Resource is not reserve: the distinction that decides a negotiation
The divergence between “resource” and “reserve” is often a point of impasse in mineral asset negotiations. While the resource represents only the geological estimate of the quantity of material available, the reserve delimits the economically extractable fraction, supported by technical-economic studies. This distinction determines whether the property can be used as a basis for valuation, financing, or transfer of control. Ignoring the difference creates the risk of an inflated valuation and compromises the legal certainty of the operation.
What is a mineral resource, and why it alone does not support an offer#
A mineral resource, as defined by JORC Code 2012, cl. 20, is the estimate of the quantity of mineralized material that can be extracted based on geological, engineering, and exploration data, without consideration of economic viability. This estimate incorporates geological uncertainties, tonnage and grade modeling, and is expressed in terms of mass or volume.
The resource classification does not include an assessment of operating costs, market prices, infrastructure, or regulatory factors. Thus, the mere existence of a resource does not guarantee that the material will be profitable for exploitation.
For this reason, in a purchase or investment offer, the resource serves only as an indication of potential, requiring additional analyses before becoming a determining element of price or viability.
What transforms a resource into a reserve: the Modifying Factors#
The transition from resource to reserve depends on the application of the Modifying Factors established in JORC Code 2012, cl. 29. These factors cover four main categories: (i) geotechnical and mining factors, (ii) processing and metallurgical factors, (iii) economic and market factors, and (iv) legal, environmental, and infrastructure factors.
Each factor must be analyzed with specific data, such as extraction costs, metallurgical recovery, selling price, licensing requirements, and energy availability. The sum of these elements allows for the determination of whether the portion of the resource can be converted into economically mineable ore.
Only after the verification of all Modifying Factors is the portion of the resource recognized as a reserve, meeting the requirements of reliability and demonstration of economic viability.
The three levels of resource confidence: inferred, indicated, measured#
The JORC Code classifies resources into three levels of confidence: inferred, indicated, and measured. The inferred resource is based on limited geological data, with wide drill spacing and high uncertainty of continuity; its estimate is qualitative and serves to guide initial prospecting.
The indicated resource uses a denser set of samples, allowing for quantitative modeling with moderate uncertainty. Parameters of grade, thickness, and extent are determined with greater precision, although they do not yet reach the rigor required for a complete economic assessment.
The measured resource requires a high degree of sampling density, rigorous quality control, and validation of geological models. In this category, the tonnage and grade estimate has low uncertainty, allowing for the realization of preliminary feasibility studies.
The two categories of reserve: probable and proved#
According to the JORC Code, cl. 29, reserves are subdivided into probable and proved. The probable reserve corresponds to a portion of a resource (generally measured or indicated) that, after the application of Modifying Factors, demonstrates economic viability with a moderate level of confidence. The technical and economic assumptions are reasonably well supported, but may be subject to revision with additional information.
The proved reserve represents the part of the resource that, under the same premises, presents high confidence of profitable extraction. This category requires high-quality data, demonstration of geotechnical stability, proven processing methods, and robust economic margins.
The distinction between probable and proved directly influences financing leverage, royalty structure, and risk assessment in mineral asset transactions.
Why an inferred resource never supports a reserve statement#
An inferred resource, by definition, incorporates great geological uncertainty and limited sampling density. This lack of robustness prevents the reliable application of Modifying Factors, since critical parameters – such as mining costs or metallurgical recovery – depend on precise data regarding mineral continuity and ore behavior.
Hypothetical situation: imagine a holder who bases their sales proposal exclusively on an inferred resource of 500 Mt at 0.8% copper. Without additional drilling, the continuity of the mineral body remains uncertain, as does the variability of grade throughout the deposit. If the buyer moves forward assuming that that quantity can be converted into a reserve, they may incur unexpected costs for drilling, reprocessing, or even total economic unviability if the ore proves to be less homogeneous or more expensive to process than anticipated.
Therefore, the regulatory standard prevents an inferred resource from being declared a reserve, requiring the elevation of the resource to, at a minimum, indicated before the application of Modifying Factors. This requirement protects both parties against valuations based on unverifiable premises.
What this changes in a real negotiation#
In practice, the distinction between resource and reserve conditions the structuring of due diligence clauses, price, and performance guarantees. In a transaction, the buyer will request reports proving the existence of a proved or, at least, probable reserve as a prerequisite for payment release. The seller, in turn, must present documentation demonstrating the application of Modifying Factors and the appropriate classification of reserves.
If the asset is only at the inferred resource stage, the negotiation tends to focus on future exploration agreements, with staggered payments linked to conversion targets for indicated or measured resources, and subsequent reserve approval. This approach reduces exposure to the risk of overvaluation and allows the buyer to align their investments with the technical and economic proof stages.
Thus, recognizing that “resource is not reserve” guides the definition of development milestones, price adjustment mechanisms, and termination conditions, ensuring that the negotiated value reflects the economic reality of the asset and not just its geological potential.
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