Written by Andy Randell, published on LinkedIn on September 24th, 2014
With Halloween just around the corner, people are starting to make preparations for this fun pseudo-holiday. Buying candy, costumes and decorations, North America embraces the celebration of all things dead and evil with gusto!
But what Halloween is complete without a scary story? Many of us have enjoyed these around a fire at sometime; the lights dimmed and the senses heightened. These stories are often based around myths and Urban Legends, but what could be scarier than a true story? One that is happening right now all around you, Dear Reader, and one that could threaten your very existence!
Are you sitting comfortably? Then I shall begin …
The Ghosts of the Past
We have to start our story in 1997, when a scandal unfolded in the Canadian mining sector. Bre-X Minerals Ltd. held a property near the Busang River in Borneo, and had drilled the property for several years. They announced major results with extremely high levels of profitable gold being found in their core. Their share price bloomed to CA$280, with a market capital equal to $6.5bn in todays terms. The company became an overnight behemoth.
But this success quickly turned sour. On the 19 March, 1997, Filipino geologist Michael de Guzman died when he ‘fell’ from his helicopter into the jungle. What was left of him was found four days later, and positively identified from some molars and the remains of a thumb – the jungle had devoured the body.
A week later, on March 26, 1997, Colin Jones (an Australian geologist with the American company Freeport-McMoRan) visited the site to perform due diligence on the core, as Freeport were interested in forming a partnership with Bre-X Minerals Ltd. What he found was that the core contained insignificant amounts of gold. This analysis initiated a frenzied sell off of shares, and the company value decreased significantly.
Bre-X ordered more reviews and commissioned more independent studies, all of which came to the same conclusion. Strathcona Minerals were brought in to do an independent analysis, and on May 4, 1997, revealed that the samples had, at some point, be ‘salted’ with gold shaved off of jewelry. Trading at Bre-X was suspended and the company filed for bankruptcy protection.
The tsunami was released. Billions of dollars were wiped from the Toronto Stock Exchange, and in particular from Canadian public funds, such as the Ontario Teachers Plan who lost $100million from their pension fund alone. Bre-X management evaporated and moved to the Caribbean, although angry individuals who demanded their money back hunted them.
The court case continues today, with various charges of insider trading being dimissed, but a class action lawsuit now in its place.
This scandal prompted Canadians to regulate professional geology in Canada, so as to prevent such immoral actions in the future. From this, the National Instrument 43-101 was born, with guidelines that protect existing and potential investors from unsubstantiated mineral project disclosures.
NI 43-101 guidelines stipulate reporting parameters on a variety of subjects related to a mineral deposit, from geochemical analysis, drilling methods, quality control and even shipping methods. The report can only be signed off by a Professional Geoscientist (PGeo).
The model was held sacred through the ensuing boom years, and many geologists enjoyed working with a framework. Admittedly, doing all the things the report demands take more time, need some forward planning and of course, cost more. But that was then … where are we now?
The Next Chapter Has The Potential To Be Just As Chilling
It seems that as an industry, we are about to repeat the mistakes of the past. No, they wont be carbon copies of the Bre-X scandal, but a lack of funds and expertise is leading to some corner cutting that will come back to haunt us all.
I have found that talking to people who are working / consulting in the industry, they are witnessing a slew of issues that might be making life easier right now, but in the future has the potential to have a huge negative impact.
I will clarify at this point that I will not be naming names, neither are all these stories based on my own dealings!
The Cautionary Tales:
Phantom Quality Control!
The first story is the one I hear most often, and leads us right back to Bre-X: A complete disregard for quality control in sampling. At a time where every single dollar counts, attention to the quality of the data a company is producing is being rapidly superseded by the quantity they can produce. It’s a status thing.
Companies are cutting quality control to a bare minimum or, worse, not doing any at all. The insertion of blanks, standards and duplicate samples is a simple task that ensures the grades a company reports are indeed true and accurate. Some companies are looking at the internal QAQC that their assaying lab does as a substitute, but one of the reasons we should insert our own is to have confidence in the lab itself.
Most of what I have seen is an amazing lack of understanding of what QAQC is actually measuring. Along with that, decision makers are either oblivious to or ignoring what that will do to the value of their properties in the future.
If they want to attract investment or sell the property later on, then the investing party will likely undertake some form of due diligence survey. I regularly take part in due diligence work on a property, and QAQC is one of the first things I will check. If a company has not undertaken sufficient grade and consistency checks, then the client will likely have to re-sample a portion of the property to ascertain if the reported grades are indeed true – again, Bre-X. When a buyer is looking at several properties for purchase, then they will likely walk away from this due to the extra work (cost + time) that will be involved, not to mention risk to them and their own investors.
There are options – we can always re-run samples using pulp and reject material stored at the labs. I would always suggest doing this to a portion of samples anyway in an ‘Umpire Program’ to really ensure data integrity. Alas storage of samples costs – usually a couple of hundred dollars a month – and so companies are shedding their stored samples in an effort to cut costs.
So without proper QAQC and no samples in storage, where is the confidence in a property and its grade?
The impact here is obvious – a property will be passed over due to poor standards leaving the seller with worthless ground. It also means that when the industry loosens up a little, there will be a dirge of reliable exploration and development properties up for grabs, possibly suppressing growth for a period while we resample and test ground.
The Insidiousness of Cheap Labour!
Another threat to the industry right now is the unwillingness to pay professionals or those with more experience, who, quite rightly, demand a higher salary due to their experience levels.
We are seeing time and again now entire exploration programs being designed and executed by individuals who maybe have a year or two out of school, and whose past experience constitutes a summer of core logging. Some people I am working with are doing this with such grace under fire, and are reaching out for the help and advice that they need, but others are forging through unaided and are making huge mistakes.
These people are getting hired as they are often much cheaper than more experienced professionals, and even then, they themselves are getting a bad deal. Although they are generally grateful for the work, the fact that the hiring company is undervaluing them makes them less enthusiastic to do more than the minimum.
The problems are again obvious; these people could unwittingly make mistakes and oversights that their bosses are often oblivious to.
I have heard tales of drills being positioned the wrong way, core-logging omissions, scheduling errors, assaying incidents … the list goes on. Needless to say though, the moral of the story is ‘you get what you pay for’.
Ghastly Project Planning!
Companies are chasing the low hanging fruit on their properties right now. Work such as drilling is important and generates news releases, but if it is not warranted through mapping, geochemical or geophysical evidence, then it is generally a waste of money and time.
If you know me, you will know that I am an advocate of doing the science of geology to really understand a deposit because this makes every exploration dollar work in your favour.
Some companies are lacking a distinct amount of foresight about what their investment is actually resulting in, and what it means for their future. Companies that are investing less in grandiose field ops and more into research and development seem to be faring better in the current climate, and are being favoured by investment specialists. Research can include metallurgical and mineralogical studies, recovery methods and even thorough historical surveys of properties.
Terrifying Tales of Worker Conditions!
In Canada, there are very clear rules for employers to follow with regards to their employees. One of them that is particularly relevant to fieldwork is the length of time someone can stay in the field without a break. To summarize, you can work a total of 28 days consecutively (or 35 if it finishes a project), and then for each 7 days worked, you are entitled to one day off, which must be taken as a block (Note: This rule does not apply to managers).
Again, in an effort to save money on moving people around for rotational shifts, I have heard of companies keeping staff in the field for almost sixty days.
It only takes one accident with an overworked employee before the Workers Compensation Board steps in and gets involved. It could lead to shut downs, fines etc that will hinder the company financially.
But not only the safety implications, an exhausted worker is not likely to be able to maintain such a high quality of work and attention to detail. Some companies are literally working their employees into the ground in order to save a few more bucks on airfares!
Dastardly Dealings With Finances!
One of my personal favourites is the mentality that ‘we are all in this together, therefore your time is free, right?’. I have wasted hours of my time through the year working for empty promises. There are some guys with connections out there who are surveying the wasteland of devastated companies and thinking that they can clean up by collecting properties at a discounted rate.
As they lack the knowledge themselves to assess the property, they are reaching out to consultants to do the work, assuming that we are just grateful to be involved. So we dutifully carry out due diligence work on a property, make our recommendations and then put in our invoice.
You can see that they are still alive. You hear about them through your network. But do you ever hear from them directly? Do you ever receive a cheque for your time? Not always.
Alas many of these guys are stuck with a dated mentality and a bloated sense of self importance. There was a time that their charms would have worked, but in todays competitive market, we need solid cash flows; landlords and banks rarely take dreams as payment for rents and mortgages.
So who you gonna call? The truth is that there needs to be a change in the mentality of some of the surviving companies. They need to reach out to the experts to review their processes. Are they helping or harming themselves? Sometimes it is good to take a big step back and review your work, and be open to a possible reshuffle. Amazingly these things end up costing very little extra, if anything, and give you much more stability and reliability in your numbers.
The big question I have been asking recently is ‘do we need an auditor’ for the industry? NI 43-101 guidelines are great if you are reporting final figures, but should companies be held accountable for their processes? Obviously every one is different, so it would be a challenge.
My take on this, and something I do through my own consulting work, is to produce a review document per company / property that assesses their work to date and makes suggestions to bring them up to ‘code’.
The Code would look at the following criteria:
- Finances & Corporate Structure
- Projects & Stage
- Land Status
- Government Report Filings
- Sample Controls
- Sampling Methods (including Drilling)
- Umpire Testing
- Environmental & SocioEconomic Engagements
- Future Potential and Upsides
Obviously, the list could go on, but there has been some interesting conversations recently around either regulating or forming an official framework for due diligence.
If you are interesting in talking or offering ideas, or even opening your own projects up to scrutiny, then please do not hesitate to contact me!