Commodity prices are fundamental to the estimation of mineral resources, mineral reserves and the economic analysis of a mineral project. In times of rapidly changing commodity prices, or at the extreme ends of a commodity price cycle, the Qualified Person (QP) has a difficult job in selecting an appropriate commodity price. Nevertheless, selection of reasonable technical and economic parameters, including commodity price, is essential to the determination of mineral estimates and is the responsibility of the QP.
Under NI 43-101 Standards of Disclosure for Mineral Projects (NI 43-101), section 1.2 incorporates CIM Definition Standards, which includes in the definition of a mineral resource the wording “reasonable prospects for economic extraction.” Therefore, the QP must select economic parameters, one of which is the commodity price, which will result in an estimate of a mineral resource that has reasonable prospects for economic extraction.
Section 3.4(c) of NI 43-101 requires that disclosure of mineral resource and mineral reserve estimates include details of key assumptions, parameters and methods. QPs and companies are reminded that these details must be clearly stated with disclosure and must have a reasonable basis for their selection.
CIM has recently provided guidance on their website to assist QPs in selecting an appropriate commodity price and discusses items to consider when determining a reasonable price. A QP may use various methods when selecting a reasonable commodity price.
Long-term historical averages (10 to 20 years): Given the long life of most mining projects, the QP should not just consider prices in the last three years, but instead long-term historical prices, which have the benefit of removing price volatility from estimates. This, however, may lead to a material difference in the value of the project when benchmarked against current prices.
Consensus prices: Consensus prices obtained by considering prices used by peers or as provided by analysts may be utilized in some cases to select a reasonable price. This method has the advantage of providing prices that are acceptable to a wide body of industry professionals.
Current commodity price: Use of current commodity prices presents a number of positives and negatives. In terms of positives, mineral resource and mineral reserve estimates in the technical report will reflect prices when the estimate was determined. On the negative side, at the top or bottom of a commodity cycle, current prices may dramatically overstate or understate the long-term value of the project. Also, using current commodity prices could require significant annual adjustments to a company’s estimates and may have implications for impairment testing of assets.
Margin over cash cost curve: Commodity prices have a relationship with the world cash cost of production. In periods of high commodity prices, companies may increase stripping or process more marginal ores, which can increase the average cash cost of production. In periods of sustained low prices, reduced stripping and the mining of higher grades can reduce the average cash cost of production. The QP may consider adding a margin to the current midpoint on the world cash cost curve as a way of determining the commodity price.
Contract pricing: Long-term contract prices may be used in some deposits where appropriate contracts are in place. These prices may be different than current market prices, but would reflect the company’s individual mineral resource and mineral reserve position over the term of the contract.
In conclusion, the commodity price selected by the QP should match the profile of the life of mine and reflect the stage of development of the project. If a project is not likely to go into production until five or more years into the future, then it may be reasonable to consider a “long-term” average commodity price, whereas if a project is in production or is to be placed into production in the short term, it may be reasonable to consider the use of prices closer to the current price.
Craig Waldie, senior geologist with the Ontario Securities Commission, is responsible for technical reviews of mining and exploration companies’ public disclosure and technical reports for compliance with NI 43-101.