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Cutoff grade is defined as the grade that is normally used to discriminate between ore
and waste within a given orebody. Although the definition of cutoff grade is very
precise, the choice of a cutoff grade policy to be used during an exploitation of a
deposit is not. Use of simply calculated breakeven cutoff grades during the production
will in most instances lead to sub-optimum exploitation of the resource.
As long as the operators mine and process the blocks of material with grades greater
than equal to static cutoff grades without considering deposit characteristics, only the
undiscounted profits will be maximized.
The concept of using cutoff grades higher than breakeven grades during the early
years of an operation for a faster recovery of capital investments and using breakeven
grades during the later stages of the mine has been practiced in the industry for
heuristic NPV optimizations.
The year by year tons and grade schedule obtained from the modified cutoff grade
policy is given in Table 4.
In the previous calculations the G & A costs were not included in the cutoff grade and
profit calculations.
Table 5 gives yearly tons and grades schedules resulting from the cutoff grade policy
that includes fixed costs as part of the cutoff grade and the profit calculation.
Where d is the discount rate; NPVi is the NPV of the future cash flows of the years (i)
to the end of mine life N; and the C is the total processing capacity in Year i.
Algorithm for Determining Optimum Cutoff Grades
The cutoff grades gmilling(i) given in Equation (1) depend on estimates of NPVi of the
future profits in year i through the end of mine life from the operation and NPVi of the
future profits cannot be calculated until the optimum cutoff grades have been decided.