What is best practice when it comes to estimating and reporting your aggregate reserves? How can your business make sure it has done all it can to get the right assets on the books? Poor estimation or reporting and a good business suddenly looks like a bad bet. Embed best practice in strategic business planning and achieve a managed mineral asset portfolio with no surprises, argues Neil Wells.
International reporting standards provide a common basis for understanding resources and reserves information worldwide. Yet reserve and resource estimation and reporting for the minerals industry has had a chequered history and has been at the heart of a number of investment scandals. One of the biggest areas of concern has been exactly what is meant by the terms ‘reserves’ and ‘resources’, how and by whom these have been estimated and obligations to investors using such information to understand risk when determining investment opportunity.
A lack of clear definitions of terms and the factors relevant to estimation led to an international initiative to standardise market-related reporting definitions for mineral resources and mineral reserves. In 1997, a working group with representatives drawn from the US, Canada, Australia, South Africa and Europe reached agreement for the definitions of the two major categories, Mineral Resources and Mineral Reserves, and five sub-categories. These definitions form the core of national and regional reserve and resource reporting codes and standards, which continue to be developed and expanded to address the needs of all mineral industry sectors, including aggregates. The international standards for both publicly listed and privately owned aggregate producing companies are maintained by CRIRSCO (the Committee for Mineral Reserves International Reporting Standards). CRIRSCO provides and maintains a reporting template on which all national and regional reporting standards are based, ensuring compatibility and co
nsistency in reporting practices worldwide. This has important implications for minerals companies listed on stock exchanges, a number of which require information to be reported in accordance with codes and standards compliant with the CRIRSCO template.
Figure 1 shows the geographical area for which codes and standards compliant with the CRIRSCO template have been adopted. These codes and standards are mutually recognised, which may be an important consideration for international operators with activities in more than one region.
In Europe, PERC (the Pan–European Reserves and Resources Reporting Committee) is the organisation responsible for setting standards for public reporting of exploration results, mineral resources, and mineral reserves. PERC is a member of CRIRSCO, and the PERC Reporting Standard is fully aligned with the CRIRSCO Reporting Template, hence with other international reporting standards.
PERC has been particularly active in developing guidelines applicable to the estimation and reporting of reserves and resources exploited by construction materials companies.
Is investor confidence any different from company confidence?
Investor decisions and business decisions made by aggregate companies basically are driven by the same fundamental need – confidence in the information available.
The PERC Reporting Standard, in keeping with all CRIRSCO compliant reporting, is based on four core principles that provide this confidence:
Transparency: Sufficient information which is clear and unambiguous and follows recognised definitions
Materiality: Reasoned and balanced judgements are based on relevant information
Competence: The work is the responsibility of suitably qualified and experienced Competent Persons, subject to an enforceable professional code of ethics and rules of conduct
Impartiality: The Competent Person is not influenced by those commissioning any report.
The information is clearly communicated by the specialists (those preparing estimates) to non-specialists (those using estimates), based on a common understanding of the relevance of the information and the way in which it may be relied upon.
Whilst primarily aimed at external investor protection, internal use of estimates prepared to the PERC Reporting Standard provides benefits to the company, since the information is entirely consistent with that reported externally. This avoids reinterpretation of information and potential confusion when reporting separately for internal and for external purposes.
Integration of a rigorous and documented process for internal reporting supports strategic business planning based on reliable and readily available information in a standardised format. This is especially important for companies operating internationally, since it provides a ‘common language’ when considering mineral resources and reserves.
What factors are taken into account in reporting to international standards?
When defining reserves and resources to the PERC Standard, a range of factors is considered. These include not only confidence in geological information, but also other matters relevant to understanding the potential for extraction. Referred to as ‘Modifying Factors’, these are the principal drivers in determining whether materials are reported as reserves or resources.
The relationship between geological confidence and the Modifying Factors and the definitions of materials as resources and reserves is shown in Figure 2.
Reporting of resources and reserves is not simply an ‘inventory’ of all available mineral in any particular site. The definition of a resource is that part of a mineral deposit for which ‘...there are reasonable prospects for eventual economic extraction’.
It follows therefore that the estimation of the available tonnage must take account of a reasonable excavation profile, allowing for mineral sterilised in slopes, stand-offs to property boundaries, beneath fixed plant and buildings, and under access roads, ponds, tips, etc.
The principal difference between resources and reserves is one of certainty. Reporting resources implies that these materials are likely to be recovered at some point whilst reporting reserves implies a measure of certainty.
How are aggregate companies different from ‘heavy’ mining companies?
In general, aggregate companies operate in a different investment environment to mining companies. These differences relate principally to the relative value of the materials extracted and the perception of risk associated with availability, geological variability and markets.
Mining companies:
• Minerals have high intrinsic value
• Minerals have high susceptibility to geological variability and limited potential of substitution
• Minerals are relatively rare and difficult to extract
• Minerals serve global markets and are sensitive to volatility in traded prices
• Minerals’ prices are fixed globally on the commodities markets
• Reserves estimates are not commercially sensitive information
• Higher market price of the commodity makes them of interest to potential investors, which in turn justifies the higher risk
Aggregate producing companies:
• Materials have low intrinsic value
• Materials have low susceptibility to geological variability and high potential of substitution
• Occurrence of materials is common and they are easy to extract
• Materials serve local markets and are sensitive to transportation costs
• Prices are locally driven (not usually traded on commodity markets)
• Local reserves information is a very commercially sensitive
• Local markets and their continuous demand for construction materials generates a stable income that makes them of interest to those potential investors preferring continuous income with lower risk
These differences and other matters were all considered in discussions with the European Securities and Markets Authority (
Implications for construction minerals companies and access to the bond markets
In the context of preparing a prospectus for a public offer or admission to trading of equity securities, ESMA has now adopted the position that a ‘lighter touch’ in terms of reporting can apply to the large, diversified cement and aggregate companies due to the characteristics of their business models. In terms of amount of information reported, the ESMA recommendations establish principles relating to disclosures which are applied on a case by case basis. As the revised recommendations indicate, ‘…the materiality of mineral projects should be assessed having regard to all the company’s mineral projects relative to the issuer and its group taken as a whole’. The disclosure of resource and reserve estimates for a large, diversified construction materials company is generally necessary in a prospectus issued for an Initial Public Offering (IPO) or in a prospectus issued for the financing of a specific, material mineral project but is not generally necessary in a general prospectus raising capital for general f
inancing of the business.
In addition, ESMA has now adopted the position that for disclosures of reserves and resources for construction materials (if necessary), companies may report based on an aggregation of sites ‘… segmented using a unit of account appropriate to the scale of its operations’.
In essence this addresses the concern that aggregate and similar operations are a local business, and full disclosure for each site potentially provides access to commercially sensitive information for competitors. It also recognises that large aggregate and similar companies are constantly depleting and replenishing their resources, closing sites and replenishing their mineral base (through production and securing new permissions respectively).
It is the value of the portfolio as a whole within each ‘unit of account’ that is important; the impact of a reporting error at one site is generally insignificant when compared with the total mineral bases in a geographical area. Although companies may interpret ‘unit of account’ differently, (which could mean by market area, country, or even regionally, depending on the size and nature of the business) they must, of course, justify their chosen ‘units of account’ in accordance with the guiding principles of materiality and transparency.
A key requirement is that information relating to resources and reserves included in a prospectus is reported to a standard compliant with the CRIRSCO template, even though individual Competent Persons reports are not disclosed. Where sites are aggregated for reporting purposes, submission of individual site reports as part of the prospectus is not usually necessary, unless circumstances suggest that a particular site may be material in the context of the overall portfolio.
It follows therefore that companies should consider estimation and reporting to a standard compliant with the CRIRSCO template as a matter of routine, so that resource and reserve information is readily available should disclosure to the markets be necessary.
The value of reliable reserve and resource estimation for a company
Investors expect to have confidence in information reported since this affects their investment decisions. Equally, companies should have confidence in information, since this materially affects its strategic and operational decisions.
Business decisions at a quarry, either operational or investment, rely on a good understanding of the recoverable tonnages to meet product specifications and matched to the demand for such products. This requires good geological confidence supported by clear development plans. Typically, resource and reserve estimates reflect the long-term plan for the quarry, so deviations from the short and mediumterm plan through the life of the operation can have significant effects on the overall estimated tonnage available for extraction.
When deviations occur, the estimates become unreliable and a revised plan is usually necessary to ensure that the implications on recoverable tonnage are properly understood.
Poor estimation practices in a company, combined with a poor understanding of the implications, result in unreliable and potentially misleading business critical information. This can be especially so when companies have multiple operations spread across many countries or continents where local estimation practices and considerations may vary, or where different standards and definitions have been used in the past.
A single standard for reserves and resources reporting saves time, effort and cost
Although the reporting of mineral resources and reserves to international standards has at its heart the protection of investors, it is apparent that the benefits of such reporting flow into the company as well. Regulatory pressures for reporting might at first consideration appear to be another bureaucratic hurdle for business, but they also present an opportunity for aggregate companies to take stock of their internal practices and standards in respect of estimation and reporting.
Maintaining reliable and robust resource and reserve information and recognising its importance in the business decisionmaking cycle provides significant benefits for operators by reducing uncertainty.
In addition, by having such information readily available and in a format and style that satisfies the PERC Reporting Standard, preparing statements for investors is a simpler task, reducing workload and shortening the time needed to release such statements to the market.
Neil Wells is the Senior Manager responsible for Global Land and Minerals in
