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06-12-2011 
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Stephens Valuation & Consultancy Pty Ltd

 

 

Roderick Stephens BSc (Hons) MC AAPI (CPV)

Evaluation of Reserves and Resources for Quarry Valuation

Introduction

One of the most important aspects of any resource evaluation involves the quarry geology, and it is common to measure the extent of the geology by calculating the quantities of reserves and resources. For definition purposes the valuer terms reserves as being a particular proved resource, whilst resources identifies the broader materials within a geological deposit. The geology also determines the nature, extent and quality of the products, the markets they serve, and the product pricing structure. We also considered in an earlier paper on Quarry Royalties, issues involved in mineral ownership as well as constraints to mineral ownership which also impact on the quarry reserves and resources. Therefore in order to calculate quarry reserves and resources the valuer must have a good understanding of the geology, the ownership rights and the constraints to ownership.

Reserves and Resources

It is usual to split the reserves and resources into several broad categories namely Proved, Probable and Possible. The reserves and resources can also be further classified as measured and inferred, but these measures are outside the scope of this paper.

 

A typical reserves and resources summary would be set out as follows:

 

Classification and Risk

Estimated Tonnage

Life in years

Output in tonnes p.a.

Proved       Low Risk

1,000,000

5

200,000

Probable    Medium Risk

2,000,000

8

250,000

Possible     High Risk

3,000,000

10

300,000

 

 

 

 

Total Resource

6,000,000

23

260,000

 

 

Proved Reserves   Low Risk

The proved reserves indicate a high level of certainty as to the quality and quantity of a particular resource. If a quarry operation is active then quarry faces are often exposed which clearly indicates the geology of the resource in a given area. In addition the quarry material is also processed and regularly tested to establish its consistency for the market. Also proved reserves would generally consist of resources at the back of a known quarry face, but also confirmed by borehole or trial pits or other geological information to fully support the consistency of the resource.

 

 

Probable Resources   Medium Risk

The probable resources would involve areas where very little geological testing has been done, although the likelihood of the resource existing is still very strong. This may involve a single or a few boreholes over a much larger area. As workings progress in the quarry, and quarry faces removed, then probable resources can be converted to proved reserves, as further geology is exposed and the consistency confirmed.

 

Possible Resources   High Risk

The possible resources would either be resources outside of a consented area, or deposits at greater depths than borehole records. There are always geological conditions that can occur within a mineral deposit when a quarry operator least expects it. The presence of an underground fault line can significantly change the geology in a given area. Basalt flows can be relatively shallow away from the main epicentre of a former volcano.

 

In other instances the presence of the water table and the salinity of the water could make the working of a mineral uneconomic. Within limestone there are often cavities that can significantly deplete the quantity of the resources, and create working difficulties, and sometimes potential heritage issues. Clays can contaminate some deposits and make them uneconomic to process. Fissures and faults can also affect the quality of the resource in given areas. Thrusts and overthrows or synclines and anticlines can also impact on a resources quality and can often sterilise a resource within the immediate area.

 

For valuation purposes the proved, probable and possible reserves and resources are assessed to identify the different levels of risk and uncertainty involved in each category. The risk factor should also be adjusted depending on the lifespan of each category and the mineral output.
Insert chart

Calculation of Reserves and Resources

The reserves and resources are calculated by identifying the area of land within which the geological deposit occurs and within any planning or other constraints such as set backs or easements etc. Regard needs to be had to the ownership of the minerals which can change depending upon the geology. Also as workings progress at depth, then quarry benches often have to be retained which also limits the areas involved. The various areas are then multiplied by the depths to provide a total volume of the resource. Once a total volume is derived for the proved, probable and possible reserves and resources, then this is then multiplied by the density of the deposit to provide a total tonnage, which is appropriately apportioned. The density or specific gravity can vary according to the type of geological deposit involved, and can vary with the depth, as deeper resources are often more compacted and have higher densities. Where waste materials are involved, such as clay intrusions for example, or a high silt content within sands for instance, then these are often subtracted from the reserves and resources, or allocated to the possible resources, depending on whether the waste deposits are economical or not.

Life of the Resource

The life of the total reserves and resources can be calculated by dividing the total reserve or resource by the estimated annual output. The life of the resource changes every year as output changes, but also there needs to be a reflection of the market share of the operator, which may change over time as competing quarries close due to lack of resources, and increased outputs could result. Similarly where a new quarry starts up within the area, then this may involve a drop in output which extends the life of the quarry.
 
Insert Chart

 

 

Geology

Geological mapping is available for the majority of populated areas throughout Australia and provides a host of information. However where mapping is not available such as in remote areas then these areas are unlikely to service any sizeable markets and so the valuer would have to make judgements based on the products and consideration of the working faces and any testing or investigations that have previously been carried out.

 

In broad terms geological deposits can often be identified as Sedimentary or Igneous / Metamorphic, which are identified in cross section below.

 

An example of a Sedimentary Deposit is as follows:
 

 

An example of an igneous/metamorphic deposit is as follows:
 

 

 
 

The geological mapping provides a range of information such as the different outcrops and ages of rocks together with detailed descriptions of the rock types. The mapping also shows known and conjectural fault lines, dip of the strata, previous mines, overthrows, thrusts, synclines and anticlines and often cross sections through the stratum. However geological mapping only provides a broad overview of the geology, and a site specific investigation can reveal a very different picture. Therefore the valuer needs to keep an open mind until the mapping information is fully supported by facts from the site inspection.

 

An example of a fault line or fissure is as follows. The overburden on the left may render the resource uneconomical due to the costs of extraction.
 

 

 

An example of an overthrow and thrust (syncline or anticline) is as follows:
 

 

 

The site inspection allows the valuer to confirm established knowledge and to identify additional information. Exposed quarry faces can provide evidence that the quarry resources match the description on the geological mapping. Other geological information can be established by exposure of cuttings for roads and railways, and often erosion from streams and rivers can provide a good indication of geological history within the vicinity. In other instances the flora and fauna can also provide a good indication of the underlying geology, as particular species often thrive under certain underlying geological rock types, but not in others. Quite often the older the rock types which tend to be igneous / metamorphic the more acid the soils can be, whilst younger sedimentary rocks such as limestone, can be more Ph neutral and support a different biodiversity of plant species.

Borehole Information

Boreholes can provide a wealth of information about quarries geology. The extracted cores from the boreholes, can provide an indication of the consistency of the resource at depth. For certain rocks, the quality at depth can be very different to the surface deposit, as often the deeper deposit has been subject to compaction for possibly million of years. As a result the cores can be tested for a variety of purposes to establish the characteristics of the rocks, their properties and in turn determine their end use. Boreholes can also indicate the presence of the water table within a resource, which can be useful for using within the processing operation on site, but also to determine whether high salinity levels occur at depth, which for certain resources can cause working problems or make the resource uneconomic. It is fairly common to drill a borehole from 20 to 30 metres in depth, as often this can provide geological confirmation of the resource for many years, and most operators would limit their investigations once a sizeable resource has been proved.

Trial Pits

Where the resource involves Sand or Sand and Gravel, then the resource can differ quite dramatically over even a 10 metre distance. Therefore investigations for sand or sand and gravel are often undertaken by a trial pit. This involves excavating a large hole often to 3 to 4 metres in depth, and records can then be taken of the cross section of the hole in various directions, but also a representative sample can be taken of the material excavated. A series of trial pits throughout a resource, can very quickly build a strong indication of the geology of the surface deposit. It is also common to find clays beneath sand or sand and gravel deposits and the trial pits can establish the working depth of the resource.

Materials Testing

There are a variety of tests that can be carried out on quarry products. The most common practice involves sieve testing where the different particle size fractions are determined. This needs to be carried out on a regular basis at most quarries, as for hard rock, jaw crushers can wear and alter the particle size produced over time, whilst for sand resources, then unless the particle grading is of particular size fractions, then if the sand is used within concrete, then it can cause structural failure. Other tests involve the hardness of the stone, sometimes known as the 10% Fines test, and this identifies the crushing strength in Newtons per millimetre squared. Road bases materials are often assessed for compaction and plasticity which involves the CBR or Californian Bearing Ratio test. Further, chemical tests for sulphates and chlorides, which can affect concrete and cause it to fail, are also important. There are numerous tests carried out to meet a variety of specifications, and every quarry operator, needs to have a strong understanding of all aspects of testing in order to maximise their product range, and to ensure compliance and consistency for every product.

Hydrology and Hydrogeology

Any evidence of any streams, rivers or springs within the quarry extraction area should be noted. This can have an impact on how the resource is to be worked, whether wet or dry and whether pumping is involved. Some water tables can involve high salinity issues and these need to be carefully monitored as this could render the resource uneconomic.

Overburden

The overburden from the quarry extraction area is often removed and stockpiled around the perimeter of the quarry extraction area and then utilised for future restoration. If overburden is significant then this can render the resource uneconomic.  

 

Some operators leave the overburden in place and carry out blasting, and the resultant blend often involves the right mixture to assist with making road bases. This process is a great advantage for the operators as it removes any costs of stripping, plus the costs of blending. The disadvantage is that there would be no overburden available for restoration and soils may have to be imported at a later date to rectify this situation, which can cost more than the sales benefit of selling the overburden in the first place.

Blasting

Blasting costs can be considerable for any quarry operation. Ironically the harder the stone, the higher the blasting and crushing costs, and often a higher quality stone can be less economical than an alternative stone which still passes the 10% Fines test. Therefore if the stone is harder than it needs to be, then an allowance or discount is often applied to reflect this.

 

How to Value Reserves and Resources

An economic reserve and resource is only worth the income that can be derived from it. There are many instances where operators think that the way to value the resource is to multiply the total resource tonnage of say 6,000,000 tonnes by the royalty of say $3.00 per tonne to provide a figure of $18,000,000. This is clearly wrong but is widely practised and has no regard to the output or market demand or the speed at which the resource is worked or the risk involved within the market place.  

 

A typical resource evaluation is as set out overpage:  

 
Insert Chart
   

The above chart shows how the reserves and resources have been classified into Proved (Blue), Probable (Yellow) and Possible (Green), and risk assessed by increasing the yield to reflect the uncertainty throughout the life of the reserves and resources. The chart also shows changes to the output to reflect changing conditions within the market, changes to CPI (Inflation) which every operator would expect growth from their initial royalty. Other aspects could be reflected depending on the site circumstances and uncertainties of geology. The total value of the reserves and resources derives a value of $5.0 Million as compared to the $18 Million that some operators may adopt where they have no knowledge of the capacity of the market.

Conclusion

The assessment of reserves and resources involves a high degree of specialist knowledge within both geology, the quality of the material, and the nature of the market in which the quarry operates, as well as an understanding of how these factors relate to valuation principles. The geology is the most important factor in relation to all quarries, as without a resource, then, there would be no quarry. Obviously issues such as location to the market, planning, licensing, access, operating costs etc are some of the other factors involved, but without a quality resource, then there may not be a market.

 

The opinions expressed in the above paper are the personal views of the author gained from experience and research within the extractive industries. No responsibilities can be held for any person or company who relies on information within this paper or who attempts to take any extracts from this paper. This paper is not to be used or quoted in part or as a whole for commercial use without the express written consent of the author.

 

Stephens Valuation and Consultancy Pty Ltd

 

By Roderick Stephens BSc (Hons) MC AAPI (CPV)

Certified Practising Valuer

Registered Valuer QLD & WA

PO Box 404

Emu Plains

NSW 2750

Tel No:  02 *4704 *8483         

E mail: rodstephens@optusnet.com.au

Mobile 0423 *383 *343

Website: www.quarryvaluations.com which is a Registered Trade Mark 

 

 
sales rock gravel sand stone sandstone limestone plant equipment machinery sales landfill void space tonnes fair market api tax taxation depreciation amortisation audits auditors asx reporting standards disclosure directors valuations cost marriage reserves resources hard rock lease
aasb 116 138 6 137 117 accounting quarrying leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone plant equipment machinery sales landfill void space tonnes fair market api tax taxation depreciation amortisation audits auditors asx reporting standards disclosure directors valuations cost marriage reserves resources hard rock lease
aasb 116 138 6 137 117 accounting quarrying leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone plant equipment machinery sales landfill void space tonnes fair market api tax taxation depreciation amortisation audits auditors asx reporting standards disclosure directors valuations cost marriage reserves resources hard rock lease
aasb 116 138 6 137 117 accounting quarrying leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone plant equipment machinery sales landfill void space tonnes fair market api tax taxation depreciation amortisation audits auditors asx reporting standards disclosure directors valuations cost marriage reserves resources hard rock lease
aasb 116 138 6 137 117 accounting quarrying leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone plant equipment machinery sales landfill void space tonnes fair market api tax taxation depreciation amortisation audits auditors asx reporting standards disclosure directors valuations cost marriage reserves resources hard rock lease
aasb 116 138 6 137 117 accounting quarrying leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone plant equipment machinery sales landfill void space tonnes fair market api tax taxation depreciation amortisation audits auditors asx reporting standards disclosure directors valuations cost marriage reserves resources hard rock lease
aasb 116 138 6 137 117 accounting quarrying leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone plant equipment machinery sales landfill void space tonnes fair market api tax taxation depreciation amortisation audits auditors asx reporting standards disclosure directors valuations cost marriage reserves resources hard rock lease
aasb 116 138 6 137 117 accounting quarrying leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone plant equipment machinery sales landfill void space tonnes fair market api tax taxation depreciation amortisation audits auditors asx reporting standards disclosure directors valuations cost marriage reserves resources hard rock lease
aasb 116 138 6 137 117 accounting quarrying leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone plant equipment machinery sales landfill void space tonnes fair market api tax taxation depreciation amortisation audits auditors asx reporting standards disclosure directors valuations cost marriage reserves resources hard rock lease
aasb 116 138 6 137 117 accounting quarrying leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone plant equipment machinery sales landfill void space tonnes fair market api tax taxation depreciation amortisation audits auditors asx reporting standards disclosure directors valuations cost marriage reserves resources hard rock lease
aasb 116 138 6 137 117 accounting quarrying leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone plant equipment machinery sales landfill void space tonnes fair market api tax taxation depreciation amortisation audits auditors asx reporting standards disclosure directors valuations cost marriage reserves resources hard rock lease
aasb 116 138 6 137 117 accounting quarrying leases quarry royalties royalty quarries value valuation valuer nsw qld vic queensland victoria au australia nz com sales rock gravel sand stone sandstone limestone plant equipment machinery sales landfill void space tonnes fair market api tax taxation depreciation amortisation audits auditors asx reporting standards disclosure directors valuations cost marriage reserves resources hard rock lease