The Application of Modifying Factors

S.M. Rupprecht

University of Johannesburg, Republic of South Africa

Demonstration of the feasibility of economic extraction is not required before Exploration

Results or Mineral Resources are reported. However, the use of Modifying Factors is
fundamental in demonstrating feasibility and thus in converting a Mineral Resource to a
Mineral Reserves. Understanding the application of theses Modifying Factors is
important to ensure the correct declaration of a Mineral Reserve. Failure to properly
investigate all relevant Modifying Factors can lead to the incorrect conversion of Mineral
Resources to Reserves, adding unnecessary risk to a project or even leading to premature
closure of a mine. The importance of correctly applying Modifying Factors to Mineral
Resources is discussed and examples provided to demonstrate the negative outcomes
when Modifying Factors are incorrectly applied.

Traditionally, mining engineers have looked to the more conventional Modifying Factors;
such as mining, metallurgical, legal, and economic factors. However, other factors, for
example, governmental, social and labour, environmental, and infrastructure factors,
previously thought by some engineers to be less significant, are now recognized as key
factors. The paper discusses the application of Modifying Factors and their importance in
establishing the feasibility of a mining project.

INTRODUCTION

Establishing a Mineral Reserve demonstrates the financial viability of a mine or project. Having
sufficient Proved Reserves to cover the payback period of a project is viewed by most lenders as an
essential requirement; one which limits risk to the investor. For the Competent Person (CP) it is
important that all Modifying Factors are considered when declaring a Mineral Reserve. Failure to
properly investigate all relevant Modifying Factors can lead to the incorrect conversion of Mineral
Resources to Mineral Reserves, adding unnecessary risk to a project or even leading to premature
closure of a mine. The author has been involved with a number of recent projects that have closed due
to project teams failing to fully understand the effect of Modifying Factors.

The SAREC/SAMVAL Companion Volume Conference

Emperors Palace, 17–18 May 2016
Southern African Institute of Mining and Metallurgy
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The SAMREC Code 2016 states that:

A Mineral Reserve is the economically mineable part of a Measured and/or Indicated Mineral
Resource.

It includes diluting materials and allowances for losses, which may occur when the material is
mined or extracted and is defined by studies at Pre-Feasibility or Feasibility level as appropriate
that include application of Modifying Factors. Such studies demonstrate that, at the time of
reporting, extraction could reasonably be justified.

The reference point at which Mineral Reserves are defined, usually the point where the ore is
delivered to the processing plant, must be stated. It is important that, in all situations where the
reference point is different, such as for a saleable product, a clarifying statement is included to
ensure that the reader is fully informed as to what is being reported.

Based on the above statement, it is clear that in order to declare a Mineral Reserve a Pre-Feasibility or
Feasibility Study must have been completed and all Modifying Factors included to demonstrate, at the
time of reporting, that extraction could be realistically and reasonably justified. In terms of Proved and
Probable Mineral Reserves the Code also allows for a life-of-mine (LOM) plan to be suitable for an
operating mine. Until 2016, Pre-Feasibility or Feasibility Study were not adequately defined. However,
in order to improve transparency the 2016 SAMREC Code now defines Pre-Feasibility and Feasibility
Study and LOM Plan.

A Pre-Feasibility Study is a comprehensive study of the viability of a range of options for a mineral
project that has advanced to a stage at which the preferred mining method in the case of
underground mining or the pit configuration in the case of an open pit has been established and an
effective method of mineral processing has been determined. It includes a financial analysis based
on realistic assumptions of technical, engineering, operating, economic factors and the evaluation
of other relevant factors that are sufficient for a Competent Person, acting reasonably, to determine
if all or part of the Mineral Resource may be classified as a Mineral Reserve. The overall confidence
of the study should be stated. A Prefeasibility Study is at a lower confidence level than a Feasibility
Study.

A Feasibility Study is a comprehensive design and costing study of the selected option for the
development of a mineral project in which appropriate assessments have been made of realistically
assumed geological, mining, metallurgical, economic, marketing, legal, environmental, social,
governmental, engineering, operational and all other modifying factors, which are considered in
sufficient detail to demonstrate at the time of reporting that extraction is reasonably justified
(economically mineable) and the factors reasonably serve as the basis for a final decision by a
proponent or financial institution to proceed with, or finance, the development of the project. The
overall confidence of the study should be stated.


A LOM Plan is a design and costing study of an existing operation in which appropriate
assessments have been made of realistically assumed geological, mining, metallurgical, economic,
marketing, legal, environmental, social, governmental, engineering, operational and all other
Modifying Factors, which are considered in sufficient detail to demonstrate at the time of reporting
that extraction is reasonably justified. The level of study should at least be equivalent to a
Prefeasibility.



The above sets out the minimum expectations for the various technical studies. Table 2 of the 2016
SAMREC Code also provides recommendations in terms of the confidence levels associated with
capital expenditure and operating costs for the types of technical studies. The CP is expected to
understand the level of work required to declare a Pre-Feasibility Study or Feasibility Study; however,
the Code provides additional guidance in order to improve transparency. In the past, some CPs have

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stretched the definition of Scoping Studies to attempt to justify the declaration of a Mineral Reserve
when the study is in fact not conducted to a Pre-Feasibility Study level.

When converting a Mineral Resource to a Mineral Reserve the two most significant Modifying Factors
are dilution and mining loss. Mining dilution is defined as waste material, either barren material or
waste containing some mineral content below the cut-off grade, and which is extracted during the
course of mining operations and thereby forms part of the Mineral Reserve. Mining loss is defined as
ore left behind in the mining operation due either to practical mining considerations such as the
application of a maximum mining cut in deep Witwatersrand gold deposits, designed stability pillars,
etc. Unplanned ore loss results from ore being left behind due to poor cleaning practices, poor
sampling, estimation errors, or misdirected (tipped) trucks or hoppers resulting in ore being tipped
into waste passes.

Underestimating dilution can lead to the overstating of the head grade, and the understatement of
mining losses can lead to the overstatement of tonnage. An accurate estimation of the head grade is
the more critical of the two, and the author has seen a number of new mines fail due to the
overestimation of the head grade. The CP must ensure that appropriate factors are applied when
converting Mineral Resources to Mineral Reserves. The author has observed a number of mines’ head
grades negatively affected due to underestimation of mining dilution.

MODIFYING FACTORS

In order to convert a Resource to a Reserve one must consider the application of all the Modifying
Factors. It is not uncommon to view reports that inadequately cover some of the Modifying Factors
when demonstrating the viability of a project. Key factors identified are:

•
Mining
•
Metallurgical
•
Economic
•
Marketing
•
Legal
•
Environmental
•
Infrastructural
•
Social and governmental.


Mining
The application of mining losses and dilution is probably one of the more contentious elements of
applying Modifying Factors to mineral resources. Project owners tend to be optimistic in estimating
mining dilution and mining losses. For operating mines the CP should make use of historical results to
benchmark the mining factors. For Mineral Reserves estimated from technical studies the CP must use
their experience to select the appropriate factors.

An example of the important role of mining factors in the Reserve estimation process is the following.
In 2006 a Feasibility Study was conducted on a platinum project which estimated dilution at 14.5% at a
grade of 1.5 g/t (4E). Based on the assumed dilution a run-of-mine (ROM) head grade of 3.16 g/t was
used for the project evaluation. At the mine’s start-up the actual ROM head grade ranged from 2.1 to
2.4 g/t (4E). During this period the Mineral Reserve grade was reviewed and re-adjusted from 3.16
g/t to 2.65 g/t (4E), based on planned improvements in stoping width and other in-stope dilution
controls. In 2012, the project was placed on care and maintenance with the actual ROM grade never
consistently achieving the estimated 2.65 g/t. In the author’s opinion, the failure to achieve the
planned ROM head grade was one of the main reasons why the mine was placed on care and
maintenance.

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Additional considerations include the mining method, mine plans and production schedules. The CP
should provide a description and justification of the mining method(s), as well as discussion of the
mining rate, mine equipment selection, grade control measures, geotechnical and geohydrological
consideration, human resource requirements, health and safety, dilution, mining losses, and operating
costs. For open pit mines additional inputs for pit slopes, slope stability, and strip ratio are required.
For underground mining, the mining method, rock engineering considerations, ventilation and
cooling, mine drainage, as well as the impact on surface and groundwater require discussion.

Metallurgical or Beneficiation
The metallurgical characterization of any ore is critical in terms of describing or identifying any factors
that may have a negative impact on product quality and recovery. Frequently, metallurgical
recoveries are based on historical data or test work based on limited sample sites that do not always
reflect the natural variability in most orebodies. If the metallurgical inputs are not properly
considered, inaccurate recoveries may be used resulting in either lower or higher plant recoveries,
thus potentially impacting on the accuracy of the reporting of Mineral Reserves (Pienaar and Freese,
2016).

Metallurgical considerations include the metallurgical process or method, equipment, plant capacity,
efficiencies, and personnel requirements. The CP should discuss the nature, scope, and
representativeness of metallurgical test work undertaken and the recovery factors used, and comment
on the appropriateness of the selected methodology, e.g. whether it is well established or new
technology. A detailed flow sheet and a mass balance should exist, especially for multi-product
operations from which the saleable products are priced according to different chemical and physical
characteristics.

The CP should state what assumptions or allowances have been made for deleterious elements, the
results of any bulk-sample or pilot-scale test work, and the degree to which such samples are
representative of the orebody as a whole. Stated recoveries must be related to full-scale operations,
taking into account laboratory scale test results as well as the geological domain in which the ore is
sourced. The CP must consider environmental, community, and health and safety issues associated
with the metallurgical process, with those sections dealing with hazardous materials or operations
incorporating more detail. Issues like acid water drainage and other hazardous seepages into the
groundwater from tailings and waste storage facilities should be carefully considered as the cost of
lining such facilities is enormous.

Economics Parameters
The financial viability of a project is a critical factor – in order for a Mineral Reserve to be declared, the
project must be economically feasible, proving the deposit is mineable The CP should ensure that the
commodity prices are relevant to the product quality and volume being sold and related to the
market. For example, in the case of Coal Reserves the coal quality must be reported in order to
support the proposed market and selling price. Without such details it inappropriate for the CP to
declare a Reserve. For projects/mines selling commodities under a current contract the CP should
consider whether the full Reserve is covered by the contract or establish the likelihood of the contract
being extended, including commentary on future commodity prices and volumes.

When considering economic parameters the CP should provide a description of the product to be sold
and the market conditions for the product, its impact on that market, and whether contracts for the
sale of the product are in place or expected to be obtained. The CP should state and justify all
economic criteria that have been used for the study, such as capital and operating costs, exchange
rates, revenue inputs, royalties, and cut-off grades. The method used to estimate the commodity price
profiles used for cut-off grade calculation, economic analysis and project valuation, including
applicable taxes, inflation indices, and exchange rates should be described. The CP should
demonstrate that the product price assumptions are reasonable and supportable, andjustify
assumptions concerning production cost and value of the product. Consideration should be given to
transportation, treatment, penalties, exchange rates, marketing, and other costs.

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A detailed cash flow analysis for the life of the project, including a summary of taxes, royalties, and
other government levies must be completed. Sensitivity and risk analyses related to grade, prices,
capital costs, operating costs, and any additional significant variables should be conducted. The date
of the financial report and the base date of the financial analysis must be stated.

CPs must also ensure that the point of sale is clearly defined and that on- and off-mine costs are
accurately accounted to the point of sale. The documentation supporting commodity prices and sales
volumes should include a comparison of prices with historical, current, and future price forecasts as
well as a consideration of contracts, market conditions, exchange rates, and any other material
information. In special cases, commodity prices may be confidential and it may be necessary for the
CP to withhold price-sensitive information. In such cases, for transparency the CP needs to justify
why such information is not disclosed.

Marketing
The SAMREC Code requires the consideration of the supply, demand, and stock situation for the
particular commodity, consumption trends, and factors likely to affect supply and demand into the
future. A customer and competitor analysis along with likely market windows for the product should
be discussed and a description of the product to be sold, customer specifications, testing, and
acceptance requirements included in the analysis. The CP should discuss whether there exists a ready
market for the product and whether offtake agreements are in place or are expected to be readily
obtained.

A realistic commodity price is important. The market assessment may indicate that minerals are not
saleable in the proportions in which they are to be produced, and as a result the Reserves estimates
may need to be adjusted.

Legal
A statement in the study is required to the effect that no legal issues exist that could negatively affect
the project. Although the CP may not be qualified to conduct a legal due diligence, he/she should
conduct basic checks to verify that the prospecting permit or mining right, or other rights, are valid or
reasonably expected to be granted. CPs should be careful when actual tenure is not secured, as more
than one example can be provided where a client believed that the prospecting or mining right would
be granted only to find that the right had already been granted to another party. No tenure means no
Mineral Reserve.

Environmental
The CP should provide information on the status of studies of potential environmental impacts of the
mining and processing operation, as well as a statement on the status of the approval processes for all
necessary permits (tailings and waste). The CP should describe future yearly environmental liabilities,
compliance methods and costs, including rehabilitation and closure funding. Reference to the
Environmental Impact Study should be recorded and the CP must recognize that environment
permitting may change over time, which could impact on the Mineral Reserve estimation. If problems
arise or are solved, the Mineral Reserve estimates must be adjusted accordingly.

Some permits cannot be obtained until after a detailed mine study has been conducted, i.e. a Mineral
Reserve has been declared. The CP should recognize that there may be reasons why obtaining some
permits could be postponed. Furthermore, as the regulatory process may be time-consuming it is
recognized that material information should be released to the investors in a timely fashion, and
therefore it is acceptable that material is disclosed prior to granting of permits, as deemed appropriate
by the CP. To reflect the above, the Table 5.5 in the 2016 SAMREC Code has been modified so as to
enable a Mineral Reserve to be declared on anticipation of the approval of various environmental
permits.

Recent discussions around the updating of the Code have included the introduction of material input
to the environmental section of the Code, as well as Table 1. This approach has been largely rejected

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since the Working Group was of the opinion that sufficient guidance is already present in the Code.
While many environmental issues need to be considered when developing a mineral project, it is not
the place for the Code to provide guidance on all of these issues. Sufficient requirements are made in
terms of Environmental Impact Assessments, water use, and other aspects. Rather, the Code is there to
ensure that the CP has satisfied himself/herself that full environmental compliance has taken place.
The declaration of a Mineral Reserve must fully comprehend environmental factors that may impact
on the project.

Infrastructure
The CP should report in sufficient detail to demonstrate that the necessary facilities have been allowed
for, which may include, but are not limited to, processing plant, tailings dam, leaching facilities, waste
dumps, road, rail or port facilities/allocations, power supply, potable water, wastewater treatment,
stormwater handling, communications, fuel storage, offices, housing, security, resource sterilization
testing etc. Detailed maps showing locations of facilities should exist. Project milestones and
completion dates should be stated. In South Africa, the availability of power, water, and material
handling (off-mine logistics) are critical. The author has reviewed a number of projects where
infrastructure requirements have been critically underestimated, in some case to the extent that
realistic infrastructure requirements have led to the failure of the project. In South Africa, the cost of
self-generated power has a significant impact on the operating costs. Therefore, the delivery date of
power sourced from the local grid must be carefully considered. The allocation of water rights and
delivery is equally critical.

Social and Governmental

One of the significant changes included in the 2016 SAMREC Code is the relaxation of the clause
dealing with obtaining the necessary government approvals. ’A statement [deleted] (to) the effect that
mandatory social and labour management programmes, if any, have been approved or there is reasonable basis to
believe that approval can be obtained. Costs of such programmes should be considered in Techno economic
studies.’ This clause has replaced the 2009 clause that ’A statement should be provided to the effect that all
necessary permits have been approved.’ The above has brought the SAMREC Code in line with other
international codes, as well as account for the fact that investors may require Mineral Reserve status
while awaiting the various governmental permits to be approved – a task that often may take over
two years to accomplish. The critical aspect of the new clause is the ’reasonable basis’, which the CP
must consider.

Local environmental laws and processes must be taken into account. To demonstrate reasonable
expectation that all permits, ancillary rights, and authorizations can be obtained, the reporting entity
must show understanding of the procedures to be followed to obtain such permits, ancillary rights,
and authorizations.

Information that materially increases or decreases the risk that the necessary legal rights or permits
will be obtained must be publicly disclosed. It is recognized that the legal and permitting environment
may change over time and that such changes could have an impact on the Mineral Reserve estimate. If
obstacles arise or are eliminated, the Mineral Reserve estimates must be adjusted accordingly.

It is recognized that some permits cannot be obtained until after a Mineral Reserve has been declared.
There might be sound business reasons why obtaining some permits should be postponed. It is also
recognized that waiting for all permits to be on hand could result in critical information not being
released to the investors in a timely fashion, and therefore it is recommended that disclosure of
material information occur prior to obtaining permits as appropriate

Documentation should include a brief description of the title, claim, lease, or option under which the
reporting entity has the right to hold or operate the property, indicating any conditions that the
registrant must meet in order to obtain or retain the property. Royalty terms and clawback rights of
former claimholders also must be disclosed. If held by leases or options, the expiration dates of such

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leases or options should be stated. If extension of leases or options will be needed to mine the Mineral
Reserves, there should be reasonable expectation that such extension will be granted.

A statement should be provided to the effect that mandatory social management programmes (social
and labour plan), if any, have been approved. A statement should also be provided to the effect that
such governmental requirements have been approved. A number of statutory requirements relevant
to project development should be considered. The following lists a few South African government
requirements that should be considered by the CP (Rupprecht, 2014):

•
Mineral and Petroleum Resources Development Act (MPRDA) (Act 28 of 2002)

•
MPRDA Act of 49 of 2008
•
MPRDA Amendment Bill 2013
•
Broad-based Socio-Economic Charter
•
Mineral and Petroleum Resources Royalty Act (Act 28 of 2008)
•
National Environmental Management Act (NEMA) (Act 107 of 1998)
•
National Environmental Management Air Quality (Act 39 of 2004)
•
National Environmental Management Waste Act (Act 59 of 2008)
•
National Environmental Management Protected Areas Act (Act 57 of 2003)
•
Environmental Conservation Act (Act 73 of 1998)
•
National Forests Act (Act 30 of 1998)
•
National Water Act (Act 36 of 1998)
•
Mine Health and Safety Act (Act 29 of 1996) and amendments (MHSA).

Risk Analysis
Project technical, social, environmental, and economic risk should be highlighted in order to inform
the reader of the likelihood of the identified risk, mitigating considerations, and the impact the risk
may have on the Mineral Reserve declaration. Depending upon the identified risk, the Mineral
Reserve declaration could result in a Measured Resource being converted to Probable Reserves or
even removed from the reserve category altogether. Similarly, an Indicated Resource could be found
unsuitable for Reserve declaration. The author has observed several Mineral Reserve declarations that
are only ’going through the motions’. A risk analysis should be viewed as a powerful tool to help
management mitigate potential problems before they become significant.

CONCLUSION

As commonly understood, the application of the Modifying Factors constitutes an integral part of the
Mineral Reserve estimation process. It is the responsibility of the Competent Person to ensure that all,
not just some, of the Modifying Factors are adequately considered during the estimation and
reporting of Mineral Reserves. This paper provided an analysis of the Modifying Factors provided in
the 2016 SAMREC Code as a mechanism to improve reporting standards, reporting transparency, and
provide assurance that all technical inputs have been considered. The 2016 SAMREC Code provides a
comprehensive checklist (Table 1) for the Competent Person to consider and comment.

REFERENCES

Pienaar, D. and Freese, L.B. 2016. The importance of geometallurgical characterization of metalliferous
ore bodies. The Southern African Institute of Mining and Metallurgy, SAMREC and SAMVAL
Companion Volume. In press
Rupprecht, S.M. 2014. The SAMREC Code and its impacts on mine valuation and the SAMVAL Code.
3rd Mineral Project Valuation School. Southern African Institute of Mining and Metallurgy,
Johannesburg.

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SAMREC. 2009. South African Mineral Resource Committee. The South African Code for Reporting of
Exploration Results, Minerals Resources and Mineral Reserves (the SAMREC Code). 2007
edition as amended July 2009. Prepared by the South African Mineral Resource Committee
(SAMREC) Working Group. http://www.samcode.co.za/downloads/SAMREC2009.pdf

Dr. Steven Rupprecht

Senior Lecturer
University of Johannesburg

Steven has 29 years mining experience commencing his career in 1986 with Gold Fields of South
Africa where he gained underground production mining experience working at Venterspost Gold
Mine, East and West Driefontein Gold Mines, and Leeudoorn Gold Mine. In 1997 Steven was moved
to Head Office as Group Mining Engineer and Senior Mining Engineer Coal.
In 1999 He joined CSIR Mining Technology as Research Area Manager and worked extensively on the
Deepmine and Futuremine Research Programmes.
In 2003 Steven joined RSG Global as a Principal Mining Engineer until 2007 when joined Keaton
Energy as a Technical Director, a position he held until 2009.
In 2010 joined the University of Johannesburg as Senior Lecture and Director of Mining. He also does
mining consultancy work for Borrego Sun and Coffey Mining.
Steven is a Fellow of the South African Institute of Mining and Metallurgy (SAIMM), an co-opted
member of the SAIMM Council, vice chairman of the SAMREC working group and member of the
SAIMM Technical Programme Committee, and the SAIMM Career Guidance and Educational
Committee

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