The eye of the beholder
Autonomous geologists, hired to analyze mining data, have tons of leeway
When Barkerville Gold Mines Ltd. told investors a few weeks ago that its British Columbia-based project held the potential to cough up 90 million ounces of gold, the first reaction from industry insiders was disbelief. After all, the legendary Timmins gold camp has produced about 70 million ounces, and fewer than 100 million ounces are produced globally each year.
Their second reaction was more of a question: Who the heck calculated those numbers?
It turned out they were derived by Peter George, a veteran geologist at Geoex Ltd. The British Columbia Securities Commission (BCSC) has since intervened with many concerns about his work on Barkerville’s Cow Mountain project, and the company remains a penny stock as investors have little confidence in its stated resources. The stock spiked from 81¢ to as high as $1.67 after the report came out, but has since dropped to 77¢.
Aside from providing yet another reminder about the perils of investing in junior miners — especially when metal prices are floundering — Barkerville has turned the spotlight on the independent geologists who are hired by miners to analyze drilling results and confirm the metal content of their deposits. These individuals, called Qualified Persons or QPS, have little to no contact with investors, but have an enormous impact on whether mining projects get developed and how they are perceived in the market. They also have a lot of leeway in how they interpret data, which can sometimes lead to projections that are far too enthusiastic or — less often — too cautious.
The QP is a key cog in National Instrument 43-101, the series of mining disclosure rules that were introduced in Canada after the Bre-X scandal. The idea behind 43-101 was to improve investor confidence by forcing mining companies to meet very specific guidelines when reporting reserves and resources.
The QP provides independent verification of a company’s data. A miner cannot report a 43-101compliant resource estimate for a deposit until a QP has pored over and vouched for the drill results. The resulting technical report is one of the most crucial documents a junior mining company produces, because it has that independent seal of approval. There is no reason for QPs to be anything but honest, since they receive only a fee however the report turns out.
“When they were putting together 43-101, they looked at the experience in Australia and other places and realized that the insertion of the Qualified Person was the linchpin to this whole thing,” said Greg Ho Yuen, a partner in Fasken Martineau’s global mining group.
QPs are regulated and have to abide by a general set of rules, just like in accounting, law or any other profession. And, just as in other professions, they often have to exercise their personal judgment. No two mining properties are exactly the same, and some QPs are simply more aggressive than others. Two QPs could come up with different interpretations of the same data without doing anything blatantly wrong.
Sometimes it simply comes down to the parameters a company is using. Take Endeavour Silver Corp. The Vancouver-based miner recently acquired a mine called El Cubo from AuRico Gold Inc. and this week released its own QP-approved report on the mine’s reserves and resources. The decline from AuRico’s numbers was startling: Silver and gold reserves plummeted by 62% and 65%, respectively, while resources fell 55% for silver and 64% for gold.
AuRico’s figures weren’t wrong, but Endeavour used much more conservative estimation parameters than AuRico, and focused on higher-grade material. The decline in reserves and resources was not treated as terrible news, and Endeavour’s shares actually rose on Monday after the report came out. All the same, some in-
Some QPS say they are under pressure to deliver numbers clients want
vestors were stunned by the magnitude of the drop between two independently verified resource estimates.
“We took a hard look at what we felt was mineable vis-à-vis reserves, and we also felt it very important that this operation make more money than it was. For us, that simply meant focusing on grade,” chief executive Bradford Cooke said on a conference call.
Occasionally, a QP will do something far out of the ordinary, such as using overly optimistic metal price assumptions, or deriving a huge amount of reserves and resources with limited data to back up such assertions. When that happens, the company gets a call from the regulators.
The example getting the most attention these days is Barkerville. Six years ago, the indicated gold resource at Cow Mountain was calculated at 431,000 ounces. In late June, Mr. George calculated that there were 10.6 million ounces. He further estimated that the geological potential of the project was 65 million to 90 million ounces. If those numbers are accurate, Barkerville is sitting on one of the greatest gold finds in Canadian history.
“If you plotted these reports in terms of quality and in terms of reliability, you will find a bell curve. And this guy is above the 99th percentile in his optimism,” said Henrik Thalenhorst, a veteran geologist at Strathcona Mineral Services Ltd.
This is not the first time Mr. George has been in the spotlight. In 2010, he worked on a resource estimate for Rubicon Minerals Corp. that was restated lower after regulators intervened. He also provided a bullish assessment of the Bruce Channel deposit in Ontario, which Goldcorp Inc. eventually acquired for $1.5-billion.
While he runs his own small firm, some miners hire QPs from large consulting firms to verify their data. These firms have their own peer-review process to analyze results and avoid anomalies. In some cases, they may use more than one estimating geologist for a 43-101 report.
Looking beyond outliers such as Barkerville, Mr. Thalenhorst worries more generally that QPs can be influenced by pressure from the mining companies, which naturally want the best possible results and may encourage people to look at data a certain way. “Particularly a younger person can be affected by that,” he said.
Robert Holland, chief mining advisor at the BCSC, said the commission gets feedback from QPs who say they are under “tremendous” pressure to deliver the numbers clients want. It is an inherent conflict of interest in the system. More broadly, he thinks junior mining disclosure has become more aggressive in recent months as companies slog through a rough bear market.
“They’re competing with everyone else for scarce resources. And so maybe they figure they can get an advantage by being a little more aggressive,” he said.
Of course, sometimes a QP simply gets things wrong. Mr. Thalenhorst provides a theoretical example: Imagine there is a drill intercept of 10 metres, with two metres of 5% copper and eight metres of 0.1% copper. The average grade works out to 1.08%. If a copper cutoff grade of 0.5% is used in the resource estimate, the entire 10-metre intercept might be included by utilizing the 1.08% average, even though just two metres are above the cutoff. While that seems ridiculous to even the most untrained eye, he said it is the kind of thing that sometimes happens.
If QPs do make mistakes, they are referred to their professional association, the Canadian Institute of Mining, Metallurgy and Petroleum. Class-action lawyers are also on the prowl for miners that report numbers way out of line. Put together, these factors keep the system functioning reasonably well.
But for investors, the message is obvious: QPs may be professional geologists, but their word is not the last word. Like many other aspects of 43-101, QPs build investor confidence without being any kind of perfect solution.