Inferred Resource

An Inferred Resource is the ghost in the machine of mining estimates. It represents the lowest confidence category of a Mineral Resource as defined by international reporting standards. Think of it as an educated guess made by a Geologist. Based on limited geological evidence and sampling—perhaps from widely spaced Drilling or surface mapping—the geologist can reasonably infer that a mineral deposit exists, but they cannot verify its actual grade or tonnage with any real certainty. The key word here is “inferred.” There is not enough data to confirm the geological and grade continuity of the deposit. Consequently, while the potential size of an Inferred Resource can sound impressive in a press release, it comes with a massive dose of uncertainty. It's crucial for investors to understand that an Inferred Resource cannot be the basis for a Feasibility Study and cannot be converted into a Mineral Reserve, which is the economically mineable portion of a deposit.

To truly grasp the speculative nature of an Inferred Resource, you need to see where it fits in the hierarchy. Regulators have created a “resource pyramid” to classify mineral deposits based on increasing levels of geological confidence. The main standards governing this are Canada's NI 43-101 and Australia's JORC Code. The progression from a geological guess to a bankable asset looks like this:

• Inferred Resource: The base of the pyramid and the starting point. It's a target for future exploration, not a confirmed asset. The uncertainty is too high to allow for any meaningful economic evaluation.
• Indicated Resource: The next step up. Drilling and sampling are dense enough that a geologist has a “reasonable” level of confidence in the tonnage, grade, and other characteristics. You can start building a preliminary mine plan around this.
• Measured Resource: The top of the resource pyramid. The deposit has been tested and sampled so thoroughly that the geologist has “high” confidence in the estimates. The risk of the minerals not being there is very low.

Only the more reliable Indicated and Measured Resources can be considered for conversion into Mineral Reserves (Probable Reserve and Proven Reserve, respectively) after rigorous studies confirm they can be mined profitably. An Inferred Resource must first be upgraded through more drilling before it can even be considered in this calculation.

For a value investor, an Inferred Resource should be handled with extreme caution—it's often a trap. Junior exploration companies, hungry for capital, frequently tout massive Inferred Resource figures to generate market hype. These numbers can paint a picture of a world-class deposit, but they are purely conceptual.

The central risk is simple: the resource might be smaller, of a lower grade, or not even exist in an economically recoverable form. A company whose entire value proposition rests on an Inferred Resource is not an investment; it's a speculation. So, how should a prudent investor treat it?

1. Assign it zero value. When calculating a mining company's Net Asset Value (NAV), the most conservative and sensible approach is to attribute no value whatsoever to Inferred Resources. A company’s tangible, bankable value lies in its Proven and Probable Reserves. Any value given to an Inferred Resource is an exercise in speculation, not investing.
2. See it as a “call option.” If you must, think of an Inferred Resource as a free call option on future exploration success. It’s a potential bonus, not a core asset. Your investment decision should be based on the company's other, more tangible assets and its financial strength.

While inherently risky, an Inferred Resource isn’t entirely meaningless. It tells you where a company might be focusing its exploration efforts. Here’s what to look for:

• The Upgrade Path: Does the company have a clear, fully-funded plan to conduct the additional drilling needed to upgrade the Inferred Resource to an Indicated or Measured status? A plan without capital is just a wish.
• The Economic Study: Be very wary of a Preliminary Economic Assessment (PEA), sometimes called a scoping study. This is the only type of economic report that is permitted to include Inferred Resources. A PEA is, by definition, preliminary and conceptual. A project's economics can look fantastic in a PEA, only to fall apart later when more rigorous studies, which exclude Inferred Resources, are completed.
• Management's Track Record: Look at the leadership team. Have they successfully taken a project from the Inferred stage all the way to a producing mine before? A proven team is one of the best risk mitigators in the highly speculative world of mineral exploration.