AMC Consultants Can Help Fix Your Mine's Broken Break-Even Grade

7/9/23, 13:47 AMC Consultants can help fix your mine's broken break-even grade
In Association with AMC
Partner Content October 1, 2021
Is break-even grade broken?
“A 0.1 g/t gold grade error in a break-even grade can

destroy half of the value of an Ore Reserve”
It’s time to take a fresh look at how break-even grades

are calculated and used in mining studies and Ore
Reserve estimates. An error of just 0.1 g/t in the cut-off
grade (COG) of a large-scale open-pit gold mine can
result in over 50 percent of the Ore Reserve having zero
value. Worryingly, this scale of error is not exceptional—
in fact, it’s quite common. The evidence suggests that
many operations, large and small, are using
subeconomic cut-off grades.
Companies Intelligence
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AMC, Inc.
Cog, LLC
BEG Ltd
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Hidden complexities
Most companies use a break-even grade (BEG) as their

COG, but they are mostly unaware of the issues it can
cause. BEG is defined as the grade at which revenue
generated is equal to production cost:
The simplicity of this equation belies the complexities of

how each variable is or should be calculated—in
particular, which costs should be included and how cost,
recovery, and payability can be functions of grade.
The impacts of these hidden complexities might be

mathematically small when expressed as a grade, but
even minuscule changes in COG can result in massive
changes to tonnage. This means that a significant
portion of most Ore Reserves are marginal in value,
which isn’t apparent in a global Ore Reserve statement.
Let’s take a look at a real-world example. Figures 1 and 2

are anonymized distributions for a large, low-grade,
open-pit gold mine. These distributions are typical for
reserves that use the BEG to estimate an Ore Reserve.
Figure 1 shows the percentage of value in each

increment of net value, and Figure 2 shows the
corresponding percentage of tonnage for each
increment.
Figure 1: Ore reserve value distribution
Figure 2: Ore reserve tonnage distribution
Note that the bottom 27% of the Ore Reserve tonnage

holds only 6% of the value, while the top 27% of the Ore
Reserve holds 60% of the value. Significantly, over 50%
of the Ore Reserve tonnage is of low or marginal value.
This means that a small error, plus or minus, in

calculating the BEG translates into a significant addition
or reduction in the reserve tonnage. Importantly, if the
BEG is underestimated (i.e. ore at the BEG has a negative

value), then a significant portion of the reserve will be
mined with a negative contribution to the cash flow.
Figure 3: Effect of 5 $/t calculation error
Figure 3 shows the effect of a 5 $/t error in the BEG

calculation, in which 27% of the Ore Reserve now has a
negative value. The 0–5 $/t portion of the reserve
should be contributing to the value of the project, but its
value is offset by the cost of the subgrade portion. When
these two portions are combined, 55% of the Ore
Reserve has an effective value of $0.
At a gold price of 1,650 $/oz, a $5/t error translates into

cut-off grade error of 0.1 g/t. Hence, an error of 0.1 g/t
in the BEG calculation of a large, low-grade, open-pit
gold mine can result in 50–60% of the Ore Reserve
having zero value.[1] [1] It should be noted that although
the conventional concept of BEG is flawed, the resulting
ore reserves are not necessarily invalid. The JORC Code
only requires that the ore reserve is shown to be
“economically mineable” (JORC 2012). JORC only requires
that the total ore reserve must be economically
mineable and does not say anything about having to
exclude negative value material.
Common errors
In his paperi on “negatively geared” reserves,

Poniewierski explains that the most common errors in
calculating BEG are:
Assumption that recovery is a constant for all head

grades
Omission of sustaining capital costs
On the first issue, consider a mine with a head grade of

2.2 g/t and recovery of 94% at that grade. At a fixed 94%
recovery, the break-even grade works out to be 0.4 g/t
with a tails grade of 0.02 g/t. The problem is that a head
grade of 2.2 g/t we have a tails grade of 0.13 g/t. Instead
of a fixed recovery, if a fixed tails grade is used, at the
same price and cost conditions, the BEG works out to be
more than 0.5 g/t.
If a 0.1 g/t error in the BEG can nullify 50–60% of the

Ore Reserve, imagine what a 0.5 g/t error will do.
Research of JORC Table 1 ASX releases shows that a large
percentage of Ore Reserve cut-off grades are calculated
with fixed recovery rates.
The second issue, omission of sustaining capital costs,

can result in a significant underestimation of the true
cost of mining and processing ore, and therefore the

BEG. Sustaining capital is expenditure that maintains
existing capabilities, as opposed to project capital, that
is used to add capabilities or capacity. Mines capitalise
these costs so that they can use depreciation to spread
them out over the useful lifetime of the equipment being
maintained. However, regardless how the cost is treated
for tax purposes, sustaining capital needs to be included
in the cut-off grade calculation.
For example, in the context of BEG, other than the

magnitude of the costs, there is no difference between
replacing an oil filter every 50 hours (an operating cost)
and replacing a truck engine every 16,000 hours (a
capital cost), or even replacing a truck every 50,000
hours (a capital cost).
Optimizing COG
There is significant potential for error in all inputs to the

BEG calculation and the only true method of
determining the BEG is to financially model a set of
scenarios with varying cut-off grades and production
rates. Figure 4 shows how the undiscounted cashflow
can be expected to peak at a particular COG. This is the
true BEG. Above this grade, valuable material is excluded
from the Ore Reserve; below this grade, unprofitable
material is included in the Ore Reserve.
The peak undiscounted cash flow shown in Figure 4 will

result in the highest NPV for the project under a defined
set of operating conditions. These conditions, however,
change over the life of the project and, hence, so does
the BEG. Hence, the optimum COG isn’t a constant over
the life of the mine.
There is a perception in the mining industry that

increasing COG above the BEG results in high-grading
the resource –that is, picking the eyes out of a resource
and destroying potential value. But the notion of high-
grading or subgrading oversimplifies the problem;
instead, the focus needs to be on “right-grading”. Right-
grading excludes loss-making material by employing a
properly engineered mine plan that delivers the
company’s goals.
Working out the optimum COG strategy needs to move

on from simplistic, back-of-envelope calculations. COG
should not be a predefined input into a study. It needs to
be an outcome of a sensitivity analysis that identifies the
mining strategy and COG that deliver the best result for
the shareholders in accordance with the company’s
stated goals.
Regardless of whether your project is under

development or in operation, the impact of a flawed
COG can be massive. This poses an important question
for many mining operations: is your COG strategy
destroying value?
Take the next step
To learn more about optimizing your COG strategy, fill

in the contact form below and a representative from
AMC Advisory from your local AMC office will be happy
to set up a meeting. You’ll also find some useful
background reading on the BEG calculation and COG
strategies in on the page listed below.
For further information, please visit AMC Consultants

Advisory Service
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7/9/23, 13:47 AMC Consultants can help fix your mine's broken break-even grade

In Association with AMC

Partner Content October 1, 2021

Is break-even grade broken?

“A 0.1 g/t gold grade error in a break-even grade can

It’s time to take a fresh look at how break-even grades

Most companies use a break-even grade (BEG) as their

The simplicity of this equation belies the complexities of

The impacts of these hidden complexities might be

Let’s take a look at a real-world example. Figures 1 and 2

Figure 1 shows the percentage of value in each

Figure 1: Ore reserve value distribution

Figure 2: Ore reserve tonnage distribution

Note that the bottom 27% of the Ore Reserve tonnage

This means that a small error, plus or minus, in

BEG is underestimated (i.e. ore at the BEG has a negative

Figure 3: Effect of 5 $/t calculation error

Figure 3 shows the effect of a 5 $/t error in the BEG

At a gold price of 1,650 $/oz, a $5/t error translates into

In his paperi on “negatively geared” reserves,

Assumption that recovery is a constant for all head

On the first issue, consider a mine with a head grade of

If a 0.1 g/t error in the BEG can nullify 50–60% of the

The second issue, omission of sustaining capital costs,

cost of mining and processing ore, and therefore the

For example, in the context of BEG, other than the

There is significant potential for error in all inputs to the

The peak undiscounted cash flow shown in Figure 4 will

There is a perception in the mining industry that

Working out the optimum COG strategy needs to move

Regardless of whether your project is under

Take the next step

To learn more about optimizing your COG strategy, fill

For further information, please visit AMC Consultants

Share this article

Mining news and in-depth feature articles on

License our content

Our marketing solutions

Terms and conditions

© Verdict Media Limited 2023

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