Understanding Cut-Off Grade 5 (Incremental Ore) or "Why is my mine losing money?

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Brian W. Buss - President of BWB COnsulting Services Inc.

Understanding Cut-Off Grade 5

(Incremental Ore) or "Why is my mine
losing money?"
Published on March 26, 2018

Brian Buss, P.Eng., PMP. Follow

54 10 0
President at BWB Consulting Se…

This is the fifth in a series of articles I've been writing on cut-off grade. Selection of
an appropriate cut-off grade is the most important and fundamental driver of
economic value for any mineral deposit. Getting this wrong can have significant
repercussions on mine and plant sizing, up front capital costs, production rate,
operating costs, and ultimately the cash flow for the operation and return on
investment. A brief summary of the information presented in the first 4 articles is
presented below. It is recommended that the reader work through all of these
articles from the beginning as the information (and understanding of the topic) is
built up sequentially in these articles. Links to all these articles can be found on my
LinkedIn page as well as my corporate website.

1) Review of Previous Articles

Article 1 - Cut-Off Grade 1 (Basics)

This article dealt with the basics of Cut-Off Grade. In this article I answered the
following questions: "What is Cut-Off Grade?", "Why is Cut-Off Grade so
important?", "What happens if you get the Cut-Off Grade wrong?", and "How do you
calculate Cut-Off Grade?"

Click Here To See Article

Article 2 - Cut-Off Grade 2 (Equivalent Grade)

This article dealt with Equivalent Grade and why it is so important in the mineral
resource industry. The factors that are applied in the conversion of In-Situ grades
(like those generated by geological block models) to Equivalent Grade are
described and the calculation process that is used for the conversion was
presented.

Click Here To See Article

Article 3 - Cut-Off Grade 3 (Poly-Metallic Deposits)

In this article I described the complexities inherent in calculating Equivalent Grade

for poly-metallic deposits. A worked example was presented for a
Copper/Gold/Silver deposit. The process used to express the Equivalent Grade in
terms of any of the three major metals of interest was explained.

Click Here to See Article

Article 4 - Cut-Off Grade 4 (Tonnage, Grade, and Costs)

In this article the concept of Cut-Off Grade was tied together with the concept of the
Tonnage/Grade relationship for the resources and reserves for any given deposit.
The importance of selecting the right Cut-Off Grade and how it is applied to
determine the specific tonnage and grade of a deposit was explained. A simple gold
deposit was presented as an example for both resource and reserves estimation at
any given Cut-Off Grade. The importance of accurately converting the
tonnage/grade relationship from a resource to a reserve was discussed. The
ramifications of getting the Cut-Off Grade wrong in determining the tonnage and
grade for a deposit and the economic impact of that error was presented. Finally,
the appropriate selection of the cost base used to establish the Cut-Off Grade was
discussed, specifically what should be included and what should be excluded from
the cost base.

2) Incremental Ore - Definitions

In previous articles I went to great lengths to stress the importance of calculating a

cut-off grade based on all-in-sustaining costs (AISC) of the operation. A loose
definition of AISC is "All costs incurred as part of normal operations once the
operation has reached a steady state following construction". Incremental ore is
defined as any mineralized part of the deposit below the AISC cut-off that can
incrementally add value to the economics of the operation under a specific set of
well defined circumstances. The question that must be clearly answered is this:
"When is adding low grade material to my mine plan a good idea?" Since the
answer to this question is binary (Yes or No) it can be addressed rationally as a cut-
off grade question. Remember, cut-off grade is simply the point at which you will
choose to take, or not to take, a specific action. My first impression is to say never
include incremental ore in the mine plan as it generally destroys value, especially if
the decision making process is not rationally justified. Just because your geologist
wants to mine every possible ounce of gold or pound of copper, is not a rational cut-
off grade decision.

A good rule of thumb is that under no circumstances should material below the
AISC cut-off grade be mined or fed to the mill if material above the AISC cut-off
grade is available. Displacing higher grade material with any amount of lower grade
will reduce margin/tonne, total revenue/year, and erode profitability. It might add
mine life, but mine life is not the goal, profit is. If mine life extension is a goal, you
must be aware that lowering the cut-off grade to do so will erode value and
profitability.

So, is there ever a time where mining or processing low grade is ok? Yes, under a
rational set of decision making criteria based on cut-off grade, the addition of
incremental ore can add value. Typical circumstances where incremental ore adds
value are presented below.

1) The low grade material needed to be at least partially processed anyway .

This situation occurs most frequently in open pit operations. Low grade material
must be blasted to expose higher grade material beneath. The corollary in
underground mining is developing drifts through low grade material to expose higher
grade production areas or the case where low grade dilution has failed into a stope
and filled a drawpoint. The line of questioning now runs like this: "Since I've already
paid for the drilling and blasting of this material, can I consider these costs sunk,
and do I now evaluate the material at the lower "incremental" cost of hauling, milling
and smelting/refining?" The simple answer is yes.

2) The low grade material had to be moved to surface anyway. In a pit, this is a
non-issue as all material must be removed from the pit to allow mining to continue.
In the underground environment, there may often be an additional choice to either
use the low grade as backfill or haul/hoist it to surface. The backfill/hoist decision is
a cut-off grade decision point. Once the material gets to surface (or out of the pit)
the decision to send it to a waste pile or a low grade stockpile is also a cut-off grade
decision. They both require a rational decision making process based on the
incremental downstream costs from that decision point on.

3) There is low grade material near to a previously developed part of the mine.
This decision is based on the following logic: "We already spent the capital money
to get here, so can I remove the sustaining costs from my cut-off grade calculations
and call the lower grade material ore?" This is a particularly tricky question to
answer. The answer is yes, but the ore should be scheduled at the end of the mine
life as a scavenging phase after all the ore above AISC cut-off grade has been
mined. Sometimes, this is impractical as the incremental (low grade) material might
be located in small isolated pods scattered throughout the mine. Going back to get
these pods might be a significant expense at the end of mine life. In these cases,
the incremental low grade could be scheduled into the mine plan but the amount of
this material (as a %) and the reduction in annual revenue that inclusion of this
material represents should be very well understood. I would normally expect to see
incremental ore of this nature represent no more than 15% of the total material to be
mined from any given level or deposit. If it is much more than this, phasing the
extraction of this material to the end of mine life should be considered.

3) Calculation of Incremental Cut-Off Grade

Incremental cut-off grades can be calculated by converting the incremental

downstream mining and processing costs at the decision point into a cut-off grade
by dividing the cost by the metal price and factoring for Foreign Exchange (FX) and
conversion of weight measures. In the example below, the conversion from cost (in
this case in Euros) to a cut-off grade in g/t of gold is calculated as follows:

COG (Au g/t) = Cost (Euro/t) ) / Price of Au ($US/oz) x 31.10348 (g/oz) x 1.15
$US/Euro

The table below presents a progressive table of ever decreasing incremental cut-off
grades for a hypothetical underground mine in Europe. Note that these are net
recovered (payable) grades meaning that the block of ore in question must deliver
this amount of gold for sale. The in-situ grade will, of course, need to be higher than
this due to losses in process, as was discussed in my previous articles. The first
column is the AISC cut-off grade. This grade is used to set the mine plan. Stopes
are designed on this cut-off grade and then extracted from the block model. The
second column is the incremental cost (and cut-off grade) excluding certain fixed
costs and sustaining capital. This is used to make a second pass through the
remaining parts of the block model to identify any incremental stopes. So long as
these stopes represent < 15% of the total material to be mined and they are
proximal to the development required for the first pass mining stopes, these can be
included in the mine plan. The third column represents low grade material in a
drawpoint. Material above this cut-off can be sent to surface for stockpiling. If the
grade is below this level, the stope should be abandoned and filled. The fourth
column represents broken development ore. Material above this threshold should
be sent to surface for stockpiling. Material below this threshold should be used as
fill. The last column represents the special case in an underground mine, where low
grade material had to come to surface because there was no place available to put
it as fill. This is the same decision point for low grade in an open pit that reaches the
pit rim. Material above this cut-off will go to the surface stockpile, otherwise it is
waste.

So, knowing the cost structure of your operation and the key decision points you
face, you can effectively create a cut-off grade policy to match those decision
points.

Table of Incremental Cut-Off Grades in a Hypothetical Underground

Mine

4) What Do You Do When the Mill Runs Dry?

There are times in a mine's life when the mill cannot be filled to capacity with
material above the AISC cut-off grade. This can occur towards the end of mine life
as pods are mined out, as a result of higher grade material being depleted, or due to
a major upset to production from a flood or other catastrophic event. In these cases,
the following question arises: "Can the addition of incremental (lower grade)
material generate better economic outcomes than running the mill partially empty?"
The simple answer is "yes", however, the full economic impact must be determined
to avoid this becoming a "just fill the mill with anything" strategy.
In order to fully evaluate this option, we must understand the relationships between
costs and production rate or throughput. Underground mines have a significant
portion of fixed or at least short term fixed costs. Unit costs are therefore
significantly influenced (dependent on) production rate or throughput. Milling costs
seem to be less driven by fixed costs so their unit costs are less dependent on
throughput. A typical cost/throughput relationship for an underground mine/mill
complex is shown below.

So let's say that the mine is operating in the green circle at 3,400 t/d at an AISC of
$US 150/tonne. Using the 1,250 $US/oz, this roughly translates to 3.7 g/t as an
AISC cut-off grade. The mine is running at 5.0 g/t currently. A flood occurs and the
lower part of the mine will be out of production for 1 year. This will shift production to
the blue circle at 2,800 t/d at an AISC of ~$180/t which roughly translates to 4.5 g/t.
There is a low grade zone that can be brought on-line fairly quickly to make up the
missing 600 t/d. What should the mine do? A) Cut production and wait for the
flooded area to be back in production or B) Reopen the low grade area? Let's do
the math.

A) The cut back option will generate a profit according to the following calculations.

Profit = Revenue - Cost

Profit = 5 g/t x $US 1,250/oz / 31.10348 g/oz x 2,800 t/d x 350 d/yr - $US 180 x
2,800 t/d x 350 d/yr

Profit = $US 20.5 M

B) Adding the low grade must result in at least the same profit as in Case A)

$US 20.5 M = Revenue of HG + Revenue of LG - Total Cost

Revenue of LG = $US 20.5 M - Revenue of HG +Total Cost

Revenue of LG = $US 20.5 M - 5 g/t x $US 1,250/oz /31.10348 x 2,800 t/d x 350
d/yr + $US 150/t x 3,400 x t/d x 350 d/yr

Revenue of LG = $US 2.1 M

Revenue of LG = $US 2.1 M = Grade of LG x $US 1,250/oz /31.10348 x 600 t/d x

350 d/yr

Solve for Grade of LG = 0.25 g/t

So essentially, because of the cost structures at the operation, as long as the

incremental ore contributes a net 0.25 g/t of value (after all losses), the overall
economics favour adding the low grade. Keeping the mine and mill operating at
maximum capacity has such a dramatic effect on reducing costs, that just about any
material will add economic value to an operation that is not maximized. That is not
to say that this is the preferred economic solution. In fact every effort should be
made to find better grade materials and return to a situation where the minimum
cut-off grade meets the $150/t threshold of ~ 3.7 g/t.

One strategy that can be applied is to look for blocks of ore at successively lower
cut-offs until the production capacity is matched. In this case, the 3.7 g/t threshold
would be the starting point for analysis. Any stopes that can meet this criteria are
identified, isolated, and committed to the base production plan. If the capacity is still
not filled, a second round of stopes are identified at a slightly lower cut-off grade -
say 3.2 g/t. These stopes are then identified, isolated, and committed to the base
production plan as well. A third or fourth phase is applied at ever decreasing cut-off
grades, until the production capacity can be filled. This strategy will provide the best
possible grade material (and best possible economic outcome) to fill the plant
capacity.
 In the long term, this strategy is not sustainable and provides sub-optimal cash flow
as it is fundamentally contradictory to the basic tenets of an AISC cut-off grade
strategy. If longer term or chronic shortfalls of material above AISC are expected,
an alternate strategy is required. An attempt should be made to lower the systemic
fixed costs at the mine and mill to radically affect a fundamental downward shift in
the position of the cost curve. This might be accomplished by shutting down certain
areas of the mine, reducing utilities consumption (compressed air, ventilation
volumes, process water etc.), changing shift schedules, or switching to batch
operations. It should be kept in mind that shrinking to efficiency in terms of unit cost
is extremely difficult and is seldom successful.

Inclusion of mineralized materials at a cut-off grade anywhere below the AISC of

production will always reduce the economic returns of a mining operation. There are
situations and times in an operations life when low grade materials will have to be
mined (usually to access higher grade materials) and this material needs to be
considered in the context and time frame that it is produced. It is quite possible that
this material can add value to the operation either during an unplanned production
interruption or late in the mine life when milling capacity comes available. The value
of low grade materials must be rigorously assessed against a set of well established
incremental cut-off grades to allow rational decisions to be made about what the
best course of action is under these conditions.

Decisions regarding incremental ore should not be left to chance.

As usual, I look forward to receiving your support, feedback, and critical comments.

Publié par

Brian Buss, P.Eng., PMP. Suivre

President at BWB Consulting Services…

Here is the 5th article in my series on cut-off grades. This is a very sensitive topic. The economics of every given situation
must be clearly understood before entering into any strategy that incorporates "incremental ore".

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