August 2015

Update on the Australian Coal Guidelines

coal reclaimer
  • By David Arnott MAusIMM CP(Geo)

Why the launch of the 2014 Coal Guidelines should be welcomed by mining companies and investors

On 26 September 2014 the Queensland Resources Council (QRC) ratified the successor document to the 2003 edition of the ‘Australian Guidelines for the Estimating and Reporting of Inventory Coal, Coal Resources and Coal Reserves’ (2003 Coal Guidelines). The newest edition was also later ratified on the 17 October 2014 by the Coalfields Geology Council of New South Wales (CGC). These ratifications completed a review process that had commenced two years earlier. Over that period some 18 meetings had been undertaken – totalling approximately 2750 working hours – by 27 industry professionals from Queensland and New South Wales representing the QRC, CGC, the JORC Committee, mining companies, coal explorers and mining industry consultants. Along with this, there had been a period of wider industry consultation following publication of a draft document in April 2014.

The successor document to the 2003 Coal Guidelines is entitled the ‘Australian Guidelines for Estimating and Classification of Coal Resources’ (2014 Coal Guidelines). It provides support and guidance to those preparing estimates and classification of Coal Resources in accordance with the guiding principles of the ‘Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves’ (the JORC Code).

Questions raised during the review process of the 2003 Coal Guidelines have included:

  • Why did the committee decide to revise the 2003 Coal Guidelines, given the JORC Code is adequate?
  • How do the 2014 Coal Guidelines differ from the earlier 2003 Coal Guidelines?
  • What benefit will the revised document provide to the mining industry?

This article attempts to answer these questions. In doing so I present my own personal opinions and, although they may align in areas with others, this article does not attempt to represent the views of the JORC Committee, AusIMM, AIG, QRC, CGC or the Coal Guidelines review committee to which I was a participant.

Background

Before answering these questions, let’s revisit recent history to help set the scene for the review.

During the recent mining boom the coal industry found itself in a market of unrivalled prices for both metallurgical and thermal coal. Jobs for technical professionals in this sector, like other parts of the mining industry, were at an all time high, with wages and conditions of employment matching the demand. Geologists, geophysicists, mining and geotechnical engineers no longer had to travel overseas to find attractive remuneration as in the past – this could be achieved through employment opportunities locally, either on FIFO, DIDO or residential rosters. An influx of migrant technical professionals attempted to meet the demand shortfall in the local coalfields. Intake at our universities in the fields of earth science and engineering increased, thereby creating a supply of new graduates eager to commence what appeared as a lucrative career in mining.

The investing public was keen also to jump on the bandwagon, many buying into projects that were at best speculative, historically showing little merit if considered against traditional ‘pre boom’ commodity pricing structures.

Then the bubble burst (taking longer than some had expected) resulting in the price for both metallurgical and thermal coal being slashed. As a result some mines have closed, most are shedding staff in an attempt to reduce the cost of production, while others have ceased production and have moved into care and maintenance. Real wages for those still employed are now aligned with other parts of our economy. The perceived oversupply of technical professionals in Australia has resulted in many overseas professionals returning to their country of origin. Some companies have forestalled further capital investment in an attempt to maintain margins, while other operations are using longer term mining plans, avoiding investing in the immediate collection of further information to enhance their short-term plan. Other operations are just slowly bleeding out, producing at a loss to avoid mine closure and the associated costs of rehabilitation.

Yet demand for coal still exists, as do profits (albeit smaller) for those that can keep operational costs low. Given that our industry today has greater tonnages of coal available and is producing more than ever, it is not unrealistic to expect that the price per tonne for coal would drop to a more traditional cost base considering the decreased global demand.

To survive in this market you have to do things the right way. It is often the case that in times of plenty, poor practices develop. It is easy when making larger margins to unknowingly develop and accept what may be considered small indiscretions. I believe these indiscretions (whatever they may be) were developed during the mining boom, due in part to high staff turnovers, stretched targets and a largely subcontracted workforce with less traditional oversight and ownership of responsibilities than we have historically seen in many mining operations. So we now have an industry learning from its mistakes and attempting across all areas to become lean and far more productive to maximise remaining margins with the current coal price.

Key issues

Why did the committee decide to revise the 2003 Coal Guidelines, given the JORC Code is adequate?

Many readers would recognise that they, or industry peers they know, voiced concern both prior to and during the height of the mining boom. The concern was around the estimation and reporting of Coal Resources. It was apparent to many technical professionals (Competent Persons in their own right), that the manner and the basis by which some Coal Resources were being estimated, classified and reported, did in fact, not reflect the likely uncertainty of the coal deposit in question.

It was apparent that both companies and investors relying on information reported to make an informed decision were being placed at risk. The risk existed because these people and organisations were relying on people deemed ‘Competent’, and they were unable to recognise potential errors and omissions because of the manner in which classifications were applied and the lack of transparency that existed around areas that may be considered material in making an investment decision.

Some companies have rushed to what I will call ‘ticking a box’ to enable them to report Coal Resources and Coal Reserves.

This may seem harsh, yet it is my opinion that some companies have rushed to what I will call ‘ticking a box’ to enable them to report Coal Resources and Coal Reserves. Their hope was to attract more of a share of the available investment dollars at the time, their aim to either commence producing or increase existing production of export coal to what appeared an insatiable world market, without really understanding what they had to deal with once production commenced.

I also hold the belief that for other companies it was more about building the perceived value of the asset through increasing the confidence classification of the Coal Resource and/or Coal Reserve at minimal cost, and then unloading it onto an unsuspecting market with an inappropriate term describing the deposit as ‘JORC Compliant’.

It is for reasons such as these that the JORC Code exists, and also why there is now greater rigour expected from the JORC Code (2012 edition) in meeting and communicating the minimum standards required in reporting.

As an industry we need to ask ourselves ‘Should we expect to receive enthusiasm for investment in the exploration and development of projects when there have been demonstrations of low levels of success in meeting expected aims?’ With a tight market and given the poor performance of the mining industry to progress exploration targets through to profitable operational mines, we as an industry have to get smarter. The investing public gets gun shy when they see failure again and again. And mining operators likely feel the same when recognising risks that are clearly identifiable upon review of historical data that should have been considered and communicated in both the estimation and classification of a Coal Resource.

Clause 42 of the 2012 JORC Code makes specific reference to the 2003 Coal Guidelines – or its successor document – for providing guidance to both those estimating Coal Resources and Coal Reserves in addition to statutory reporting primarily not intended for the investing public. As I have outlined previously (in this article and other forums), many industry professionals were vocal in the way in which the 2003 Coal Guidelines were being applied by some in the estimation and classification of Coal Resources. I believe this was why the JORC Committee phrased Clause 42 of the latest edition of the JORC Code as referring to a successor document. They knew the industry as a whole wasn’t happy with what was going on and gave an opportunity for the industry to fix it with one simple sentence. You may suggest they just remove reference to the 2003 Coal Guidelines from the JORC Code, yet this in my opinion is just like sticking your head in the sand and not addressing the problem at all. Creating a successor document provides an opportunity to remove the problem completely, by defining what is now considered acceptable and what isn’t.

As I have alluded, evidence had been mounting that some Competent Persons were signing off on Coal Resource estimates with little scientific basis. They were rather relying on the ability to solely classify a Coal Resource on the basis of it being within 500 m, 1000 m or 4000 m of a borehole intersection. Worse still, it didn’t seem to matter if the borehole even intersected the coal seam of interest. Nothing else was considered or assigned relevance in their classification. No support was provided for the methodology applied. It is likely that instances still exist today that, should judicious investigation be undertaken, we would find the techniques applied in the estimation and confidence classification to be flawed.

The sole use of maximum suggested distances was not only being applied to deposits in Australia but further afield, stretching to New Zealand, the United Kingdom, eastern Europe, south-east Asia and Africa. While it demonstrated the success of the JORC Code in becoming a cornerstone internationally for the preparation of public reports in relation to mineral deposits, it did nothing to enhance either the JORC Code itself, or the coal industry at large. In fact it was doing the complete opposite, by watering down the objectives of the JORC Code and demonstrating a lack of scientific judgement.

coal reclaimer

Some readers may infer from my statements thus far that there was something wrong with the 2003 Coal Guidelines. This is not my assertion at all, but rather I have come to the conclusion, along with others, that its original intent was either being misinterpreted or inappropriately used. As I have outlined, given that the JORC Code mentions the 2003 Coal Guidelines, it was felt necessary by many in the coal industry that a revision was required to address the matter (in regard to suggested distances). Not replacing the 2003 Coal Guidelines with a successor document (and waiting for a subsequent revision to the JORC Code that may possibly remove reference to the Coal Guidelines) would do nothing in the immediate term, nor would it put on notice a minority within the coal sector that such practices continue to have a negative impact on the coal industry as a whole. Furthermore, the Coal Guidelines provides discussion on Inventory Coal, an aspect which is not considered part of a Coal Resource and public reporting yet one which does relate to the needs of governments when planning.

I believe that it is for these reasons that something had to be done in finding a successor document. It was evident there was a need to change the status quo of what our industry considers acceptable for the estimation and classification of Coal Resources. We have had the luxury of being a self-regulated industry in this regard and it was only through active participation by our community that I believe this would be maintained into the future.

How do the 2014 Coal Guidelines differ from the 2003 Coal Guidelines?

In our review the committee felt that the guidelines should not be prescriptive in nature (for the same reasons the JORC Code isn’t). The 2003 Coal Guidelines had provided suggested maximum distances (along with other matters for consideration) for the estimating and classifying of Coal Resources, yet this had both become exploited and taken out of context from its original intent.

This led to wider discussion about what the Coal Guidelines should and shouldn’t contain. It was decided that it was unnecessary for the guidelines to replicate aspects of the JORC Code. To avoid confusion, and any later ambiguity between the two documents, it was decided that if the JORC Code adequately covered a topic then a reference would be made to it in the Coal Guidelines to avoid replication. Anything that was to be included in the guidelines had to support and provide further guidance to the JORC Code. A ‘how-to’ manual wasn’t seen as the answer in replacing the 2003 Coal Guidelines (as this would be likely prescriptive in nature, thereby failing our first test), yet the document must provide sufficient information to guide professionals, particularly junior explorers who may be preparing a Maiden Resource statement, or to younger professionals who may be preparing their first statement.

By far the biggest difference people reading the 2014 Coal Guidelines will notice is that there is next to no mention of Coal Reserves. Submissions were made by various industry professionals (and graciously accepted by the committee) as to how they should be determined. It became evident very early in the review process that the determination of Coal Reserves is not unique when compared against other Mineral Reserves. Yes, I agree that there may be differing aspects in the mining and processing of coal when comparisons are made to other commodities, yet the fundamental principles for determining if a coal deposit can provide a positive NPV are the same, and it was the opinion of the committee that the JORC Code covered this adequately.

In removing the suggested distances from the guidelines, there was an expectation that the Competent Person would be required to demonstrate their competence through application of scientific principles and knowledge, not just their ability to use a pair of compasses to draw circles around borehole intercepts. In removing the suggested maximum distances the committee recognised alternatives must be provided. This proved to be easier said than done.

It was on this basis that the committee then spent a deal of time documenting alternative methodologies that require consideration in the estimation and classification of Coal Resources. The methods provided are in essence not unique to coal and could be considered as applicable to other commodities of interest. The Competent Person is guided in the estimation and classification of Coal Resources, and should consider such things as:

  • critical assessment of relevant local, geographical and geological settings
  • data analysis, error and verification
  • identifying critical data
  • statistical analysis
  • geological modelling
  • geostatistical analysis.

Some or all of these techniques are now necessary to consider in determining a Coal Resource. No longer will Competent Persons be able to dumb down an estimate by solely using a suggested maximum distance as the basis of classifying an estimate. The principles of transparency and materiality as described in the JORC Code are fully supported and reinforced in the 2014 Coal Guidelines.

By far the biggest difference people reading the 2014 Coal Guidelines will notice is that there is next to no mention of Coal Reserves.

The 2014 Coal Guidelines provide definitions to terms such as domains and how they should be considered within the context of a deposit. Aspects of coal modelling as they pertain to resource estimation are also given more attention. Different methods of applying geostatistics for Coal Resource classification are outlined. There guidelines also contain updated sections on the adequacy and attention to coal quality that should be considered in undertaking an estimate, and more attention is given to factors that relate to ‘reasonable prospects of eventual economic extraction’ as they pertain to coal.

By far one of the other biggest modifications was providing a Q&A section and including suggested references for obtaining additional information. The committee recognised that the 2014 Coal Guidelines themselves couldn’t cover everything, yet there are many questions raised time and again by technical professionals when developing resource estimates. Supplementary information was provided in the hope of guiding people in the right direction to make informed decisions. Questions answered include:

  • What is a ‘JORC compliant’ resource estimate?
  • What is a ‘spotted dog’?
  • Can a single sample that covers several seams or plies be used as a Coal Quality Point of Observation?
  • What geostatistical methods can be used to aid Resource classification?
  • What should good geological modelling documentation include?

Much work was done on whether or not to include a discussion on Inventory Coal. As I said this isn’t part of a Coal Resource, yet I believe, on reviewing the guidelines, people will recognise its worth and relationship to Coal Resources and why it was maintained in the current edition.

Will this revised document improve the mining industry?

The simple answer to this final question is no it won’t. The document holds no power to do that, it’s just a PDF file available to print and read. The power in it is that it allows us to do something ourselves. It provides us with an opportunity to change and make things better. It provides an opportunity for people that may be new to the estimation and classification of Coal Resources to get informed and provides reference material to further their knowledge. It enables any of us to be prompted about the things we should be considering as Competent Persons when estimating and classifying Coal Resources. It also enables the investor to recognise maybe what they should be looking for as having been considered before deciding to invest in a project.

In conclusion I would like to thank my fellow committee members for their efforts in the pursuit of completing this task, our employers who provided their support of the time required in achieving this end, and those industry professionals providing constructive criticism and feedback (of which most was very positive) for the draft release. I would also like to thank the JORC Committee, QRC, and CGC which supported the review, and the AusIMM and AIG for their communications to industry throughout this process. 

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