Basic Economic Concepts
Published:January 01, 1995
Because the purpose of any reserve estimate is to permit an economic evaluation of the deposit, a general understanding of basic economic principles is required of the estimator. Whether we like it or not, the “rules of the game” are expressed in economic terms, and the underlying purpose of our endeavors is not to produce tons, pounds, or ounces of some commodity, but rather is to produce dollars of profit.
Cost accounting is not normally of much interest to an exploration geologist charged with delineating a potential mineral resource, and this text does not pretend to cover the subject in any detail. However, virtually all mining operations are preceded by a detailed feasibility study designed to demonstrate that the proposed operation will, in fact, return a profit on the necessary capital investment. Such a study will involve a detailed analysis of both capital and operating costs of the proposed operation, and is typically built up around the anticipated labor and supply costs for each phase of the project—a preliminary cost sheet. Most such studies involve an iterative process, whereby alternative operating scenarios are investigated and initial rough cost estimates are refined. Since these costs ultimately determine the grades at which mineralized material becomes ore, they are fundamental to the final reserve estimate, and all parties involved in the estimating process should have at least a basic understanding of the projected cost structure.
For rough, preliminary resource estimates, overall figures may be satisfactory to determine whether or not a given
Figures & Tables
Ore Reserve Estimates in the Real World
In Simplest Terms, the work of the mineral industry may be defined as the search for and production of some naturally occurring mineral substance useful for some specific purpose, and as such, that substance is both a defining element of and the underlying basis for our existence as a species.
The fundamental requirement for any venture designed to extract a mineral substance from the ground is the presence of a reserve of that substance, and the estimation of the quantity and quality of the available reserve is the single most important step in the development of a mineral discovery. In fact, the basic purpose of ore reserve estimation is to provide the first step in the evaluation of a business opportunity:
… all financial calculations can be no more than the transposition of the ore reserve estimate into other terms.
(King et al., 1982, p. 65)
Prior to roughly 1970, there was little or no standardization of nomenclature regarding the various levels of reliability attached to estimates of mineral resources or reserves, and quite frequently the same term was applied to estimates of widely differing reliabilities, made for widely different purposes. It was generally accepted that the term “ore” should be restricted to material having at least a remote possibility of economic viability, and that the terms “proven” or “measured,” “probable” or “indicated,” and “possible” or “inferred” should be used to denote estimates based on progressively less reliable data. In 1980, based on modifications of a standardized system proposed in 1976, the U.S. Bureau of Mines (USBM) and U.S. Geological Survey (USGS) published a revised classification system (Fig. I-1), in which the term “resources” was applied to an overall “concentration of [a] naturally occurring solid, liquid or gaseous material in or on the earth’s crust in such form and amount that economic extraction from the commodity is currently or potentially feasible.” The term “reserves” was restricted to “that part of an identified resource that meets specified minimum physical and chemical criteria ...[and] may encompass those parts of the resources that have a reasonable potential for becoming economically available within planning horizons beyond those that assume proven technology and current economics” (USBM … USGS, 1980, p. 2).
In 1996, the United Nations proposed a three dimensional scheme for the classification of resources and reserves (Fig. I-2) that assigns a numerical degree of reliability to each of three axes, representing economic, feasibility, and geologic elements of the evaluation (United Nations, 1996; Kirk, 1998).