what do I commonly see in studies that I examine on behalf of stock exchange on behalf of investment banks and others firstly the cot the competent or qualified person the question to ask is can this competent person be cross-examined by their peers in a court of law and justify their status and the opinions that they have some examples of things that I see an expiration geologists endorsing a reserve estimate there's nothing inherently wrong with this provided that the expiration geologists can demonstrate significant exposure to engineering expiration geologists are trained as geologists they're not trained as engineers so in most cases I'd be extremely cautious in this situation a metal geologist endorsing a coal resource I've worked in metal mines all my life I've never worked in a coal mine there is no way that I would ever endorse a coal resource but I have seen this as an example maybe this guy does know something about coal but more than likely not and the resource estimates endorsed by this person are more than likely to be fundamentally flawed non-western trained professionals often take a formulaic approach to the estimation of resources and reserves every all body is different every all body requires an individual independent approach therefore it is mostly in appropriate to apply some kind of a formulaic structure to the investigation of resources and reserves you also need to be wary of what's called one-man bands or single operators and second-tier consultancies typically these individuals these organizations do not have the depth to undertake large and complicated resource and reserve estimates they may be entirely appropriate in smaller simpler projects but for the more complicated larger projects you need an organization with depth and reputation in terms of financials the capital payback period needs to be well defined typically three maybe five or eight years the effect of discounting as I mentioned earlier means that beyond about eight years when applying a reasonable discount rate for a mine ten percent maybe more the cash flow beyond this period of time has very little value this requires that cutoff grades be varied throughout the course of the operation of that mine a well-managed mine will commence operation with a very high cutoff grade this means that the head grade of the ore is very high as well which results in large margins in order to pay back that capital the cutoff grade is then varied throughout the course of the life of the mine in response to either capital requirements for sustaining capital or changing market conditions a strategy must be applied to it and this sort of strategy needs to be enunciated in any documentation associated with the project and this affects the project's value discount rates are one area where I see the greatest degree of manipulation in my view it is not appropriate to apply a discount rate of somewhere less than say eight percent to a mining project the Hong Kong Stock Exchange stipulates that the minimum discount rate applied to mining projects is ten percent in my exposure to bhp the world's largest mining company I know that for their purposes the discount that they applied to their tier 1 projects is twelve percent they are inherently conservative the application of these elevated discount rates irrespective of the cost of capital encompasses the risk associated with the mining project and ensures that an appropriate strategy has taken early in the life of the mine to repay capital in relation to marketing commonly I see forecasting of metal prices beyond consensus that is too far into the future to have any confidence whatsoever there are 38 banks that are prepared to forecast the gold price in 18 months time however only five banks are prepared to forecast the gold price in five years time therefore it can be reasonably concluded that nobody knows what the gold price is going to be in five years time nobody really knows what the American dollar exchange rate is going to be in three or five years time therefore when people have metal prices forecast out 8 10 15 years significant caution has to be applied to these forecasts and the valuation of a project adjusted accordingly people often don't consider the effect of contaminants in the or concentrates produced by a particular mining operation the customers apply a penalty to these contaminants and again referring to the iron ore market high silica high aluminium low grade iron ore no longer has a place in the market for the last five or eight years large volumes of this material has been sold however the Chinese have completed rail construction and for the most part large building instruction they no longer need this low-grade iron ore to produce low quality steel that market is moving into white goods into automobiles things that require a higher quality of still there for a better quality of raw ingredient this marketing was poorly researched by many of the mining iron ore mining projects that in recent years have struggled geotechnical parameters which is the strength of the rock in which the mine is constructed are very rarely adequately covered if the mine walls fail if the tunnels fail underground then the entire investment has been lost I can't stress the importance of undertaking good competent geotechnical investigation of a mining project fixed and operating costs are very rarely adequately expressed or estimated in reality the operating cost of a mining project is actually derived from gravity we're trying to lift a piece of rock from down here to a point elevated from its origin the way that we do this is using energy typically diesel in an engine that has an efficiency of somewhere less than twenty percent so there really is not much variation in the operating costs of mines around the world dependent on the price of diesel in a local environment and from the most part I don't see a great deal of variation in diesel prices if there is access to cheap energy then a mind may be able to gain an operating cost advantage productivity is often poorly factored for a local operating environment in most cases I see mining engineers simply take manufacturer productivity estimates and apply these to whichever market that they are operating in this is inappropriate because there is no way that you'll get the same productivity from a piece of equipment in a developed nation as you will in a developing nation the skills of the operators of that equipment are just not present in that environment and the productivity suffers accordingly this leads us to fixed costs which are often opaque fixed costs are very well very rarely well factored into the mining operation fixed costs the costs of the head office the cost of supply of a base load of power to that plant the cost of interest on loans required to keep the mine in operation these are all examples of fixed costs that are very rarely well expressed or estimated in any mining project that I see resources I often see uncritical use of resource models the various reporting codes that I am required to operate under particularly in relation to valuations require me to make informed criticism of the resources on which these valuations are based associated with this is very poor dilution waste rock that is unavoidably mind with the ore is very poorly factored into the estimates similarly with reserves if I can't forecast metal prices or currency exchange rates Beyonce five maybe eight years then I do not have a suitable basis on which to estimate a reserve I'm quite comfortable with a mind having an implied reserve of five or eight years worth of mine life and a large resource beyond that unless the grade of that mine is so high that that commodity is going to be mined in any circumstances which is not the case with most minds in my view it is unjustified to estimate reserves that imply a mine life beyond five maybe eight years these reserves require an underlying schedule to demonstrate that the or can actually be mined no schedule no reserve and associated with the schedule is required sensitivity analysis and all of this again is under laid by some metallurgical assumptions that need to be justified some external factors that influence valuations licensing the cost of rehabilitation either during or at the end of the minds life this is effectively a fixed cost that needs to be treated as such during the course of the mines financial model all of this requires supporting documentation there needs to be a justifiable basis for any of these assumptions and estimates Australia is a amateur mining market and investors there even if they may be somewhat simplistic in their understanding of mining projects do have some understanding of the confidence that geologists mining engineers placing resources and reserves so there is some degree of understanding of this I also add that as a mature market the Australian Stock Exchange's attitude is that if you invest in a two cent share and lose your money that's your problem they're not regulators the assumption is that investors in these mature markets such as Australia have access to enough knowledge to be able to inform their own investment decisions so it's very much at your own risk in somewhere like Australia my experience in Hong Kong and Singapore is that the exchanges here provide a far more regulatory control over what is released on their exchanges recognizing that investors are far less informed about what they're investing in if you like undeveloped stage of the Asian market that's possibly appropriate much as I personally do not like to see that sort of regulation I think perhaps it is appropriate in this early market until investors here have the confidence to do their own research and make informed investments based on opinions gained from experience