Mineral Reserve

A Mineral Reserve is the portion of a Mineral Resource that has been confirmed to be legally and, most importantly, economically extractable. Think of it this way: a 'Mineral Resource' is like knowing there's treasure buried on an island. A Mineral Reserve, however, is the detailed business plan for digging up that treasure. It confirms not only that the gold is there, but also that you have the permits, the technology, and a sound financial reason to go get it. This conclusion is reached after rigorous engineering and financial analysis, known as a Feasibility Study. This study considers all the “modifying factors,” including mining methods, processing, economic viability, marketing, legal, environmental, social, and governmental factors. In short, a reserve isn't just a geological guess; it's a bankable asset on a mining company's balance sheet, representing the ore that can be profitably mined under current and expected conditions.

For anyone looking to invest in a mining company, understanding the difference between a resource and a reserve is non-negotiable. A company's entire value proposition is built upon its reserves. These are the assets that will generate future Cash Flow. While a vast 'Mineral Resource' sounds impressive, it carries significant uncertainty. It's potential, not a plan. A Mineral Reserve, on the other hand, has a high degree of confidence attached to it. It has passed the crucial test of profitability. As a value investor, you're looking for certainty and a margin of safety. A company with a large and growing base of high-quality reserves is fundamentally more robust and less speculative than one that only touts its resources. The reserves are the tangible, economic engine of the company.

The journey from a geological anomaly to a mineable asset is a process of de-risking and increasing confidence. Geologists and engineers use a classification system to communicate this level of certainty to investors. At the highest level, you have Resources (the potential) and Reserves (the economically viable plan). Within reserves, there are two key categories you'll see in company reports.

Understanding this distinction helps you gauge the quality and certainty of a company's core assets.

• Probable Mineral Reserve: This is the part of a resource that has a lower level of confidence than a 'Proved Reserve' but is still considered economically mineable. The engineering and geological studies are sufficient to support a mine plan, but some of the technical or economic details might be based on less detailed data. Think of it as a well-researched business plan that still has a few assumptions to be finalized.
• Proved Mineral Reserve (or Proven): This is the gold standard. A Proved Reserve has the highest degree of geological and economic confidence. The size, grade, and characteristics of the ore body are known with great certainty from detailed drilling and sampling. The mine plan, processing methods, and costs are fully engineered and understood. For an investor, these are the most reliable and bankable assets a mining company holds.

Scrutinizing a company's Mineral Reserves is a cornerstone of due diligence in the mining sector. It allows you to look past the marketing hype and assess the true substance of the business.

Always look for a company's official reserve statement, typically found in its annual reports or technical filings. These reports are governed by strict regulatory codes designed to protect investors from misleading information. Pay attention to which code is being used:

• The JORC Code in Australia.
• NI 43-101 in Canada.
• S-K 1300 in the United States.

These codes ensure that the estimates are prepared by a qualified professional and are based on sound evidence.

This is a critical point for value investors. A Mineral Reserve is only a reserve because it's profitable at a certain Commodity Price. Companies must state the price assumptions (e.g., gold at $1,800/ounce, copper at $3.50/pound) used in their calculations. Be wary of companies using overly optimistic price forecasts. If a company calculates its reserves using a gold price of $2,500/oz, and the actual market price falls to $1,900/oz, a significant portion of that “reserve” may suddenly become uneconomic to mine and could be downgraded back to a resource. Look for companies that use conservative price assumptions, as this provides a greater Margin of Safety.

Mining is, by its very nature, a depleting business. Every tonne of ore mined reduces the company's reserves. A healthy mining company must constantly replace what it mines. A key metric to watch is the Reserve Replacement Ratio, which shows whether a company is finding or acquiring more ounces of metal than it's producing. A company that consistently fails to replace its reserves is, in effect, slowly liquidating itself.