may 2009 issue
|
The Geo Beat
It’s About Real Resources — Not Esoterica
|
BY TOM SNEDDON, P.GEOL. |
BY TOM SNEDDON, P.GEOL.
APEGGA Manager, Geoscience Affairs
“Approval...is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns. Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas.”
- Warren Buffett, in an open letter to Berkshire Hathaway’s shareholders, Feb. 27, 2009
As technical professionals who create wealth, we should find the above quote particularly poignant and relevant to our work.
The 2008/09 financial meltdown came about through wealth destruction on a colossal scale — caused not by the wealth creators but by the wealth distributors and speculators. As this is being written, the common wisdom is that the meltdown occurred because commodity speculation blew prices beyond what could be supported by world economic activity, and merchant banks created complex “asset-backed commercial paper” that bore little resemblance to economic activity in the real world.
Mr. Buffet suggests that Gaussian econometric models, based on esoteric statistics and mathematics, must share some of the blame as well, since they do not take real-world business processes into account.
In a real sense, geoscientists seek approval for their recommendations from the keepers of the purse strings, to allow projects to proceed from a paper or electronic exercise to wealth discovery and recovery from the ground. Make no mistake about this one — the value of any bit of moose pasture we evaluate is zero before we determine what Mother Earth is hiding away.
The property becomes worth some (usually small) value at discovery and builds in value as we move from resource estimation through proven reserves. At that point, we pass the property (now likely passed through several corporate hands) to our partners in wealth creation, the engineering profession, who figure out how to extract and transfigure the resource we found and delimited into a product that someone, somewhere is willing to buy.
Our cost-based models do the formal valuation piece at each step of the process, while the promoters and speculators determine the market price for the real estate. We assume that under “normal” conditions, the value of the property converges on the market price for the product, discounted for costs of recovery and the risk involved with the project, over the life of the project. And we assume that when the risks or prices exceed the expected value of the project, the mine/well is closed and the land value reverts to zero.
We are always wrong because there is no such thing as a “normal” market. The business cycle is non-stationary; hence we never know the future value of the risk, prices or product demand. We are always right because every deposit has its day and the same forces ensure that. We never know exactly when that day will happen.
On the psychological level, we also need approval. The prospect generation activity allows us to focus all of our technical and commercial knowledge on getting that approval. It comes from gaining acknowledgement from our peers that we have outstanding expertise and technical skill; from the executive committee (often headed by a distinguished professional geoscientist) and from the shareholders who will get a wealth boost from a successful play.
There is no greater rush for a project team leader, however, than the prospect presentation. It can be downright giddy. Nine times out of 10, though, we don’t get an approval and we are crushed. Rejection is not all bad, as it breeds an even greater need for approval. We work even harder at developing the next prospect proposal that will turn rejection into acceptance, followed by success with the drill.
But do we fully understand and appreciate the values for alpha, beta, gamma and delta we plug into the reservoir model? Do we properly agonize over selecting the most appropriate value? Do we conduct a sensitivity analysis before committing to it and selecting the outcome that makes the most geological, geophysical and geochemical sense?
Our sense of professionalism demands that we answer yes to the above, and that we make the audience for our presentations fully aware of the risks and benefits present in any prospect.
Geoscientists are famously non-mathematical in their approach to science. Thanks to great advances in geostatistics and the huge reservoir of numerical data available, that is changing.
The newer members of the profession are also members of the Nintendo/Xbox/Wii generation who revel in 3D games and simulations, and gleefully plunge into the mysteries of geoSCOUT, AccuMap, GeoCarta and the alphabet soup of other software. All of this has raised the success rate for exploration projects to over 90 per cent, if you check the monthly reports from the Energy Resources Conservation Board, and thus is a Good Thing.
Given all our high technology tools in the office, we are in real and present danger of becoming a “nerdy-sounding priesthood,” to use Mr. Buffett’s terminology — one that never touches the rocks from whence all wealth is derived. It is essential that we should never lose our perspective, and that we be skeptical of any conclusion we cannot observe and authenticate in the field.
Show me the rocks. Then I will show you the money.
As long as our drills, rock hammers, hiking boots and Brunton Pocket Transits are not far away and we keep close watch on what the geophysical crews are actually doing in the field, we will keep the respect of those who depend upon our recommendations. They, in turn, will continue to give us the approval we seek.
We can do no less.
|