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When metals prices are high, we are generally told that we should lower the cutoff grade. Our cutoff grade versus metal price formula tells us this is the correct thing do. Our grade-tonnage curve reaffirms this since we will now have more metal in the mineral reserve.

But is lowering the cutoff grade the right thing?

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, available on Amazon HERE.

Recently we have seen a trend of higher cash costs at operating mines when commodity prices are high. Why is this?

It may be due to higher cost operating inputs due to increasing labour rates or supplies. It may also be partly due to the lowering of cutoff grades. This lowers the 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 concern was that since the plant throughput rate is fixed, when gold prices are high we suddenly decide to lower the head grade and produce fewer and higher cost ounces of gold.

Do the opposite

His point was that we should do the opposite. When prices are high, we should produce more ounces of gold, not fewer. In essence, periods when supply is low (or demand is high) may not be the right time to further cut 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 of gold. The upside being an extension in the mine life. A company can report more ounces in reserves and perhaps the overall image of the company looks better (if it is being valued on reserves). To read more about the value of grade-tonnage curves, you check out this blog post “Grade-Tonnage Curves – Worthy of a Good Look“.

What if metal prices drop back?

The problem is that there is no guarantee that metal prices will remain where they are and the new lower cutoff grade will remain where it is. If the metal prices drop back down, the cutoff grade will be increased and the mineral reserve will revert back to where it was. All that was really done was accept a year of lower metal production for no real long term benefit.

This trade-off contrasts a short term vision (i.e. maximizing annual production) against a long term vision (i.e. extending mineral reserves).

Conclusion

The bottom line is that there is no simple answer on what to do with the cutoff grades. Hence there is a 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 changes on the orebody.

I would like to caution that one should be mindful when plugging in new metal prices, and then running off to the mine operations department with the new cutoff grade. One should fully understand both the long term and short term impacts of that decision.

In another blog post on the cutoff grade issue, I discuss whether in poly-metallic deposits the cutoff should be based on metal equivalent or block NSR value. Neither approach is perfect, but I prefer the NSR option. You can read that post at “Metal Equivalent Grade versus NSR for Poly-Metallics“.

Note: If you would like to get notified when new blogs are posted, then sign up on the KJK mailing list on the website. Otherwise I post notices on LinkedIn, so follow me at: https://www.linkedin.com/in/kenkuchling/.

(Orig-2016 Updated-2026)

Question: How important is the integrity of the tailings dam to the success of a mine?

Answer: Very important.

Tailings dam safety is so important that in some jurisdictions regulators are requiring that mining companies have independent review boards or third-party audits done on their tailings designs. The logic is that, although a reputable consultant may be doing the dam design, there is still a need for outside oversight. Differences in interpretation and experience, or errors and omission are always a possibility regardless of who does the design. A second set of eyes is beneficial.

Question: How important is the resource estimate to the success of a mine?

Answer: Critically important. The mine life, project economics, and shareholder value all rely on it. The resource estimate IS the project. So why aren’t third-party audits of the estimate that common?

NI43-101 Was The First Step

In the years prior to the NI 43-101 regulations, junior mining companies could develop their own resource estimates and disclose those results publicly. With the advent of NI 43-101, a second set of eyes was introduced, whereby an independent QP would need to review the company’s internal resource or prepare their own independent estimate. The QP ultimately takes legal responsibility for the estimate.

The QP is the sole and final arbiter, or are they?

Many resource estimates are prepared solely by the contracted independent QP. In most cases this estimate gets published without any other oversight. In other words, no second set of eyes has taken a deep dive into it. We recognize the QP is a qualified expert, but is their judgement without question and error free?

The past Parker Challenges have shown that different experts can arrive at different resource estimates using the exact same geological data. In my experience with due diligence, it is not uncommon for our resource expert to find disagreements with the target’s resource model. There likely is no one perfect resource model.

Audits – Good Idea or Not?

Like the tailings design, would it be a good idea for companies to have a second set of eyes take a look at the resource estimates developed by their independent QP’s? Probably yes, with a few caveats. First I would like to clarify that an independent review can consist of three levels of review.

Internal peer review: the idea is to catch errors before public release, working in collaboration with the responsible QP.
Independent technical review: purpose to independently validate methodology, interpretations, and conclusions used by the responsible QP.
Independent resource estimate: whereby the third party actually prepares an entirely new resource estimate. This is sometimes done by due diligence teams.

For a junior miner, I generally think the second option is the preferred approach. The company can have their responsible QP prepare the resource estimate, then have another genuinely independent QP review the database, geological model, estimation methodology, classification and reasonable-prospects assumptions.

What are the Pro’s and Con’s

There are both pro’s and con’s to undertaking such a cold eyes audit. It can create issues that will need to be dealt with, and these can be avoided by not doing the review at all.

Pros

Adds credibility to the resource: an independent review can give investors, analysts, lenders, and potential partners greater confidence in the estimate. This can be important for a company whose technical team or project has limited history.
Catches technical errors: An independent audit may identify problems involving geological interpretation, density assumptions, or grade estimation, classification, etc.
Improves the company’s internal controls: if they only have a few technical employees assisting or checking the work of the responsible QP.
Reduces financing and transaction risk: by having a resource that has been independently audited it may be easier to market to potential investors and financiers.
Provides an early warning before commencing a PEA or feasibility study. If the resource contains weaknesses, it is much cheaper to discover them during an audit than after spending money on the studies and then discovering the flaws.
Maybe identify upside: an experienced reviewer may identify opportunities to improve the model, expand the resource, improve classification, or reduce overly conservative assumptions.
Protects the board and management from a governance perspective: having an independent technical audit can show that management took reasonable steps to verify their most key material technical disclosure.

Cons

It costs money: for a small junior, an independent resource audit can be a significant expense. The cost can be difficult to justify if the deposit is still at an early exploration stage and the resource is going to eventually change substantially with further drilling.
It can delay disclosure: a proper audit requires access to drill data, geological models, databases, QA/QC information, estimation parameters and supporting documentation. This will delay the disclosure of the resource update or technical report.
The auditor may disagree with the company’s QP. Although this can be a positive, it can also be painful. It may create difficult situations where the reviewer suggests shrinking the resource or modifying the geological interpretation.
“Independent” doesn’t necessarily mean completely independent since the reviewer is still being paid by the company, directed by the company, and could try to gain favor for future work. The audit may be closer to a peer review rather than a truly independent audit.
It can create false confidence. An independent audit doesn’t guarantee that the resource is correct. Two competent QPs can still legitimately produce somewhat different estimates. Which one is correct?
Potential liability and disclosure issues: if the audit identifies a material problem, the company may be forced to address it. Once management is aware of a material technical deficiency, simply ignoring it can create a much bigger governance and disclosure problem.

Repeated audits can become expensive and inefficient. Hence one would not want to do them every time a minor change is made to the resource model. But at least one audit may provide learnings that improve subsequent resource updates.

The Bottom Line

For a junior mining company preparing a material resource estimate, I’d strongly recommend an independent audit at some point, albeit under certain conditions. For example:

when the resource is going to be a major valuation driver for the company;
if the company is starting a PEA or feasibility study;
if the company is raising significant capital and needs credibility;
if there has been a major change in the geological interpretation;
if the company is selling the project and independent audits will likely be done by acquirers;
if management has concerns about the robustness of the estimate due to complex geology or metallurgy.

An independent audit is likely not required every time the resource is updated. However resource estimates have been shown to be wrong from time to time by the economic failures of some new mines.

Would an independent audit have prevented these failures – I don’t know. However, one doesn’t want their own company to become one of these case studies, so take all possible steps to avoid it.

Note: You can sign up for the KJK mailing list to get notified when new blogs are posted. Follow me on Twitter at @KJKLtd for updates and other mining posts. The entire blog post library can be found at https://kuchling.com/library/

For some free mining calculator apps, including project timelines and a simplified cashflow modeller, check out this website https://sites.google.com/view/drillingdown

When metals prices are high, we are generally told that we should lower the cutoff grade. Our cutoff grade versus metal price formula tells us this is the correct thing do. Our grade-tonnage curve reaffirms this since we will now have more metal in the mineral reserve.

But is lowering the cutoff grade the right thing?

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, available on Amazon HERE.

Recently we have seen a trend of higher cash costs at operating mines when commodity prices are high. Why is this?

It may be due to higher cost operating inputs due to increasing labour rates or supplies. It may also be partly due to the lowering of cutoff grades. This lowers the head grade, which then requires more tonnes to be milled to produce the same quantity of metal.

Do the opposite

His point was that we should do the opposite. When prices are high, we should produce more ounces of gold, not fewer. In essence, periods when supply is low (or demand is high) may not be the right time to further cut supply by lowering head grades.

Now this is the point where the grade-tonnage curve comes into play.

What if metal prices drop back?

This trade-off contrasts a short term vision (i.e. maximizing annual production) against a long term vision (i.e. extending mineral reserves).

Conclusion

The bottom line is that there is no simple answer on what to do with the cutoff grades. Hence there is a 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 changes on the orebody.

I would like to caution that one should be mindful when plugging in new metal prices, and then running off to the mine operations department with the new cutoff grade. One should fully understand both the long term and short term impacts of that decision.

Note: If you would like to get notified when new blogs are posted, then sign up on the KJK mailing list on the website. Otherwise I post notices on LinkedIn, so follow me at: https://www.linkedin.com/in/kenkuchling/.

(Orig-2016 Updated-2026)

Question: How important is the integrity of the tailings dam to the success of a mine?

Answer: Very important.

Question: How important is the resource estimate to the success of a mine?

Answer: Critically important. The mine life, project economics, and shareholder value all rely on it. The resource estimate IS the project. So why aren’t third-party audits of the estimate that common?

NI43-101 Was The First Step

The QP is the sole and final arbiter, or are they?

Audits – Good Idea or Not?

Like the tailings design, would it be a good idea for companies to have a second set of eyes take a look at the resource estimates developed by their independent QP’s? Probably yes, with a few caveats. First I would like to clarify that an independent review can consist of three levels of review.

Internal peer review: the idea is to catch errors before public release, working in collaboration with the responsible QP.

Independent technical review: purpose to independently validate methodology, interpretations, and conclusions used by the responsible QP.

Independent resource estimate: whereby the third party actually prepares an entirely new resource estimate. This is sometimes done by due diligence teams.

What are the Pro’s and Con’s

There are both pro’s and con’s to undertaking such a cold eyes audit. It can create issues that will need to be dealt with, and these can be avoided by not doing the review at all.

Pros

Adds credibility to the resource: an independent review can give investors, analysts, lenders, and potential partners greater confidence in the estimate. This can be important for a company whose technical team or project has limited history.

Catches technical errors: An independent audit may identify problems involving geological interpretation, density assumptions, or grade estimation, classification, etc.

Improves the company’s internal controls: if they only have a few technical employees assisting or checking the work of the responsible QP.

Reduces financing and transaction risk: by having a resource that has been independently audited it may be easier to market to potential investors and financiers.

Provides an early warning before commencing a PEA or feasibility study. If the resource contains weaknesses, it is much cheaper to discover them during an audit than after spending money on the studies and then discovering the flaws.

Maybe identify upside: an experienced reviewer may identify opportunities to improve the model, expand the resource, improve classification, or reduce overly conservative assumptions.

Protects the board and management from a governance perspective: having an independent technical audit can show that management took reasonable steps to verify their most key material technical disclosure.

Cons

It costs money: for a small junior, an independent resource audit can be a significant expense. The cost can be difficult to justify if the deposit is still at an early exploration stage and the resource is going to eventually change substantially with further drilling.

It can delay disclosure: a proper audit requires access to drill data, geological models, databases, QA/QC information, estimation parameters and supporting documentation. This will delay the disclosure of the resource update or technical report.

The auditor may disagree with the company’s QP. Although this can be a positive, it can also be painful. It may create difficult situations where the reviewer suggests shrinking the resource or modifying the geological interpretation.

“Independent” doesn’t necessarily mean completely independent since the reviewer is still being paid by the company, directed by the company, and could try to gain favor for future work. The audit may be closer to a peer review rather than a truly independent audit.

It can create false confidence. An independent audit doesn’t guarantee that the resource is correct. Two competent QPs can still legitimately produce somewhat different estimates. Which one is correct?

Potential liability and disclosure issues: if the audit identifies a material problem, the company may be forced to address it. Once management is aware of a material technical deficiency, simply ignoring it can create a much bigger governance and disclosure problem.

Repeated audits can become expensive and inefficient. Hence one would not want to do them every time a minor change is made to the resource model. But at least one audit may provide learnings that improve subsequent resource updates.

The Bottom Line

For a junior mining company preparing a material resource estimate, I’d strongly recommend an independent audit at some point, albeit under certain conditions. For example:

when the resource is going to be a major valuation driver for the company;

if the company is starting a PEA or feasibility study;

if the company is raising significant capital and needs credibility;

if there has been a major change in the geological interpretation;

if the company is selling the project and independent audits will likely be done by acquirers;

if management has concerns about the robustness of the estimate due to complex geology or metallurgy.

An independent audit is likely not required every time the resource is updated. However resource estimates have been shown to be wrong from time to time by the economic failures of some new mines.

Would an independent audit have prevented these failures – I don’t know. However, one doesn’t want their own company to become one of these case studies, so take all possible steps to avoid it.

Note: You can sign up for the KJK mailing list to get notified when new blogs are posted. Follow me on Twitter at @KJKLtd for updates and other mining posts. The entire blog post library can be found at https://kuchling.com/library/

For some free mining calculator apps, including project timelines and a simplified cashflow modeller, check out this website https://sites.google.com/view/drillingdown