- Reserves

Sampling

Reserves and resources are based on assays of the metal content in samples taken from the rock that constitute the reserves or resources. In greenstone gold deposits small pockets of very high grade gold, including visible gold (VG) and nuggets are relatively common. However, the average grade mined is what is important.

This is affected by the average grade of the orebody and how much waste rock (dilution) is imposed by the mining method used. The sometimes extreme variation of gold grades in greenstone deposits often forces management to "cut" high grade assays so they don't distort the calculation of the average forecast gold grade.

The "gold standard" for assays is a diamond drilling, which yields a tube of rock which is split or cut in two lengthways. Typically one half is assayed for its gold content while the balance is kept as a reference sample. In large, often lower grade deposits, the cheaper reverse circulation drilling, which yields chip samples, is often used with diamond drilling used as a periodic check.

The confidence in the individual samples is lower, but this is balanced by the ability to drill more holes for more samples but when drilling in waterlogged rock the reported grades can be greatly distorted.

Channel sampling involves chipping or cutting a groove across an exposed vein or part of the orebody. If this is done carefully it can yield a good quality representative sample, but it does require a relatively high level of skill and care. Other sample methods include chip and grab samples, a methodology often used in early-stage exploration.

Reserves

Reserves represent that part of a gold miner's mineral inventory that has been shown to an acceptable confidence level to be economically viable. This means that work has been done to ensure that:

- The company has a solid title to the orebody and all relevant permits have been acquired.

- The responsible geologist has established the size and grade of the deposit to an acceptable confidence level.

- The engineering staff has satisfied themselves that the ore can be extracted at a cost that generates positive cash flow at the gold price used for the reserve calculation (the SEC - Securities and Exchange Commission of the United States Government - now stipulates that the gold price used should be the 12 quarter rolling average).

If this ore is at a new mine, then engineering has been done on all required infrastructure, and this has been costed to ensure that the total cost of the new project will allow the project to deliver (at the very least) a positive cash flow.

The reserve calculation does not normally specify a rate of return other than a positive cash flow. However, mining companies would typically expect a rate of return on new projects that covers their cost of capital, with a premium to cover the project's risk level.

Resources

Gold ounces in the resource category are there because they fail one or more of the above tests for reserve ounces.

A closer fix on the level of quantification can be gained by looking at the resource categories where a mining company offers such a breakdown. Resources are often broken into three groups-measured, indicated and inferred-with the main difference between the three categories being the distance between the samples that are taken.

In measured, the sampling areas are spaced closely enough to confirm both geological and grade continuity, while in indicated they are spaced closely enough for geological and grade continuity to be reasonably assumed.

Measured and Indicated (M&I) are the better measured ounces, and once the other requirements are satisfied, these measured ounces could be added to reserves. Inferred ounces are much less well quantified and require more drilling to raise the level of confidence required for M&I and ultimately admission into reserves.