Cut-off Grades for Mineral Resource Reporting

par | Juil 13, 2016

environmentalThe CIM Standards on Mineral Resources and Reserves – Definitions and Guidelines, the mineral resource reporting code required for Canadian projects by Canadian National Instrument (NI) 43-101, states that a compliant mineral resource must be in “such form, grade or quality and quantity that there are reasonable prospects for eventual economic extraction”.

One of the implications of this is that, in most cases, the reporting of a mineral resource at either a zero, or a very low, cut-off grade is generally considered to be inappropriate.  Some reasonable cut-off grade needs to be applied to the mineral inventory prior to reporting them as mineral resources.  A table or chart of sensitivity to cut-off grade may be supplied but zero or near-zero cut-off grades may not be reported in most cases.  The methods of determining cut-off grade can vary, particularly for open pit deposits.

Underground Mineral Resources

While underground mines may operate with more than one cut-off grade, they typically have a base case or break-even cut-off.  In a polymetallic mine, the cut-off may be expressed as an ‘equivalent grade’ of the primary metal, or by the net smelter return (NSR) value of the mineralized material. That cut-off will be whatever grade is needed to recover enough metal or mineral to pay the cash costs of production. These costs typically comprise mining (stoping and stope development), hoisting/hauling, processing, royalties and general and administrative (G&A) costs. If the revenue from the recovered metal or minerals covers these costs, the rock is generally considered to be ore and is processed or stockpiled for later processing.

Most mines use stable, long-term commodity price assumptions rather than spot metal prices for determining whether the recovered metal can cover production costs for their resource and reserve reporting. Industrial and specialty minerals also need to consider the quality and suitability of that mineral for its proposed end use, and the size of that market. Specialty expertise may need to be sought for pricing information, market size and product specification before a mineral resource is reported.

Other secondary (incremental or marginal) cut-off scenarios may be considered for such situations where production requirements dictate that sub-economic material must be hoisted to surface, at which time, if the mill is not full, only the marginal costs of milling, royalties and G&A might be considered.  However, for the determination of a mineral reserve, the base case described above would be the cut-off grade used for public reporting.  Use of secondary cut-offs may then be employed simply for maximization of the mineral resource. Furthermore, before declaring a mineral reserve, a development project will need to demonstrate that applying the selected cut-off grade generates sufficient operating surplus to provide an adequate return on capital invested.

For a property which has advanced beyond an early stage but for which no preliminary economic analysis (PEA) or feasibility study has been completed, and little or no metallurgical data are available, a cut-off grade needs to be selected for initial reporting of the mineral resource. This may be accomplished in one of two ways:

  • If there is an operating mine in that region which processes similar ores at a rate appropriate for the resource being reported and the cut-off parameters for that mine are known, then that cut-off grade could be employed at the target property.
  • Alternatively, with appropriate engineering input and advice, a high level estimate of mining, hoisting/hauling, processing, royalty and G&A costs for a deposit of that type and size could be made using comparable examples. This estimate, combined with reasonable long-term metal price and recovery assumptions, would allow for the estimation of an approximate cut-off grade. This estimate of costs may not achieve the level of accuracy seen even in a PEA and the resulting mineral resource would typically not have been adjusted for the modifying factors required in a mineral reserve estimate, such as waste dilution and mining losses associated with the selected mining method. This cut-off grade would usually be applied to large contiguous blocks of above-grade mineralization.  Isolated, remote blocks are usually not considered due to the prohibitive cost of development to reach them.

Both of these scenarios highlight the need for basic metallurgical testwork early in the delineation process of a newly discovered mineralized zone. Is the grade of the deposit sufficient to overcome the possibility of poor recoveries? In other words, should further money and effort be spent on the project?

Open Pit Mines

Open pit mines typically operate at materially lower unit mining costs than underground mines for several reasons including scale of equipment and the lack of need for ventilation, among others. This often results in much lower cut-off grades allowing more, lower grade mineralization to be included in a mineral resource or reserve statement. However, there are other constraints placed on open pit mines which may limit their depth, no matter the size of the mineralized body.

As an open pit deepens, its rim typically expands well beyond the mineralized body and into waste rock. This waste rock must be mined and hauled (but not processed) in order to access the ore. Open pit mines minimize the amount of waste material that must be mined by maintaining the steepest slope angles consistent with safety and stability over the operating life of the pit. As such, the walls need to be laid back at angles which are often in the 40° to 50° range. This is the overall pit slope although it is typically accomplished by a series of stepped berms, benches and inter-bench walls.  Haulage ramps further reduce the overall pit slope angle. Consequently, with increasing depth, the amount of waste to be mined increases faster than the amount of ore which is reached (i.e., the stripping ratio increases) and eventually an economic pit limit is reached, below which the mineralization ceases to be open pittable ‘ore’ as it cannot be mined profitably.

This fact, combined with the CIM requirements of “reasonable prospects for economic extraction”, pose a restriction on the use of open pit cut-off grades for the reporting of mineral resources.  A narrow deposit mined by open pit methods will quickly approach a stripping ratio which makes underground mining more attractive (albeit at a higher unit cost requiring a higher cut-off grade).

For this reason, modern open pits are typically not designed to a single specific cut-off grade but rather are optimized based on the net cash flow from all blocks of ore after consideration of the waste rock which needs to be moved to reach those blocks. This is normally done using the Lerchs-Grossmann (LG) algorithm employed by proprietary ‘pit optimization’ software, in which a series of cones of ever-increasing size are applied to the block model using appropriate pit slopes to define the cone shape. The revenue generated by the mineralized blocks in the model that fall within each cone can be determined from the mining, haulage, processing, royalties and G&A costs, as well as metallurgical recoveries and commodity price assumptions. The haulage costs applied typically increase as the pit deepens. The revenue can then be compared to the cost of mining and processing those ore blocks, plus the cost of mining and dumping the required waste to reach them, including G&A. Eventually the LG optimization software reaches an ‘optimum’ pit size wherein the net revenue ceases to increase. Some software packages also take into account the time value of money, and will optimize on the basis of maximizing net present value (NPV).

Once the optimized pit shell has been determined, an engineered open pit design needs to be prepared in order for a mineral reserve to be declared. The optimized shell will have no allowance for haulage roads and other practical, production considerations. Blocks with positive cash flows within the optimized pit shell are usually considered to be the mineral resource. Those mineral resource blocks with positive cash flows within the fully designed pit shell will be considered a mineral reserve after adjustments for dilution and mining losses.

Because the LG optimization typically considers an increase in haulage cost as the pit deepens there is no single cut-off grade for the pit. It will be slightly different on each bench. Also, all blocks within the pit must be mined whether the material is processed or not. For this reason, any low grade blocks for which the grade meets the marginal cost of processing, royalties and G&A at the pit rim are often stockpiled for processing late in the mine life. This cut-off grade, sometimes called the pit rim cut-off, will be different again from the full cut-off grades applicable to each bench. Such material may be reported separately as a low-grade stockpile.

For the reasons described above it is often inappropriate to use only a single open pit cut-off grade to report a mineral resource without an optimized pit shell. Many deposits will be too deep relative to their width to be mined completely by open pit methods and reporting the entire block model inventory therefore would not meet the CIM’s “reasonable prospects for economic extraction” test, although mineral resources below the pit bottom could be reported at a cut-off appropriate to underground mining.

At present neither NI 43-101 nor the CIM Standards explicitly require the use of an LG-optimized pit shell to report a mineral resource using open pit cut-off grades, although Micon understands that recommendations to do so have been made.  It is Micon’s opinion that unless the mineral resource being reported is both wide and very shallow (such as the caliche nitrate deposits of Northern Chile, for example), a pit-optimized mineral resource estimate is likely the most appropriate one to ensure consistency with the requirement for reasonable prospects of eventual economic extraction.





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