Probable Reserve

Probable Reserve is a term you'll frequently encounter when exploring companies in the oil, gas, and mining sectors. Think of it as the middle child in the family of resource estimates, sitting snugly between the reliable older sibling, Proven Reserves, and the more speculative younger one, Possible Reserves. A Probable Reserve is an estimate of a resource (like oil, gas, or gold) that is not yet “proven” but has a good chance of being commercially extracted. The official definition usually pegs this “good chance” at a probability of at least 50%. These estimates are based on geological and engineering data from nearby locations but aren't confirmed by the rigorous testing required for a reserve to be classified as proven. For investors, they represent potential future value that isn't quite bankable yet.

For a Value Investing practitioner, understanding Probable Reserves is about seeing beyond the obvious. While the market correctly values a company heavily on its rock-solid Proven Reserves, it often applies a steep discount to Probable Reserves—or sometimes, ignores them altogether. This is where opportunity can knock. A company with a large stash of Probable Reserves holds significant upside potential. If further drilling and analysis lead to these reserves being upgraded to “Proven” status, the company's asset base can suddenly swell, often leading to a sharp increase in its stock price. A savvy investor who has done their homework might identify a company where the likelihood of this upgrade is much higher than the market believes. This creates a potential Margin of Safety; you're buying into future growth at a bargain price. However, the key word is “probable,” not “certain.” The risk is that these reserves never get upgraded, leaving them as just a footnote on a geologist's report.

To truly grasp Probable Reserves, it helps to see them in context with their siblings. In the industry, these are often referred to as the “P” categories.

These are the crown jewels. Proven Reserves have a high degree of certainty (typically 90% or greater) of being recovered under current economic and technological conditions. Analysts often refer to them as “1P” reserves. When a bank lends money to a resource company, this is the number they care about most. It's the most conservative and reliable measure of a company's resources.

As we've discussed, these are the “likely” reserves, with a 50% or greater chance of recovery. They are less certain than Proven Reserves but are based on solid geological evidence. When analysts want a slightly more optimistic but still reasonable view, they combine Proven and Probable reserves. This combination is known as 2P Reserves (1P + Probable = 2P) and is a very common metric for valuing resource companies.

This is the most speculative category. Possible Reserves are based on more limited geological data and have a lower chance of being recovered (typically estimated at 10% or more). They are the “long shots.” Combining all three categories gives you 3P Reserves (Proven + Probable + Possible), which represents the most optimistic, high-risk view of a company's potential resource base.

Let's imagine two mining companies, Solid Gold Inc. and Potential Metals Corp., both trading at the same price.

• Solid Gold Inc. proudly announces it has 1 million ounces of Proven (1P) gold reserves. The market understands this and has valued the company accordingly.
• Potential Metals Corp. reports 800,000 ounces of Proven (1P) reserves, but it also reports an additional 500,000 ounces of Probable Reserves.

At first glance, Solid Gold looks like the safer bet. However, the market, being cautious, might be valuing Potential Metals almost entirely on its 800,000 Proven ounces, effectively giving you the 500,000 Probable ounces for free. If you do your research and find that the geological signs are strong for those Probable Reserves to be converted to Proven, you've found a potential bargain. If the conversion happens, Potential Metals will suddenly be sitting on 1.3 million ounces of Proven reserves, and the market will likely rush to revalue the company upwards.

Probable Reserves are a measure of calculated potential. They're not as certain as cash in the bank, but they're far more tangible than a wild guess. For investors willing to look beyond the headline numbers and understand the underlying geology and economics, analyzing a company's Probable Reserves can be a powerful tool for uncovering hidden value in the resource sector.