THE ECONOMIC DEFINITION OF

OPE

Kenneth F. Lane
CUT-OFF GRADES IN THEORY AND PRACTICE
THE ECONOMIC
DEFINITION OF ORE

Cut-Off Grades in Theory and Practice

By
Kenneth F. Lane

COMET Strategy Pty Ltd

Brisbane, Australia
COMET Strategy Pty Ltd
Suite 16, Sea Air, 141 Shore Street West, Cleveland
Queensland 4163, Australia

© COMET Strategy Pty Ltd 2015

First published 1988; Reprinted with minor corrections 1991.

Reprinted with updates and improvements 1997.
This 4th edition printed February 2015
Grateful acknowledgement to Dr John Bensley, Richard Wooller and Chris King
(graphics) who converted the pre-electronic edition, holding true to the original
version as much as possible and making the changes from the author.
All rights reserved. Except for normal review purposes, no portion of this hook
can be reproduced or utilised in any form without permission of the publishers

ISBN 978-0-9941852-2-8

iv
Contents

Acknowledgements x
Foreword xi
Notation Summary xii

Chapter 1 Introduction 1
Background; purpose of book; mining as a staged process; the
extraction stage; definition of ore as the extracted material; cut-off
grade criterion; economic basis for determination; form of
presentation; semantic considerations; significance of finite resource;
cut-off criterion; optimum cut-off grade policies; computer
application.

Chapter 2. Economic Principles 6

Necessity to analyse the economics of a mining operation; the
concept of present value; optimum cut-off grades maximise present
values; alternative criteria; importance of capacities; effect of price
variations; drawbacks to most breakeven calculations; economic
definition of ore.

Chapter 3. Finite Resources and Present Values 11

Formula for present value; dependence upon time, resource remaining
and operating strategy; maximum surface and exploitation tracks;
optimum strategy tracks; algebraic derivation of maximisation
expression; the opportunity cost term and methods of estimation.

Chapter 4. Economic Models 21

Components of a mining system and throughputs; mineralised
material, ore and mineral; definitions and discussion; semantics,
notation.

v
Chapter 5. Limiting Economic Cut-Off Grades 27
Maximising present values with one component limiting; derivation
of formulae for mine, treatment and market limiting; illustrative
calculations; independence of actual grade distribution; the
operational cut-off grade decision; parametric cut-off grades.

Chapter 6. Balancing Cut-Off Grades 34

More than one component limiting; effect of cut-off grades on
relative quantities of mineralised material, ore and mineral; balancing
cut-off grades; graphical illustrations; strategic and tactical
significance.

Chapter 7. Effective Optimum Cut-Off Grades 39

Choosing effective optimum from limiting economic and balancing
cut-off grades; graphical illustrations; algorithm for determination;
other techniques.

Chapter 8. Economic Forecasts 46

Sources of price, cost and performance forecasts; present value
estimates; rate of change of present value; realistic single price
movement effect; simple typical year extrapolation; yearly data for
determination of complete cut-off policy; discount rates; effects of
tax; discount rate as a parameter.

Chapter 9. Mineralised Reserve Estimates 50

Sources of information; grades presently available from short term
plan; changing grade distributions with time; long term planning and
reserve estimation; operational cut-off values; selectivity;
inaccuracies in grade measurement; conditional simulation; cut-off
application at extraction stage, not development; plans in tonnages
rather than time; regularity of grade limits; consistency of grade
categories; grade distribution within categories; parametric grades.

vi
Chapter 10. Calculating a Complete Cut-Off Policy 57
Determining a sequence of annual cut-off grades; consistency of cash
flows and present values; iterating from initial present value
assumptions; formulae for opportunity cost estimates; calculating
cash flows; compiling present values; revising initial estimates;
computer programs.

Chapter 11. Parametric Cut-Off Grades 62

Grade categories indirectly related to actual grades; secondary
mineral equivalents; grade measurement inaccuracies; relationships
between actual and parametric; grid search technique for optimum.

Chapter 12. The Effects of Inaccuracies in Grade Control 66

Difficulties of measurement; predicted versus actual grades; predicted
grades parametric; graphical illustration; variance reduction and
quality of grade estimation; effect on cut-off grade policy.

Chapter 13. Stockpiling Intermediate Grades 71

Stockpiling for later processing; added costs; deteriorating recoveries;
optimum policy complex but rarely crucial; estimation of minimum
stockpile grade; withdrawals when cash flows are increased;
derivation of formulae; considerations to shorten calculations.

Chapter 14. Planning Mine Expansions 77

Pressures to expand; increased output at marginal capital cost; larger
capacities imply different cut-off grade policies; need to study
alternatives; incremental net present value analysis; illustrative
example; effect of increases in scale.

vii
Chapter 15. Designing New Mines 81
Conceptual planning; description of planning process; importance of
cut-off grade strategy; deposit modelling and grade estimation;
preliminary mine planning; order of magnitude engineering estimates;
alternative plans and plant sizes; comparing alternatives; cut-off grade
strategies and net present values; revision of plans and estimates; re-
evaluation and iterative planning; economic forecasts and
sensitivities; role of computer systems; early planning for the
Bougainville project.

Chapter 16. Deposits of Two Minerals 87

Single mineral equivalent sometimes satisfactory; invalid when one
mineral has limited market; cut-off dependent upon two variables;
cut-off grade lines; calculating the optimum line; formulae for
limiting economic cut-off grade lines; balancing grades; optimisation
by grid search technique.

Chapter 17. Other Economic Models 93

Analysis not confined to basic model; many others amenable to same
techniques; a net of tax evaluation, with formulae for S.A. tax;
varying mill recovery according to a simple formula; a more
complicated case with varying throughputs; determination of optima
by calculus.

Appendix
Software for Cut-off Grade Optimisation 98
History of development; areas of application; specimen example with
input files and output tables; discussion of future developments.

Case Study 1. Underground Tin 106

Old mine. Remaining reserves in developed stopes nearing
exhaustion. Analysis of economic factors affecting closure decision.

viii
Case Study 2. Underground Lead/Zinc 110
Established mine. Grades as zinc equivalents. Throughputs
constrained by hoisting. Present value estimated from sale of equity.
Calculation of current cut-off. Effect of price change.

Case Study 3. Open Pit Uranium 114

Established mine. Reserves from short-term plan. Residual present
value by directors ' valuation. All components limiting. Calculation of
limiting economic, balancing and effective optimum cut-offs.
Sensitivity to present value.

Case Study 4. Open Pit Copper/Molybdenum 119

Established mine. Copper equivalent grades in original copper
categories - parametric. Single increment reserve table. Simple
present value estimate. Concentrator limiting. Calculation of current
cut-off and complete cut-off policy. Evaluation of concentrator
expansion.

Case Study 5. Underground Gold 126

Established mine. Grades parametric because of regression effect.
Single increment reserve table with residual present value. Current
cut-off grade calculated by breakeven method and by maximising
present value before and after tax.

Case Study 6. Open Pit Copper Pre-feasibility Study 133

Reserves in six increments. Calculation of complete cut-off policy
with changing prices and capacities. Evaluation of stockpiling policy.

CaseStudy7 Open Pit-Uranium/Copper 139

Established mine. Two mineral reserve in nine increments, with
residual present value. Complete cut-off policy. Evaluation of mill
expansion strategy.

Bibliography 144

ix
Acknowledgements

Many colleagues in the mining industry, particularly within Rio Tinto,

have been associated with the work which is described in this book. I
should mention especially Mike Blackwell, the engineer who nursed the
infant ideas to maturity on their first major application at Bougainville,
and also Allen Sykes, who signposted the straight and narrow economic
path.
I have collaborated with RTZ Technical Services on many applications
and new developments. Over the years many members of the staff have
contributed enthusiastically and given constant encouragement. More
recently, Metalica Consultores in Chile (particularly Juan Camus) have
been keen supporters and their help with the promotion of a wider
understanding of the subject has been very valuable.

* * *
The book has been out of print since 2010 and I assumed that interest in
the subject had waned, although occasional enquiries filtered through to
me. Now, in 2014, I learn that this assumption was premature and that
the book is being reprinted on the initiative of Brett King, a friend and
colleague for many years. This revival means a lot to me and I very
much appreciate his considerable efforts together with those of other
colleagues still working to promote a better understanding of the
economics of mining.

Kenneth F. Lane

x
Foreword

(to the first edition, 1988)

I believe this book is important for three reasons.
First, the topic is important and, although widely researched and taught
in mining schools, no authoritative book on the subject has been written.
Second, it is written in a clear manner, which will help even the non-
mathematically inclined student or the professional associated with the
development of mines.
Finally, with the strong emphasis given to the economics of the whole
mining process, and not just the economics of orebodies, the author
drives home a lesson often forgotten by the geologist and even the mine
planner.
Ken Lane has done a service to the mining industry in writing this book.
His early pioneering work some 20 years ago in the RTZ Group brought
a new dimension to the world of mining, and I am glad that he has
continued his association with the RTZ Consulting Group, which
benefits greatly from his advice.

Sir Alistair Frame

Chief Executive of Rio Tinto Zinc Corporation

xi
Present Value Analysis
Time T Short interval t
Resource Available R Small increment r
Variables defining Time per unit of resource τ
Exploitation Strategy Ω Exploitation Strategy for t ω

Present Value V = V (T, R, Ω) (also W)

Maximum P.V. V* = V* (T, R)
Opportunity Cost F = δV* − dV* ⁄ dT Primes(')
Cash Flow C per year indicate
c per unit of resource special
Increment in P.V. v per unit of resource values in
Cost of Capital δ (100δ %) context
Terminal Value Γ
Economic Model
Throughput Variable Capacity
Cost (throughput/year)
(/unit
throughput)
Mining Material m M
Treating Ore h H
Marketing Mineral k K

Fixed or Time costs f per year

Price p per unit of material
Cut-off Grade g mineral/unit of ore
Optimum Cut-offs G mineral/unit of ore
Average Grade g  mineral/unit of ore
Ore/Material Ratio x
Yield during treatment y (l00y %)
Quantities q
Stockpile recovery cost s per unit of material
Stockpile size S units of material
Cut-off intercepts ϒ1, ϒ2 mineral/unit of ore
Suffixes denote years or have particular significance in the context.
Certain other symbols are also used with strictly local definitions.

xii