Quantifying Geologic Uncertainty

ASTM International, formerly known as the American Society for Testing and Materials, released a new standard this week that affects the assessment of in-place coal resources. ASTM D8215-19a is the Standard Practice for Statistical Modeling of Uncertainty in Assessment of In-place Coal Resources. The standard appears to be largely based on a method developed by the U.S. Geological Survey, Scientific Investigations Report 2014-5196.

Reaction to the standard is understandably quite negative given how battered the coal industry is already. Bankruptcies from major coal producers have continued in 2019 as the market for steam coal remains depressed, coal fired power plants continue to retire, and natural gas now generates more electricity than coal when viewed in the U.S. as a whole (EIA Electricity Data Browser).

Yesterday, I spoke at the annual Kentucky Professional Engineers in Mining Seminar and provided an update on the reporting of Mineral Resources and Reserves. Among the topics discussed was the new Regulation S-K 1300, which I have blogged about here. Following the short update, several participants asked questions about how the new ASTM standard affects reporting under S-K 1300, and if it was going to be required. The short answer is “no,” the new standard is not a requirement to S-K 1300, but anyone who has had to defend their work in a legal setting understands that citing an accepted standard, especially one from ASTM, goes a long way toward winning an argument.

With respect to Regulation S-K 1300, there is plenty of evidence that the U.S. Securities and Exchange Commission wanted quantifiable assessments of geologic uncertainty. However, the final rule did not require disclosure of uncertainty expressed by statistics and confidence limits. Here is the actual discussion from the final rule (p. 66379).

In a change from the proposed rules, the final rules do not require that the qualified person quantify and disclose the uncertainty associated with indicated and measured mineral resources in terms of the uncertainty associated with the production estimates derived from them by providing the confidence limits of relative accuracy, at a specific confidence level, of the preliminarily estimated production quantities per period from the resource.601 Although this approach for reporting the level of uncertainty is consistent with best practice in the industry,602 we acknowledge that, for the reasons several commenters stated, requiring this approach in all instances could be impractical or inappropriate, unduly burdensome, and costly for many registrants.603

In lieu of a provision mandating a quantitative assessment of risk regarding indicated and measured mineral resources, we are requiring the qualified person to disclose the criteria used to classify a resource as indicated or measured and to justify the classification.604 This disclosure must include a discussion of the uncertainty in the indicated or measured mineral resource estimates, the sources of the uncertainty, and how those sources were considered in the estimates.605 This approach is consistent with commenters’ suggestion that we permit a qualitative discussion of the uncertainties involved in resource determinations in lieu of a quantitative assessment.606 While the final rules do not require a qualified person to use estimates of confidence limits derived from geostatistics or other numerical methods to support the disclosure of uncertainty surrounding mineral resource classification, if the qualified person chooses to use such confidence limit estimates, the final rules instruct that he or she should consider the limitations of these methods and adjust the estimates appropriately to reflect sources of uncertainty that are not accounted for by these methods.607

The adopted approach is similar to the approach under the CRIRSCO-based codes, which encourages but does not require a quantitative assessment of risk regarding indicated or measured mineral resource estimates, and leaves the decision whether to use estimates of confidence limits to the discretion of the qualified person.608 The qualified person may use estimates of confidence limits when assessing the level of uncertainty regarding his or her mineral resource estimates if he or she believes that such use would be practical and helpful. If, however, the qualified person determines that the use of estimates of confidence limits would be inappropriate or impractical, he or she may refrain from undertaking such a quantitative assessment of risk regarding his or her indicated or measured mineral resource estimates.

For similar reasons, the final rules do not require a qualified person to state the minimum percentage of inferred mineral resources he or she believes will be converted to indicated and measured mineral resources with further exploration. Many commenters objected to the proposed requirement because they believed that it would be impractical and burdensome.609 We have been persuaded that such a requirement may not be necessary because the final rules require the qualified person to have a reasonable expectation that the majority of inferred mineral resources could be upgraded to indicated or measured mineral resources with continued exploration.610 As some commenters suggested, this required expectation will act as a substitute for the proposed quantification in that, if the qualified person cannot meet this expectation with regard to part of a deposit, that part cannot be classified as inferred resources.611 Further, the provision requiring the qualified person to be able to defend the basis for his or her reasonable expectation before his or her peers 612 will also help to dissuade the determination and disclosure of unreasonable inferred mineral resource estimates.

Similar to the approach adopted regarding indicated and measured resources, in lieu of a provision requiring a quantitative assessment of risk regarding inferred resources, we are requiring the qualified person to disclose the criteria used to classify a resource as inferred and to justify the classification.613 This disclosure must include a discussion of the uncertainty in the inferred resource estimates, the sources of the uncertainty, and how those sources were considered in the estimates. This approach is again consistent with commenters’ suggestion that we permit a qualitative discussion of the uncertainties involved in resource determination. We believe that such a required qualitative discussion of the criteria used to classify and justify a deposit, in whole or part, as inferred resources would serve to inform investors about the reliability of the disclosure without unduly burdening registrants.

Regardless of whether the qualified person provides a qualitative or quantitative assessment of risk, under the final rules the qualified person must adequately explain his or her reasons for classifying a mineral resource as inferred, indicated, or measured and that his or her classification is consistent with the definitions of inferred, indicated, and measured mineral resources. In this regard, the final rules require the qualified person to list all of the factors considered regarding the level of uncertainty and explain how those factors contributed to the final conclusion about the level of uncertainty underlying the resource estimates.614

The SEC was fully aware of the USGS Scientific Investigations Report (see p. 66387 and footnote 717 in the final rule) but does not mandate use of the USGS method in the Final Rule.

Although drill hole spacing may be a factor that informs the qualified person’s assessment of geologic confidence, for the purposes of public company disclosure to investors, we indicated that we do not believe it should be the sole factor.717

Clearly, ASTM International, the USGS, and the SEC are in alignment when all three state that classification of coal resources by USGS Circular 891 alone is not acceptable today. In conclusion, coal resource classification must evolve to use more objective measures, some of which may involve statistics, to provide meaningful and quantitative assessments of in-place volumes. Further, the methods applicable to coal may be applied to other, similar, stratified deposits. Ultimately, as the Final Rule states, “the qualified person must adequately explain his or her reasons for classifying a mineral resource as inferred, indicated, or measured and that his or her classification is consistent with the definitions of inferred, indicated, and measured mineral resources.”

Contact Groff Engineering & Consulting today to help with your resources and reserves assessments. We regularly provide assistance to our clients in the form of due diligence, minerals appraisals, mine plans and reserve statements. We are also available to consult and provide assistance to your existing team of qualified professionals.