The cut-off grade is that grade of material (volume or weight of good bits divided by the total bits of stuff) below which mining is uneconomic. Or it is the amount of the good bits that must be obtained from mining a given amount of material in order that all the costs are recovered and no profit is left. Calculating the cut-off grade involves a mini-feasibility study in which all the known and potential costs of the project are accounted for. 

As stated before I am a big believer in creating models of “orebodies” as early as possible in the exploration cycle and this is doubly true for the calculation of a cut-off grade. For any given assumptions about costs, the analysis can determine the amount of ore that needs to be found and at what grade in order that the project is attractive to someone other than your brother-in-law. If there is no hope in finding the size or grade of deposit then the project can be deep-sixed early on, saving lots of money but sending the stock price into the dumpster. That is where the bearded ones have it over the dumb engineers – there is no glory in killing a DOA project. If you don’t think there is lots of shareholder pressure to keep lousy projects alive then you need to consider again why Qualified Persons reports must be done by people outside of the organization. And even then consultants are keenly aware of who pays their bills - and it isn’t shareholders and stock exchanges. So it is a big problem. Fortunately dumb engineers are usually mostly honest. In fact we’re often compared favourably with the local village idiots who are known to be inscrutably honest always.

So how does one calculate the cut-off grade... There are some very elegant theories and techniques for doing so but I prefer the “brute force” method because it is the only one I understand. This involves calculating the annual net cash flows for the proposed operation at 3 or 4 different, realistic grades for the assumed deposit and then calculating the net present value for the operation at these selected grades. The concept of net present value is discussed under a different section so won’t be described here. When this is done a graph of net present value versus grade can be drawn and that grade at which the project net present value is zero becomes the cut-off grade.

This methodology includes the cost of the capital to build the project and is a more useful (in my mind) determination for new and proposed projects than just looking at the operating costs of the operation. Very few shareholders or lending institutions are interested in investing in projects which do not give them back their money with some sort of return. If the project has been around for a number of years and the original investment has been paid back then including the original capital cost is not important. So when you read the companies reports which mention cut-off grades it is always prudent to investigate how they defined this grade.

The costs to calculate the cut-off grade must involve all the capital used in purchasing the property, exploration, engineering and construction, working capital and any ongoing capital costs to maintain the project (replacement of equipment, painting tanks etc.) These are the initial and sustaining costs. Then there are the ongoing operating costs for the mine, plant, supervision and overhead, maintenance, tailings, marketing, head office allocations, interest, royalties, taxes and a host of other mostly forgotten expenses. These, one might notice, are all the elements necessary for a feasibility study hence - “feasibility study in a bottle”. When all these costs are put into a financial model one quickly gets a sense of whether the project is worth pursuing or not. If the model is built early in the exploration cycle then one can get a sense of how many tonnes and at what grade the ore needs to be in order to make a mine out of the dream. If subsequent exploration determines that the tonnage and grade targets can’t be met then there is an argument to drop the project and look for something else. 

In the early days of the project there will be lots of assumptions rather than data but by testing the assumptions in the model one can determine which costs are most important to project success and work can be directed to getting more data in the areas that are important. For example, if the type of milling process is the most important factor in determining project success then rather than drill a bunch more holes maybe it is best to spend the money on metallurgical testing. Without a financial model, companies always spend the money on drilling because big guys with beards who wear flannel a lot can be quite intimidating. But that is not always the best allocation of the money.

If this is the feasibility study in a bottle then it behooves to discuss the real feasibility study. This is important stuff to investors who are trying to figure out what the company means by all those upbeat press releases. Is it a mine or isn’t it? Read on...