I know your already fed up with me,...but I have another,...in the category of,..."those nice geologist folks would lie to us would they?" They have plenty of ways to do it legally!!!! ROTFLMAO (big ggggggggggggggggggggggggg)
Whistleblower raises doubts over ore bodies
Questions reserve levels: 'This is the mining world's equivalent of aggressive accounting'
Sandra Rubin, Senior Business Writer
Financial Post
Monday, September 30, 2002
National Post
"Canadian shareholders should be furious," Jan Merks says. "They are the ones who should take action."
A majority of Canadian mining companies are using a form of statistical "geo-engineering" that permits them to inflate proven and probable reserves by up to 25%, says the man who raised the spectre of fraud at Bre-X Minerals months before it became public.
Jan Merks, who has written a textbook on mineral sampling, says geostatistics can be manipulated as easily as financial statements to present a deceptively favourable view to investors.
"This is the mining world's equivalent of aggressive accounting," said Mr. Merks, president of Matrix Consultants Ltd. in Vancouver and something of a controversial figure in the Canadian mining world. "If you put inventories that you don't have on the books, then it is just as wrong."
It is a technical debate that has smoldered at the edges of the geological world for years, without attracting investor attention. But Mr. Merks' claims, in the wake of the accounting scandals that have shaken faith in North American securities markets, are bound to have new relevancy for an investing public soured on overly optimistic projections.
Canadian mining executives contacted by the Financial Post say the methods they employ to map ore bodies are proven to be reliable, and constitute the industry standard. There is no allegation the companies are doing anything illegal.
However, if Mr. Merks is correct -- and he has some high-profile supporters -- it means the value of the deposits that underpin the share prices of this country's publicly traded gold, silver, copper, platinum, nickel and coal mining companies may be inflated. It also implies that world inventories are lower than believed.
"I have no doubt Jan Merks is extremely credible," said Norman Anderson, the former chief executive and chairman of Cominco Ltd., as well as a longtime former director of Toronto-Dominion Bank and Homestake Mining Co.
"I would believe his statistics over many others."
Mr. Merks says the problem is with geostatistics, a computer-driven variant of applied statistics developed in the 1960s to calculate the size of mineral finds.
He says it has turned out to be flawed science, but the industry has maintained it as the standard nonetheless because it is in their interest to have the most aggressive resource estimate possible.
"The companies, the investment bankers, the lawyers, they just don't want to hear about it because it limits their ability to raise money," he said. "The industry doesn't want limits. It wants room to manoeuvre." The problem, according to Mr. Merks, is that the geologist entering the data from drill holes is required to make assumptions about the size and shape of the ore body -- including whethermineralization is continuous between drill holes.
The assumptions are based many factors, including the geology of the region and experience with the mineral in question.
But Mr. Merks claims a simple test can be administered afterward to verify that the assumptions, and the resource estimate, are accurate. It involves using applied statistics to test for the continuity of mineralization between the holes.
Without it, he says, "geostatistical video games" can be used to boost resource estimates by 10% to 25%, as well as misrepresent the continuity of the ore -- which has a direct impact on how much can be profitably mined.
Mr. Merks insists that if Barrick Gold Corp. had employed his methods, the company would not have "misjudged the grade of ore in its mines." Barrick made headlines last week when it cut its profit forecast for the year by about one-fifth because of lower than anticipated grades and recovery rates at mines in Canada, the United States and Tanzania. Its share price took a beating.
Barrick challenged the relevance of that view, however. "This has got everything to do with mine sequencing and processing rather than ore reserves," said vice-president Vincent Borg. "We've got a track record of almost 20 years of accurately estimating reserves and mining them succeessfully."
The U.S. Securities and Exchange Commission says it is aware of the controversy surrounding geostatistics and, while it permits the method to be used as part of a company's resource calculations, it does not permit estimates based on geostatistics alone.
According to John Heine, a SEC spokesman, the U.S. regulator requires a number of additional measures, including more actual drilling. The SEC has also been known to question resource estimates where it believes the assumptions are too aggressive.
In April, for example, Stillwater Mining disclosed that the SEC was challenging its methodology, which quickly sent the company's share price down 15%.
Stillwater, which had been making assumptions of uninterrupted mineralization up to 1,900 feet beyond each drill core sample, agreed to limit all assumptions to 1,000 feet. The revised assumptions shaved 10% from its probable reserves -- underscoring how closely the assumptions and the eventual resource calculations are linked.
Canadian securities regulators do not appear as tough.
Deborah McCombe, chief mining consultant at the Ontario Securities Commission, says provincial securities commissions recently adopted a series of measures they believe will help prevent the types of abuses Mr. Merks is concerned about. She said she is aware of his work and that he is considered respected.
Under National Instrument 43-101, Canadian companies must have resource estimates prepared by a "qualified person" -- a geologist with a minimum of five years' experience, including experience with the resource in question, who is also a member of a professional society.
Ms. McCombe did not explain how this would prevent a geologist from adopting the most aggressive of the plausible assumptions, other than to say that concerns for reputation might help keep them in line.
She added that reporting issuers are subject to a comprehensive review every four or five years, at which time "everything is looked at" retroactively, including all technical reports.
She also said she may review reports as they are filed, "but I'd only look if I really thought there was an issue, that something didn't seem quite right. We're not checking every single report here. We're relying on mining companies to have proper disclosure."
The OSC, Canada's largest securities regulator, has not ordered any resource rollbacks similar to Stillwater in recent years.
John Ing, president of Maison Placements Canada, says there is no question the SEC is tougher than the OSC when it comes to reserve estimates. "Their classification is stricter," says Mr. Ing, a gold analyst. "The American regulations are tighter than Canadian in this area."
Mr. Merks' claims are surfacing at a time the TSX is said to be contemplating marketing itself internationally as a specialty exchange with expertise in mining.
He has been battling the scientific establishment for years over the limits of geostatistics, and contacted Canadian regulators and exchange officials, but to no avail.
He wrote Rowland Fleming, the former president of the Toronto Stock Exchange, in 1997 -- in the heat of the Bre-X gold fraud -- and urged him to talk to the Standards Council of Canada about setting up a committee on ore-reserve estimation techniques.
"I appreciate your taking the time to write and have duly noted your comments," Mr. Fleming said in a two-sentence response. Nothing further happened.
Mr. Merks claims to have been shut out of this country's scientific fraternity by a few influential disciples of geostatistics who have much to lose academically if it is accepted as flawed science.
He says he has been denied a fair hearing and that abstracts accepted by influential U.S. journals, including those published by the Society for Mining and Mineral Exploration, are routinely turned down by the Canadian Institute of Mining, Metallurgy and Petroleum (CIM) Bulletin following peer review by geostatisticians.
Mohan Srivastava, who co-authored a textbook on geostatistics, acknowledges that Mr. Merks "touches on an important issue, because there is enough flexibility in the tool kit to inflate reserves."
But Mr. Srivastava says he believes there is a "smoke and mirrors aspect" to his claims, and complains Mr. Merks can be evasive when asked for straight answers.
"The couple of times I've had access to work that he's done, or papers he's written, I haven't been able to make sense of it -- and I think I've been pretty fair-minded," he said in an interview. "I can't imagine there's a silver-bullet calculation out there that is going to say: This is wrong by 12.2%. It strikes me as a bit nutty."
However, Cominco's Mr. Anderson, who is retired, says he began working with Mr. Merks in 1978 in a practical setting "and it was soon recognized throughout the company that this guy knew what he was talking about. He's got a bit of a sharp personality, but he's blessedly smart.
"The problem is, you get three or four geologists in a room using geostatistics, Jan waltzes in and tells them they're wrong -- and they're going to get pissed," he said. "There are a lot of vested interests out there. It takes time to turn the Queen Mary around."
But while many in the academic community dismiss Mr. Merks and his claims, he is consulted by the largest and most reputable North American mining companies when they encounter problems with mineral deposits.
Barrick, Placer Dome Inc., Falconbridge Ltd., Kinross Gold Corp., Cominco and Homestake are among those that have retained him over the years to take a second look at their sampling practices. He is almost always retained quietly, and signed to confidentiality agreements -- sometimes by an exploration chief who doesn't want senior executives to know he has been called in.
Mr. Merks says while it may suit the industry to have maximum manoeuvrability in the initial stages of an acquisition or find, when it comes to bankrolling the development, everyone wants an accurate view of what is in the ground.
He says where there are discrepancies, companies will usually state at some point that the probable reserves simply didn't pan out as expected. They will also reduce the life expectancy of a mine, blaming dilution of the ore body, to hide the fact that the deposit was smaller than had been first indicated, he claims.
"Canadian shareholders should be furious. They are the ones who should take action. They are always the ones who pay when mines have to be scrapped."
Mr. Merks is writing a textbook entitled Geostatistics; Human Error or Scientific Fraud? to explain why geostatistical ore deposits are likely to shrink during mining.
He says, at the very least, his method would ensure resource estimates were accompanied by confidence limits -- as with public opinion polls -- which state the results are considered accurate to within a certain percentage 19 times out of 20.
That way, investors could get some sense of how aggressive the assumptions were, because confidence limits define the uncertainty of the final results.
Michel Dagbert, co-founder of Montreal-based Geostat Systems International Inc., is a staunch proponent of geostatistics. Surprisingly, he says much of what Mr. Merks says is correct: that it is easy to inflate resource estimates using geostatistics (as well as a number of other methods, he says) -- and that there should be some validation to bear it out. He too would like mandatory confidence limits.
"The thing is, we disagree on the method with which to do it," Mr. Dagbert said from Montreal.
He said companies using geostatistics do validate their findings in a number of ways, including looking for correlation between samples, sensitivity analysis and testing core from blast holes to verify the estimate is correct.
"If people don't want to do it his way, maybe it's because they don't believe in what he is proposing as this extra step. It's a question of statistical theory, it's a debate."
srubin@nationalpost.com |
