Geological Criteria and MethodologyFor Estimating Coal Resources and Reserves

Donald K. Lumm, Ph.D., C.P.G. ECSI, LLC Lexington, Kentucky

123rd Annual MeetingIllinois Mining Institute

Marion, Illinois25 August 2015

Presentation Outline

• Sequence of Development of a Coal Property• “Resource” vs. “Reserve” Classification• Reliability Categories• Geological Data and Mapping Files Required for

Resource Estimates• Analysis of Borehole Data and Coal Quality Data• Mineability Criteria – Western Kentucky• Coal Valuation – Brief Summary

Typical Sequence of Development of a Coal Property

Discovery

Desk TopStudy

Pre-Feasibility Study orProspect Report U.S. Securities and Exchange Committee

(SEC) type Reserve Report

Canadian Securities AdministratorNational Instrument (NI43-101)type Mineral Resource Report

Australasian Joint Ore ReservesCommittee (JORC) type Mineral Reserve Report

Knowledge Base (Data) and Disclosure

Reconnaissance ExplorationDrilling and Sampling

Analytical(Chemical andPhysical) Testing

ExplorationMine and

InfrastructureDevelopment

MineProduction(Depletion)

MineReclamation

Marketing Parameters(Production Costs, CoalQuality, Sale Price, etc.)

Coal Wasteand Refuse

Storage

Mineral Acquisition, Surfaceand Wheelage Agreements

Permit Planning,Submittal, Review,Revision, Approval

Bonding andLicensure

FeasibilityStudy

ProjectCommissioning

Geological ReserveModeling and Mapping

PROJECT

VALUE

Bond Recovery or Forfeiture

ReserveAudit

The Role of the Geologist

• Identify, correlate, measure, and describe coal seams, interburden, and roof and floor rock units

• Conduct exploration and infill core logging; maintain and edit borehole and core log database

• Generate geological cross sections• Generate coal seam distribution and thickness maps,

and resource or “mineability” maps• Conduct in-mine mapping and sampling of roof, floor

and coal seam• Prepare periodic coal resource estimates

Coal Resources vs. Reserves

Coal resources are those coal deposits present in such forms and amounts that economic extraction is currently or potentially feasible.

Coal reserves are those coal deposits which could be mined and sold for economic profit at the time of determination considering environmental, legal, and technological constraints. The “reserve” is that part of the resource for which the thickness, quantity, rank, and quality, have been reasonably determined by a greater degree of geologic assurance.

Classification of Coal Resources(Early version by USGS & USBM, 1973)

(From USGS Bulletin 1450-B, Figure 1, 1973)

Classification of Coal Resources (Conforms to SEC Industry Guide 7; established by USGS, Cir. 891, 1983)

(From Wood et al., USGS Circular 891, 1983)

Reliability Categories – Distance from Bore hole Datum Point

Measured < ¼ mi radius

Indicated = ¼ mi to ¾ mi radius

Inferred = ¾ mi to 3 mi radius

Bore hole datum point

Area of Hypothetical ResourcesBeyond 3-mi radius

Inferred = ¾ mi to 3 mi radius

Bore hole datum point

Measured < ¼ mi radius

Indicated = ¼ mi to ¾ mi radius

Coal outcrop Coal outcrop

Reliability Categories - Distance from Outcrop, Mine, and Bore hole Datum Points

Coal outcrop

Abandoned Deep Mine

Bore hole datum points

Inferred = ¾ to 3 mi radius

Measured < ¼ mi radius

Indicated = ¼ to ¾ mi radius

Coal outcrop

Area of Hypothetical ResourcesBeyond 3 mi radius

Geological Data Required for Resource Estimates

• Bore hole (rotary) logs and core hole logs• Gamma ray – neutron logs• Coal quality analyses (short prox., washability)

Mapping Files Required for Resource Estimates • Digital base maps: property, topographic, satellite• Coal outcrop and subcrop maps• Permit, mined out area, and depletion maps• Oil and gas well location maps, wetland maps, etc.

Analysis of Borehole Data

• Can old and new bore hole logs and records be verified by a third party?– Accuracy of surface location or legal description– Surface elevation – Coal thickness measurements and descriptions– Non coal thickness measurements and

descriptions• A perceived or confirmed inaccuracy may require

that the data point be disqualified outright, or used with some form of disclaimer (e.g., “Do Not Honor”)

• Thickness of almost all rock units and coal beds on log ends in “0” inches

• “Coal & Slate” listed together for same thickness interval

• Geologist should be skeptical and use borehole logs and thickness measurements with impartial discretion

Driller’s LogVerify Thickness Measurement

Core Log Measurement and Description

Is the “bone” coal and other non coal partings properly identified, measured and listed in the core log?

Analysis of Coal Quality Data

• Can the coal quality analyses be verified by a third party?

• During sampling, the collector must properly identify each coal sample interval thickness, depth (or elevation) on the chain of command list that is submitted to the commercial coal lab

• The reviewer of the lab analyses must verify the sample thickness and depth (or elevation) with a source core hole log or field location description and measurement

Coal Quality DataSampling after a Drilling Campaign

Coal Quality Data Incomplete or Vague Sample Identification

Core hole Log used to VerifyCoal Quality Sample Identity and Interval

Mineability Criteria – Illinois(from Illinois State Geological Survey)

• Surface Mineable Coal Resources– Coal > 18 in. thick and < 200 ft. deep

• Deep Mineable Coal Resources– Coal > 28 in. thick and > 75 ft. deep

(Treworgy et al., ISGS IMN 118, 1999)

Mineability Criteria – Western Kentucky(from Kentucky Revenue Cabinet)

• Reserve mapping must consider the following criteria and parameters and exclude these areas where present:- seam thickness < 4.0 ft deep (shaft/slope access)- seam thickness < 3.0 ft deep (drift access)- strip ratio > 15:1 (area mining)- strip ratio > 10:1 (contour mining)- in-seam rock reject > 35%- Ash > 18%; Sulfur > 3.0%; BTU <10,500 lbs

• Variations of the above parameters may be specified

Mineability Criteria (con’t)

• Natural Restrictions include:– Insufficient interburden (deep)– Insufficient or excessive cover (deep)– Excessive strip ratio (surface)– Excessive topographic relief (surface)– Uncontrollable roof or floor conditions (deep)– Coal sterilized because of previous mining above

or below– Physical isolation or insufficient block size

Mineability Criteria (con’t)

• Cultural Restrictions include:– Roads, railroads, pipelines, municipal boundaries,

buildings cemeteries– Proximity to inactive or abandoned mine– Oil/gas well or field– Environmental restrictions (wildlife sanctuary,

forest preserve, protected watershed, archaeological site)

– Adverse property or legal access denied

Coal Tonnage Calculations

• Tons in-place = # acres x seam thickness (ft.) x 1,800 tons/ac./ft.

• Recoverable tons =Tons in-place x mine recovery rate % x wash

recovery % x moisture addition %

Coal Valuation – Brief Summary

• The amount of supportive detail required in a Valuation Report depends on the intended purpose and audience of the Report and level of disclosure

• Externally listed valuations for annual shareholders or for property sales or acquisitions typically requires an impartial third party to prepare the reserve report and a valuation report

• The Assessor must be a “Competent Person” having specified educational and professional qualifications and experience in mineral valuation practice

Coal Valuation (con’t)

• The Income Approach to valuation is the most common method used for coal and minerals

• The Discounted Cash Flow (DCF) model is applied; the value of a property can be estimated by calculating the projected year-by-year cash flows over the life of the project or mine

• The Net Present Value (NPV) is calculated to gauge the value of the property at yearly intervals

• Operational assumptions and market uncertainty requires high, expected, and low valuation estimates

Summary

• Resource and reserve estimation is an ongoing, periodic task required for most coal properties

• US Coal reserve estimates must be classified and conform to criteria established in USGS Circular 891 (Wood et al., 1983)

• Mineability criteria vary within the same coalfield• The collection, analysis, and judicial use of the

borehole and coal quality data are crucial for deriving meaningful resource estimates