A Resource Investors Guide to Understanding Drilling Methods

According to a report released by the ASX last year, 7.3 million Australians own shares. That's over 46% of the population (one of the highest proportions in the world), and all of them want to optimize their returns. One of the best ways you can develop an investing edge over the teeming masses is to broaden and deepen your knowledge base; an intricate understanding of the business you are investing in helps you better avoid pitfalls and identify opportunities when they come about.

Resources on the whole are a typical case; most announcements related to company value are scattered with unique terms and mining lingo. And shareholders regularly re-value the worth of any mining or energy company on the ASX at a moment's notice, given the release of profit results or a change in commodity prices. With this in mind one of the most important items that crops up regularly is a drilling result. Learn to interpret this piece of information and you'll have a head-start on the hoards of novice investors diving into the market upon hearing of the 28% gains the mining sector has made so far in 2007.

To that end, here are some of the primary drilling methods miners employ when defining the characteristics of a solid ore body...

Rotary air blast drilling is one of the fastest, cheapest, easiest ways for miners to obtain a sample from their resource. In an RAB operation, a spinning tungsten drill bit forces its way down through the ore, blowing fragments back up to the surface for examination. It is one of the least accurate methods, as these sample fragments are often compromised by other particles on their way up the drill hole. Consequently, companies tend to look at this technique as their first port of call for estimating the specifications of a given deposit; at this stage accuracy is not critical. RAB drilling is generally used for relatively shallow depths of up to 25m, or to remove soft rock on top of the deposit.

Miners use another type of drilling method, air percussive drilling, when the layers of rock are quite hard. Instead of a rotating drill bit, in air percussion a hammer bit strikes the rock, forcing its way through to cut samples from the ore which are then blown back up the drill hole in the same way as in an air rotary operation. Accuracy of air percussion samples suffers for the same reasons as air rotary samples, so companies commonly apply it early on too.

Mud rotary is similar to the rotary air drilling method in many respects. The only major difference is that water, not air, is the medium by which fragments travel back to the surface. Mixing water with the cuttings yields a "slurry", upon which geologists perform analysis after removal. This yields low-accuracy results at a lower price, but miners use it at deeper depths than an air rotary operation, mostly on soft rock material.

The final method of drilling is diamond core drilling. For the purposes of an investor, the results from a diamond core drill are the ones to take notice of. The technique stands out from the rest of the field in terms of accuracy, but is also the most expensive, and hence is used towards the end of a definition study. A hollow, cylindrical diamond encrusted drill bit rotates at high speed, cutting through the ore and extracting a solid sample that travels up through the drill pipe. This gives an unbiased estimate of the deposit, because no other particles have a chance to contaminate the ore on its journey up the drill hole.

The most important thing to remember is that while the different drilling methods outlined are appropriate for different scenarios, they also imply difference levels of confidence in the sample. For example, in Victor Rudenno's 2004 manual The Mining Valuation Handbook, he notes that the integrity of air rotary drilling alone does not substantiate definition of a reserve, without correlation between rotary results and an appropriate nearby diamond core sample. Though there is always uncertainty in results, the diamond drilling method gives analysts the best chance to identify what lies beneath.

You should apply a liberal dose of skepticism to any drilling release. Some companies tend to report only the most positive results when offering shareholders a picture of mine progress, so it is best to always assume the worst.

We partially derive the value of a mining business from what it owns underground, but we can usually only estimate what it owns underground. By the time analysts identify the economic potential of a geological structure beyond doubt, the market has usually factored it into the share price, so knowing how to interpret drilling results will give you a rough idea of where market value is likely to head. This is one way to get a head start on the rest of the pack.

By Al Robinson
The Daily Reckoning Australia

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