Mineral Reserves, or an independent consultant. When the Competent Persons
recommendations are likely to have material consequences (such as development of a new mining or
processing facility, or significant decreases or increases in reserves), it is recommended that these
recommendations be independently reviewed before the recommendations are finalized. The
independent reviewer should qualify as a Competent Person in the context of the project being
reviewed.

5. Complaints made in respect of the professional work of a Competent Person will


be dealt with under the disciplinary procedures of the professional organization to
which the Competent Person belongs.

6. When an U.S. listed company with interests abroad (i.e. outside the U.S.) wishes
to report the corresponding Exploration Results, Mineral Resources or Mineral
Reserves, and those were prepared by a person who is not a member of an appropriate
U.S. institution or a Recognized Overseas Professional Organization (ROPO), it is
necessary for the company to nominate a Competent Person or Persons to take
responsibility for the Exploration Results, Mineral Resources or Mineral Reserves
estimate. The Competent Person or Persons undertaking this activity should
appreciate that they are accepting full responsibility for the estimate and supporting
documentation and should not treat the procedure merely as a rubber-stamping
exercise.

Rules, regulations or guidelines concerning the Competent Person differ from country to country. When
Exploration Results, Mineral Resources or Mineral Reserves are reported in the United States or in
countries other than the United States it is the responsibility of the Competent Person and the entity
making a public report to ensure that the applicable rules, regulations and guidelines are followed.

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12. COAL, INDUSTRIAL MINERALS, DIAMONDS AND OTHER GEMSTONES

12.1. Introductory Remarks

Recommendations made in this document, including those in the proposed 2005 SME
Guide, are designed to be applicable to all minerals. However, it is recognized that
different conditions and priorities apply, depending on the mineral or project under
consideration. For this reason, the role of the Competent Person is emphasized
throughout. The Competent Person has responsibility to determine which factors
should be taken into account for each project. In the next three sub-sections,
assessment criteria are discussed that are specific to coal, industrial minerals,
diamonds and gem stones, respectively. The objective is to assist the Competent
Person in assessing such minerals.

Industry Guide 7 is used by the SEC to determine how reserves should be estimated
and reported by all mining companies. Interpretation of Industry Guide 7 varies
depending on the mineral being reported. For example, because of coal specific
characteristics including geological continuity over large areas, the strategic value
of controlling very long-term reserves, and product pricing highly dependent on
deposit location and quality requirements which must be satisfied to demonstrate
technical and economic feasibility of coal reserves, are not necessarily the same as for
other minerals. There are some situations where coal reserves can be declared
primarily on the basis of demonstrated analogy with existing mines. A similar
approach can be used for some industrial minerals. However, for base metals and
precious metals there are very few situations (the Witwatersrand gold fields being
one) where sufficient similarity with existing mines can be demonstrated to declare a
reserve without completion of a detailed technical and economic study.

12.2. Reporting of Coal Resources and Coal Reserves

Because of characteristics specific to coal, requirements for public reporting of coal


resources and coal reserves are not necessarily consistent with those for other
minerals. For coal companies the terms Coal Resources and Coal Reserves can
be used instead of Mineral Resources or Mineral Reserves.

The Working Group recognizes that some of its recommendations may result in
stricter definitions of Coal Reserves than currently accepted by the SEC. If this is the
case, some material currently classified as Coal Reserves may be reclassified as Coal
Resources. Application of the recommended definitions of Mineral Reserves to coal
would be misleading to investors and as such would not be appropriate for the coal
mining industry unless Coal Resources could also be reported. Even if Coal
Resources could be reported, a transition period would be required before stricter
definitions of Coal Reserves are implemented. Coal guidelines are listed in the
section below, which recognize the basis for current practices, including the use of
analogy between coal deposits as a basis for reserve declaration.

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The economic value of a coal field is a function of location, access to market, quality,
and demand for different types of coal products (metallurgical coal, electricity
generation, etc.). This aspect of product pricing, while similar to that encountered
with some industrial minerals, is significantly different from that generally applicable
to metals. For this reason, and because of anti-trust, confidentiality and other market
constraints, public reporting of price assumptions made when evaluating coal reserves
is not recommended and should not be required.

Coal Reserves are reported as saleable product, which may include run-of-mine coal
or washed coal. It is recommended that the same method be used when reporting
Coal Resources.

Current practice requires that coal reserves be reported as Assigned Coal Reserves
or Unassigned Coal Reserves. Assigned Coal Reserves are reserves that have been
committed by the coal company to operating mine shafts, mining equipment, and
plant facilities, and all coal which has been leased by the company to others.
Unassigned Coal Reserves represent reserves that have not been committed, and
which would require new mine shafts, mining equipment, or plant facilities before
operations could begin in the property. The primary reason for this distinction is to
inform investors as to which coal reserves will require substantial capital investments
before production can begin. The same classification should be used for Coal
Resources. The terms Assigned and Unassigned coal reserves are broadly similar in
their definition to the terms developed and undeveloped reserves generally used for
other minerals.

The following text will be added to the 2005 SME Guide to clarify the reporting of
Mineral Resources and Mineral Reserves as it relates to coal.

Reporting of Exploration Results for Coal, Coal Resources and Coal


Reserves
1. The clauses in this section of the Guide address matters that relate specifically to
the Public Reporting of Mineral Resources and Mineral Reserves for coal. Coal is
generally sold on the basis of product specifications and market acceptance. Such
factors as quality and marketability are therefore important and should be carefully
considered before declaring coal resources or coal reserves. Unless otherwise stated,
all other clauses in this Guide, including Figure 1 and Table 1, apply to Exploration
Results, Mineral Resources and Mineral Reserves for coal.

When reporting information and estimates for coal deposits, the key principles and purpose of the
Guide apply and should be borne in mind. Because of coal specific characteristics including
geological continuity over large areas, the strategic value of controlling very long-term reserves, and
product pricing highly dependent on deposit location and coal quality the most significant
requirements which must be satisfied before a resource or a reserve is declared are not necessarily the
same for coal as they are for other minerals.

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2. The terms Mineral Resource and Mineral Reserve, and the subdivisions of
these terms as illustrated on Figure 1, apply also to coal reporting, but if preferred by
the reporting entity, the terms Coal Resource and Coal Reserve and the
appropriate subdivisions may be substituted.

When assessing criteria listed in this Guide which may be applicable to coal, the term grade should
generally be considered equivalent to coal quality.

3. As for all minerals, it is the responsibility of the Competent Person to determine


in each particular situation which specific requirement must be satisfied before a Coal
Resource or a Coal Reserve can be declared. The Competent Person should
determine which evaluation criteria in Table 1 are applicable, which additional
evaluation criteria should be taken into account if any, and the materiality of such
criteria.

Many criteria listed in Table 1 which may be critical to the evaluation of other mineral deposits, such as
base metals or precious metals, will not apply to the evaluation of coal deposits. Such criteria as coal
quality, cost to markets including transportation cost, location and quality of competing coal reserves,
and ability to compete with such reserves to access the market, are important and should be carefully
considered before declaring a Coal Reserve.

Geological similarity between neighboring coal deposits can greatly simplify demonstration of a new
Coal Resource, as well as reduce the technical and economic study requirements needed to
demonstrate a Coal Reserve next to an operating mine. Geological similarity must be demonstrated by
means of drill holes, mapping or other deposit-specific geoscientific evidence to a suitable level of
confidence required to declare Measured and/or Indicated Resources. Mere inference of the continuity
of coal thickness and quality from an operating mine onto a neighboring block or property is not
sufficient to declare Measured and Indicated Resources and subsequently a Reserve.

Demonstration of geological similarity or analogy with an operating mine is usually not sufficient to
demonstrate technical and economic feasibility. Factors such as access to the deposit and permitting
constraints are likely to be project specific. It is the responsibility of the Competent Person to ascertain
that there is sufficient information to demonstrate geological similarity and to determine which additional
factors must be taken into account to demonstrate technical and economic feasibility with a reasonable
level of confidence.

When a coal deposit is scheduled to be mined at a date some distance in the future, declaration of a
Coal Reserve implies reasonable expectation at the time of reporting that the necessary permits could
be obtained as needed.

4. Coal Resources and Coal Reserves should be reported as saleable product, either
as run-of-mine coal or washed coal.

For coal deposits it is common practice to report a saleable product rather than the as mined product
which is traditionally regarded as the Mineral Reserve for most other minerals. It is important that a
clarifying statement is included to ensure that the reader is fully informed as to what is being reported.
Some coal deposits may be capable of yielding products suitable for more than one application and/or
specification. If considered material by the reporting entity such multiple products should be quantified
and reported.

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5. Coal Resources and Coal Reserves should be reported as Assigned or Unassigned.

Assigned coal is coal that has been committed by the coal company to operating mine shafts, mining
equipment, and plant facilities, and all coal which has been leased by the company to others.
Unassigned coal represents coal that has not been committed, and which would require new mine
shafts, mining equipment, or plant facilities before operations could begin on the property. The primary
reason for this distinction is to inform investors which coal will require substantial capital investments
before production can begin. Coal which has been leased to another company or is leased from
another company should be disclosed separately.

6. Recommendations made in this Guide, that price assumptions and sensitivity to


price changes be disclosed, do not apply to coal.

Coal is being sold in a highly competitive national and international market. Price disclosure can be
viewed as price signaling and interpreted as anticompetitive. For business and legal reasons,
disclosure of price assumptions made when estimating Coal Resources and Coal Reserves may be
detrimental to the interest of shareholders and is usually not advisable. Other requirements concerning
pricing which are included in the Guide are applicable to coal. This includes the requirement that prices
be based on forward-looking estimates reflecting managements reasonable and supportable short- and
long-term expectations, and that justification for such prices be documented.

12.3. Reporting of Mineral Resources and Mineral Reserves for Industrial


Minerals

Because of properties specific to industrial minerals, some public reporting


requirements for such minerals are not necessarily the same as for other minerals.
The following text will be added to the 2005 SME Guide to clarify the reporting of
Mineral Resources and Mineral Reserves as it relates to industrial minerals.

Reporting of Exploration Results, Mineral Resources and Mineral


Reserves for Industrial Minerals
1. The clauses in this section of the Guide address matters that relate specifically to
the Public Reporting of industrial minerals, stone and aggregates of all forms and
other bulk commodities such as borates, talc, kaolin etc. that are generally sold on the
basis of their product specifications and market acceptance. Such factors as quality
and marketability are therefore important and should be carefully considered before
declaring Mineral Reserves. Unless otherwise stated, all other clauses in this Guide,
including Figure 1 and Table 1, apply to Exploration Results, Mineral Resources and
Mineral Reserves for industrial minerals.

When reporting information and estimates for industrial minerals, the key principles and purpose of the
Guide apply and should be borne in mind. Assays may not always be relevant, and other quality criteria
may be more applicable. If criteria such as deleterious minerals or physical properties are of more
relevance than the composition of the bulk mineral itself, then they should be reported accordingly.

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The factors underpinning the estimation of Mineral Resources and Mineral Reserves for industrial
minerals are the same as those for other deposit types covered by the Guide. It may be necessary,
prior to the reporting of a Mineral Resource or Mineral Reserve, to take particular account of certain key
characteristics or qualities such as likely product specifications, proximity to markets, and present
access to market or ability to get access to market.

For some industrial minerals, it is common practice to report the saleable product rather than the as-
mined product, which is traditionally regarded as the Mineral Reserve for base and precious metals
and other minerals. It is important that, in all situations where the saleable product is reported, a
clarifying statement is included to ensure that the reader is fully informed as to what is being reported.

Some industrial mineral deposits may be capable of yielding products suitable for more than one
application and/or specification. If considered material by the reporting entity, such multiple products
should be quantified either separately or as a percentage of the bulk deposit.

2. With respect to modifying factors, the normal geological parameters may be less
important in the case of industrial minerals, stone and aggregate. Such factors as
quality, transportation, cost to markets, location and quality of competing reserves,
and ability to compete with such reserves to access the market, are important and
should be carefully considered before declaring Mineral Reserves.

3. As a general rule, a Mineral Reserve cannot be declared unless there are


reasonable expectations that all permits, ancillary rights and authorizations required
for mining can be obtained. For some minerals such as sand, gravel and aggregates,
permitting requirements may be such that reasonable expectations can only be
defined by comparison with competing reserves. When a deposit is scheduled to be
mined at a date some distance in the future, declaration of a Mineral Reserve implies
reasonable expectation at the time of reporting that the necessary permits could be
obtained when needed.

4. Recommendations made in this Guide, that price assumptions and sensitivity to


price changes be disclosed, may not apply to all industrial minerals.

Some industrial minerals are sold in a highly competitive local, national and/or international market. For
business and legal reasons, disclosure of price assumptions may be detrimental to the interest of
shareholders and may not be advisable. Other requirements concerning pricing which are included in
the Guide are applicable to industrial minerals. This includes the requirement that prices be based on
forward-looking estimates reflecting managements reasonable and supportable short- and long-term
expectations, and that justification for such prices be documented.

12.4. Reporting of Mineral Resources and Mineral Reserves for Diamonds and
Other Gemstones

Because of characteristics specific to diamonds and other gemstones, some reporting


requirements are not necessarily the same for these minerals as they are for others.
The following text will be added to the 2005 SME Guide to clarify the reporting of

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Mineral Resources and Mineral Reserves as it relates to diamonds and other
gemstones.

Reporting of Exploration Results, Mineral Resources and Mineral


Reserves for Diamond and Other Gemstones
1. The clauses in this section of the Guide address matters that relate specifically to
the Public Reporting of Exploration Results, Mineral Resources and Mineral
Reserves for diamonds and other gemstones. Unless otherwise stated, all other
clauses in this Guide, including Figure 1 and Table 1, apply to Exploration Results,
Mineral Resources and Mineral Reserves for diamonds and other gemstones.

For the purposes of Public Reporting, the requirements for diamonds and other gemstones are
generally similar to those for other commodities with the replacement of terms such as mineral by
diamond and grade by grade and average diamond value. The term quality should not be
substituted for grade, since in diamond deposits these have distinctly separate meanings.

A number of characteristics of diamond deposits are different from those of, for example, typical
metalliferous and coal deposits and require special consideration. These include the generally low
mineral content and variability of primary and placer deposits, the particulate nature of diamonds, the
specialized requirement for diamond valuation and the inherent difficulties and uncertainties in the
estimation of diamond resources and reserves.

2. Reports of diamonds recovered from sampling programs must provide material


information relating to the basis on which the sample is taken, the method of recovery
and the recovery of the diamonds. The weight of diamonds recovered may only be
omitted from the report when the diamonds are considered to be too small to be of
commercial significance. The lower cutoff size should be stated along with the type
of bottom sieve used.

The stone size distribution and price of diamonds and other gemstones are critical components of the
resource and reserve estimates. At an early exploration stage, sampling and delineation drilling will not
usually provide this information, which relies on large diameter drilling and, in particular, bulk sampling.

In order to demonstrate that a resource has reasonable prospects for economic extraction, some
appreciation of the likely stone size distribution and price is necessary, however preliminary. To
determine an Inferred Mineral Resource in simple, single-facies or single-phase deposits, such
information may be obtainable by representative large diameter drilling. More often, some form of bulk
sampling, such as pitting and trenching, would be employed to provide larger sample parcels.

In order to progress to an Indicated Mineral Resource, and from there to a Probable Mineral Reserve, it
is likely that much more extensive bulk sampling would be needed to fully determine the stone size
distribution and value. Commonly such bulk samples would be obtained by underground development
designed to obtain sufficient diamonds to enable a confident estimate of price.

In complex deposits, it may be very difficult to ensure that the bulk samples taken are truly
representative of the whole deposit. The lack of direct bulk sampling, and the uncertainty in

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demonstrating spatial continuity of size and price relationships should be persuasive in determining the
appropriate resource category.

3. Where diamond Mineral Resource or Mineral Reserve grades (carats per ton) are
based on correlations between the frequency of occurrence of micro-diamonds and of
commercial size stones, this must be stated, the reliability of the procedure must be
explained and the number of stones and their weight reported by sieve size.

4. For Public Reports dealing with diamond or other gemstone mineralization, it is a


requirement that a statement verifying the independence of the valuation accompany
any reported valuation of a parcel of diamonds or gemstones. The valuation must be
based on a report from a demonstrably reputable and qualified expert.

If a valuation of a parcel of diamonds is reported, the weight in carats and the lower cutoff size of the
contained diamonds must be stated and the value of the diamonds must be given in U.S. dollars per
carat. Where the valuation is used in the estimation of diamond Mineral Resources or Mineral Reserves,
the valuation must be based on a parcel representative of the size, shape and color distributions of the
diamond population in the deposit.

Diamond valuations should not be reported for samples of diamonds processed using total liberation
methods.

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APPENDIX 1

U.S. SECURITIES AND EXCHANGE COMMISSION

DIVISION OF CORPORATION FINANCE

INDUSTRY GUIDE 7
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

INDUSTRY GUIDES

TABLE OF CONTENTS

Guide Subject

Securities Act Industry Guides

7 Description of property by issuers engaged or to be engaged in


significant mining operations

Exchange Act Industry Guides

7 Description of property by issuers engaged or to be engaged in


significant mining operations

From US Securities and Exchange Commission WEB site:

http://www.sec.gov/divisions/corpfin/forms/industry.htm#secguide7
Description of Property by Issuers Engaged or to Be Engaged in Significant Mining
Operations

Guide 7.

(a) Definitions. The following definitions apply to registrants engaged or to be engaged in


significant mining operations:

(1) Reserve. That part of a mineral deposit which could be economically and legally
extracted or produced at the time of the reserve determination.

Note: Reserves are customarily stated in terms of "ore" when dealing with metalliferous
minerals; when other materials such as coal, oil, shale, tar, sands, limestone, etc.
are involved, an appropriate term such as "recoverable coal" may be substituted.

(2) Proven (Measured) Reserves. Reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or
quality are computed from the results of detailed sampling and (b) the sites for
inspection, sampling and measurement are spaced so closely and the geologic
character is so well defined that size, shape, depth and mineral content of reserves
are well-established.

(3) Probable (Indicated) Reserves. Reserves for which quantity and grade and/or
quality are computed form information similar to that used for proven (measure)
reserves, but the sites for inspection, sampling, and measurement are farther apart
or are otherwise less adequately spaced. The degree of assurance, although lower
than that for proven (measured) reserves, is high enough to assume continuity
between points of observation.

(4) (i) Exploration State includes all issuers engaged in the search for mineral
deposits (reserves) which are not in either the development or production
stage.

(ii) Development Stage includes all issuers engaged in the preparation of an


established commercially minable deposit (reserves) for its extraction which
are not in the production stage.

(iii) Production Stage includes all issuers engaged in the exploitation of a


mineral deposit (reserve).

Instruction to paragraph (a). Mining companies in the exploration stage should not refer
to themselves as development stage companies in the financial statements, even though

Appendix 1.doc: SEC Industry Guide 7 Page 2 of 5


such companies should comply with FASB Statement No. 7, if applicable.

(b) Mining Operation Disclosure. Furnish the following information as to each of the mines,
plants and other significant properties owned or operated, or presently intended to be
owned or operated, by the registrant:

(1) The location and means of access to the property.

(2) A brief description of the title, claim, lease or option under which the registrant
and its subsidiaries have or will have the right to hold or operate the property,
indicating any conditions which the registrant must meet in order to obtain or
retain the property. If held by leases or options, the expiration dates of such leases
or options should be stated. Appropriate maps may be used to portray the locations
of significant properties;

(3) A brief history of previous operations, including the names of previous operators,
insofar as known;

(4) (i) A brief description of the present condition of the property, the work
completed by the registrant on the property, the registrant's proposed program
of exploration and development, and the current state of exploration and/or
development of the property. Mines should be identified as either open-pit or
underground. If the property is without known reserves and the proposed
program is exploratory in nature, a statement to that effect shall be made;

(ii) The age, details as to modernization and physical condition of the plant and
equipment, including subsurface improvements and equipment. Further, the
total cost for each property and its associated plant and equipment should be
stated. The source of power utilized with respect to each property should also
be disclosed.

(5) A brief description of the rock formations and mineralization of existing or


potential economic significance on the property, including the identity of the
principal metallic or other constituents insofar as known. If proven (measured) or
probable (indicated) reserves have been established, state (i) the estimated
tonnages and grades (or quality, where appropriate) of such classes of reserves,
and (ii) the name of the person making the estimates and the nature of his
relationship to the registrant.

Instructions to paragraph (b)(5):

1. It should be stated whether the reserve estimate is of in-place material or of


recoverable material. Any in-place estimate should be qualified to show the
anticipated losses resulting from mining methods and beneficiation or

Appendix 1.doc: SEC Industry Guide 7 Page 3 of 5


preparation.

2. The summation of proven (measured) and probable (indicated) ore reserves is


acceptable if the difference in degree of assurance between the two classes of
reserves cannot be readily defined.

3. Estimates other than proved (measured) or probable (indicated) reserves, and


any estimated values of such reserves shall not be disclosed unless such
information is required to be disclosed by foreign or state law; provided,
however, that where such estimates previously have been provided to a person
( or any of its affiliates) that is offering to acquire, merge, or consolidate with,
the registrant or otherwise to acquire the registrant's securities, such estimates
may be included.

(6) If technical terms relating to geology, mining or related matters whose definition
cannot readily be found in conventional dictionaries (as opposed to technical
dictionaries or glossaries) are used, an appropriate glossary should be included in
this report.

(7) Detailed geographic maps and reports, feasibility studies and other highly
technical data should not be included in the report but should be, to the degree
appropriate and necessary for the Commission's understanding of the registrant's
presentation of business and property matters, furnished as supplemental
information.

(c) Supplemental Information.

(1) If an estimate of proven (measured) or probable (indicated) reserves is set forth in


the report, furnish:

(i) maps drawn to scale showing any mine workings and the outlines of the
reserve blocks involved together with the pertinent sample-assay thereon.

(ii) all pertinent drill data and related maps.

(iii) the calculations whereby the basic sample-assay or drill data were translated
into the estimates made the grade and tonnage of reserves in each block and
in the complete reserve estimate.

Instructions to paragraph (c)(1):


Maps and drawings submitted to the staff should include:

Appendix 1.doc: SEC Industry Guide 7 Page 4 of 5


(a) A legend or explanation showing, by means of pattern or symbol, every
pattern or symbol used on the map or drawing; the use of the symbols used
by the U.S. Geological Survey is encouraged;

(b) A graphical bar scale should be included; additional representations of scale


such as "one inch equals one mile" may be utilized provided the original
scale of the map has not been altered;

(c) A north arrow on the maps;

(d) An index map showing where the property is situated in relationship to the
state or province, etc., in which it was located;

(e) A title of the map or drawing and the date on which it was drawn;

(f) In the event interpretive data is submitted in conjunction with any map, the
identity of the geologist or engineer that prepared such data; and

(g) Any drawing should be simple enough or of sufficiently large scale to clearly
show all features on the drawing.

(2) Furnish a complete copy of every material engineering, geological or metallurgical


report concerning the registrant's property, including governmental reports, which
are known and available to the registrant. Every such report should include the
name of its author and the date of its preparation, if known to the registrant.
Instruction to paragraph (c)(2)Any of the above-required reports as to which the
staff has access need not be submitted. In this regard, issuers should consult with
the staff prior to filing the report. Any reports not submitted should be identified in
a list furnished to the staff. This list should also identify any known governmental
reports concerning the registrant's property.

(3) Furnish copies of all documents such as title documents, operating permits and
easements needed to support representations made in the report.

Appendix 1.doc: SEC Industry Guide 7 Page 5 of 5


APPENDIX 2

THE 1999 SME GUIDE

A GUIDE

FOR REPORTING EXPLORATION INFORMATION,

MINERAL RESOURCES, AND MINERAL RESERVES


01 March 1999

A GUIDE FOR REPORTING


EXPLORATION INFORMATION, MINERAL
RESOURCES,
AND MINERAL RESERVES

SUBMITTED BY:

THE RESOURCES AND RESERVES COMMITTEE

TO

THE BOARD OF DIRECTORS


OF
THE SOCIETY FOR MINING, METALLURGY AND
EXPLORATION, INC.

8307 SHAFFER PARKWAY


LITTLETON, COLORADO 80127
PHONE: (303) 973-9550
FAX: (303) 973-3845
E-MAIL: sme@smenet.org
Foreword

1. In 1988, at the request of members of the Society for Mining, Metallurgy, and
Exploration (SME), Inc., the President of SME formed Working Party #79, Ore
Reserve Definition, with the mission to develop guidelines for the public reporting of
exploration information, resources, and reserves. A Subcommittee was appointed by
the Working Party to draft these guidelines and submit recommendations to SME.
The Subcommittees recommendations were published by SME in the April 1991
issue of Mining Engineering, and as a document entitled A Guide for Reporting
Exploration Information, Resources, and Reserves in January 1992. Work continued
on an ad-hoc basis until 1996, when Working Party #79 was renamed the SME
Committee on Resources and Reserves and became a standing committee.

Since 1994, the Council of Mining and Metallurgical Institutions (CMMI) has been
working to create a set of international definitions for reporting mineral resources and
mineral reserves. An ad-hoc International Definitions Group was formed, with
representatives from mining and metallurgical institutions from the United States
(SME), Australia (AusIMM), Canada (CIM), the United Kingdom (IMM) and South
Africa (SAIMM). A major breakthrough came on October 18, 1997 when the CMMI
International Definitions Group met in Denver, Colorado and reached a provisional
agreement (the Denver Accord) on definitions of mineral resources and mineral
reserves. Concurrently, and since 1992, the United Nations Economic Commission
for Europe (UN-ECE) has been developing an international framework classification
for mineral resources and mineral reserves. A joint meeting was held in Geneva on
October 4, 1998 between the CMMI International Definitions Group and the UN-
ECE Task Force. Agreement was reached to incorporate the CMMI standard
reporting definitions for mineral resources and reserves into the UN framework
classification, thus giving truly international status to the CMMI definitions.

2. The 1999 updated version of the SME Guide takes into account the October 1998
agreement reached in Geneva to develop an internationally accepted set of definitions
and reporting standards. This has resulted in changes to the wording of the originally
published definitions, but has not changed the meaning of the definitions or the intent
of the Guide. The opportunity has also been taken to respond to many constructive
suggestions received since the original publication of the Guide in April 1991.

The main changes can be summarized as follows:

introduction of the concept and definition of Competent Person;

adjustments to the definitions of Mineral Resource, Measured Mineral


Resource, Indicated Mineral Resource, Inferred Mineral Resource, Mineral
Reserve, Proved Mineral Reserve and Probable Mineral Reserve to reflect the
agreement reached between organizations participating in the CMMI initiative; the
adjustments do not change the basis of the definitions; and

Appendix 2.doc: 1999 SME Guide Page 2 of 25


recognition that in certain situations, Measured Mineral Resources could convert to
Probable Mineral Reserves rather than to Proved Mineral Reserves, because of
uncertainties associated with modifying factors which are taken into account in the
conversion from Mineral Resources to Mineral Reserves.

3. The Guide has been adopted by the Society for Mining, Metallurgy, and Exploration,
Inc. and is therefore strongly recommended to be used by members of this
organization.

4. The United States Securities and Exchange Commission (U.S. SEC) regulates the
reporting of exploration information, resources and reserves by organizations,
individuals or companies (entities) subject to the filing and reporting requirements
of the U.S. SEC. Decisions as to when and what information should be publicly
reported are the sole responsibility of the entity owning the information, and are
subject to U.S. SEC rules and regulations. These rules and regulations vary from time
to time, and at any given time may not be consistent with the content of this Guide.
At the time this Guide was prepared, the U.S. SEC did not allow the use of the terms
Mineral Resource. The advice of securities counsel should be sought in preparing
filings for the U.S. SEC or other securities regulatory authorities, and in preparing
other public disclosures.

5. The Guide is recommended as a minimum standard for reporting exploration


information, Mineral Resources and Mineral Reserves for public and private purposes.
In terms of the Guide, a public report is a report on exploration information, Mineral
Resources or Mineral Reserves, prepared for the purpose of informing the general
public.

Public reports include, but are not limited to: company Annual Reports, quarterly reports,
press releases and other reports. It is recommended that the Guide apply to the following
reports if they have been prepared or are likely to be used for informing the general public:
information memoranda, expert reports and technical papers reporting on exploration
information, Mineral Resources or Mineral Reserves.

6. Public companies should provide all relevant and material information, necessary for
an intelligent layman to make a reasonable and balanced assessment of the
exploration information, Mineral Resource or Mineral Reserve being reported.

While every effort has been made within the Guide to cover most situations likely to be
encountered in the reporting of exploration information, Mineral Resources and Mineral
Reserves, there will inevitably be occasions when doubt exists as to the appropriate
procedure to follow. In such cases, users of the Guide and those compiling reports under the
Guide should be guided by its intent, which is to provide a minimum standard for reporting
and to ensure that such reporting contains all information which investors and their
professional advisers would reasonably require, and reasonably expect to find in the report,
for the purpose of making a reasoned and balanced judgment regarding the exploration
information, Mineral Resource or Mineral Reserve reported.

Table 1, included at the end of the Guide, supplies an outline of items that should be
considered when evaluating a project. The importance of each item will vary with the project
and it is recognized that, for some projects, other items may be relevant which are not on the

Appendix 2.doc: 1999 SME Guide Page 3 of 25


list. The Table should be considered a guide to facilitate a rational and orderly approach to
evaluation. However, the need remains for exploration and mining professionals to make
difficult decisions, such as the classification of material as a Mineral Resource or a Mineral
Reserve. Decisions remain a matter of professional judgment based on knowledge,
experience, and industry practices.

The relative importance of the items in Table 1 will vary with each project depending on the
geological environment and technical constraints, as well as economic and legal conditions
pertaining at the time of evaluation. When evaluating a project, the relative importance of
each item should be weighed. All relevant information must be given careful consideration
before deciding which information should be reported to the public.

Where a particular report addresses only some of the items in Table 1, the report should
disclose its limited scope and should refer to other information required for a complete
evaluation of the exploration information, Mineral Resource or Mineral Reserve being
reported. While such limited scope reports are commonly prepared as part of the overall
preparation of an evaluation, such reports may contain information warranting public
disclosure independent of the results of other studies and the authors of such reports should
be aware of their responsibilities with respect to public disclosure.

Public disclosure may be required of factors most likely to affect the accuracy of estimates
made in the report. The authors of reports should both identify and evaluate these important
factors within their reports.

For a variety of reasons, including the need for confidentiality, all data used to evaluate a
project need not be made public. However, the public can reasonably assume that all
necessary information is available to support public statements at the time they are made.

Demonstration of economic feasibility is not required before reporting exploration information


or Mineral Resources. However, particular attention should be given to all relevant
information that increases or decreases the chances that the project will result in economic
exploitation. Demonstration of economic feasibility is required before reporting Mineral
Reserves.

It is recognized that estimates of exploration information, Mineral Resources, and Mineral


Reserves, being predictions of what will occur in the future based on imperfect knowledge of
the present, are inherently forward-looking statements, and will be inaccurate to some degree.
It is also recognized that different individuals analyzing the same data may arrive at
somewhat differing interpretations and conclusions. The fact that a Mineral Reserve estimate
is misclassified or proven inaccurate at a later date, when additional information becomes
available or economic conditions have changed, does not necessarily mean that the estimate
was made incompetently or fraudulently. Statements concerning exploration information,
Mineral Resources and Mineral Reserves must have a reasonable basis and be made in
good faith.

7. It is recognized that further review of the Guide will be required from time to time.
Constructive suggestions are solicited from all users of this Guide. Comments should
be sent directly to the Resources and Reserves Committee, care of SME.

Competence and Responsibility

8. A public report concerning an entitys exploration information, Mineral Resources


and/or Mineral Reserves is the responsibility of the entity acting through its

Appendix 2.doc: 1999 SME Guide Page 4 of 25


governing board. Any such report must be based on, and fairly reflect, the content of
a report prepared by a Competent Person (or Persons) as defined below.

In reporting exploration information, Mineral Resources and/or Mineral Reserves in a


public report, an entity may need to edit the report prepared by the Competent Person.
Where such editing takes place, the entity should ask the Competent Person to give
his/her consent in writing to the edited information in the form and context in which it
appears in the public report.

9. Reports detailing Mineral Resource and Mineral Reserve estimates from which a
public report on Mineral Resources and Mineral Reserves is prepared, must be
prepared by or under the direction of, and signed by, a Competent Person or Persons.

10. A Competent Person is a person who is a member of a professional society for


earth scientists or mineral engineers, or has other appropriate qualifications. The
Competent Person must have a minimum of five years experience which is relevant to
the style of mineralization and type of deposit under consideration and to the activity
which that person is undertaking. If the Competent Person is estimating, or
supervising the estimation of Mineral Resources, the relevant experience must be in
the estimation, assessment and evaluation of Mineral Resources. If the Competent
Person is estimating, or supervising the estimation of Mineral Reserves, the relevant
experience must be in the estimation, assessment, evaluation and economic analysis
of Mineral Reserves.

The key qualifier in the definition of a Competent Person is the word `relevant'. Determination
of what constitutes relevant experience can be a difficult area and common sense has to be
exercised. For example, in estimating vein gold mineralization, experience in a high nugget,
vein-type mineralization such as tin, uranium etc. will probably be relevant whereas
experience in (say) massive-type deposits may not be. As a second example, to be
considered competent in evaluating and reporting on placer or alluvial gold deposits, a
person would need to have considerable (at least five years) experience in this type of
mineralization, because of the characteristics of gold in alluvial systems, the particle sizing of
the host sediment, and the low grades being quantified. Experience with placer deposits
containing minerals other than gold may not necessarily provide appropriate relevant
experience.

The key word relevant also means that it is not always necessary for a person to have five
years experience in each and every type of deposit in order to act as a Competent Person if
that person has relevant experience in other deposit types. For example, a person with (say)
20 years experience in Mineral Resource estimation in a variety of metalliferous hard-rock
deposit types may not require five years specific experience in (say) porphyry copper
deposits in order to act as a Competent Person. Relevant experience in the other deposit
types would count towards the required experience in relation to porphyry copper deposits.

In addition to experience in the style of mineralization, a Competent Person reporting Mineral


Resources must have sufficient experience in the sampling and assaying techniques relevant
to the deposit under consideration to be aware of problems which could affect the reliability of
the data. Knowledge of extraction and processing techniques applicable to that deposit type
is also important.

Appendix 2.doc: 1999 SME Guide Page 5 of 25


As a general guide, persons being called upon to sign as a Competent Person should be
clearly satisfied in their own minds that they could face their peers and demonstrate
competence in the commodity, type of deposit and situation under consideration. If doubt
exists, the person should either seek concurring opinions from other colleagues or should
decline to sign as a Competent Person.

Estimation of Mineral Resources may be a team effort (for example, involving one person or
team collecting the data and another person or team preparing the Mineral Resource
estimate), and estimation of Mineral Reserves is commonly a team effort involving a number
of technical disciplines. The Competent Person (or Persons) who signs the report is
responsible and accountable for the whole of the report under the Guide. However, it is
recommended that, where there is a clear division of responsibilities within a team, each
Competent Person accept responsibility for his or her particular contribution. For example,
one Competent Person could accept responsibility for the collection of geological data,
another for the Mineral Resource estimation process, another for the mineability study, and
the project leader could accept responsibility for the overall report. It is important that the
Competent Person accepting overall responsibility for a Mineral Resource or Mineral Reserve
report which has been prepared in whole or in part by others is satisfied that the work of the
other contributors is acceptable to the Competent Person.

Rules, regulations or guidelines concerning the Competent Person differ from country to
country. In the United States, the U.S. SEC does not currently require that a Competent
Person sign a public report on exploration information, Mineral Resources or Mineral
Reserves. In Australia, the Australian Stock Exchange Limited (ASX) requires that releases
by entities which make statements about Mineral Resources or Mineral Reserves are based
on information compiled by a Competent Person as defined by the Australasian Code for
Reporting of Mineral Resources and Ore Reserves (The JORC Code). In Canada in 1998,
the Mining Standards Task Force of the Toronto Stock Exchange and Ontario Securities
Commission recommended that the concept of Qualified Person be incorporated formally
into rules applicable to the publication of Mineral Resources and Mineral Reserves. In these
and all other jurisdictions, it is the responsibility of the Competent Person and the entity
making a public report to ensure that the appropriate rules, regulations and guidelines are
followed.

Reporting Terminology

11. Public reports dealing with exploration information, Mineral Resources and/or
Mineral Reserves must only use the terms set out in Figure 1.

Appendix 2.doc: 1999 SME Guide Page 6 of 25


Figure 1 General Relationship between Exploration Information, Mineral Resources and Mineral
Reserves

EXPLORATION
INFORMATION

MINERAL MINERAL
RESOURCES RESERVES
Reported as
Reported as
mineable
potentially mineable
production
mineralization
estimates

INFERRED

Increasing
level of
geological
knowledge INDICATED PROBABLE

and
confidence

MEASURED PROVED

Consideration of mining, metallurgical,


economic, marketing, legal, environmental,
social and governmental factors
(the "modifying factors")

Figure 1 sets out the framework for classifying exploration information, tonnage and grade
estimates and contained or recoverable minerals as applicable. This classification reflects
different levels of geological confidence and different degrees of technical and economic
evaluation. Mineral Resources can be estimated mainly on the basis of geoscientific
information with some input from other disciplines. Mineral Reserves, which are a modified
sub-set of the Indicated and Measured Mineral Resources, require consideration of those
factors affecting extraction, including mining, metallurgical, economic, marketing, legal,
environmental, social and governmental factors, and should in most instances be estimated
with input from a range of disciplines.

Appendix 2.doc: 1999 SME Guide Page 7 of 25


In certain situations, Measured Mineral Resources could convert to Probable Mineral
Reserves rather than to Proved Mineral Reserves because of uncertainties associated with
modifying factors which are taken into account in the conversion from Mineral Resources to
Mineral Reserves. This relationship is shown by the broken arrow in Figure 1. In such
situations these modifying factors should be fully explained.

In certain situations, previously reported Mineral Reserves could convert back to Mineral
Resources because of new information according to which a Mineral Reserve can no longer
be reported. The resulting two-way relationship is shown by the two-headed arrows in Figure
1. The modifying factors which resulted in reclassification of a Mineral Reserve should be
fully explained.

Public Reporting General

12. Reports concerning an entitys exploration information, Mineral Resources or


Mineral Reserves should include a description of the style and nature of
mineralization.

13. An entity must disclose relevant information concerning the status and characteristics
of a mineral deposit which could materially influence the economic value of that
deposit. To meet disclosure obligations, an entity may be required to promptly report
any material changes in its Mineral Resources or Mineral Reserves.

14. Throughout the Guide, where appropriate, quality may be substituted for grade
and volume may be substituted for tonnage.

15. Units used for reporting Mineral Resources or Mineral Reserves should be those
generally applicable within the industry and within the jurisdiction where reporting
takes place, for the mineral being reported.

Reporting of Exploration Information

16. An entity may choose or be required to report exploration information. If an entity


reports exploration information in relation to mineralization not classified as a
Mineral Resource or a Mineral Reserve, estimates of tonnage and average grade,
except for the weighted average grade of specified assay intervals, must not be
reported.

Where descriptions of exploration targets or exploration potential are given in public reports,
any figures mentioned must be clearly order-of-magnitude and conceptual in nature and
expressed so as not to misrepresent them as an estimate of Mineral Resources or Mineral
Reserves.

17. Public reports of exploration information relating to mineralization not classified as a


Mineral Resource or Mineral Reserve must contain sufficient information to allow a
considered and balanced judgment of the significance of the results. This must
include relevant information such as the geological setting, sampling intervals and
methods, sample locations, assay data, laboratory analyses, data aggregation methods

Appendix 2.doc: 1999 SME Guide Page 8 of 25


plus information on any of the criteria listed in Table 1 that are material to an
assessment. The reporting of exploration sampling or geophysical results must not be
presented so as to unreasonably imply that a potentially economic deposit has been
discovered.

Table 1 is a checklist which those preparing reports on exploration information, Mineral


Resources and Mineral Reserves should use as a reference. The checklist is not prescriptive
and, as always, relevance and materiality are overriding principles which determine what
information should be publicly reported. Reporting of isolated assays without placing them in
perspective is unacceptable.

Reporting of Mineral Resources

18. A Mineral Resource is a concentration or occurrence of material of intrinsic


economic interest in or on the Earths crust (a deposit) in such form and quantity that
there are reasonable prospects for eventual economic extraction. The location,
quantity, grade, geological characteristics and continuity of a Mineral Resource are
known, estimated or interpreted from specific geological evidence and knowledge.
Mineral Resources are sub-divided, in order of increasing geological confidence, into
Inferred, Indicated and Measured categories. Portions of a deposit that do not have
reasonable prospects for eventual economic extraction must not be included in a
Mineral Resource.

The term Mineral Resource covers deposits which have been identified and estimated
through exploration and sampling and from which Mineral Reserves may be defined by the
consideration and application of technical, economic, legal, environmental, social and
governmental factors.

The term reasonable prospects for eventual economic extraction implies a judgment (albeit
preliminary) by the Competent Person in respect of the technical and economic factors likely
to influence the prospect of economic extraction, including the approximate mining
parameters. In other words, a Mineral Resource is not an inventory of all mineralization drilled
or sampled, regardless of cut-off grade, likely mining dimensions, location or continuity. It is a
realistic inventory of mineralization which, under assumed and justifiable technical and
economic conditions, might become economically extractable.

Where considered appropriate by the Competent Person, Mineral Resource estimates may
include mining related assumptions which should be clearly stated.

19. An Inferred Mineral Resource is that part of a Mineral Resource for which
tonnage, grade and mineral content can be estimated with a low level of confidence. It
is inferred from geological evidence and assumed but not verified geological and/or
grade continuity. It is based on information gathered through appropriate techniques
from locations such as outcrops, trenches, pits, workings and drill holes which is
limited or of uncertain quality and/or reliability. An Inferred Mineral Resource has a
lower level of confidence than that applying to an Indicated Mineral Resource.

The category is intended to cover situations where a mineral concentration or occurrence has
been identified and limited measurements and sampling completed, but where the data are
insufficient to allow the geological and/or grade continuity to be confidently interpreted. The

Appendix 2.doc: 1999 SME Guide Page 9 of 25


assumptions made in evaluating an Inferred Mineral Resource must be reasonable, after
considering all available information. Due to the uncertainty which may attach to some
Inferred Mineral Resources, it cannot be assumed that all or part of an Inferred Mineral
Resource will be upgraded to an Indicated or Measured Mineral Resource as a result of
continued exploration. Confidence in the estimate is not sufficient to allow the appropriate
application of technical and economic parameters or to enable an evaluation of economic
viability worthy of public disclosure. Caution should be exercised if this category is considered
in economic studies.

20. An Indicated Mineral Resource is that part of a Mineral Resource for which
tonnage, densities, shape, physical characteristics, grade and mineral content can be
estimated with a reasonable level of confidence. It is based on exploration, sampling
and testing information gathered through appropriate techniques from locations such
as outcrops, trenches, pits, workings, and drill holes. The locations are too widely or
inappropriately spaced to confirm geological continuity and/or grade continuity but
are spaced closely enough for continuity to be assumed. An Indicated Mineral
Resource has a lower level of confidence than that applying to a Measured Mineral
Resource, but has a higher level of confidence than that applying to an Inferred
Mineral Resource.

A deposit may be classified as an Indicated Mineral Resource when the nature, quality,
amount and distribution of data are such as to allow the Competent Person determining the
Mineral Resource to confidently interpret the geological framework and to assume continuity
of mineralization. Confidence in the estimate is sufficient to allow the appropriate application
of technical and economic parameters and to enable an evaluation of economic viability.

21. A Measured Mineral Resource is that part of a Mineral Resource for which
tonnage, densities, shape, physical characteristics, grade and mineral content can be
estimated with a high level of confidence. It is based on detailed and reliable
exploration, sampling and testing information gathered through appropriate
techniques from locations such as outcrops, trenches, pits, workings, and drill holes.
The locations are spaced closely enough to confirm geological and/or grade
continuity.

A deposit may be classified as a Measured Mineral Resource when the nature, quality,
amount and distribution of data are such as to leave no reasonable doubt, in the opinion of
the Competent Person determining the Mineral Resource, that the tonnage and grade of the
deposit can be estimated within close limits and that any variation from the estimate would
not significantly affect potential economic viability. This category requires a high level of
confidence in, and understanding of, the geology and controls of the mineral deposit.
Confidence in the estimate is sufficient to allow the appropriate application of technical and
economic parameters and to enable an evaluation of economic viability.

22. The choice of the appropriate category of Mineral Resource depends upon the
quantity, distribution and quality of data available and the level of confidence that
attaches to those data. The appropriate Mineral Resource category must be
determined by the Competent Person.

Mineral Resource classification is a matter for skilled judgment and the Competent Person
should take into account those items in Table 1 which relate to confidence in Mineral
Resource estimation.

Appendix 2.doc: 1999 SME Guide Page 10 of 25


In deciding between Measured Mineral Resource and Indicated Mineral Resource, the
Competent Person may find it useful to consider, in addition to the phrases relating to
geological and grade continuity in Clauses 20 and 21, the phrase in the guideline to the
definition for Measured Mineral Resource: .... any variation from the estimate would not
significantly affect potential economic viability.

In deciding between Indicated Mineral Resource and Inferred Mineral Resource, the
Competent Person may wish to take into account, in addition to the phrases relating to
geological and grade continuity in Clauses 20 and 21, the guideline to the definition for
Indicated Mineral Resource: Confidence in the estimate is sufficient to allow the appropriate
application of technical and economic parameters and to enable an evaluation of economic
viability, which contrasts with the guideline to the definition for Inferred Mineral Resource:
Confidence in the estimate is not sufficient to allow the appropriate application of technical
and economic parameters or to enable an evaluation of economic viability worthy of public
disclosure. Caution should be exercised if this category is considered in economic studies.

23. Mineral Resource estimates are not precise calculations, being dependent on the
interpretation of limited information on the location, shape and continuity of the
occurrence and on the available sampling results. Reporting of tonnage and grade
figures should reflect the order of accuracy of the estimate by rounding off to
appropriately significant figures and by qualification with terms such as
approximately.

Depending on the accuracy of the estimate, rounding to the second or third significant figure
should be sufficient. For example 10,863,425 tons at 8.23 per cent could be stated as 11
million tons at 8.2 percent or 10.9 million tons at 8.23 percent. In order to emphasize the
imprecise nature of a Mineral Resource or Mineral Reserve estimate, it is recommended that
the final result always be referred to as an estimate not a calculation.

24. Mineral Resource reports must specify one or more of the categories of Inferred,
Indicated and Measured. Reports must not contain Inferred Mineral Resource
figures combined with either of the other two categories. The Measured and Indicated
categories must be separately reported if this information is material. A Mineral
Resource must not be reported in terms of contained metal content unless
corresponding tonnage and grade figures are also presented. Mineral Resource figures
must not be aggregated with Mineral Reserve figures.

25. Table 1 provides, in a summary form, a list of the main criteria which should be
considered when preparing reports on exploration information, Mineral Resources
and Mineral Reserves. These criteria need not be discussed in a public report unless
they materially affect estimation or classification of the Mineral Resources.

It is not necessary, when publicly reporting, to comment on each item in Table 1, but it is
essential to discuss any matters which might materially affect the readers understanding or
interpretation of the results or estimates being reported. This is particularly important where
inadequate or uncertain data affect the reliability of, or confidence in, a statement of
exploration information or an estimate of Mineral Resources and/or Mineral Reserves; for
example, poor sample recovery, poor repeatability of assay or laboratory results, limited
information on tonnage factors etc.

Appendix 2.doc: 1999 SME Guide Page 11 of 25


If there is doubt about what should be reported in order to ensure full disclosure, it is better to
err on the side of providing too much information rather than too little.

Mineral Resource or Mineral Reserve estimates are sometimes reported after adjustment by
cutting of high grades, the application of factors such as dilution, mine or mill call factors,
and similar modifying factors. If any of the data are materially adjusted or modified for the
purpose of making the estimate, this should be clearly stated in a public Mineral Resource or
Mineral Reserve report and the nature of the adjustment or modification described.

26. The words ore and reserves must not be used in stating Mineral Resource
estimates as the terms imply technical feasibility and economic viability and are only
appropriate when all relevant technical, economic, legal, environmental, social and
governmental factors have been considered. Reports and statements should continue
to refer to the appropriate category or categories of Mineral Resources until technical
feasibility and economic viability have been established. If re-evaluation indicates
that the Mineral Reserves are no longer viable, the Mineral Reserves must be
reclassified as Mineral Resources or removed from Mineral Resource/Mineral
Reserve statements altogether.

It is not intended that re-classification from Mineral Reserves to Mineral Resources should be
applied as a result of changes expected to be of a short term or temporary nature, or where
management has made a deliberate decision to operate on a non-economic basis. Examples
of such situations might be a commodity price drop expected to be of short duration, mine
emergency of a non-permanent nature, transport strike etc.

Reporting of Mineral Reserves

27. A Mineral Reserve is the economically mineable part of a Measured or Indicated


Mineral Resource. It includes diluting materials and allowances for losses which may
occur when the material is mined. Appropriate assessments, which may include
feasibility studies, have been carried out and include consideration of and
modification by realistically assumed mining, metallurgical, economic, marketing,
legal, environmental, social and governmental factors. These assessments
demonstrate at the time of reporting that extraction is reasonably justified. Mineral
Reserves are sub-divided in order of increasing confidence into Probable Mineral
Reserves and Proved Mineral Reserves.

Mineral Reserves are those portions of Mineral Resources which, after the application of all
mining factors, result in an estimated tonnage and grade which, in the opinion of the
Competent Person making the estimates, can be the basis of a viable project after taking
account of all relevant metallurgical, economic, marketing, legal, environmental, social and
governmental factors. Mineral Reserves are inclusive of diluting material which will be mined
and delivered to the treatment plant or equivalent.

The term economic implies that extraction of the Mineral Reserve has been established or
analytically demonstrated to be viable and justifiable under reasonable investment and
market assumptions. The term Mineral Reserve need not necessarily signify that extraction
facilities are in place or operative nor that all governmental approvals have been received. It
does signify that there are reasonable expectations of timely approvals.

Appendix 2.doc: 1999 SME Guide Page 12 of 25


It should be noted that the Guide does not imply that an economic operation must have
Proved Mineral Reserves. Situations arise where Probable Mineral Reserves alone may be
sufficient to justify extraction, as for example with some alluvial tin or gold deposits. This is a
matter for judgment by the Competent Person and the management of the entity owning the
information.

The terms Ore Reserves and Mineral Reserves can be used interchangeably where it is
customary to do so, usually for metallic deposits and some industrial minerals.

28. A Probable Mineral Reserve is the economically mineable part of an Indicated


and, in some circumstances, Measured Mineral Resource. It includes diluting
materials and allowances for losses which may occur when the material is mined.
Appropriate assessments, which may include feasibility studies, have been carried out
and include consideration of and modification by realistically assumed mining,
metallurgical, economic, marketing, legal, environmental, social and governmental
factors. These assessments demonstrate at the time of reporting that extraction is
reasonably justified. A Probable Mineral Reserve has a lower level of confidence than
a Proved Mineral Reserve.

29. A Proved Mineral Reserve is the economically mineable part of a Measured


Mineral Resource. It includes diluting materials and allowances for losses which may
occur when the material is mined. Appropriate assessments, which may include
feasibility studies, have been carried out and include consideration of and
modification by realistically assumed mining, metallurgical, economic, marketing,
legal, environmental, social and governmental factors. These assessments
demonstrate at the time of reporting that extraction is reasonably justified.

30. The choice of the appropriate category of Mineral Reserve is determined primarily by
the classification of the corresponding Mineral Resource and must be made by the
Competent Person.

The Guide provides for a direct relationship between Indicated Mineral Resources and
Probable Mineral Reserves and between Measured Mineral Resources and Proved Mineral
Reserves. In other words, the level of geoscientific confidence for Probable Mineral Reserves
is the same as that required for the determination of Indicated Mineral Resources and for
Proved Reserves is the same as that required for the determination of Measured Mineral
Resources.

The Guide provides for a two-way relationship between Measured Mineral Resources and
Probable Mineral Reserves. This is to cover the situation where uncertainties associated with
any of the modifying factors considered when converting Mineral Resources to Mineral
Reserves may result in there being a lower degree of confidence in the Mineral Reserves
than in the corresponding Mineral Resources.

If the uncertainties in the modifying factors that prevented the Measured Mineral Resource
being converted to a Proved Mineral Reserve are removed, then the Measured Mineral
Resource may be converted to a Proved Mineral Reserve. No amount of confidence in the
modifying factors for conversion of a Mineral Resource into a Mineral Reserve can override
the upper level of confidence which exists in the Mineral Resource. Under no circumstances
can an Indicated Mineral Resource be converted to a Proved Mineral Reserve, unless new
information first justifies conversion to a Measured Mineral Resource. Under no

Appendix 2.doc: 1999 SME Guide Page 13 of 25


circumstances can an Inferred Mineral Resource be converted to a Mineral Reserve unless
first converted to an Indicated or Measured Mineral Resource.

Application of the category of a Proved Mineral Reserve implies the highest degree of
confidence in the estimate.

Refer also to Clause 22 regarding classification of Mineral Resources.

31. Mineral Reserve estimates are not precise calculations. Tonnage and grade figures in
reports should be expressed so as to convey the order of accuracy of the estimates by
rounding off to appropriately significant figures.

See Clause 23 regarding rounding of Mineral Resource estimates.

32. Mineral Reserve reports must specify one or both of the categories of Proved and
Probable. Reports that combine Proved and Probable Mineral Reserve figures must
provide estimates for each category if this information is material. Reports must not
present contained metal figures unless corresponding tonnage and grade figures are
also presented.

33. When reporting a Mineral Reserve, tonnages, grades and mineral or metal contents
must be reported after taking into account mining loss and mining dilution. Mineral
and metal contents can be reported after also taking into account processing
recoveries. If processing recoveries are not taken into account, the percentage
expected to be recovered or lost after processing must be reported.

34. In situations where figures for both Mineral Resources and Mineral Reserves are
reported, a clarifying statement must be included in the report which clearly indicates
that the Mineral Resources are additional to the Mineral Reserves.

An appropriate form of clarifying statement may be:

The Measured and Indicated Mineral Resources are additional to the Mineral Reserves.

It is strongly recommended that, if there is a significant difference between a Mineral Reserve


and the Mineral Resource from which this Mineral Reserve was estimated, an explanation of
the reasons for the difference should be included in the report. This will assist the reader of
the report in making a judgment of the likelihood of the remaining Mineral Resources
eventually being converted to Mineral Reserves.

When converting Mineral Resources to Mineral Reserves, Mineral Reserves may incorporate
material (dilution) which may not have been included in the original Mineral Resource. This
fundamental difference between Mineral Resources and Mineral Reserves should be
explained if of material significance.

Remaining Mineral Resources must be reported separately from Mineral Reserves because
the resulting total may be very misleading in economic terms and may be misunderstood or,
more seriously, misused to give a false impression of the prospectivity of a project.

Public reporting of tonnage and grade estimates other than Mineral Resources and Mineral
Reserves is not permitted under the Guide. Other estimates may be useful for an entity in its

Appendix 2.doc: 1999 SME Guide Page 14 of 25


internal calculations and evaluation processes, but their inclusion in public reports could
cause confusion.

In preparing the Mineral Reserve statement, the relevant Mineral Resource statement on
which it is based should first be developed. This should be reconciled with the Mineral
Resource statement estimated for the previous comparable period and differences (due, for
example, to mine production, exploration, etc.) identified. The application of appropriate
factors to the Mineral Resource can then be made to develop the Mineral Reserve statement
which can also be reconciled with the previous comparable Mineral Resource statement.
Mining companies are encouraged to reconcile estimates whenever possible in their reports.
A detailed account of differences between Mineral Reserves and corresponding Mineral
Resource figures is not essential, but sufficient comment should be made to enable
significant variances to be understood by the reader.

35. Table 1 provides, in a summary form, a list of the main criteria which should be
considered when preparing reports on exploration information, Mineral Resources
and Mineral Reserves. These criteria need not be discussed in a public report unless
they materially affect estimation or classification of the Mineral Reserves. In
reporting Mineral Reserves, information on assumed metallurgical recovery factors is
very important, and should be included in public statements. Changes in economic or
political factors alone may be the basis for significant changes in Mineral Reserves
and should be reported accordingly.

See guidelines to Clause 25 regarding references to Table 1.

Reporting of Mineralized Stope Fill, Stockpiles, Remnants,


Pillars, Low-Grade Mineralization and Tailings

36. The Guide applies to the reporting of all potentially economic mineralized material
including mineralized stope fill, stockpiles, remnants, pillars, low grade
mineralization and tailings.
For the purposes of the Guide, mineralized stope fill and stockpiles of mineralized material
can be considered to be similar to in situ mineralization when reporting Mineral Resources
and Mineral Reserves. Consequently the Competent Person carrying out the assessment of
the fill or stockpiles must use the bases of classification outlined in the Guide. In most cases,
the opinion of a mining engineer should be sought when making judgments about the
mineability of fill, remnants and pillars.

If there are not reasonable prospects for the economic extraction of a particular portion of the
fill or stockpile, then this material cannot be classified as either Mineral Resources or Mineral
Reserves. If some portion is currently sub-economic but there is a reasonable expectation
that it will become economic, then this material may be classified as a Mineral Resource.
Such stockpile material may include old dumps and tailings dam material. If technical and
economic studies have demonstrated that economic extraction could reasonably be justified
under realistically assumed conditions, then the material may be classified as a Mineral
Reserve.

The above guidelines apply equally to low-grade in-situ mineralization, sometimes referred to
colloquially as mineralized waste or marginal-grade material, and often intended for
stockpiling and treatment towards the end of mine life. For clarity of understanding, it is
recommended that tonnage and grade estimates of such material be itemized separately in

Appendix 2.doc: 1999 SME Guide Page 15 of 25


public reports, although they may be aggregated with total Mineral Resource and Mineral
Reserve figures.

Stockpiles are defined to include both surface and underground stockpiles, including broken
ore in stopes, and can include ore currently in the ore storage system. Mineralized material in
the course of being processed (including leaching), if reported and of material importance,
should be reported separately together with the basis for estimation.

Mineralized remnants, shaft pillars and mining pillars which are potentially mineable are in
situ mineralization and consequently are included in the Guide definitions of Mineral
Resources and Mineral Reserves.

Mineralized remnants, shaft pillars and mining pillars which are not potentially mineable must
not be included in Mineral Resource and Mineral Reserve statements.

United States Securities and Exchange Commission

37. The United States Securities and Exchange Commission (U.S. SEC) regulates the
reporting of exploration information, resources and reserves, by entities subject to the
filing and reporting requirements of the U.S. SEC. Decisions as to when and what
information should be publicly reported are the sole responsibility of the entity
owning the information, and are subject to U.S. SEC rules and regulations. These
rules and regulations vary from time to time, and at any given time may not be
consistent with the content of this Guide. At the time this Guide was prepared, the
U.S. SEC did not allow the use of the term Mineral Resource. The advice of
securities counsel should be sought in preparing filings for the U.S. SEC or other
securities regulatory authorities, and in preparing other public disclosures.

Appendix 2.doc: 1999 SME Guide Page 16 of 25


TABLE 1. Checklist of Assessment Criteria
______________________________________________________________________________________
Estimates of the value of mineral projects are expressions of judgment predicated on knowledge and
experience. Such estimates are more than arbitrary determinations; they seek to attach value as a
consequence of method. The methods employed must be scientifically valid, tested, using accepted
scientific definitions of terms and accepted procedures, and best suited to the making of reliable estimates
for the project in question. Evaluation of mineral projects requires periodic examination and evaluation of
all new and existing data. The dynamic nature of the evaluation of mineral projects implies that a valid
estimate made at a given time may be significantly changed when new information becomes available.
Evaluation of a mineral project should consider all the criteria listed below and such additional criteria that
may be viewed as significant. The relative importance of the criteria will vary with the particular project
and the legal and economic conditions pertaining at the time of evaluation. When information is publicly
reported, it must be sufficient to enable an intelligent layman to make a reasonable and balanced
assessment of the significance of this information. When and whether information should be publicly
released is subject to current laws and regulations in the relevant jurisdictions.
______________________________________________________________________________________

Evaluation Criteria Exploration Mineral Resource Mineral Reserve


Information
A. General
1. Purpose of report Statement of person for See Exploration See Exploration
whom the report was Information Information
prepared, whether it was
intended as a full or
partial evaluation, what
work was conducted,
what work remains to be
done.

2. Project Description Description of See Exploration See Exploration


commodity, magnitude Information Information
of project, background,
and business
arrangement.

3. Project Location Description of location See Exploration See Exploration


(country, state or Information Information
province, county,
township and range,
easting and northing,
etc.); a map showing
location and access
should exist.

4. Property Ownership Description of See Exploration See Exploration


ownership of surface Information Information
rights, mineral rights,
access rights, leases,
concessions, royalties,
and other encumbrances
and liabilities.

Appendix 2.doc: 1999 SME Guide Page 17 of 25


Evaluation Criteria Exploration Mineral Resource Mineral Reserve
Information
B. Project Data
1. Location of Project Maps and cross sections See Exploration See Mineral Resource.
Data or other two- or three- Information. Particular The location of samples
dimensional attention should be and other relevant
representation of given to drill hole and features (property lines,
information should other sample survey mine workings, etc.)
exist, showing location information including should be well-known.
of samples, drill holes, downhole surveys. If the The location of drill
exploration pits, sample locations are not hole collars should be
underground workings, well known, the effect accurate and the
geological data, etc. on the resource adequacy of the down-
When evaluating drill estimates should be hole surveying
hole information, considered. technique should be
consideration should be reviewed and
given to depth to top and commented on.
bottom of
mineralization, to total
length and average
grade of intercepts, and
to the accuracy of
survey information
including downhole
surveys.

2. Geological Data Description of the See Exploration See Mineral Resource


nature, detail, and Information. Particular
reliability of geological attention should be
information (rock types, given to drill hole
structure, alterations, logging and other
mineralizations, and sample information used
relation to known in resource evaluation.
mineralized zones, etc.). Description of the
Description of thoroughness with
geophysical and which all significant
geochemical data. lithologic, structural,
Reliable geological mineralogical,
maps and cross sections alteration, or other
should exist to support geological or
interpretations. geotechnical
characteristics were
recorded. Significant
data, or data that could
materially influence the
estimated quantity and
quality of the resource,
should be discussed.

Appendix 2.doc: 1999 SME Guide Page 18 of 25


Evaluation Criteria Exploration Mineral Resource Mineral Reserve
Information
3. Sampling
a. Method Description of sample See Exploration See Mineral Resource.
type and sample Information. The Adequate sampling
collection method (hand, quantity and quality of verification techniques,
grab, trench, channel, or sample information is including appropriate
chip sample; core hole, critical to the reliability numbers of duplicates
rotary hole, or reverse of resource estimates. and appropriate
circulation; bulk sample, Particular attention statistical analyses of
etc.). Discussion of should be given to this duplicates are required.
sample quality and information.
representativeness
(sample recovery, high
grading, selective losses
or contamination, and
any other factors that
may have resulted in
sample biases, etc.).
Discussion of whether
duplicate samples or
alternative methods of
sampling were used to
verify sample quality. If
indirect methods of
measurement were used
(geophysical methods),
these should be
described, with attention
given to errors in
interpretation.

b. Preparation Description of See Exploration See Exploration


laboratory and method Information Information.
used for sample Verification of the
preparation, suitability of sample
subsampling and size preparation is required.
reduction, and
likelihood of inadequate
or nonrepresentative
samples (improper size
reduction
contamination, etc.).
Discussion of whether
tests were performed to
verify the suitability of
sample preparation.

Appendix 2.doc: 1999 SME Guide Page 19 of 25


Evaluation Criteria Exploration Mineral Resource Mineral Reserve
Information
c. Analysis Identification of See Exploration See Exploration
laboratory and analytical Information Information.
method (fire assay, AA Verification of
assay, emission analytical techniques
spectroscopy, etc.). and quality control
Discussion of precision programs are required.
and accuracy, including
the use of check assays,
quality control
programs, and
submission of samples
to other laboratories for
verification.
d. Specific Gravity Generally not Discussion of how the See Mineral Resource.
and Bulk determined. tonnage factor was The specific gravity and
Tonnage determined (assumed or bulk tonnage must have
measured). If assumed, been measured by
which assumptions were methods that adequately
made and on which account for void spaces
basis. If measured, by (vugs, porosity, etc.) and
what method and how for differences between
frequently. Discussion rock and alteration
of whether different zones within the deposit.
tonnage factors were
used in different parts of
the deposit and why.

C. Interpretation
1. Geological Description of See Exploration See Mineral Resource.
Interpretation And geological model and Information. Discussion
Model inferences made from of sufficiency of data
this model. Discussion density to assure
of adequacy of data continuity of
density and reliability, mineralization and
and whether the quality provide an adequate data
and quantity of base for the estimation
information are procedure used.
sufficient to support Discussion of the extent
statements made or to which the
inferred concerning interpretation is based
potential for significant on data or on
economic discovery. assumptions and
whether consideration
was given to alternative
interpretations or
models.

Appendix 2.doc: 1999 SME Guide Page 20 of 25


Evaluation Criteria Exploration Mineral Resource Mineral Reserve
Information
2. Numerical Model Generally not Detailed description of See Mineral Resource.
determined. the method used and the
assumptions made to
estimate tonnages and
grades (section,
polygon, inverse
distance, geostatistical,
or other method).
Description of how the
geological interpretation
was used to control the
resource estimates.
Discussion of basis for
using or not using grade
cutting or capping.

2. Numerical Model Generally not If a computer method See Mineral Resource.


(Continued) determined. was chosen, description
of programs and
parameters used.
Geostatistical methods
are extremely varied and
should be described in
detail. The method
chosen should be
justified. The
geostatistical
parameters, including
the variogram, and their
compatibility with the
geological interpretation
should be discussed.
Experience gained in
applying geostatistics to
similar deposits should
be taken into account.

D. Extraction
1. Mining
a. Method Description of any Description of any Description and
obvious mining factors mining factors that justification of mining
that could have a could have a significant method(s) to be used.
significant impact on the impact on the project Discussion of mining
project feasibility. feasibility. Discussion of rate, equipment selected,
possible mining ore control methods,
methods. geotechnical and
hydrological
considerations,
personnel requirements,
dilution, and mine
recovery.

Appendix 2.doc: 1999 SME Guide Page 21 of 25


Evaluation Criteria Exploration Mineral Resource Mineral Reserve
Information
a. Method For open pit mines,
(Continued) discussion of pit slopes,
slope stability, and strip
ratio. For underground
mines, discussion of
mining method, rock
mechanics
considerations, mine
design characteristics,
and ventilation.

b. Costs Generally not Stated reasonable Description and


determined. assumptions. justification of capital
and operating costs.

2. Processing

a. Method Description of any Description of any Description and


obvious processing processing factors that justification of
factors that could have a could have a significant processing method(s) to
significant impact on the impact on the project be used, equipment,
project feasibility. feasibility. Discussion of plant capacity and
possible processing personnel requirements.
methods. Justification of
estimated recovery
(proportion of material
sent to the processing
plant that will be
recovered) whether
based on historical
information, laboratory
test, or pilot plant
results.

b. Costs Generally not Stated reasonable Description and


determined. assumptions. justification of capital
and operating costs.

3. Recovery

a. Mining Generally not Stated reasonable Reported tonnages,


determined. assumptions. grades and mineral
contents must take into
account mining dilution
and losses. Description
and justification of
mining dilution and
losses is required.

Appendix 2.doc: 1999 SME Guide Page 22 of 25


Evaluation Criteria Exploration Mineral Resource Mineral Reserve
Information
b. Processing Generally not Stated reasonable Discussion of whether
determined. assumptions. the reported tonnages
and grades consist of
material in place or
whether processing
recoveries are included.
If in-place values are
reported, information
must be supplied
concerning expected
processing losses or
recoveries. Justification
of processing recoveries
is required.

4. Environmental Description of obvious Description of any The necessary permits


Compliance and environmental factors environmental factors have been obtained, or
Reclamation likely to stop the project. that could have a there is reasonable basis
significant impact on the to believe that all
project feasibility. permits required for the
Discussion of possible project can be obtained
means of mitigation. in a timely manner.
Description of
environmental
compliance methods and
costs.

5. Cutoff Grade Generally not Justification of the Description of methods


determined. cutoff grade used to used to calculate cutoff
report resources. grades.

E. Feasibility
1. Other Economic Description of valuable See Exploration Description of product
Considerations and potentially valuable Information. A resource to be sold. Discussion of
product(s) including represents material from whether there exists a
suitability of products to which economic ready market for the
market. extraction of a product product, whether
is currently or contracts for the sale of
potentially feasible. the product are in place
Before reporting or expected to be readily
resources, consideration obtained. Justification of
should be given to this assumptions made
definition. concerning production
cost and value of
product. Transportation,
marketing, and other
costs should be
considered.

Appendix 2.doc: 1999 SME Guide Page 23 of 25


Evaluation Criteria Exploration Mineral Resource Mineral Reserve
Information
2. Valuation Methods Generally not applied. Stated reasonable Detailed description of
assumptions. the method used to
determine the economic
feasibility of the project.

F. Assurance Data to support Description and Description and


Classification estimates with a justification of criteria justification of criteria
sufficient degree of used to classify the used to classify the
assurance is lacking. resource. When reserves. Reserves are
Specific quantities and reported, a resource classified as proven or
grades cannot be should be classified as probable to reflect
reported. measured, indicated, or relative degrees of
inferred. Depending on geological assurance.
materiality measured Depending on
and indicated resources materiality, proven and
may be combined and probable reserves may
need not be reported be combined. There
separately. To classify a should not be significant
resource as measured or uncertainty concerning
indicated, there must be the economic viability
a reasonably high level of the project. Only
of confidence with measured and indicated
respect to the quality of resources can be
the information used to considered for inclusion
calculate this resource, in the reserve.
as well as the Resources classified as
interpretation of this inferred lack the
information. requisite degree of
assurance to be included
in the reserve.

Appendix 2.doc: 1999 SME Guide Page 24 of 25


Evaluation Criteria Exploration Mineral Resource Mineral Reserve
Information
G. Other Description of any other Description of any other While any other material
Considerations significant information material information information affecting
that is likely to prevent that could prevent or the project should be
or facilitate the facilitate the economic discussed, no material
economic viability of viability of the resource. impediments to the
the project. Identification of work or profitable exploitation
Identification of work or conditions required to of the property should
conditions required to convert the resource to a remain. Material
demonstrate the reserve. A resource uncertainties about the
presence of a resource represents material that geology, extraction,
or to evaluate this has the potential of processing, marketing,
resource. being of economic and legal requirements
value. No specific have been eliminated. It
economic criteria need is not required that all
be assumed when permits be issued or that
evaluating a resource. mining and processing
However, known facilities have been
information that constructed. However,
significantly reduces or there should be a
increases the probability reasonable basis to
of economic feasibility believe that permitting
should be reported. and construction of the
necessary facilities can
be accomplished in a
timely manner.

H. Qualification of Name and qualification See Exploration See Exploration


Estimator(s) of the Competent Information Information
Person(s) preparing and
reviewing the foregoing.

Appendix 2.doc: 1999 SME Guide Page 25 of 25


APPENDIX 3

THE 2005 SME GUIDE

FOR REPORTING EXPLORATION RESULTS,

MINERAL RESOURCES, AND MINERAL RESERVES


THE SME GUIDE FOR REPORTING
EXPLORATION RESULTS, MINERAL RESOURCES,
AND MINERAL RESERVES

(The 2005 SME Guide)

SUBMITTED BY:

THE SEC RESERVES WORKING GROUP


THE RESOURCES AND RESERVES COMMITTEE

TO:

THE BOARD OF DIRECTORS


OF
THE SOCIETY FOR MINING, METALLURGY AND EXPLORATION, INC.

8307 SHAFFER PARKWAY


LITTLETON, COLORADO 80127
PHONE: (303) 973-9550
FAX: (303) 973-3845
E-MAIL: sme@smenet.org

April 2005
Foreword

i. The April 2005 SME Guide for Reporting Exploration Results, Mineral Resources,
and Mineral Reserves (the 2005 SME Guide) has been adopted by the Society for
Mining, Metallurgy, and Exploration, Inc. (SME) and is therefore strongly
recommended to be used by members of this organization.

ii. The Guide is recommended as a minimum standard for reporting Exploration Results,
Mineral Resources and Mineral Reserves for public and private purposes. In terms of
the Guide, a Public Report is a report on Exploration Results, Mineral Resources or
Mineral Reserves prepared for the purpose of informing the general public.

iii. In this Guide, important terms and their definitions are highlighted in bold text. The
guidelines are written using regular font. Paragraphs with border on the left side and
written in italics give directions on how to interpret definitions and guidelines.

iv. THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (U.S.


SEC) REGULATES THE REPORTING OF EXPLORATION RESULTS,
RESOURCES AND RESERVES BY ORGANIZATIONS, INDIVIDUALS OR
COMPANIES (ENTITIES) SUBJECT TO THE FILING AND REPORTING
REQUIREMENTS OF THE U.S. SEC. DECISIONS AS TO WHEN AND WHAT
INFORMATION SHOULD BE PUBLICLY REPORTED ARE THE SOLE
RESPONSIBILITY OF THE ENTITY OWNING THE INFORMATION, AND ARE
SUBJECT TO U.S. SEC RULES AND REGULATIONS. THESE RULES AND
REGULATIONS VARY FROM TIME TO TIME, AND AT ANY GIVEN TIME
MAY NOT BE CONSISTENT WITH THE CONTENT OF THIS GUIDE. THE
ADVICE OF SECURITIES COUNSEL SHOULD BE SOUGHT IN PREPARING
FILINGS FOR THE U.S. SEC OR OTHER SECURITIES REGULATORY
AUTHORITIES, AND IN PREPARING OTHER PUBLIC DISCLOSURES.

v. It is recognized that further review of the Guide will be required from time to time.
Constructive suggestions are solicited from all users of this Guide. Comments should
be sent directly to:

Chairman, Resources and Reserves Committee


Society for Mining, Metallurgy and Exploration, Inc.
8307 Shaffer Parkway
P.O. Box 277002
Littleton, CO 80127-7002
U.S.A.

Appendix 3.doc: 2005 SME Guide Page 2 of 44


Table of Contents
Clause Number
from to
Foreword i v

Table of Contents - -

History 1 2

Governing Principles 3 3

Scope 4 5

Competence and Responsibility 6 11

Reporting Terminology 12 12

Public Reporting General 13 17

Reporting of Exploration Results 18 20

Reporting of Mineral Resources 21 30

Reporting of Mineral Reserves 31 39

Mineral Reserves Declaration Report 40 46

Mineral Reserves and Commodity Pricing 47 52

Reserves Sensitivity Test 53 53

Permitting and Legal Requirements 54 55

Reporting of Mineralized Fill, Pillars, Low-Grade Mineralization,


Stockpiles, Dumps and Tailings 56 56

Reporting of Exploration Results for Coal, Coal Resources and


Coal Reserves 57 62

Reporting of Exploration Results, Mineral Resources and Mineral


Reserves for Industrial Minerals 63 66

Reporting of Exploration Results, Mineral Resources and Mineral


Reserves for Diamonds and Other Gemstones 67 70

TABLE 1. Checklist of Assessment Criteria

Appendix 3.doc: 2005 SME Guide Page 3 of 44


History

1. In 1988, at the request of members of the Society for Mining, Metallurgy, and
Exploration (SME), Inc., the President of SME formed Working Party #79, Ore
Reserve Definition, with the mission to develop guidelines for the public reporting of
exploration results, resources, and reserves. A Subcommittee was appointed by the
Working Party to draft these guidelines and submit recommendations to SME. The
Subcommittees recommendations were published by SME in the April 1991 issue of
Mining Engineering, and as a document entitled A Guide for Reporting
Exploration Information, Resources, and Reserves (the SME Guide) in January 1992.
Work continued on an ad-hoc basis until 1996, when Working Party #79 was
renamed the SME Resources and Reserves Committee and became a standing
committee.

In 1994, the Council of Mining and Metallurgical Institutions (CMMI) started a


concerted international effort to create a set of international definitions for reporting
mineral resources and mineral reserves. An ad-hoc International Definitions Group
was formed, with representatives from mining and metallurgical institutions from the
United States (SME), Australia (AusIMM), Canada (CIM), the United Kingdom
(IMM) and South Africa (SAIMM). A major breakthrough came on October 18, 1997
when the CMMI International Definitions Group met in Denver, Colorado and
reached a provisional agreement (the Denver Accord) on definitions of mineral
resources and mineral reserves. Concurrently, and since 1992, the United Nations
Economic Commission for Europe (UN-ECE) was developing an international
framework classification for mineral resources and mineral reserves. Starting in
October 1998, joint meetings were held in Geneva between the CMMI International
Definitions Group and the UN-ECE Task Force, resulting in agreement to incorporate
the CMMI definitions into the UN framework classification.

In 2002, the Combined Reserves International Reporting Standards Committee


(CRIRSCO) was formed, replacing the CMMI International Definitions Group with
the mission to continue coordination between member countries, of the development
of international standards for the definition and reporting of exploration results,
mineral resources and mineral reserves. Chile joined CRIRSCO and developed the
first non-English reporting code which follows the international definitions.

The international resources and reserves definitions have been accepted as part of
national reporting codes and guidelines by the regulating agencies of Australia (1989),
South Africa (2000), Canada (2001), and Chile (2004).

2. The SME Guide, first published in 1992, was updated in 1999 when the requirement
was introduced that the reporting of mineral resources and reserves be made by a
Competent Person. The SME Guide was recommended to be used by members of
SME. However, some key aspects of the SME Guide were not consistent with
requirements of the U.S. Securities and Exchange Commissions (U.S. SEC) which
are based on the SEC Industry Guide 7. While the SME Guide was accepted by a

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number of U.S. and international mining and consulting companies, its usefulness
remained limited.

To resolve the differences between the SME Guide and the U.S. SEC rules and
regulations, SME opened a dialogue with the U.S. SEC and started a renewed effort
to better define the industry position with respect to a number of critical issues. In
February 2004, SME formed a consortium of mining, consulting and financial
auditing organizations known as the SEC Reserves Working Group (the Working
Group), whose members formed the SME Resources and Reserves Committee. The
Working Group recommendations were included in this Guide and submitted to the
SEC for their consideration in April 2005. The most significant changes include
improved definition of the terms Mineral Resources and its subdivisions (Measured,
Indicated and Inferred Mineral Resources), and clarification of the technical,
economic, legal and permitting requirements which must be satisfied before a reserve
can be declared. A section has been added defining the commodity prices which can
be used for reserve estimation and reporting, and how price sensitivity should be
measured during periods of low prices. Documentation requirements are clarified,
including the requirement for a Mineral Reserves Declaration Report. The role of the
Competent Person is reemphasized.

Governing Principles

3. This Guide was written taking into account industry good practices and the mission of
the U.S. Securities and Exchange Commission (SEC) which is to protect investors
and maintain the integrity of the securities markets. All investors, whether large
institutions or private individuals, should have access to certain basic facts about an
investment prior to buying it. The SEC requires public companies to disclose
meaningful financial and other information to the public, which provides a common
pool of knowledge for all investors to use to judge for themselves if a company's
securities are a good investment. Only through the steady flow of timely,
comprehensive and accurate information can people make sound investment
decisions. To meet the SEC's requirements for disclosure, a company must make
available all information, whether it is positive or negative, that might be relevant to
an investor's decision to buy, sell, or hold the security.

The main principles governing the development and application of this Guide are
transparency, materiality and competence.

Transparency requires that the reader of a public report is provided with


sufficient information, the presentation of which is clear and unambiguous, so
as to understand the report and not to be misled.
Materiality requires that a public report contains all the relevant information
which investors and their professional advisers would reasonably require, and
reasonably expect to find in a public report, for the purpose of making a
reasoned and balanced judgment regarding the exploration results, mineral
resources or mineral reserves being reported.

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Competence requires that the public report be based on work that is the
responsibility of suitably qualified and experienced persons who are subject to
an enforceable professional code of ethics and rules of conduct.

The following additional principles were also taken into account:

Consistency between Financial and Technical Reports: Financial reports take


into account mineral resources and mineral reserves and are based on
assumptions concerning commodity prices, exchange rates, and other
parameters of significance. To be clear and unambiguous technical and
financial information should be published on a comparable basis.
Consistency between Financial Markets: For global companies, transparency
can only be achieved if information is reported on a consistent basis in all
financial markets. Only then can the information supplied to all investors be
identical, clear and unambiguous.

Scope

4. Public reporting: The Guide is recommended as a minimum standard for reporting


Exploration Results, Mineral Resources and Mineral Reserves for public and private
purposes. In terms of the Guide, a Public Report is a report on Exploration Results,
Mineral Resources or Mineral Reserves, prepared for the purpose of informing the
general public.

Public reports include, but are not limited to: company Annual Reports, quarterly reports, press releases,
reports which the U.S. SEC requests companies to publish on a yearly, quarterly or other basis, and
other reports. It is recommended that the Guide apply to the following reports if they have been
prepared or are likely to be used for informing the general public: information memoranda, expert
reports and technical papers reporting on Exploration Results, Mineral Resources or Mineral Reserves.

5. Use of the Guide: Public companies should provide all relevant and material
information, necessary for an intelligent layman to make a reasonable and balanced
assessment of the Exploration Results, Mineral Resource or Mineral Reserve being
reported.

While every effort has been made within the Guide to cover most situations likely to be encountered in
the reporting of Exploration Results, Mineral Resources and Mineral Reserves, there will inevitably be
occasions when doubt exists as to the appropriate procedure to follow. In such cases, users of the
Guide and those compiling reports under the Guide should be guided by its intent, which is to provide a
minimum standard for reporting and to ensure that such reporting contains all information which
investors and their professional advisers would reasonably require, and reasonably expect to find in the
report, for the purpose of making a reasoned and balanced judgment regarding the Exploration Results,
Mineral Resource or Mineral Reserve reported.

Table 1, included at the end of the Guide, supplies an outline of items that should be considered when
evaluating a project. The importance of each item will vary with the project and it is recognized that, for
some projects, other items may be relevant which are not on the list. The Table should be considered a
guide to facilitate a rational and orderly approach to evaluation. However, the need remains for

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exploration and mining professionals to make difficult decisions, such as the classification of material as
a Mineral Resource or a Mineral Reserve. Decisions remain a matter of professional judgment based
on knowledge, experience, and industry practices.

The relative importance of the items in Table 1 will vary with each project depending on the geological
environment and technical constraints, as well as economic and legal conditions pertaining at the time
of evaluation. When evaluating a project, the relative importance of each item should be weighed. All
relevant information must be given careful consideration before deciding which information should be
reported to the public.

Where a particular report addresses only some of the items in Table 1, the report should disclose its
limited scope and should refer to other information required for a complete evaluation of the Exploration
Results, Mineral Resource or Mineral Reserve being reported. While such limited scope reports are
commonly prepared as part of the overall preparation of an evaluation, such reports may contain
information warranting public disclosure independent of the results of other studies and the authors of
such reports should be aware of their responsibilities with respect to public disclosure.

Public disclosure may be required of factors most likely to affect the accuracy of estimates made in the
report. The authors of reports should both identify and evaluate these important factors within their
reports.

For a variety of reasons, including the need for confidentiality, some data used to evaluate a project
need not be made public. However, the public can reasonably assume that all necessary information is
available to support public statements at the time they are made. Regulators including the SEC may
require copies of all supporting documents on a confidential basis even if such documents are not
made public.

Demonstrating feasibility of economic extraction is not required before reporting Exploration Results or
Mineral Resources. However, particular attention should be given to all relevant information that
increases or decreases the chances that the project will result in economic extraction. Demonstrating
feasibility of economic extraction is required before reporting Mineral Reserves.

It is recognized that estimates of Exploration Results, Mineral Resources, and Mineral Reserves, being
predictions of what will occur in the future based on imperfect knowledge of the present, are inherently
forward-looking statements, and will be imprecise to some degree. It is also recognized that different
individuals analyzing the same data may arrive at somewhat differing interpretations and conclusions.
The fact that a Mineral Reserve estimate is misclassified or proven inaccurate at a later date, when
additional information becomes available or economic conditions have changed, does not necessarily
mean that the estimate was not made in good faith by a competent person taking into account the
information available at the time. Statements concerning Exploration Results, Mineral Resources and
Mineral Reserves must have a reasonable basis and be made in good faith.

Competence and Responsibility

6. Any Public Report concerning an entitys Exploration Results, Mineral Resources


and Mineral Reserves is the responsibility of the entitys management. Any such
report must be based on, and fairly reflect the information and supporting
documentation prepared by a Competent Person or Persons, as defined below.

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An entity issuing a Public Report shall make publicly available on request the
name(s) of the Competent Person or Persons, state whether the Competent Person is a
full time employee of the entity, and, if not, name the Competent Persons employer
and its relationship with the entity.

Issuance of the Public Report requires the written consent of the Competent Person or
Persons as to the form and context in which it appears. The Competent Person must
read and approve the entitys public disclosure of information prepared by the
Competent Person, and the use of his/her name in connection with that disclosure.

The requirement for, and the naming of, a Competent Person is aimed at increasing the quality of the
information being released and add to investors confidence. These guidelines only require that the
name of the Competent Person be made available on request. However, whenever Exploration
Results, Mineral Resources or Mineral Reserves are publicly reported, it is recommended that the
name of the Competent Person be disclosed.

7. Documentation detailing Exploration Results, Mineral Resources and Mineral


Reserves estimates, on which a Public Report on Exploration Results, Mineral
Resources, and Mineral Reserves is based, must be prepared by, or under the
direction of, and signed by, a Competent Person or Persons. If the Competent Person
is an employee, officer, director or associate of a company whose principal business
is the provision of engineering or geoscientific services, the documentation must also
be signed by that company.

8. A Competent Person is a Member or Fellow of an approved institution in the


U.S. with an enforceable code of ethics 1 , or of a Recognized Overseas
Professional Organization (ROPO) included in a list promulgated by the SME
from time to time.

A Competent Person is an engineer, geoscientist or other mining professional


who must have a minimum of five years experience which is relevant to the style
of mineralization and type of deposit under consideration and to the activity
which that person is undertaking.

If the Competent Person is preparing a report on Exploration Results, the


relevant experience must be in exploration. If the Competent Person is
estimating, or supervising the estimation of Mineral Resources, the relevant
experience must be in the estimation, assessment and evaluation of Mineral
Resources. If the Competent Person is estimating, or supervising the estimation
of Mineral Reserves, the relevant experience must be in the estimation,
assessment, and economic evaluation of Mineral Reserves.

1
On February 27, 2005, SME approved the formation of a new class of Registered Members who
will be subject to an enforceable code of ethics. SME will start accepting Registered Members
not later than January 1, 2006. The Competent Person requirements will become fully effective
for public reports submitted as of December 31, 2006.

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The key qualifier in the definition of a Competent Person is the word relevant. Determination of what
constitutes relevant experience can be a difficult area and common sense has to be exercised. Different
experience is required to evaluate coal, base metal, industrial mineral, iron ore, sand and gravel, or
gold deposits. Other differences are less obvious. In estimating Mineral Resources for vein gold
mineralization, experience in a high-nugget, vein-type mineralization such as tin, uranium etc. will
probably be relevant whereas experience in (say) a low grade disseminated gold deposit may not be.
To qualify as a Competent Person in the estimation of Mineral Reserves for alluvial gold deposits,
considerable (probably at least five years) experience in the evaluation and economic extraction of this
type of mineralization would be needed. This is due to the characteristics of gold in alluvial systems, the
particle sizing of the host sediment, and the low grades involved. Experience with placer deposits
containing minerals other than gold may not necessarily provide appropriate relevant experience.

The key word relevant also means that it is not always necessary for a person to have five years
experience in each and every type of deposit in order to act as a Competent Person if that person has
relevant experience in other deposit types. For example, a person with (say) 20 years experience in
estimating Mineral Resources for a variety of metalliferous hard-rock deposit types may not require as
much as five years specific experience in (say) porphyry copper deposits in order to act as a
Competent Person. Relevant experience in the other deposit types could count towards the experience
in relation to porphyry copper deposits.

In addition to experience in the style of mineralization, a Competent Person taking responsibility for the
compilation of Exploration Results or Mineral Resource estimates should have sufficient experience in
the sampling and analytical techniques relevant to the deposit under consideration to be aware of
problems which could affect the reliability of data. Some appreciation of extraction and processing
techniques applicable to that deposit type may also be important.

9. Persons being called upon to act as Competent Persons should be clearly satisfied in
their own minds that they could face their peers and demonstrate competence in the
commodity, type of deposit and situation under consideration. If doubt exists, the
person should either seek opinions from appropriately experienced colleagues or
should decline to act as a Competent Person.

Estimation of Mineral Resources may be a team effort (for example, involving one person or team
collecting the data and another person or team preparing the estimate). Estimation of Mineral Reserves
is very commonly a team effort involving several disciplines. It is recommended that where there is a
clear division of responsibility within a team, each Competent Person and his or her contribution should
be identified, and responsibility accepted for that particular contribution. However, the definitions have
been specifically written to allow an appropriate degree of latitude for companies to define the
organizational structure in which they apply the role of the Competent Person. If only one Competent
Person signs the Mineral Resource or Mineral Reserve documentation, that person is responsible and
accountable for the whole of the documentation under the Code. It is important in this situation that the
Competent Person accepting overall responsibility for a Mineral Resource or Mineral Reserve estimate
and supporting documentation prepared in whole or in part by others, is satisfied, in its professional
opinion, that the work of the other contributors is reliable.

A Competent Person may be an employee of the entity reporting Exploration Results, Mineral
Resources or Mineral Reserves, or an independent consultant. When the Competent Persons
recommendations are likely to have material consequences (such as development of a new mining or
processing facility, or significant decreases or increases in reserves), it is recommended that these

Appendix 3.doc: 2005 SME Guide Page 9 of 44


recommendations be independently reviewed before the recommendations are finalized. The
independent reviewer should qualify as a Competent Person in the context of the project being
reviewed.

10. Complaints made in respect of the professional work of a Competent Person will be
dealt with under the disciplinary procedures of the professional organization to which
the Competent Person belongs.

11. When a U.S.-listed company with overseas interests wishes to report overseas
Exploration Results, Mineral Resource or Mineral Reserves, estimates prepared by a
person who is not a member of an appropriate U.S. institution or a Recognized
Overseas Professional Organization (ROPO), it is necessary for the company to
nominate a Competent Person or Persons to take responsibility for the Exploration
Results, Mineral Resources or Mineral Reserves estimate. The Competent Person or
Persons undertaking this activity should appreciate that they are accepting full
responsibility for the estimate and supporting documentation and should not treat the
procedure merely as a rubber-stamping exercise.

Rules, regulations or guidelines concerning the Competent Person differ from country to country. When
Exploration Results, Mineral Resources or Mineral Reserves are reported in the United States or in
countries other than the United States, it is the responsibility of the Competent Person and the entity
making a public report to ensure that the applicable rules, regulations and guidelines are followed.

Reporting Terminology

12. Public reports dealing with Exploration Results, Mineral Resources and/or Mineral
Reserves must only use the terms set out in Figure 1.

The term Modifying Factors is defined to include mining, metallurgical,


economic, marketing, legal, environmental, social and governmental factors

Figure 1 sets out the framework for classifying exploration results, tonnage and grade estimates and
contained or recoverable minerals as applicable. This classification reflects different levels of
geoscientific knowledge and different degrees of technical and economic evaluation. Mineral Resources
can be estimated mainly on the basis of geoscientific information with some input from other disciplines.
Mineral Reserves, which are a modified sub-set of the Indicated and Measured Mineral Resources,
require consideration of those factors affecting extraction, including mining, metallurgical, economic,
marketing, legal, environmental, social and governmental factors, and should in most instances be
estimated with input from a range of disciplines.

In certain situations, Measured Mineral Resources could convert to Probable Mineral Reserves rather
than to Proven Mineral Reserves because of uncertainties associated with modifying factors which are
taken into account in the conversion from Mineral Resources to Mineral Reserves. This relationship is
shown by the broken arrow in Figure 1. In such situations, these modifying factors should be fully
explained.

In certain situations, previously reported Mineral Reserves could convert back to Mineral Resources
because of new information according to which a Mineral Reserve can no longer be reported. The

Appendix 3.doc: 2005 SME Guide Page 10 of 44


resulting two-way relationship is shown by the two-headed arrows in Figure 1. The modifying factors
which resulted in reclassification of a Mineral Reserve should be fully explained.

Figure 1 General Relationship between Exploration Results, Mineral


Resources and Mineral Reserves

EXPLORATION
RESULTS

MINERAL MINERAL
RESOURCES RESERVES

INFERRED

Increasing
level of INDICATED
PROBABLE
geoscientific
knowledge
and
confidence
MEASURED PROVEN

Consideration of mining, metallurgical, economic, marketing,


legal, environmental, social and governmental factors
(the "Modifying Factors")

Public Reporting General

13. Public Reports concerning an entitys Exploration Results, Mineral Resources or


Mineral Reserves should include a description of the style and nature of
mineralization.

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14. An entity must disclose relevant information concerning the status and characteristics
of a mineral deposit which could materially influence the economic value of that
deposit. To meet disclosure obligations, an entity may be required to promptly report
any material changes in its Mineral Resources or Mineral Reserves.

15. An entity must review and publicly report on its Mineral Resources and Mineral
Reserves at least annually.

16. Throughout the Guide, where appropriate, quality may be substituted for grade
and volume may be substituted for tonnage.

17. Units used for reporting Mineral Resources or Mineral Reserves should be those
generally applicable within the industry and within the jurisdiction where reporting
takes place, for the mineral being reported.

Reporting of Exploration Results


18. Exploration Results include data and information generated by exploration
programs that may be of use to investors. The Exploration Results may or may
not be part of a formal declaration of Mineral Resources or Mineral Reserves.

The reporting of such information is common in the early stages of exploration when
the quantity of data available is generally not sufficient to allow any reasonable
estimates of Mineral Resources.

If an entity reports Exploration Results in relation to mineralization not classified as a


Mineral Resource or a Mineral Reserve, then estimates of tonnages and average grade
must not be assigned to the mineralization unless the situation is covered in Clause 20
below, and then only in strict accordance with the requirements of that clause.

Examples of Exploration Results include results of outcrop sampling, assays of drill hole intercepts,
geochemical results and geophysical survey results.

19. Public reports of Exploration Results must contain sufficient information to allow a
considered and balanced judgment of their significance. Reports must include
relevant information such as exploration context, type and method of sampling,
sampling intervals and methods, relevant sample locations, distribution, dimensions
and relative location of all relevant assay data, data aggregation methods, land tenure
status plus information on any of the other criteria listed in Table 1 that are material
to an assessment.

Public reports of Exploration Results must not be presented so as to unreasonably


imply that potentially economic mineralization has been discovered. If true widths of
mineralization are not reported, an appropriate qualification must be included in the
public report.

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Where assay and analytical results are reported, they must be reported using one of
the following methods, selected as the most appropriate by the Competent Person:

- Either by listing all results, along with sample intervals (or size, in the case of
bulk samples), or
- By reporting weighted average grades of mineralized zones, indicating clearly
how the grades were calculated.

Reporting of selected information such as isolated assays, isolated drill holes, assays
of panned concentrated or supergene enriched soils or surface samples, without
placing them in perspective is unacceptable.

Table 1 is a check list and guideline to which those preparing reports on Exploration Results, Mineral
Resources and Mineral Reserves should refer. The check list is not prescriptive and, as always,
relevance and materiality are overriding principles which determine what information should be publicly
reported.

20. It is recognized that it is common practice for a company to comment on and discuss
its exploration in terms of target size and type. Any such information relating to
exploration targets must be expressed so that it cannot be misrepresented or
misconstrued as an estimate of Mineral Resources or Mineral Reserves. The terms
Resource or Reserve must not be used in this context. Any statement referring to
potential quantity and grade of the target must be expressed as ranges and must
include (1) a detailed explanation of the basis of the statement, and (2) a proximate
statement that the potential quantity and grade is conceptual in nature, that there has
been insufficient information to define a Mineral Resource and that it is uncertain if
further exploration will result in the determination of a Mineral Resource.

Reporting of Mineral Resources

21. A Mineral Resource is a concentration or occurrence of material of economic


interest in or on the Earths crust in such form, quantity, and quality that there
are reasonable prospects for eventual economic extraction. The location,
quantity, grade, geological characteristics and continuity of a Mineral Resource
are known, estimated or interpreted from specific geological evidence and
knowledge. Mineral Resources are sub-divided, in order of increasing geological
confidence, into Inferred, Indicated and Measured categories.

Portions of a deposit that do not have reasonable prospects for eventual


economic extraction must not be included in a Mineral Resource.

The term Mineral Resource covers mineralization (including, in certain instances, dumps and tailings)
which has been identified within reasonable limits and estimated through exploration and sampling and
within which Mineral Reserves may be defined by the consideration and application of Modifying
Factors.

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The term reasonable prospects for eventual economic extraction implies a judgment (albeit
preliminary) by the Competent Person with respect to the technical and economic factors likely to
influence the prospect of economic extraction, including the approximate mining parameters. In other
words, a Mineral Resource is not an inventory of all mineralization drilled or sampled, regardless of
cutoff grade, likely mining dimensions, location, or continuity. It is a realistic inventory of mineralization
which, under assumed and justifiable technical and economic conditions, might become economically
extractable.

The term reasonable prospect implies that Measured, Indicated, and Inferred Mineral Resources are
constrained within pit shells or cones for open pit mines, or constrained to coherent zones which
support mining, processing and development cost estimates for underground extraction. A deposit
model is required, which may be a computer-generated block model or a model based on cross- or
long-sections. Economic tests should be documented in technical studies, but the disclosure of
resources should not require formal detailed technical and economic studies such as those required for
reserve disclosure. Economic criteria should be applied equally to all categories of resources
(Measured, Indicated and Inferred).

When publishing Mineral Resources, a statement should be made that, while the estimate of Mineral
Resources is based on the Competent Persons judgment that there are reasonable prospects for
eventual economic extraction, no assurance can be given that Mineral Resources will eventually
convert to Mineral Reserves. Consideration should also be given to publication of the reasons why a
reported Mineral Resource was not reported as a Mineral Reserve.

Commodity prices used in resource reporting should be based on the companys long-term view of the
likely range of commodity prices. If prices used for resource estimation differ from the companys long
term view as used for reserve reporting, these differences should be documented and justified.

Publication of Mineral Resources is recommended but not required. It is also recommended that, when
publicly disclosing mineral resources, material assumptions made to estimate these resources are also
disclosed. This may include disclosure of commodity price assumptions to the extent that this is
customary and does not place the company at a competitive disadvantage. It is recognized that in
some cases, such as when a product is sold under long term contract whose terms must be kept
confidential, there might be valid commercial reasons for non-disclosure. There are also circumstances
where disclosure of long term price assumptions used for business planning and reserve reporting can
be detrimental to the company, such as when bidding for sales contracts or property acquisition. If
prices are not published, the reasons for doing so must be documented. This documentation may be
treated as confidential but should be available for review by auditors or regulators when required.

Cutoff grades or other quality parameters determined by the Competent Person should be used to
exclude material for which there is no reasonable prospect for eventual economic extraction. Mineral
Resource estimates may include material below the selected cutoff grade to ensure that the Mineral
Resources comprise bodies of mineralization of adequate size and continuity to show reasonable
prospects for eventual application of a feasible mining method.

Where considered appropriate by the Competent Person, the confidence in estimates of tonnage, grade,
quality, physical characteristics and deleterious elements that may affect the ability to recover,
beneficiate or produce a saleable product must be considered in determining whether a resource can
be reported and in classifying the resource as Inferred, Indicated or Measured

All material assumptions made in determining the reasonable prospects for eventual economic
extraction must be documented and justified.

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.
Interpretation of the word eventual in this context may vary depending on the commodity or mineral
involved. For example, for some coal, iron ore, bauxite and other bulk minerals or commodities, it may
be reasonable to envisage eventual economic extraction as covering time periods in excess of 50 years.
For many gold deposits, application of the concept would normally be restricted to much shorter periods
of time, but for Witwatersrand gold deposits long periods do apply. Interpretation is the responsibility of
the Competent Person.

Any adjustment made to the data for the purpose of making the Mineral Resource estimate, for
example by cutting or factoring grades, should be clearly documented and justified.

Certain reports (e.g., inventory reports, exploration reports to a government and other similar reports
not intended primarily for providing information for investment purposes) may require full disclosure of
all mineralization, including some material that does not have reasonable prospects for eventual
economic extraction. Such estimates of mineralization would not qualify as Mineral Resources by this
definition.

Mineralized stope fill, mineralized in situ remnants, shaft and stope pillars left for ground support
purposes, and stockpiles of mineralized material, old dumps and tailings can be considered when
reporting Mineral Resources if they present reasonable prospects for eventual economic extraction.

22. An Inferred Mineral Resource is that part of a Mineral Resource for which the
overall tonnages, grades and mineral contents can be estimated with a
reasonable level of confidence. It is based on geological evidence and apparent
geological and grade continuity after applying economic parameters. It is
derived from information gathered through appropriate techniques from
locations such as outcrops, trenches, pits, workings and drill holes, and which in
some way is limited or of uncertain quality and reliability. An Inferred Mineral
Resource has a lower level of confidence than that applying to an Indicated
Mineral Resource.

The term overall means within that part of the deposit for which Measured,
Indicated and Inferred Mineral Resources are reported.

The category is intended to cover situations where a mineral concentration or occurrence has been
identified and limited measurements and sampling completed, but the data are sufficient to allow the
inference of geological and grade continuity. Commonly, it would be reasonable to expect that the
majority of Inferred Mineral Resources would upgrade to Indicated or Measured Mineral Resource with
continued exploration/delineation drilling or other sampling. However, due to the uncertainty of Inferred
Mineral Resources it should not be assumed that such upgrading will always occur.

Confidence in the estimate is sufficient to allow the application of assumed but not verified technical
and economic parameters for conceptual planning. However, confidence is usually not sufficient to
allow the results of the application of these technical and economic parameters to be used for
incremental planning and production scheduling. For this reason, there is no direct link from an Inferred
Mineral Resource to any category of Mineral Reserves (see Figure 1). Caution should be exercised if
this category is considered in technical or economic studies.

Inferred Mineral Resources should exclude material for which there is insufficient data to allow the
inference of geological or grade continuity. Inferred Mineral Resources are intended to be sufficiently

Appendix 3.doc: 2005 SME Guide Page 15 of 44


defined that overall tonnages, grades and mineral contents can be estimated with a reasonable level of
confidence.

23. An Indicated Mineral Resource is that part of a Mineral Resource for which
overall tonnages, densities, shapes, physical characteristics, grades and mineral
contents can be estimated with high levels of confidence, and local tonnages,
densities, shapes, physical characteristics, grades and mineral contents can be
estimated with reasonable levels of confidence. An Indicated Mineral Resource
is based on exploration, sampling and testing information gathered through
appropriate techniques from locations such as outcrops, trenches, pits, workings,
and drill holes. The locations are too widely or inappropriately spaced to
confirm geological continuity and grade continuity but are spaced closely
enough for continuity to be assumed. An Indicated Mineral Resource has a
lower level of confidence than that applying to a Measured Mineral Resource,
but has a higher level of confidence than that applying to an Inferred Mineral
Resource.

The term overall means within that part of the deposit for which Measured,
Indicated and Inferred Mineral Resources are reported. The term local means
within selected parts of the deposit related to mining increments which are
suitable for development of mine plans and financial analyses.

A deposit or part of a deposit may be classified as an Indicated Mineral Resource when the nature,
quality, amount and distribution of data are such as to allow the Competent Person determining the
Mineral Resource to confidently interpret the geological framework and to assume continuity of
mineralization. Confidence in the estimate is sufficient to allow the appropriate application of technical
and economic parameters to prepare incremental plans and production schedules and to enable an
evaluation of economic viability. Overall confidence in the estimates is high while local confidence is
reasonable. The Competent Person must recognize the importance of the Indicated Mineral Resource
category to the advancement of the feasibility of the project. An Indicated Mineral Resource estimate is
of sufficient quality to support detailed technical and economic studies leading to a Mineral Reserves
Declaration Report which can serve as the basis for major development decisions.

24. A Measured Mineral Resource is that part of a Mineral Resource for which
both overall and local tonnages, densities, shapes, physical characteristics,
grades and mineral contents can be estimated with a high level of confidence. It
is based on detailed and reliable exploration, sampling and testing information
gathered through appropriate techniques from locations such as outcrops,
trenches, pits, workings, and drill holes. The locations are spaced closely enough
to confirm geological and grade continuity.

The term overall means within that part of the deposit for which Measured,
Indicated and Inferred Mineral Resources are reported. The term local means
within selected parts of the deposit related to mining increments which are
suitable for development of mine plans and financial analyses.

A deposit or part of a deposit may be classified as a Measured Mineral Resource when the nature,
quality, amount and distribution of data are such as to leave no reasonable doubt, in the opinion of the

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Competent Person determining the Mineral Resource, that the tonnage and grade of production
planning and scheduling increments can be estimated within close limits and that any variation from the
estimate would not significantly affect potential economic viability of individual increments. This
category requires a high level of confidence in, and understanding of, the geology and controls of the
mineral deposit. A Measured Mineral Resource estimate is of sufficient quality to support detailed
technical and economic studies leading to a Mineral Reserves Declaration Report which can serve as
the basis for major development decisions.

25. The choice of the appropriate category of Mineral Resource depends upon the
quantity, distribution and quality of data available, the level of confidence that
attaches to those data, and the appropriateness of the estimation methodology applied.
The appropriate Mineral Resource category must be determined by the Competent
Person.

Mineral Resource classification is a matter for skilled judgment and the Competent Person should take
into account those items in Table 1 which relate to confidence in Mineral Resource estimation.

In deciding between Measured Mineral Resource and Indicated Mineral Resource, the Competent
Person may find it useful to consider, in addition to the phrases relating to geological and grade
continuity in Clauses 25 and 26, the phrase in the guideline to the definition for Measured Mineral
Resource: .... any variation from the estimate would not significantly affect potential economic viability
of individual increments.

In deciding between Indicated Mineral Resource and Inferred Mineral Resource, the Competent Person
may wish to take into account, in addition to the phrases relating to geological and grade continuity in
Clauses 25 and 26, the guideline to the definition for Indicated Mineral Resource: Confidence in the
estimate is sufficient to allow the appropriate application of technical and economic parameters to
prepare incremental plans and production schedules and to enable an evaluation of economic viability,
which contrasts with the guideline to the definition for Inferred Mineral Resource: Confidence in the
estimate is sufficient to allow the application of assumed but not verified technical and economic
parameters for conceptual planning. However, confidence is usually not sufficient to allow the results of
the application of [these] parameters to be used for incremental planning and production scheduling
Caution should be exercised if this category is considered in technical or economic studies.

26. Mineral Resource estimates are not precise calculations, being dependent on the
interpretation of limited information on the location, shape and continuity of the
occurrence and on the available sampling results. Reporting of tonnage and grade
figures should reflect the order of accuracy of the estimate by rounding off to
appropriately significant figures and by qualification with terms such as
approximately.

Depending on the accuracy of the estimate, rounding to the second or third significant figure should be
sufficient. For example, 10,863,425 tons at 8.23 per cent could be stated as 11 million tons at 8.2
percent or 10.9 million tons at 8.23 percent. In order to emphasize the imprecise nature of a Mineral
Resource or Mineral Reserve estimate, it is recommended that the final result always be referred to as
an estimate not a calculation.

Competent Persons are encouraged, where appropriate, to discuss the relative accuracy and/or
confidence of the Mineral Resource estimates. The statement should specify whether it relates to over-
all or local estimates, and, if local, state the relevant tonnage or volume. Where a statement of the

Appendix 3.doc: 2005 SME Guide Page 17 of 44


relative accuracy and/or confidence is not possible, a qualitative discussion of the uncertainties should
be provided.

27. Mineral Resource reports must specify one or more of the categories of Inferred,
Indicated and Measured. Reports must not contain Inferred Mineral Resource
figures combined with either of the other two categories. The Measured and Indicated
categories can be combined only if also reported separately. A Mineral Resource
must not be reported in terms of contained metal unless corresponding tonnage and
grade figures are also presented. Mineral Resource figures must not be aggregated
with Mineral Reserve figures.

In situations where both Mineral Resource and Mineral Reserve figures are reported
(such as tonnage, grade, mineral content), the Mineral Resource figures must not
include any material reported as a Mineral Reserve.

28. Table 1 provides, in a summary form, a list of the main criteria which should be
considered when preparing reports on Exploration Results, Mineral Resources and
Mineral Reserves. These criteria need not be discussed in a public report unless they
materially affect estimation or classification of the Mineral Resources.

It is not necessary, when publicly reporting, to comment on each item in Table 1, but it is essential to
discuss any matters which might materially affect the readers understanding or interpretation of the
results or estimates being reported. This is particularly important where inadequate or uncertain data
affect the reliability of, or confidence in, a statement of Exploration Results or an estimate of Mineral
Resources and/or Mineral Reserves; for example, poor sample recovery, poor repeatability of assay or
laboratory results, limited information on tonnage factors etc.

Mineral Resource estimates are sometimes reported after adjustment by cutting of high grades, the
application of factors such as dilution, mine or mill call factors, and similar modifying factors. If any of
the data are materially adjusted or modified for the purpose of making the estimate, this should be
clearly stated in a public Mineral Resource report and the nature of the adjustment or modification
described.

If there is doubt about what should be reported in order to ensure full disclosure, it is better to err on the
side of providing too much information rather than too little.

29. The words ore and reserves must not be used in stating Mineral Resource
estimates as the terms imply technical feasibility and economic viability and are only
appropriate when all relevant mining, metallurgical, economic, marketing, legal,
environmental, social and governmental factors have been considered. Reports and
statements should continue to refer to the appropriate category or categories of
Mineral Resources until technical feasibility and economic viability have been
established. If re-evaluation indicates that the Mineral Reserves are no longer viable,
the Mineral Reserves must be reclassified as Mineral Resources or removed from
Mineral Resource/Mineral Reserve statements altogether.

It is not intended that reclassification from Mineral Reserves to Mineral Resources should be applied as
a result of changes expected to be of a short term or temporary nature, or where management has
made a deliberate decision to operate on a non-economic basis. Examples of such situations might be

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a commodity price drop expected to be of short duration, mine emergency of a non-permanent nature,
transport strike etc.

30. As a minimum, the Competent Person should review Mineral Resource supporting
documents on an annual basis. Reports must be updated if there are significant
changes in technical and economic parameters.

If such review results in material changes in, or reclassification of Mineral Resources, timely disclosure
may be required.

Reporting of Mineral Reserves

31. A Mineral Reserve is the economically mineable part of a Measured and/or


Indicated Mineral Resource. It includes diluting materials and allowances for
losses which may occur when the material is mined. Appropriately detailed
assessments and studies have been carried out and include consideration of and
modification by realistically assumed mining, metallurgical, economic,
marketing, legal, environmental, social and governmental factors. These
assessments demonstrate at the time of reporting that extraction could
reasonably be justified. Mineral Reserves are sub-divided in order of increasing
confidence into Probable Mineral Reserves and Proven Mineral Reserves.

Before a Mineral Reserve is publicly reported, a Mineral Reserves Declaration


Report must be prepared as defined later in this Guide. This report must
contain a description of the appropriately detailed assessments and studies that
have been carried out to demonstrate that extraction could reasonably be
justified.

Mineral Reserves are those portions of Mineral Resources which, after the application of all mining
factors, result in an estimated tonnage and grade which, in the opinion of the Competent Person
making the estimates, can be the basis of a viable project after taking account of all relevant mining,
metallurgical, economic, marketing, legal, environmental, social and governmental factors. Mineral
Reserves are inclusive of diluting material which will be mined and delivered to the treatment plant or
equivalent.

The term economic implies that extraction of the Mineral Reserve has been established or analytically
demonstrated to be viable and justifiable under reasonable investment and market assumptions. The
term Mineral Reserve need not necessarily signify that extraction facilities are in place or operative or
that all governmental approvals have been received. It does signify that there are reasonable
expectations of timely approvals.

It should be noted that the Guide does not imply that an economic operation must have Proven Mineral
Reserves. Situations arise where Probable Mineral Reserves alone may be sufficient to justify
extraction, as for example with some alluvial tin or gold deposits. This is a matter for judgment by the
Competent Person and the management of the entity owning the information.

The terms Ore Reserves and Mineral Reserves can be used interchangeably where it is customary
to do so, usually for metallic deposits and some industrial minerals.

Appendix 3.doc: 2005 SME Guide Page 19 of 44


Public disclosure of Mineral Reserves is allowed only after completion of a Mineral Reserves
Declaration Report as defined later in this Guide.

32. A Probable Mineral Reserve is the economically mineable part of an Indicated


and, in some circumstances, Measured Mineral Resource. It includes diluting
materials and allowances for losses which may occur when the material is mined.
Appropriate assessments and studies have been carried out, and include
consideration of and modification by realistically assumed mining, metallurgical,
economic, marketing, legal, environmental, social and governmental factors.
These assessments demonstrate at the time of reporting that extraction could
reasonably be justified.

A Probable Mineral Reserve has a lower level of confidence than a Proven Mineral Reserve but is of
sufficient quality to serve as the basis for a decision on the development of the deposit.

33. A Proven Mineral Reserve is the economically mineable part of a Measured


Mineral Resource. It includes diluting materials and allowances for losses which
may occur when the material is mined. Appropriately detailed assessments and
studies have been carried out and include consideration of and modification by
realistically assumed mining, metallurgical, economic, marketing, legal,
environmental, social and governmental factors. These assessments demonstrate
at the time of reporting that extraction is reasonably justified.

A Proven Mineral Reserve represents the highest confidence category. The style of mineralization or
other factors could mean that a Proven Mineral Reserve cannot be demonstrated in some deposits.
Competent Persons should be aware of the consequences of declaring a Proven Mineral Reserve
before satisfying themselves that all of the relevant resource parameters and modifying factors have
been established at a similarly high level of confidence. Subsequent retraction of a publicly reported
Proven Mineral Reserve can lead to investor uncertainty and lack of corporate confidence.

34. The choice of the appropriate category of Mineral Reserve is determined primarily by
the classification of the corresponding Mineral Resource and after considering any
uncertainties in the modifying factors. Allocation to the appropriate category must be
made by the Competent Person.

The Guide provides for a direct relationship between Indicated Mineral Resources and Probable
Mineral Reserves and between Measured Mineral Resources and Proven Mineral Reserves. In other
words, the level of geoscientific confidence for Probable Mineral Reserves is the same as that required
for the determination of Indicated Mineral Resources and for Proven Reserves is the same as that
required for the determination of Measured Mineral Resources.

The Guide provides for a two-way relationship between Measured Mineral Resources and Probable
Mineral Reserves. This is to cover the situation where uncertainties associated with any of the
modifying factors considered when converting Mineral Resources to Mineral Reserves may result in
there being a lower degree of confidence in the Mineral Reserves than in the corresponding Mineral
Resources.

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If the uncertainties in the modifying factors that prevented the Measured Mineral Resource being
converted to a Proven Mineral Reserve are removed, then the Measured Mineral Resource may be
converted to a Proven Mineral Reserve. No amount of confidence in the modifying factors for
conversion of a Mineral Resource into a Mineral Reserve can override the upper level of confidence
which exists in the Mineral Resource. Under no circumstances can an Indicated Mineral Resource be
converted to a Proven Mineral Reserve, unless new information first justifies conversion to a Measured
Mineral Resource. Under no circumstances can an Inferred Mineral Resource be converted to a Mineral
Reserve unless first converted to an Indicated or Measured Mineral Resource.

Application of the category of a Proven Mineral Reserve implies the highest degree of confidence in the
estimate.

Refer also to corresponding Clause in this Guide regarding classification of Mineral Resources.

35. Mineral Reserve estimates are not precise calculations. Tonnage and grade figures in
reports should be expressed so as to convey the order of accuracy of the estimates by
rounding off to appropriately significant figures.

To emphasize the imprecise nature of a Mineral Reserve the final result should always be referred to as
an estimate, not a calculation.

Competent Persons are encouraged, where appropriate, to discuss the relative accuracy and/or
confidence of the Mineral Reserve estimates. The statement should specify whether it relates to over-
all or local estimates, and, if local, state the relevant tonnage or volume. Where a statement of the
relative accuracy and/or confidence is not possible, a qualitative discussion of the uncertainties should
be provided.

Depending on the accuracy of the estimate, rounding to the second or third significant figure should be
sufficient. For example, 10,863,425 tons at 8.23 per cent could be stated as 11 million tons at 8.2
percent or 10.9 million tons at 8.23 percent. In order to emphasize the imprecise nature of a Mineral
Resource or Mineral Reserve estimate, it is recommended that the final result always be referred to as
an estimate not a calculation.

36. Mineral Reserve reports must specify one or both of the categories of Proven and
Probable. Reports that combine Proven and Probable Mineral Reserve figures must
provide estimates for each category if this information is material. Reports must not
present contained metal figures unless corresponding tonnage and grade figures are
also presented.

37. When reporting a Mineral Reserve, tonnages, grades and mineral or metal contents
must be reported after taking into account mining loss and mining dilution. Metal
contents can be reported after also taking into account processing recoveries. If
processing recoveries are not taken into account, the percentage expected to be
recovered or lost during processing must be reported.

38. In situations where figures for both Mineral Resources and Mineral Reserves are
reported, a clarifying statement must be included in the report which clearly indicates
that the Mineral Resources do not include any material reported as Mineral Reserves.

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An appropriate form of clarifying statement may be:

The Mineral Resources do not include material reported as Mineral Reserves.

It is strongly recommended that, if there is a significant difference between a Mineral Reserve and the
Mineral Resource from which this Mineral Reserve was estimated, an explanation of the reasons for the
difference should be included in the report. This will assist the reader of the report in making a judgment
of the likelihood of the remaining Mineral Resources eventually being converted to Mineral Reserves.

When converting Mineral Resources to Mineral Reserves, Mineral Reserves may incorporate material
(dilution) which may not have been included in the original Mineral Resource. This fundamental
difference between Mineral Resources and Mineral Reserves should be explained if of material
significance.

Remaining Mineral Resources must be reported separately from Mineral Reserves because the
resulting total may be very misleading in economic terms and may be misunderstood or, more seriously,
misused to give a false impression of the prospectivity of a project.

Public reporting of tonnage and grade estimates other than Mineral Resources and Mineral Reserves is
not permitted under the Guide. Other estimates may be useful for an entity in its internal calculations
and evaluation processes, but their inclusion in public reports could cause confusion.

In preparing the Mineral Reserve statement, the relevant Mineral Resource statement on which it is
based should first be developed. This should be reconciled with the Mineral Resource statement
estimated for the previous comparable period and differences (due, for example, to mine production,
exploration, etc.) identified. The application of appropriate factors to the Mineral Resource can then be
made to develop the Mineral Reserve statement which can also be reconciled with the previous
comparable Mineral Reserve statement. Mining companies are encouraged to reconcile estimates
whenever possible in their reports. A detailed account of differences between Mineral Reserves and
corresponding Mineral Resource figures is not essential, but sufficient comment should be made to
enable significant variances to be understood by the reader.

Mineral Reserve estimates are sometimes reported after adjustment by cutting of high grades, the
application of factors such as dilution, mine or mill call factors, and similar modifying factors. If any of
the data are materially adjusted or modified for the purpose of making the estimate, this should be
clearly stated in a public Mineral Reserve report and the nature of the adjustment or modification
described.

39. As a minimum, the Competent Person should review Mineral Resource and Mineral
Reserve supporting documents on an annual basis. Reports must be updated if there
are significant changes in technical and economic parameters.

If such review results in material changes in, or reclassification of Mineral Resources, timely disclosure
may be required. In operating mines, reconciliation reports which compare mined resources and
reserves with actual production, should be reviewed annually.

Appendix 3.doc: 2005 SME Guide Page 22 of 44


Mineral Reserves Declaration Report

40. Public disclosure of Mineral Reserves is allowed only after completion of a technical
and economic study whose results and supporting documentation form a Mineral
Reserves Declaration Report. The Competent Person is responsible for the content
of the Mineral Reserves Declaration Report and supporting documentation.

The content of a Mineral Reserves Declaration Report will vary depending on the project being studied.
It is the responsibility of the Competent Person to determine that all applicable subjects are taken into
account when preparing the report. A checklist of assessment criteria is given in Table 1. It is the
responsibility of the Competent Person to determine which ones of these criteria and which additional
criteria should apply to a particular project. The relative importance of these criteria will vary with the
particular project and the legal and economic conditions pertaining at the time of determination.

The Mineral Reserves Declaration Report can be a single document in which all assessment criteria
deemed applicable by the Competent Person are analyzed, or a summary document which contains
supporting documentation by reference only. The Competent Person takes responsibility for the
content of the Mineral Reserves Declaration Report and all supporting documentation included by
reference.

41. A Mineral Reserves Declaration Report is the result of a properly defined,


adequately scoped, and professionally executed study of the viability of a
mineral project. The study must have advanced to the stage where mining and
mineral processing methods are defined and permitting is determined to be
feasible. Realistic production and/or sales schedules must have been developed
for the life of the project, including estimates of capital and operating costs. For
projects with very long life the study must be sufficient to justify investments
needed for current and planned production, as well as ongoing investments
which will be needed to maintain long-term operations.

For new projects, the study must include a financial analysis, based on
realistically assumed mining, metallurgical, economic, marketing, legal,
environmental, social and governmental factors, that is sufficient for a
Competent Person, acting reasonably, to determine if all or part of the Measured
and Indicated Mineral Resource may be converted to a Mineral Reserve.

For addition of Mineral Reserves to an existing operation or project, the study


must be thorough enough to ensure that, in the opinion of the Competent Person,
the previously declared Mineral Reserve combined with the new addition can be
reported as a Mineral Reserve.

In making a Mineral Reserves declaration, it is implicit that the Mineral Reserves Declaration Report
and associated studies conclude that, in the opinion of the Competent Person, the material disclosed
meets the requirements of technical and economic viability and that, in the opinion of the entity
reporting the Mineral Reserves, development of the Mineral Reserves would meet reasonable
investment criteria when compared to alternative investments with similar risk.

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In the case of a new mine, the Mineral Reserves Declaration Report will comprise, either in its entirety
or by reference, a comprehensive suite of documents, produced under the supervision of a Competent
Person, which support the reserve estimates being published. It is the Competent Persons
responsibility to ensure that the documentation is sufficiently complete, accurate and cohesive as a
whole to demonstrate the required confidence to enable public disclosure of the Mineral Reserves.

In the case of an operating mine, where existing reserves and mining experience lend greater
confidence to the estimation of contiguous or nearby reserves, ensuring that the work done addresses
all the issues required to establish a Mineral Reserve remains the responsibility of a Competent Person.
The work must be supported by a Mineral Reserves Declaration Report covering, either directly or by
reference, all of the relevant factors but with selective modification and allowances based on operating
data and the inclusion of the new reserves in an overall project mining plan.

In the case of an operating mine or a mine with historical operation, if sufficient data is available, a
reconciliation report should be included in the Minerals Reserves Declaration Report. A reconciliation
report is a report which, for a defined time period or volume mined, compares actual production (as
estimated from ore control, mine production reports, and/or mill production reports) with expected
production as determined from the deposit model used for reserve estimation.

42. Public Reporting of a Mineral Reserve will normally indicate the intent to mine, or
that a tangible asset has been defined for potential sale. Sufficient work should have
been done during the study to confirm with reasonable certainty that there are no
likely impediments, whether technical, economic or legal, to a mining operation being
established.

A Mineral Reserve Declaration Report must discuss and explain risk (defined as the possibility of loss
or failure), and where possible provide further explanation of how uncertainty (defined as incomplete
knowledge which can result in either risk or opportunities) will be handled. If representing material
information, project risk must also be disclosed in terms that the lay investor can understand.

Where Mineral Reserves have been defined but are scheduled to be mined at a date some distance in
the future (as is commonly the case in the coal industry), sufficient assurance should be available on
annual basis that, in the judgment of the Competent Person, endorsed by the reporting entity, economic
viability can be demonstrated and the reserves retained in inventory.

Once Mineral Reserves have been defined and disclosed, further optimization may take place together
with other refinements designed to provide sufficiently detailed engineering to establish cost estimates,
define and mitigate risks and determine an implementation plan. However, it is implicit in a reserves
declaration that this phase of optimization will not materially negatively affect the quantity, quality or
economic viability of the Mineral Reserves.

When a Mineral Reserve is published, an assurance statement must be made that the Mineral Reserve
Declaration Report standard was followed.

43. The contents of a Mineral Reserves Declaration Report may include sensitive
information on product pricing strategies, marketing and sales forecasts and as such
may remain confidential to the reporting entity. Where required or requested for the
purposes of review or audit, the reporting entity will release this information to
appropriate bodies such as the regulators or auditors on a confidential basis as
supplemental information.

Appendix 3.doc: 2005 SME Guide Page 24 of 44


44. Table 1 provides, in a summary form, a list of the main criteria which should be
considered when preparing reports on Exploration Results, Mineral Resources and
Mineral Reserves. These criteria must be taken into account when preparing a
Mineral Reserves Declaration Report, but need not be discussed in a public report
unless they materially affect estimation or classification of the Mineral Reserves.

It is not necessary, when publicly reporting Mineral Reserves, to comment on each item in Table 1, but
it is essential to discuss any matters which might materially affect the readers understanding or
interpretation of the results or estimates being reported.

45. In estimating Mineral Reserves, information on assumed metallurgical recovery


factors and processing losses play a critical role. Similarly, information relating to
deleterious elements and physical characteristics that affect the ability to beneficiate
or sell the product is also critical. This information must be discussed in the Mineral
Reserves Declaration Report and, depending on its materiality, may have to be
publicly disclosed.

46. Only that part of a Mineral Resource that has been classified as a Measured or
Indicated Mineral Resource can be considered for conversion to a Mineral Reserve.
Under no circumstance can an Inferred Mineral Resources be converted to a Mineral
Reserve unless it is first converted to an Indicated or Measured Mineral Resource.
When completing production schedules and economic studies for the purpose of
determining whether a Mineral Reserve can be publicly reported, no material other
than Measured and Indicated Mineral Resources should be considered.

Mineral Reserves and Commodity Pricing


47. Commodity prices used for the determination of Mineral Reserves should be based on
forward-looking estimates reflecting managements reasonable and supportable short-
and long-term expectations as supported by all available evidence. The basis for the
selected prices must be justified and supported by appropriate documentation. The
Competent Person must ascertain that these prices are consistent with historical prices
or with sales agreements and marketing determinations.

48. For current mining operations, the price profile used for Mineral Reserve estimation
can reflect current market conditions for short-term forecasts, while trending with
time upward or downward toward the long-term price estimates based on
managements expectations. For undeveloped Mineral Reserves, management should
use their long-term price expectations.

49. For commodities sold under existing contracts, Mineral Reserves should be
determined based on contract terms. For Mineral Reserves whose production would
extend beyond the quantities specified in existing contracts, reasonable and
supportable assumptions should be made to determine the prices applicable for the
estimation and reporting of these Mineral Reserves.

Appendix 3.doc: 2005 SME Guide Page 25 of 44


50. To demonstrate the economic feasibility of a Mineral Reserve, the estimated prices,
combined with other engineering parameters and modifying factors, must be applied
to only Measured and Indicated Mineral Resources.

Mineral Reserves being the economically mineable part of a Measured or Indicated Mineral Resource,
appropriate assessments must demonstrate at the time of reporting that extraction is reasonably
justified. This requires that assumptions are made concerning the price of the commodity or product
that will be sold when the mine is in production.

Mineral Reserves are estimated and published to supply information to investors concerning the value
of the deposit and the risk which may be associated with its development. Mineral Reserves are used
by management, in conjunction with Mineral Resources, for short-term, long-term and strategic
planning. They play a critical role in accounting, including impairment testing, fair value accounting,
calculation of depreciation, depletion and accumulated retirement obligation provision rates. To supply
investors with information which is consistent with managements plans and financial reporting,
commodity prices used for the determination of Mineral Reserves should be based on forward-looking
estimates reflecting managements reasonable and supportable expectations as supported by all
available evidence.

Managements price expectations must be reasonable and supportable. Most commodities, whether
sold using publicly quoted prices (e.g., base metals and precious metals) or under long term contract
(e.g., coal and iron ore), experience long term price cycles. Price expectations should reflect current
prices as well as long-term trends. Overly optimistic or pessimistic price expectations could result in
significant over or underestimation of reserves. It is the responsibility of management and the
Competent Person to determine whether the prices used for reserve estimation are reasonable and
supportable, given all available information.

During periods of low prices, a mining company may choose to temporarily curtail operations and save
the asset until prices recover. When such actions are taken, this information must be publicly disclosed.
In such circumstances, previously published Mineral Reserves may not have to be written off, provided,
in the opinion of management and the Competent Person higher future prices can be reasonably and
supportably assumed. As discussed below, whenever applicable a Reserve Sensitivity Test must be
performed as part of the Mineral Reserves estimation process, whose results will assist investors in
determining the risk associated with a project in periods of low commodity prices.

51. The forward price profile used to estimate Mineral Reserves, including expected
short-term and long-term prices, and justification of these prices, must be documented.
This documentation must be included in the Mineral Reserves Declaration Report.

It is likely that part or all of the price profile documentation will contain sensitive information which
should be treated as confidential. Where required or requested for the purposes of review or audit, this
information may be released to appropriate bodies such as the U.S. SEC or auditors on a confidential
basis as supplemental information.

The documentation supporting managements expectations may include: comparison of prices with
historical and current prices and forward curves, contracts and market considerations, currency
exchange rates where applicable, third party sources, and supplemental information.

52. Public disclosure of prices used for Mineral Reserve estimation is recommended but
not required. When commodity prices are disclosed, disclosure can be as a single

Appendix 3.doc: 2005 SME Guide Page 26 of 44


price estimate equal to that used for reserve determination, or as a range of prices
within which no material change in reserves would occur. Whether or not commodity
prices used to estimate reserves are published, the overall methodology used to
determine those prices should be disclosed. Such disclosure should be in a form
which helps investors determine whether, in their own opinion, prices used represent
reasonable views of future prices.

It is recognized that in some cases, such as when a product is sold under long term contract whose
terms must be kept confidential, there can be valid commercial reasons for non-disclosure. There are
circumstances where disclosure of long term price assumptions used for business planning and reserve
reporting can be detrimental to the company and the investors, such as when bidding for sales
contracts or property acquisitions. If prices are not published, the reasons for doing so must be
documented. This documentation may be treated as confidential but should be available for review by
auditors or regulators when required.

Reserves Sensitivity Test


53. When estimating Mineral Reserves, and if historical commodity prices are available,
a Reserves Sensitivity Test must be conducted. The objective is to assess and
report the sensitivity of the Mineral Reserves to recent fluctuations in commodity
prices. This test is conducted based upon the realization of a positive non-discounted
cumulative forward-looking cash flow at a Test Price equal to the average
commodity price which prevailed during the most recent last three-years. The Test
Price must be calculated as of the end of the financial year of the reporting entity, or
within six months prior to the end of the financial year.

If the commodity price(s) used to develop the reserves is higher than the most recent
three-year average price(s), the reporting entity should determine if mining the
reserves at the most recent three-year average commodity price(s) generates non-
discounted, forward-looking positive cumulative cash flow for each operating unit. If
not, the reporting entity should disclose for those operating units (whether in
production, proposed or curtailed) the commodity price(s) that is required to achieve
positive cumulative cash flow.

It is recognized that there are commodities for which historical prices which reflect
the value of the product sold (or to be sold) are not publicly available. In such
circumstances, a Test Price cannot be calculated and a Reserves Sensitivity Test is not
required.

A Test Price can usually be calculated for base metals and precious metals as such prices are quoted
on international exchanges. There are other commodities for which publicly quoted prices may not be
available or may not represent the value of the product sold or to be sold. In such cases, a Reserves
Sensitivity Test cannot be meaningfully completed. The lack of necessary price information must be
documented in the Mineral Reserves Declaration Report.

If a Mineral reserve is reported using a price lower than the test price, the forward-looking discounted
cash flow must be positive, and the Reserve Sensitivity Test (based on an undiscounted cash flow)
need not be performed.

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When applicable, a statement should be made that a Reserves Sensitivity Test was completed, or that
such a test was not applicable. The test results must be included in the Mineral Reserves Declaration
Report. The Reserves Sensitivity Test should be applied to each mine or each reporting unit, in
accordance with the format used in publicly reporting the Mineral Reserves. The test results should be
listed separately for each mine or reporting unit which failed to pass the test. Mines or reporting units
which successfully passed the test can be reported as a group.

If the Reserve Sensitivity Test was applied and failed during the current and previous reporting years,
this should be taken into account to determine whether continued declaration of reserves is justified.
Even if reserves can still be declared, the Competent Person may recommend additional disclosure

When exchange rates must be taken into account to complete the Reserves Sensitivity Test, the
average exchange rate which prevailed during the last three years should be used. When conducting
the Reserves Sensitivity Test, all prices and costs must be on a constant price (un-escalated) basis.

Permitting and Legal Requirements

54. For a mineral deposit to be considered a Mineral Reserve, it is required that legally
enforceable mineral title sufficient to allow exploration, development and extraction
is controlled by the reporting entity at the time of determination. If the reporting
entity is leasing or sub-leasing the mineral, the lease or sub-lease should be from an
entity which has control of the necessary mineral titles. There must be no known
material obstacles to mining, such as those which have caused shut down of mines or
processing plants, or failure to get permits to operate. There must be a reasonable
expectation that all permits, ancillary rights and authorizations required for mining,
and to the extent applicable processing, can be obtained in a timely fashion, and
maintained for ongoing operations.

The reporting entity must complete a review of all legal and permitting requirements and document the
results of this review. Local environmental laws and processes must be taken into account. To
demonstrate reasonable expectation that all permits, ancillary rights and authorizations can be obtained,
the reporting entity must show understanding of the procedures to be followed to obtain such permits,
ancillary rights and authorizations. Demonstrating earlier success in getting the necessary permits can
be used to document the likelihood of success. If permits are required, but there is no defined
procedure to obtain such permits, reasonable expectation of success may be questioned.

Information which materially increases or decreases the risk that the necessary legal rights or permits
will be obtained must be publicly disclosed. It is recognized that the legal and permitting environment
may change over time and that such changes could have an impact on reserve determination. If it is
determined that obstacles arise or are eliminated, the reserve estimates must be adjusted accordingly.

It is recognized that some permits cannot be obtained until after a reserve has been declared. There
might be sound business reasons why obtaining some permits should be postponed. It is also
recognized that waiting for all permits to be on hand could result in critical information not being
released to the investors in a timely fashion.

Documentation should include a brief description of the title, claim, lease or option under which the
reporting entity has or will have the right to hold or operate the property, indicating any conditions which

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the registrant must meet in order to obtain or retain the property. If held by leases or options, the
expiration dates of such leases or options should be stated. If extension of leases or options will be
needed to mine the reserves, there should be reasonable expectation that such extension will be
granted.

Information relating to this review of legal and permitting issues must be documented in a report. This
report must be included in the Mineral Reserves Declaration Report either in full or by reference. The
content of this report may remain confidential to the reporting entity. However, when required, it may
be released to regulators or auditors on a confidential basis.

55. If the reporting entity has title in a mineral deposit which meets all the reserve criteria,
and licenses, leases, or subleases the reserves to another entity for economic
consideration, the Mineral Reserves that have been licensed, leased, or subleased,
must be reported by the reporting entity (the lessor) as a subset of the entitys total
Mineral Reserves.

If the reporting entity has licensed, leased, or subleased Mineral Reserves from
another entity, the Mineral Reserves that have been licensed, leased, or subleased,
must be reported by the reporting entity (the lessee) as a subset of the entitys total
Mineral Reserves.

This requirement for additional disclosure is particularly relevant to mineral holding companies whose
business is leasing mineral properties.

Reporting of Mineralized Fill, Pillars, Low-Grade Mineralization,


Stockpiles, Dumps and Tailings
56. The Guide applies to the reporting of all potentially economic mineralized material
including mineralized fill, pillars, low-grade mineralization, stockpiles, dumps, and
tailings.

For the purposes of the Guide, mineralized stope fill and stockpiles of mineralized material can be
considered to be similar to in situ mineralization when reporting Mineral Resources and Mineral
Reserves. Consequently the Competent Person carrying out the assessment of the fill or stockpiles
must use the bases of classification outlined in the Guide. In most cases, the opinion of a mining
engineer should be sought when making judgments about the mineability of fill, remnants and pillars.

If there are not reasonable prospects for the economic extraction of a particular portion of the fill or
stockpile, then this material cannot be classified as either Mineral Resources or Mineral Reserves. If
some portion is currently sub-economic but there is a reasonable expectation that it will become
economic, then this material may be classified as a Mineral Resource. Such stockpile material may
include old dumps and tailings dam material. If technical and economic studies have demonstrated that
economic extraction could reasonably be justified under realistically assumed conditions, then the
material may be classified as a Mineral Reserve.

The above guidelines apply equally to low-grade in-situ mineralization, sometimes referred to
colloquially as mineralized waste or marginal-grade material, and often intended for stockpiling and
treatment towards the end of mine life. For clarity of understanding, it is recommended that tonnage

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and grade estimates of such material be itemized separately in public reports, although they may be
aggregated with total Mineral Resource and Mineral Reserve figures.

Stockpiles are defined to include both surface and underground stockpiles, including broken ore in
stopes, and can include ore currently in the ore storage system. Mineralized material in the course of
being processed (including leaching), if reported and of material importance, should be reported
separately together with the basis for estimation.

Mineralized remnants, shaft pillars and mining pillars which are potentially mineable are in situ
mineralization and consequently are included in the Guide definitions of Mineral Resources and Mineral
Reserves.

Mineralized remnants, shaft pillars and mining pillars which are not potentially mineable must not be
included in Mineral Resource and Mineral Reserve statements.

Reporting of Exploration Results for Coal, Coal Resources and Coal


Reserves
57. The clauses in this section of the Guide address matters that relate specifically to the
Public Reporting of Mineral Resources and Mineral Reserves for coal. Coal is
generally sold on the basis of product specifications and market acceptance. Such
factors as quality and marketability are therefore important and should be carefully
considered before declaring coal resources or coal reserves. Unless otherwise stated,
all other clauses in this Guide, including Figure 1 and Table 1, apply to Exploration
Results, Mineral Resources and Mineral Reserves for coal.

When reporting information and estimates for coal deposits, the key principles and purpose of the
Guide apply and should be borne in mind. Because of coal specific characteristics including
geological continuity over large areas, the strategic value of controlling very long term reserves, and
product pricing highly dependent on deposit location and coal quality the most significant
requirements which must be satisfied before a resource or a reserve is declared are not necessarily the
same for coal as they are for other minerals.

58. The terms Mineral Resource and Mineral Reserve, and the subdivisions of these
terms as illustrated on Figure 1, apply also to coal reporting, but if preferred by the
reporting entity, the terms Coal Resource and Coal Reserve and the appropriate
subdivisions may be substituted.

When assessing criteria listed in this Guide which may be applicable to coal, the term grade should
generally be considered equivalent to coal quality.

59. As for all minerals, it is the responsibility of the Competent Person to determine in
each particular situation which specific requirement must be satisfied before a Coal
Resource or a Coal Reserve can be declared. The Competent Person should
determine which evaluation criteria in Table 1 are applicable, which additional
evaluation criteria should be taken into account if any, and the materiality of such
criteria.

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Many criteria listed in Table 1 which may be critical to the evaluation of other mineral deposits, such as
base metals or precious metals, will not apply to the evaluation of coal deposits. Such criteria as coal
quality, cost to markets including transportation cost, location and quality of competing coal reserves,
and ability to compete with such reserves to access the market, are important and should be carefully
considered before declaring a Coal Reserve.

Geological similarity between neighboring coal deposits can greatly simplify demonstration of a new
Coal Resource, as well as reduce the technical and economic study requirements needed to
demonstrate a Coal Reserve next to an operating mine. Geological similarity must be demonstrated by
means of drill holes, mapping or other deposit-specific geoscientific evidence to a suitable level of
confidence required to declare Measured and/or Indicated Resources. Mere inference of the continuity
of coal thickness and quality from an operating mine onto a neighboring block or property is not
sufficient to declare Measured and Indicated Resources and subsequently a Reserve.

Demonstration of geological similarity or analogy with an operating mine is usually not sufficient to
demonstrate technical and economic feasibility. Factors such as access to the deposit and permitting
constraints are likely to be project specific. It is the responsibility of the Competent Person to ascertain
that there is sufficient information to demonstrate geological similarity and to determine which additional
factors must be taken into account to demonstrate technical and economic feasibility with a reasonable
level of confidence.

When a coal deposit is scheduled to be mined at a date some distance in the future, declaration of a
Coal Reserve implies reasonable expectation at the time of reporting that the necessary permits could
be obtained as needed.

60. Coal Resources and Coal Reserves should be reported as saleable product, either as
run-of-mine coal or washed coal.

For coal deposits, it is common practice to report a saleable product rather than the as mined product
which is traditionally regarded as the Mineral Reserve for most other minerals. It is important that a
clarifying statement is included to ensure that the reader is fully informed as to what is being reported.
Some coal deposits may be capable of yielding products suitable for more than one application and/or
specification. If considered material by the reporting entity, such multiple products should be quantified
and reported.

61. Coal Resources and Coal Reserves should be reported as Assigned or Unassigned.

Assigned coal is coal that has been committed by the coal company to operating mine shafts, mining
equipment, and plant facilities, and all coal which has been leased by the company to others.
Unassigned coal represents coal that has not been committed, and which would require new mine
shafts, mining equipment, or plant facilities before operations could begin on the property. The primary
reason for this distinction is to inform investors which coal will require substantial capital investments
before production can begin. Coal which has been leased to another company or is leased from
another company must be disclosed separately.

62. Recommendations made in this Guide, that price assumptions and sensitivity to price
changes be disclosed, do not apply to coal.

Coal is being sold in a highly competitive national and international market. Price disclosure can be
viewed as price signaling and interpreted as anticompetitive. For business and legal reasons,

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disclosure of price assumptions made when estimating Coal Resources and Coal Reserves may be
detrimental to the interest of shareholders and is usually not advisable. Other requirements concerning
pricing which are included in the Guide are applicable to coal. This includes the requirement that prices
be based on forward-looking estimates reflecting managements reasonable and supportable short- and
long-term expectations, and that justification for such prices be documented.

Reporting of Exploration Results, Mineral Resources and Mineral


Reserves for Industrial Minerals
63. The clauses in this section of the Guide address matters that relate specifically to the
Public Reporting of industrial minerals, stone and aggregates of all forms and other
bulk commodities such as borates, talc, kaolin etc. that are generally sold on the basis
of their product specifications and market acceptance. Such factors as quality and
marketability are therefore important and should be carefully considered before
declaring Mineral Reserves. Unless otherwise stated, all other clauses in this Guide,
including Figure 1 and Table 1, apply to Exploration Results, Mineral Resources and
Mineral Reserves for industrial minerals.

When reporting information and estimates for industrial minerals, the key principles and purpose of the
Guide apply and should be borne in mind. Assays may not always be relevant, and other quality criteria
may be more applicable. If criteria such as deleterious minerals or physical properties are of more
relevance than the composition of the bulk mineral itself, then they should be reported accordingly.

The factors underpinning the estimation of Mineral Resources and Mineral Reserves for industrial
minerals are the same as those for other deposit types covered by the Guide. It may be necessary,
prior to the reporting of a Mineral Resource or Mineral Reserve, to take particular account of certain key
characteristics or qualities such as likely product specifications, proximity to markets, and present
access to market or ability to get access to market.

For some industrial minerals, it is common practice to report the saleable product rather than the as-
mined product, which is traditionally regarded as the Mineral Reserve for base and precious metals
and other minerals. It is important that, in all situations where the saleable product is reported, a
clarifying statement is included to ensure that the reader is fully informed as to what is being reported.

Some industrial mineral deposits may be capable of yielding products suitable for more than one
application and/or specification. If considered material by the reporting entity, such multiple products
should be quantified either separately or as a percentage of the bulk deposit.

64. With respect to modifying factors, the normal geological parameters may be less
important in the case of industrial minerals, stone and aggregate. Such factors as
quality, transportation, cost to markets, location and quality of competing reserves,
and ability to compete with such reserves to access the market, are important and
should be carefully considered before declaring Mineral Reserves.

65. As a general rule, a Mineral Reserve cannot be declared unless there are reasonable
expectations that all permits, ancillary rights and authorizations required for mining
can be obtained. For some minerals such as sand, gravel and aggregates, permitting
requirements may be such that reasonable expectations can only be defined by

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comparison with competing reserves. When a deposit is scheduled to be mined at a
date some distance in the future, declaration of a Mineral Reserve implies reasonable
expectation at the time of reporting that the necessary permits could be obtained when
needed.

66. Recommendations made in this Guide, that price assumptions and sensitivity to price
changes be disclosed, may not apply to all industrial minerals.

Some industrial minerals are sold in a highly competitive local, national and/or international market. For
business and legal reasons, disclosure of price assumptions may be detrimental to the interest of
shareholders and may not be advisable. Other requirements concerning pricing which are included in
the Guide are applicable to industrial minerals. This includes the requirement that prices be based on
forward-looking estimates reflecting managements reasonable and supportable short- and long-term
expectations, and that justification for such prices be documented.

Reporting Exploration Results, Mineral Resources and Mineral


Reserves for Diamonds and Other Gemstones
67. The clauses in this section of the Guide address matters that relate specifically to the
Public Reporting of Exploration Results, Mineral Resources and Mineral Reserves for
diamonds and other gemstones. Unless otherwise stated, all other clauses in this
Guide, including Figure 1 and Table 1, apply to Exploration Results, Mineral
Resources and Mineral Reserves for diamonds and other gemstones.

For the purposes of Public Reporting, the requirements for diamonds and other gemstones are
generally similar to those for other commodities with the replacement of terms such as mineral by
diamond and grade by grade and average diamond value. The term quality should not be
substituted for grade, since in diamond deposits these have distinctly separate meanings.

A number of characteristics of diamond deposits are different from those of, for example, typical
metalliferous and coal deposits and require special consideration. These include the generally low
mineral content and variability of primary and placer deposits, the particulate nature of diamonds, the
specialized requirement for diamond valuation and the inherent difficulties and uncertainties in the
estimation of diamond resources and reserves.

68. Reports of diamonds recovered from sampling programs must provide material
information relating to the basis on which the sample is taken, the method of recovery
and the recovery of the diamonds. The weight of diamonds recovered may only be
omitted from the report when the diamonds are considered to be too small to be of
commercial significance. The lower cutoff size should be stated along with the type
of bottom sieve used.

The stone size distribution and price of diamonds and other gemstones are critical components of the
resource and reserve estimates. At an early exploration stage, sampling and delineation drilling will not
usually provide this information, which relies on large diameter drilling and, in particular, bulk sampling.

In order to demonstrate that a resource has reasonable prospects for economic extraction, some
appreciation of the likely stone size distribution and price is necessary, however preliminary. To

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determine an Inferred Mineral Resource in simple, single-facies or single-phase deposits, such
information may be obtainable by representative large diameter drilling. More often, some form of bulk
sampling, such as pitting and trenching, would be employed to provide larger sample parcels.

In order to progress to an Indicated Mineral Resource, and from there to a Probable Mineral Reserve, it
is likely that much more extensive bulk sampling would be needed to fully determine the stone size
distribution and value. Commonly such bulk samples would be obtained by underground development
designed to obtain sufficient diamonds to enable a confident estimate of price.

In complex deposits, it may be very difficult to ensure that the bulk samples taken are truly
representative of the whole deposit. The lack of direct bulk sampling, and the uncertainty in
demonstrating spatial continuity of size and price relationships should be persuasive in determining the
appropriate resource category.

69. Where diamond Mineral Resource or Mineral Reserve grades (carats per ton) are
based on correlations between the frequency of occurrence of micro-diamonds and of
commercial size stones, this must be stated, the reliability of the procedure must be
explained and the number of stones and their weight reported by sieve size.

70. For Public Reports dealing with diamond or other gemstone mineralization, it is a
requirement that a statement verifying the independence of the valuation accompany
any reported valuation of a parcel of diamonds or gemstones. The valuation must be
based on a report from a demonstrably reputable and qualified expert.

If a valuation of a parcel of diamonds is reported, the weight in carats and the lower cutoff size of the
contained diamonds must be stated and the value of the diamonds must be given in U.S. dollars per
carat. Where the valuation is used in the estimation of diamond Mineral Resources or Mineral Reserves,
the valuation must be based on a parcel representative of the size, shape and color distributions of the
diamond population in the deposit.

Diamond valuations should not be reported for samples of diamonds processed using total liberation
methods.

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TABLE 1. Checklist of Assessment Criteria

Estimates of the value of mineral projects are expressions of judgment predicated on knowledge and experience. Such estimates are more than arbitrary
determinations; they seek to attach value as a consequence of method. The methods employed must be scientifically valid, tested, using accepted scientific
definitions of terms and accepted procedures, and best suited to the making of reliable estimates for the project in question. Evaluation of mineral projects
requires periodic examination and evaluation of all new and existing data. The dynamic nature of the evaluation of mineral projects implies that a valid estimate
made at a given time may be significantly changed when new information becomes available. Evaluation of a mineral project should consider all the criteria
listed below and such additional criteria that may be viewed as significant. It is the responsibility of the Competent Person to determine which criteria listed
below and which additional criteria should apply to the study of a particular project. The relative importance of the criteria will vary with the particular project
and the legal and economic conditions pertaining at the time of determination. When information is publicly reported, it must be sufficient to enable an intelligent
layman to make a reasonable and balanced assessment of the significance of this information. When and whether information should be publicly released is
subject to current laws and regulations in the relevant jurisdictions.

Evaluation Criteria Exploration Results Mineral Resource Mineral Reserve

A. General
1. Purpose of report Statement of person for whom the report See Exploration Results See Exploration Results
was prepared, whether it was intended as
a full or partial evaluation, what work
was conducted, what work remains to be
done.

2. Project Description Description of commodity, magnitude of See Exploration Results See Exploration Results
project, background, and business
arrangement.

3. Project Location Description of location (country, state or See Exploration Results See Exploration Results
province, county, township and range,
easting and northing, etc.); a map
showing location and access should exist.

4. Property Description of ownership of surface See Exploration Results See Exploration Results
Ownership rights, mineral rights, access rights,
leases, concessions, royalties, and other

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Evaluation Criteria Exploration Results Mineral Resource Mineral Reserve

encumbrances and liabilities.

B. Project Data
1. Location of Project Maps and cross sections or other two- or See Exploration Results. Particular See Mineral Resource. The location of
Data three-dimensional representation of attention should be given to drill hole and samples and other relevant features
results should exist, showing location of other sample survey information (property lines, mine workings, etc.)
samples, drill holes, exploration pits, including down-hole surveys. If the should be well-known. The location of
underground workings, geological data, sample locations are not well known, the drill hole collars should be accurate and
etc. When evaluating drill hole results, effect on the resource estimates should be the adequacy of the down-hole surveying
consideration should be given to depth to considered. technique should be reviewed and
top and bottom of mineralization, to total commented on.
length and average grade of intercepts,
and to the accuracy of survey information
including down-hole surveys.

2. Geological Data Description of the nature, detail, and See Exploration Results. Particular See Mineral Resource
reliability of geological information (rock attention should be given to drill hole
types, structure, alterations, logging and other sample information
mineralizations, and relation to known used in resource evaluation. Description
mineralized zones, etc.). Description of of the thoroughness with which all
geophysical and geochemical data. significant lithologic, structural,
Reliable geological maps and cross mineralogical, alteration, or other
sections should exist to support geological or geotechnical characteristics
interpretations. were recorded. Significant data, or data
that could materially influence the
estimated quantity and quality of the
resource, should be discussed.

3. Topography General topographic map is sufficient Topographic map in sufficient detail to Detailed topographic map. Aerial
assess likelihood of eventual economic surveys must be checked with ground
feasibility. controls and surveys, particularly in areas
of rugged terrain, dense vegetation or
high altitude.

4. Sampling

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Evaluation Criteria Exploration Results Mineral Resource Mineral Reserve

a. Method Description of sample type and sample See Exploration Results. The quantity and See Mineral Resource. Adequate
collection method (hand, grab, trench, quality of sample information is critical to sampling verification techniques,
channel, or chip sample; core hole, rotary the reliability of resource estimates. including appropriate numbers of
hole, or reverse circulation; bulk sample, Particular attention should be given to duplicates and appropriate statistical
etc.). Discussion of sample quality and this information. analyses of duplicates are required.
representativeness (sample recovery, high
grading, selective losses or
contamination, and any other factors that
may have resulted in sample biases, etc.).
Discussion of whether duplicate samples
or alternative methods of sampling were
used to verify sample quality. If indirect
methods of measurement were used
(geophysical methods), these should be
described, with attention given to errors
in interpretation.

b. Preparation Description of laboratory and method See Exploration Results See Exploration Results. Verification of
used for sample preparation, sub- the suitability of sample preparation is
sampling and size reduction, and required.
likelihood of inadequate or non-
representative samples (improper size
reduction, contamination, etc.).
Discussion of whether tests were
performed to verify the suitability of
sample preparation.

c. Analysis Identification of laboratory and analytical See Exploration Results See Exploration Results. Verification of
method (fire assay, AA assay, emission analytical techniques and quality control
spectroscopy, etc.). Discussion of programs are required. Check sampling
precision and accuracy, including the use and assaying must have been performed
of check assays, quality control programs, by independent parties.
and submission of samples to other
laboratories for verification.

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Evaluation Criteria Exploration Results Mineral Resource Mineral Reserve

d. Specific Gravity Generally not determined. Discussion of how the tonnage factor was See Mineral Resource. The specific
and Bulk determined (assumed or measured). If gravity and bulk tonnage must have been
Tonnage assumed, which assumptions were made measured by methods that adequately
and on which basis. If measured, by what account for void spaces (vugs, porosity,
method and how frequently. Discussion etc.) and for differences between rock and
of whether different tonnage factors were alteration zones within the deposit.
used in different parts of the deposit and
why.

C. Interpretation
1. Geological Description of geological model and See Exploration Results. Discussion of See Mineral Resource.
Interpretation and inferences made from this model. sufficiency of data density to assure
Model Discussion of adequacy of data density continuity of mineralization and provide
and reliability, and whether the quality an adequate data base for the estimation
and quantity of information are sufficient procedure used. Discussion of the extent
to support statements made or inferred to which the interpretation is based on
concerning potential for significant data or on assumptions and whether
economic discovery. consideration was given to alternative
interpretations or models.

2. Numerical Model Generally not determined. Detailed description of the method used See Mineral Resource.
and the assumptions made to estimate
tonnages and grades (section, polygon,
inverse distance, geostatistical, or other
method). Description of how the
geological interpretation was used to
control the resource estimates. Discussion
of basis for using or not using grade
cutting or capping. If a computer method
was chosen, description of programs and
parameters used. Geostatistical methods
are extremely varied and should be
described in detail. The method chosen
should be justified. The geostatistical
parameters, including the variogram, and

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Evaluation Criteria Exploration Results Mineral Resource Mineral Reserve

their compatibility with the geological


interpretation should be discussed.
Experience gained in applying
geostatistics to similar deposits should be
taken into account.
D. Extraction
1. Mining
a. Method Description of any obvious mining factors Description of any mining factors that Mining method(s), mine plans and
that could have a significant impact on could have a significant impact on the production schedules defined for the life
the project feasibility. project feasibility. Discussion of possible of the project. Description and
mining methods. justification of mining method(s) to be
used. Discussion of mining rate,
equipment selected, ore control methods,
geotechnical and hydrological
considerations, personnel requirements,
dilution, and mine recovery. For open pit
mines, discussion of pit slopes, slope
stability, and strip ratio. For underground
mines, discussion of mining method, rock
mechanics considerations, mine design
characteristics, and ventilation.

b. Costs Generally not determined. Stated reasonable assumptions. Description and justification of capital
and operating costs. All capital items
identified. Detailed equipment list. Price
quotes for all major equipment items.
Major components of operating costs
itemized and justified. Capital and
operating budgets defined by year.

2. Processing
a. Method Description of any obvious processing Description of any processing factors that Description and justification of
factors that could have a significant could have a significant impact on the processing method(s) to be used,
impact on the project feasibility. project feasibility. Discussion of possible equipment, plant capacity and personnel
processing methods. requirements. Detailed flow sheet based

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Evaluation Criteria Exploration Results Mineral Resource Mineral Reserve

on comprehensive metallurgical program.


Justification of estimated recovery
(proportion of material sent to the
processing plant that will be recovered)
by geologic zone, whether based on
historical information, laboratory test, or
pilot plant results.

b. Costs Generally not determined. Stated reasonable assumptions. Description and justification of capital
and operating costs. All capital items
identified. Detailed equipment list. Price
quotes for all major equipment items.
Major components of operating costs
itemized and justified. Capital and
operating budgets defined by year.

3. Recovery
a. Mining Generally not determined. Stated reasonable assumptions. Reported tonnages, grades and mineral
contents must take into account mining
dilution and losses. Description and
justification of mining dilution and losses
is required.

b. Processing Generally not determined. Stated reasonable assumptions. Discussion of whether the reported
tonnages and grades consist of material in
place or whether processing recoveries
are included. If in-place values are
reported, information must be supplied
concerning expected processing losses or
recoveries. Justification of processing
recoveries is required.

4. Cutoff Grade Generally not determined. Justification of the cutoff grade used to Description of methods used to calculate
report resources. cutoff grades.

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Evaluation Criteria Exploration Results Mineral Resource Mineral Reserve

E. Infrastructure
1. Facilities Generally not determined Stated reasonable assumptions. It is Necessary facilities have been designed
reasonable to assume that necessary (which may include processing plant, tails
facilities could be built dam, leaching facilities, waste dumps,
road and/or rail accesses, power supply,
offices, housing, security, etc.). Detailed
map showing location of facilities.
Construction schedule developed.

2. Staffing Generally not determined Generally not determined Detailed staffing plan. Training. Salary
scale.

3. Supplies Generally not determined Reasonable assumption that necessary All necessary supplies have been
supplies can be obtained. identified (electricity, reagents, fuels,
etc.). Demonstration that supplies are
available as needed. Requirements
specified on a yearly basis.

4. Hydrology Generally not determined Stated reasonable assumptions. All water requirements specified and
sources of water identified. Dewatering
requirements estimated on the basis of
data. Water disposal and quality control.

5. Costs Generally not determined Stated reasonable assumptions. Description and justification of capital
and operating costs. All capital items
identified with sufficient detail for
costing. Construction schedule and
capital and operating budgets defined by
year.

F. Environmental Description of obvious environmental Description of any environmental factors The necessary permits have been
Compliance and factors likely to stop the project. that could have a significant impact on obtained, or there is reasonable basis to
Reclamation the project feasibility. Discussion of believe that all permits required for the
possible means of mitigation. project can be obtained in a timely
manner. Description of yearly

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Evaluation Criteria Exploration Results Mineral Resource Mineral Reserve

environmental compliance methods and


costs, including reclamation..

G. Feasibility
1. Product Valuation Description of valuable and potentially See Exploration Results. Stated Description of product to be sold.
valuable product(s) including suitability reasonable assumptions concerning likely Discussion of whether there exists a ready
of products to market. product value. market for the product, whether contracts
for the sale of the product are in place or
expected to be readily obtained. Detailed
description of method used to estimate
the commodity price profiles used for
cutoff grade calculation, economic
analysis and project valuation.
Demonstration that the price assumptions
are reasonable and supportable.
Justification of assumptions made
concerning production cost and value of
product. Transportation, marketing, and
other costs should be considered.

2. Cash Flow Generally not applied. Generally not applied. Consideration of Detailed cash flow analysis for the life of
Analysis order of magnitude capital cost, operating the project.
costs and revenue indicate reasonable
prospect of eventual economic extraction.

3. Valuation Method Generally not applied. Stated reasonable assumptions. Detailed description of the method used
to determine the economic feasibility of
the project.

4. Reserve Sensitivity Not applicable. Not applicable. Detailed description of method used and
Test results obtained.

H. Risk Analysis Generally not applied. Sufficient risk assessment completed to Fatal flow analysis. Detailed assessment
justify reasonable prospect of eventual of project technical and economic risk.

Appendix 3.doc: 2005 SME Guide (Table 1) Page 42 of 44


Evaluation Criteria Exploration Results Mineral Resource Mineral Reserve

economic extraction. Description of actions which will be


taken to mitigate risk. No significant risk
of project failure.

I. Resource and Data to support estimates with a sufficient Description and justification of criteria Description and justification of criteria
Reserve Assurance degree of assurance is lacking. Specific used to classify the resource. When used to classify the reserves. Reserves are
Classification quantities and grades/qualities cannot be reported, a resource should be classified classified as proven or probable to reflect
reported. as measured, indicated, or inferred. relative degrees of geological assurance.
Depending on materiality measured and Depending on materiality, proven and
indicated resources may be combined and probable reserves may be combined.
need not be reported separately. To There should not be significant
classify a resource as measured or uncertainty concerning the economic
indicated, there must be a reasonably high viability of the project. Only measured
level of confidence with respect to the and indicated resources can be considered
quality of the information used to for inclusion in the reserve. Resources
calculate this resource, as well as the classified as inferred lack the requisite
interpretation of this information. degree of assurance to be included in the
reserve.

J. Other Description of any other significant Description of any other material While any other material information
Considerations information that is likely to prevent or information that could prevent or affecting the project should be discussed,
facilitate the economic viability of the facilitate the economic viability of the no material impediments to the profitable
project. Identification of work or resource. Identification of work or exploitation of the property should
conditions required to demonstrate the conditions required to convert the remain. Material uncertainties about the
presence of a resource or to evaluate this resource to a reserve. A resource geology, extraction, processing,
resource. represents material that has the potential marketing, and legal requirements have
of being of economic value. No specific been eliminated. It is not required that all
economic criteria need be assumed when permits be issued or that mining and
evaluating a resource. However, known processing facilities have been
information that significantly reduces or constructed. However, there should be a
increases the probability of economic reasonable basis to believe that permitting
feasibility should be reported. and construction of the necessary
facilities can be accomplished in a timely
manner.

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Evaluation Criteria Exploration Results Mineral Resource Mineral Reserve

K. Qualification of Name and qualification of the Competent See Exploration Results See Exploration Results
Estimator(s) Person(s) preparing and reviewing the
foregoing.

Appendix 3.doc: 2005 SME Guide (Table 1) Page 44 of 44

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