44. Higher Metal Prices – Should We Lower the Cut-Off Grade?
Date: February 23, 2016Author: Ken Kuchling
When metals prices are high, we are generally taught that we should lower the cutoff grade. Our cutoff grade versus metal price spreadsheet tells us this is the correct thing do. Our grade-tonnage curve reaffirms this since we will now get more ounces of gold in the mineral reserve. But is lowering the cutoff grade really the right thing to do?
Books have been written on the subject of cutoff grades where readers can get all kinds of detailed logic and calculations using Greek symbols (F = δV* − dV*/dT). Here is one well known book by Ken Lane that sells for $998 on Amazon the last time I checked. You can also download a 38-page abridged sample of this book at THIS LINKand the full version is available for $150 at the COMET Strategy web site.
Recently we have seen higher production cash costs at operating mines when commodity prices are high. Why is this? It may be due to higher operating costs inputs caused by increasing labour rates or supplies costs. It also may be partly due to the lowering of cutoff grades, thereby lowering the milled head grade, which then requires more tonnes to be milled to produce the same quantity of metal.
A mining construction manager once said to me that he never understood us mining guys who lower the cutoff grade when gold prices increase. His rationale was that, since the plant throughput rate is fixed, when gold prices are high you suddenly decide to lower the head grade and produce fewer ounces of gold and at a higher cash cost. His point was that we should be doing the opposite; when prices are high you should produce more ounces of gold, not fewer. In essence, in times when supply is low (or demand is high) may not be the right time to further cut back on supply by lowering head grades.
Now this is the point where the grade-tonnage curve comes into play. Certainly one can lower the cutoff grade, lower the head grade and produce fewer ounces now with the upside being extending the mine life. By doing this a company is able to report more ounces in their mineral reserve and the overall snapshot of the company looks better if it is being valued on reserve ounces.
The problem with this is that there is no assurance that metal prices will remain where they are or that the new lower cutoff grade will remain where it is. If the metal prices dip back down next year, the cutoff grade will be increased and the mineral reserve is back to where it was. All that was really done was accept a year of lower metal production for no real benefit. Such a trade-off essentially contrasts a short term vision (i.e. annual production) against a long term vision (i.e. mineral reserves).
My bottom line is that there is no simple answer on what to do with the cutoff grades, hence the need to write books about it. Different companies have different corporate objectives and each mining project will be unique with regards to the impacts of cutoff grade adjustments on their orebody. I would like to caution that one should be careful when taking your cutoff grade spreadsheet, plugging in new metal prices, and then running off to the mine operations department with the result. You need to fully understand the long term and short term impacts of that decision.