RESOURCE AND RESERVE AUDITS

GAA TALK

PERTH, WA

MAY 10, 2004

RESOURCE AND RESERVE AUDITS BECOMING

INCREASINGLY COMMON

TYPES OF AUDITS

• Review of Methodology (“Fatal Flaw”)

• Due Diligence – (“Sign Off”)

• Endorsement – (“QA-QC”)

SUGGESTED STANDARDS IN RED

REVIEW OF METHODOLOGY (1)

• 1-2 Days

• Site Visit Preferred

• Adequacy of Database to Support Resources and Reserves

• Identify Risk Areas

REVIEW OF METHODOLOGY (2)

• Review Geological Controls

• Review Selectivity of Mining Operation

• Problem: Time or Scope Sometimes Insufficient to Find Fatal Flaw

DUE DILIGENCE (1)

• Duration Typically Several Weeks

• Review Procedures

• Database Check

• Implementation Check

• Suitable to Support Project Financing, CP, 43-101,10-K and 20-F Reports, etc.

DUE DILIGENCE (2)

• Site Visit Mandatory

• Field Check Hole Locations (5-10%)

• Verify Down-hole Surveys (5%)

• Verify Assays (5% Routine, Others That Appear Anomalous)

• Data Entry Error Rate < 1%

DUE DILIGENCE (3)

• Review Sampling Procedures, Core Recovery, RC Weight Recovery

• Check Grade Versus Recovery

• Check for Down-hole Contamination

• Check Density Determinations (Number, Method)

DUE DILIGENCE (4)

• Visit Assay Laboratory, Submit Checks

• Review QA-QC

- Coarse Rejects (1:20)

- Pulp Duplicates (1:20)

- Standard Reference Materials (1:20)

- Blanks (1:20)

Cu Standards Analysed by ITS (n = 718) Percent Relative Difference from Certified value

-15.00

-10.00

-5.00

0.00

5.00

10.00

15.00

0 100 200 300 400 500 600 700

Time series

Re

lati

ve

Dif

fere

nc

e (

%)

AABY std

Assay method change:

1st lab audit

AABY bias +1.7 RD

1 kg prep

DUE DILIGENCE (5)

• Is Sampling and Assaying Protocol Reasonable?

• Check for Bias (Ideally < 5%)

• Check for Precision

- 90% within +/- 20% for Coarse Rejects

- 90% within +/-10% for Pulps

Intralab Pulp Check AssayAbsolute Relative Difference

0

5

10

15

20

25

30

35

40

0 10 20 30 40 50 60 70 80 90 100

Percentage of Samples

Ab

solu

te R

elat

ive

Dif

fere

nce

less than ten times dl excluded

DUE DILIGENCE (6)

• Logging Suitable, Consistent

• Geological Interpretation is Reasonable

• Supported by Plans and Sections That Reconcile

• Ore Controls Clear

• Compare to Similar Deposits

DUE DILIGENCE (7)

• Check Choice of Rocktypes for Modeling (Particularly Ore Controls)

• Check Grade Distributions

• Check Domaining (Get Coefficient of Variation Down, Below 1 if Possible)

• Check Compositing (Consider Length versus Geological Variability, Mining Selectivity)

DUE DILIGENCE (8)

• Check Frequency Distributions (Histograms) for Outliers

• Check Capping or Outlier Restriction:

Adjust Risk to 20th Percentile for High-Grade Population

DETERMINATION OF METAL-AT-RISK MONTE CARLO SIMULATION

SIMULATION RESULTS PERCENTILE NUMHI TONS GRADE METAL 0 0 0. 0.000 0.000 10 3 28686. 141.140 5195.417 20 4 38248. 147.920 6997.185 30 5 47810. 155.454 8231.544 40 6 57372. 160.977 9321.229 50 6 57372. 166.887 10550.424 60 7 66934. 175.153 11647.569 70 8 76496. 183.816 12978.694 80 9 86058. 195.052 14614.562 90 10 95620. 217.760 17096.092 100 15 143430. 427.135 30505.174

DETERMINATION OF METAL- AT-RISKRISK ADJUSTMENT

DETERMINATION OF RISK-ADJUSTED METAL CONTENT METAL CONTENT KILOUNITS UNADJUSTED ADJUSTED LOW GR 27341.305 27341.305 HIGH GR 10895.458 6997.185 ADJUSTED TAKEN AT 20TH PERCENTILE TOTAL 38236.762 34338.488 RATIO ADJUSTED/UNADJUSTED = 0.8980 METAL-AT-RISK = 10.2%

DETERMINATION OF METAL- AT- RISK

Expected

High-grade Composites in

Period

Area No. Currently Available

Composites Mined in

year

High-grade

Threshold (g/t Au)

No. %

Metal Represented

Metal at Risk

High-grade Indicated

113 110 7 5.8 28.5 % 11.2 %

Low-grade Indicated

113 50 5 4.8 27.1 % 13.0 %

DUE DILIGENCE (9)

• Check Variography – Have Variograms Been Computed in Down-hole Direction? Has Lag Been Adjusted to Composite Length?

• Are Models Consistent in 3 Dimensions?

• Do Variogram Domains Reflect Zoning?

DUE DILIGENCE (10)

• Check Interpolation Plan – Is There Stationarity of Mean Within Selection Neighborhood? Are Soft, Firm, Hard Boundaries Reasonable?

• Is There Overprojection of High-Grade Due to Increased Data Density?

AuZone 2 (East) - Contact Analysis

0.0

0.5

1.0

1.5

2.0

2.5

-70 0 70

Distance from Contact

Au

Gra

de

(g

/t)

Samples

Composites

AuZone 4 (West) - Contact Analysis

0.0

0.5

1.0

1.5

2.0

2.5

-70 0 70

Distance from Contact

Au

Gra

de

(g/t

)

Samples

Composites

CuZone 2 (East) - Contact Analysis

0.0

0.5

1.0

1.5

2.0

2.5

-70 0 70

Distance from Contact

Cu

Gra

de

(%

)

Samples

Composites

CuZone 4 (West) - Contact Analysis

0.0

0.5

1.0

1.5

2.0

2.5

-70 0 70

Distance from Contact

Cu

Gra

de

(%

)

Samples

Composites

DUE DILIGENCE (11)

• Verify Interpolation Program: Composite Selection, Weights

• Validate With Simple Model (Nearest Neighbor – Swath Plots

• Check Selective Mining Unit Distribution Versus Grades; SMU Consistent with Production Rate?

Tonnage Versus Cutoff Grade

0.010.020.030.040.050.060.070.080.090.0

100.0

0.0 0.5 1.0 1.5

Cutoff Grade

Per

cen

t A

bo

ve C

uto

ff

SelectiveMining Units

Block GradeEstimates

Average Grade Versus Cutoff Grade

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

0.0 0.5 1.0 1.5

Cutoff Grade

Gra

de

Ab

ove

Cu

toff Selective

Mining Units

Block GradeEstimates

Ratio Blocks to SMUs Versus Cutoff Grade

0.00

0.20

0.40

0.60

0.80

1.00

1.20

0.0 0.5 1.0 1.5

Cutoff Grade

Ra

tio

Tonnage

Average Grade

Metal

DUE DILIGENCE (12)

• Review Sections and Plans Showing Block and Composite Grades

• Assess Risk, Need for Drilling

DUE DILIGENCE (13)

• Review Classification of Blocks as Measured, Indicated, Inferred

- Measured = +/- 15% with 90% Confidence on Quarterly Basis = Confirm Continuity

- Indicated = +/-15% with 90% Confidence on Annual Basis = Assume Continuity

KONIAMBO NICKEL – ORE THICKNESS

RESOURCE THIKNESS > 2m THICK and >2%Ni

Input Data

EXAMPLE CONDITIONAL SIMULATION

QUARTERLY CONFIDENCE LIMITS

Quarter Confidence Limits for reblock

ANNUAL CONFIDENCE LIMITS

Annual Confidence Limits for Reblock

DUE DILIGENCE (14)

• Check Resource Statements

• Check Final Model for Mine Planning: External Dilution Factors Reasonable?

• Mining (Ore) Recovery Reasonable?

EXTERNAL DILUTION SIMULATION

ASSUMPTIONSVein Strikes North +/- 10 DegreesVein Dips East 7- to 90 DegreesMining Comes in from East - Face Angle Dips 70 Degrees East

Mine from Mixing Dilution Ore Loss NetZone From (m) To (m) Hz, Width Hz. Width Increase/

Width (m) (m) (m) Decrease(m)

Hw waste into vein 1 0.5 1.5 1.17 0.16 1.01Hw waste into vein 1 1 2 1.57 0.06 1.51Vein into Fw waste 1 -1 0 0.81 0.33 0.48Vein into Fw waste 1 -1.5 -0.5 1.15 0.17 0.98Vein into Fw waste 1 -2 -1 1.56 0.07 1.49

Position of Mining Face

DUE DILIGENCE (15)

• Geotech/Hydrogeology in Hand to Support Slopes, Stope Design?

• Metallurgical Data Representative, Sufficient?

• Prices, Costs Reasonable?

• Cutoff Grade Reasonable? Assess Risk

• Mine Design Refined, Annual Production Schedule? Assess Risk

DUE DILIGENCE (16)

• Review Past Production Versus Models Ideally Within 5% (Cu), 10% (Au)

- Grade Control to Model – Check Planned Dilution/Ore Loss (Aim for 0%)

- Plant to Model – Check Unplanned Dilution/Ore Loss (Within 5-10%)

• If You Do Not Measure It, You Cannot Control It!!!!!!!!

Changes In Resource Tonnage (000's)

10130

-1788

1198

-2134

12854

-5000 0 5000 10000 15000

Old Model Begin Year

Depletions

New Model

Change in Cutoff Grade

New Model End of Year

DUE DILIGENCE (17)

• Review Other Factors: Legal, Environmental Permits, Socioeconomics, Sales Contracts

ENDORSEMENT

• Same Procedure as Due Dilligence

• Responsible for QA-QC of Entire Data Entry, Resource Modeling, Reserve Conversion

• Anticipate Needs of Future Auditors

CONCLUSIONS

• Resource and Reserve Modeling is a Serial Process

• Even Small Errors (10%) Can Make Big Impact on Profits; Nearly Everything is Potentially Material

• ASSUME NOTHING; CHECK EVERTHING

• TRUST NO ONE

PARALLELISM TO FINANCIAL AUDITS (1)

• Based on Discussions with:

- Matthew Hird (Deloitte & Touche)

- Jason Burkitt (PricewaterhouseCoopers)

PARALLELISM TO FINANCIAL AUDITS (2)

• Financial Audits: Follow the Money

• Resource/Reserve Audits: Follow the Metal

PARALLELISM TO FINANCIAL AUDITS (3)

• Same General Steps

- Planning

- Field Work

- Check Correctness of Presentation

DIFFERENCES

• Financial Audits Rely More on Test of Controls; Procedures are Routine; Are They Followed?

• Emphasis on Risk Areas That Could Affect Viability of Business, Incorrect Statement of P/L, Balance Sheet

• Analytical Review a Major Tool

DIFFERENCES

• Codified Industry Standards for Accounting and Audits

• Working Papers Highly Structured

• Extensive Internal and External Peer Review

WHERE WE MUST GO

• Better Definition of Best Practice

• Publication of Audit Standards

• Corporate and Regulatory Policies on When Audits Required

SEC/SME RESERVES WORKING GROUP

• Commodity Prices (3 year average versus ?)

• Definition/Declaration of Resources

• Definition of Feasibility Study

- Base Case Versus Optimization

• Permitting Requirements

• Competent Person

JORC CODE VERSUS CIM 43-101 AND SEC

• JORC Code is a Minimum Standard

• Contains Loopholes or Loosely Interpreted- Geological and/or Grade Continuity- Inferred Resources Given Positive Value to

Support Pit Designs Used to Declare Reserves

• Measured Resources Much More Restrictive in Canada, not Used Much in USA

• SEC More Active, Strict than In Past but Selective Enforcement

• Regulatory Pressure to Upgrade Standards

CHALLENGES

• Fast-track Drilling and Resource Modelling

• Increasing Optimization in Engineering

• Declining Cutoffs Increase Risk of Failure

• Pigrooting in Sparsely Drilled High-Grade Areas

• Narrow Cuts to Minimise Stripping

• GPS Controlled Mining, Robotics

MEETING THE CHALLENGES

• Increased Education and Training

• Take Back R+D from Vendors

• Conditional Simulation to Become Routine Tool

• Increased Drilling Density to Support Design

• More Focus on Reconciliation and Improvement

• Standards, Professionalism and Audits