Why Every Preliminary Economic Assessment is Fake News
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
On December 23, 2005, Canadian Securities Administrators (CSA) added a new wrinkle to the NI-43101 regulation of resource estimations with official creation of the so-called “preliminary economic assessment” (PEA). This is a document that can be tabled after a series of resource estimates and purports to address the economics of a mineral occurrence prior to technical pre-feasibility and feasibility studies.
In actuality, the preliminary economic assessment violates the very core principle of the NI-43101 mineral resources and reserves classification system. Nearly 10 years ago, I explained the Canadian Institute of Mining and Metallurgy (CIM) classifications in detail (Mercenary Musing, August 25, 2008).
The CIM systematic classification of mineral resources and mineral reserves is shown in this graphic:
The important item to note is that Inferred Mineral Resources are shown outside of the dashed box that contains all other categories. The reason is explained in an excerpt from the CIM Standards on Mineral Resources and Reserves published in 2000:
“Note that the confidence level in Inferred Mineral Resources is insufficient to allow the application of technical and economic parameters or to enable an evaluation of economic viability worthy of public disclosure.”
The guidance on Inferred Mineral Resources was modified in 2010 to read:
“Confidence in the estimate is insufficient to allow the meaningful application of technical and economic parameters or to enable an evaluation of economic viability worthy of public disclosure. Inferred Mineral Resources must be excluded from estimates forming the basis of feasibility or other economic studies.”
A “preliminary economic assessment” actually allows both economic evaluation and public disclosure of inferred resources, which as per the above definitions published by the regulatory bodies that created the regulations, do not have sufficient geological confidence to be evaluated economically.
This is a veritable bureaucratic Catch-22 of irrational circular reasoning in the best tradition of protagonist Yossarian’s dilemma in the novel by Joseph Heller (1961).
Prior to NI-43101, this level of mineral evaluation was universally called a “scoping study”. It was an internal document generated by exploration and mining companies after a cycle of advanced exploration. Internal scoping studies were used to determine if a project:
In the real world of advanced mineral projects, a scoping study was more than a simple one-off affair. It was a series of early-stage attempts to construct technical and economic models of a mineral occurrence that underwent constant revision as more data was generated.
It was a non-public document compiled and written by company geologists and engineers and designed exclusively for management, insiders, and those who had signed confidentiality agreements; e.g., technical consultants and potential buyers, partners, and/or financiers.
The internal scoping study was never ever intended for release to the public or designed for public consumption by non-technical investors.
In my opinion, the invention and promotion of the preliminary economic assessment by Canadian Securities Administrators five years after adoption of regulations for technical reports was designed as a means to:
Most of the preliminary economic assessments that I review are not worth the time, the cost, the paper, or even the digital megabytes that they occupy in cyberspace for exchange filings, news releases, and company websites.
Taken in whole, I submit that:
To reiterate: a preliminary economic assessment by a junior exploration company is an economic evaluation of inferred resources with no demonstrable economic viability.
Therefore, I conclude that every preliminary economic assessment is simply and unequivocally fake news.
The preliminary economic assessment has bastardized the technical review process. I propose that it should be banned as a public document.
But since that is highly unlikely to happen anytime soon, you must always beware of frogs masquerading as princes:
Ciao for now,