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Cutoff Grade
Mongolian Mining Evaluation Economics Short Course, 2011 Page 1 of 23

CUT-OFF GRADES AND ORE RESOURCES

INTRODUCTION

Cut-off grades are used to define what is mined, what is milled from a mine's output or what is
included in final output.

PURPOSE AND OUTCOMES

The purpose of this module is to summarise essential cutoff grade concepts to assist mine
planning exercises.
The intended outcomes, for you in this topic are to;

1. Apply the basic concepts of classical approaches to cutoff determinations.
2. Apply the basic concepts of Lanes approach to cutoff grade determination.
3. Examine operational aspects of application of cutoff grade determination approaches to mine
planning exercises.

DEFINITIONS

Ore is a mineral assemblage of actual or potential economic interest (suspected economic
interest).

Cut-off grade is any grade that is used to separate two courses of action e.g. to mine or to leave,
to mill or to dump.

Breakeven grade is that grade at which recoverable revenue exactly balances the cost of mining,
processing and marketing a mineral.

Pay limit can be used in the same context as Breakeven grade, to denote the lower limit of
mineral grade that can pay for all costs associated with its extraction.

Grade may be defined in terms of
Grade eg g/tonne for gold mineralization or % for base metals.
Equivalent metal grade per tonne where there is more than one economic mineral eg
Equivalent Zn % in a Zinc/Lead/Silver orebody
$ value per tonne eg combined value of mineralization where there is more than one
economic mineral.
Cutoff Grade

CLASSICAL CUTOFF GRADE OR BREAKEVEN ANALYSES

APPROACHES TO CUTOFF GRADE CALCULATION

Many early writers on cutoff grade theory and practice, such as Mortimer (1950) as outlined in
the Appendix A focused only on cost as a determinant of breakeven grade for operational
decision making. A number of cutoff grades can be derived which define when costs and revenue
balance depending on the stage of the mines life and definitions of cost.

Very Conservative Mine Breakeven Grade:
This approach can be used for an established mine in which there are no constraints on mill,
hoisting or other infrastructure capacity. It does not seek to maximise Present Value nor allow
for cost of sunken capital. It can be used for short term production decisions when grades
decrease away from the main (higher grade) ore to determine whether the next block of
material (either laterally or deeper) can be classified as ore or waste. It may be used in a situation
when the mill is constrained for feed, as higher grade mine blocks are temporarily not available.
As a consequence operating fixed costs and overhead administration are not included in
determining the breakeven grade. Once a project is in operation the cutoff grade determined by
marginal cost analysis may exclude many of what are defined as fixed costs.

Conservative Mine Breakeven Grade:
As above, this approach can be used for an established mine in which there are no constraints on
mill, hoisting or other infrastructure capacity. It does not seek to maximise Present Value nor
allow for cost of sunken capital. However it has included fixed direct mining and milling
operating costs and mining overhead costs in the determination to more realistically represent
direct operating costs a contractor would face if that company were alternatively performing the
task. It does not include overhead technical support costs or site and village costs.

South African Breakeven Grade:
The South African gold mining industry has for many years had to comply with a statutory cutoff
grade policy directed to conserve the countrys gold resources. The approach gives a definition
to the mineralized resource.

1) All ore mined must be able to bear its proportionate share of working costs, including
overhead and sometimes development expenses.
2) The average "breakeven" or "pay-limit" grade so determined is the cut-off grade, any
blocks of ore with higher grade become part of ore reserves.
3) Overall stopping must be almost exactly at the average grade of the whole ore reserves.
4) For these definitions time and capital expenditure are wholly irrelevant.

In essence the policy states that the cutoff grade must be set taking into account operating costs,
administration costs and associated overheads. Cost of capital and time value of money are not
Cutoff Grade

included in this determination. Mining extraction each month must be undertaken so that head
grade is at the average grade of the reserve so determined (to ensure that high grading does not
occur). The approach is conservative and does not seek to maximise Present Value nor allow for
cost of sunken capital. However it does included fixed direct mining and milling operating costs
and mining administration costs. It could be interpreted to include mine development costs of a
short life (less than two years), overhead technical support costs and site and village costs.

This definition is based on the premise that there must not be any loss of mineralization that can
pay for itself (i.e. no ore can be left in the ground after block mining has ceased). This stipulation
conflicts with the economic criterion that the last block of mineralization (ore) mined must
achieve a level of profitability greater than that available elsewhere.

Breakeven Grade Including Using Shareholder Value Added (SVA) Concept:
All companies have a policy of building shareholder value. As part of this all productive
investments are expected to carry a capital charge. A weighted average capital charge in percent
needs to be agreed. A project net asset value (market resale value) needs to be determined.
Added to this is a capital charge for the current year. Adding this to the other site operating costs
gives the breakeven value.

Breakeven Grade Including incorporating Notional Capital Expenditure:
Capital cost of a project can be appraised in terms of Payback over time. By this approach
historical capital expenditures are reflated by both an annual capital charge and additional capital
payments in subsequent years and reduced as the project makes surplus cashflow. A capital
charge rate or funding cost needs to be multiplied by this net figure. Adding this to the other
site operating costs gives the breakeven value.

BLENDED MARKET PRODUCTS

These classical approaches were originally focused on determination of cutoff or breakeven
grade for precious or base metal deposits. These approaches are, however, not directly
applicable to mined commodities from high grade deposits such as iron ore and bauxite where
the direst-shipping ore grades are fixed and defined by contract grade specifications achieved by
blending. In this situation an appropriate cutoff grade, as establishes by Royle (1981), defines the
economic optimum as the maximum tonnage of resource with a mean grade above a cutoff
grade

OTHER CONSIDERATIONS

Types of orebodies. e.g. dilution in caving mining methods, size of an underground opening is
governed by the mining method used.
Fluctuating Price. Price of a mineral product and so revenue can fluctuate widely. If product
price rises, breakeven grade declines inversely. If cut-off is lowered, average grade drops and for
Cutoff Grade

a steady mill throughput, less metal is produced. With lowered cut-off grade, the mine is using
the higher product price to profit from ore that otherwise would have been unmined. The mine
does not necessarily experience a rise in profits here with rise in prices. However, high prices
tend to attract more metal to market - a requirement (its assuming constant mill capacity) which
can only be satisfied by raising average grade. For the short term, this leads to higher profits than
other alternatives.
Costs. Costs vary at a different rate to price, so affecting breakeven grade. Should some costs
(mainly capital) costs be excluded from breakeven determinations - when they still have to be
paid for somehow? Sectional breakeven grades for different areas of the mine and different
categories or ore with varying cost structures may be necessary.

Taxation Varying systems of taxation and particularly those that vary taxation rates with
different levels of profitability.

PLANNING AND OPERATIONAL CUT-OFF GRADES

During exploration and pre-production stages of a mine's life, a cut-off grade is needed to define
geographically and quantitatively potential ore limits. This gives a prediction of the total ore
that may at some time be mined. This cut-off" grade is a planning cut-off grade, determined by
calculation or by comparison with analogous mining operations.

Operational cut-off grades are used after production starts to define on a short-term basis what
parcels of mineralization may contribute to unmined ore reserves or to streams of broken ore.
These parcels may be part or whole stopes or broken underground ore awaiting drawing.

DEFINITION OF CUT-OFF GRADE FOR DIFFERENT MINING
CONDITIONS

Under classical analysis working cost breakeven sets the cut off which in turn sets average grade
from which revenue and profit are derived. For this to be satisfied there must be

a) an adequate inventory of freely selectable ore; to enable the "average grade" to be
selected regularly,
b) unit costs that are largely constant and are independent of the level of the cut-off grade,
c) operators whose only aim is to maximize total profit over total life, and d) an average rate
of profit achieved that is adequate.

The practicality of satisfying these conditions is governed by the type of mining operation.

Cutoff Grade

Types of Mines

1. Tabular, underground orebodies e.g. coal, gold reefs. Thin and erratic mineralization
requiring close sampling for proof of ore and mining control. Available ore resources are
normally from one to a few years.
2. Massive underground orebodies e.g. most base metal mines with often massive and
disseminated resources. Total ore resources as indicated reliably by drilling are often
enormous, but because mining is strongly sequential, the ore available at anyone instant is
very limited. Poor flexibility and selectivity.
3. Massive open-pit orebodies. Includes porphyry type orebodies. Orebodies are massive
with irregular mineralization, often a core of enriched material is surrounded by lower
grades. Geologic boundaries are often not clear. There is a need for intensive valuation
drilling from surface. Mining is strongly sequential. Selectivity of broken ore often can
be very good.

Points of Cut-off

All mines need planning cut-off grades in the exploration and feasibility stages and regularly for
annual or periodical recalculation of ore reserves.

Type 1 For accurate valuation require extensive development that later serves largely for stoping.
The main cut-off grade defines what to stope. On the Witwatersrand, this cut-off must
continually be reconciled with the planning cut-off used earlier for ore reserve determination. A
parallel cut-off grade serves to select additional mill feed from already broken ground. This
introduces the concept of a Sub Economic Pay Limit applied to rock whose further treatment
only has to pay for marginal costs.

Type 2 The first cut-off choice is what to develop; a decision taken generally before stope
development. Because of their very large size, the grades of selectable units have low variance.
For this reason, the cut-off grade may in practice serve only to define the fringes of major ore
zones. The mines are unique in having two cut-off grades in series on the same material -a pre-
development sectional cut-off and a draw cut-off grade for broken ore.

Type 3 Some use of planning cut-off grades is helpful for predicting probable pit limits. The
main operating cut-off grade defines the fraction of already broken ore that goes to the mill.

Cutoff Grade

MAXAMISATION OF PRESENT VALUE AND LANES CUT-OFF GRADE
APPROACHES

Lane argues that the best criterion for optimising cut-off grade is adoption of the cut-off which
maximises the net present value of the cash flow of the whole operation. This, therefore, takes
into account the time value of money and reflects the costs and benefits of bringing forward or
delaying extraction of any one parcel of ore.

Lane (1964, 1988) considers that the each mining operation is a combination of three stages, the
mine, the mill or concentrator, and the market or refinery. Each of these three components has
its own limiting capacity to handle either ore or product and has its own set of associated costs.
In addition the whole operation has a set of fixed costs which do not necessarily relate to any one
stage.

Lane first defines three limiting economic cut-off grades, one for each stage of the operation on
the assumption that each individual stage may be the limiting factor or capacity. Details on these
approaches are set down in the Appendix.

These cut-off grades are a function of the costs of each stage and are in fact a set of three
breakeven grades, one for each separate stage. The next stage defines three balancing cut-off
grades, which balance the capacities of each of the mine stages. These are independent of the
costs and are a function of the individual capacities of each mine stage and the grade distribution
of the ore.

Lane demonstrates that the optimum cut-off grade is always one of the above six potential cut-
off grades, either a limiting or balancing cut-off, which maximises the net present value of the
cash flow.

Lane (1964) states ... the optimum cut-off grade is influenced by the economics of present
value, the capacities of the several stages in the mining operation, and the grade distribution of
the deposit.

Lane (1988) describes that each limiting capacity of the mine stages is dependent on the grade
distribution. In order to address this he defined terms to be used to describe the material handled
by each stage. The mine handles mineralised material which comprises both ore and waste and
the proportions of ore to waste are a direct function of both the grade distribution and the cut-off
grade. Ore refers to that proportion of mineralised material which is selected to be milled or
concentrated. Mineral is that proportion of the ore or mineralised material which is to marketed
or refined.

Lane (1988) defines six possible cut-off grades relating to an operation, three limiting cut-offs
and three balancing cut-offs. The overall optimum cut-off grade is the one of the above six,
which maximises the net present value of future cash flows. Hancock (2000) puts this theory to
test with mineralization data from a precious metal orebody as shown in Figure 1

Cutoff Grade

Returning to the limiting cut-off grade section, three expressions can be presented representing
incremental present value with increasing throughput for each of the three limiting stages.
These expressions reflect the rate of change in present value with increasing cut-off grade. As
the cut-off grade rises from zero, present value will also rise to a maximum which equates to
the limiting cut-off grade. Beyond this point present value again declines. The three
expressions may be expressed graphically for any one grade distribution and cost structure as
shown in Figure 1 as shown for an example mine by Hancock (2000).

Figure 1: Lanes Effective Optimum Cut-off Grade Determination

The point of maxima of each of the three curves occurs at the limiting economic cut-off grade for
each stage. These define the limiting cut-off grades for this operation as 0.3% Cu mine limiting,
0.3% Cu market limiting and 0.55% mill limiting. The intersections of the curves one with the
other occurs at the balancing cut-off grade between those two mine stages. In this the balancing
cut-off grade lies between 0.5% and 0.55% Cu cut-off grade.

The optimum cut-off grade for the overall operation is the grade which maximises the
incremental present value of the cash flow and is represented by the maximum value or apex
contained beneath the curves. This grade is the point of maximum defined as either a limiting or
balancing grade or both. In the case of Figure 1 the optimum cut-off grade occurs at a grade of
0.52% Cu which is coincident with the mine/concentrator balancing cut-off grade.

Cutoff Grade

OPERATIONAL AND PLANNING ASPECTS

Some comments on operational aspects of application of cut off grade concepts are appropriate.

In some underground mines a significant proportion of mine development extraction occurs in
ore. Some consideration on the cutoff to be used in mining waste mullock is appropriate.
Development waste in most mines poses challenges. Some can be placed as fill in underground
voids if these are available. The rest is trucked directly to a surface waste stockpile or is
temporarily stockpiled underground and hoisted in campaigns. From the hoisting shaft it goes to
the surface waste stockpile. At the end of the mines life this waste may be taken underground
during reclamation of the site at closure. It is appropriate to apply a sub-economic cutoff grade
analysis to this development waste. It has to be broken and most is taken from the mine. If there
was no constraint on mill capacity it could be passed through the processing system as long as it
could cover the marginal costs of milling. This is only viable if the mill has an increment of
spare capacity. The policy on milling development waste should be treated as a short term
decision and continuation of the policy questioned periodically. If the mill is operating at full
capacity and the ore stockpile is growing then the policy should revert to that of only treating
higher grade development material which exceeds the stoping cutoff as ore.

Treating more development material as ore has the additional advantage that some capital
development material will be classified as ore and appear on the company accounts as an
operating cost.

If the mines ore oxidises readily after breakage it cannot be surface stockpiled for extensive
periods. Many mines (particularly surface operations) stockpile marginal material for later
processing.

The step to moving from quantifying mineable reserves from geologic resources raises many
questions. Underground mine mineralisation resource statements form the base from which
stoping development and extraction can be planned and mineable reserve statements developed.
The tonnage and grade which is extracted from mine stopes will be influenced by the mining
method and the ability to fit stopes to mineralisation boundaries or mineralisation cutoff. The
difference between resources and mineable reserves will be influenced by a number factors
which lead to loss of tonnage or diminution in average grade from that established in resource
statements.

1. Geometric Loss Factor. The boundaries of an orebody often form complex planes. The stope
walls, crown or floor cannot follow these boundaries in detail due to scale of mining and
equipment. Some ore will remain behind in the mine due to this geometric misfit around stope
edges. This factor can be established by close examination of a stope block model fitted to the
mine resource model. This can be done when the detailed stope design has been established
some months before scheduled extraction.

2. Dilution Loss. Lenses of sub-grade material that lie within stope boundaries reduce average
extraction grade. Barren material on the periphery of stopes that lies within the stope
geometry but out of the resource model will have a similar effect. For this section of a mine
Cutoff Grade

stope tonnes may in fact exceed resource model tonnes although all dilution will lead to grade
reduction. This factor can be established by close examination of the interior and perimeter of
a stope block model fitted to the mine resource model. This can be done when the detailed
stope design has been established some months before scheduled extraction.

3. Loss with Unmineable Material. Unmineable mineralisation includes lenses too small for
economic stoping and material which may be lost as it surrounds and supports main
development of structures that remain to the mine end of life. This factor is difficult to
correctly establish until towards the end of mine life. Some lower grade resource
mineralisation may be bypassed in a zone early in mine life due to high-grading policy or
difficulties in access and be mined later on. This is a very difficult factor to predict until late
in mine life.

4. Overbreak. Hangingwall or crown material may extend the mine stope void beyond design
limits due to effects of blasting on ground structure. This will in fact mean that stope tonnage
exceeds resource model tonnes although all dilution will lead to grade reduction. This is a
very difficult factor to predict until after mining studies can lead to calculation of an average
stoping factor.

In moving from a geologic resource to a mining reserve and stope design not all mineralisation
can be mined. Further mining extraction factors are important as waste lenses within stopes
dilute mineralisation grade, stope geometries do not necessarily fit resource limiting planes and
affect recovery and mining inefficiencies such as overbreak and extraction of old fill lead to
losses. Detailed examination in short term planning of stope fit to mineralisation and the
factors described above would allow confirmation of an appropriate planning factor.

Most Australia mines rely extensively on contractors both for additional labour and for provision
of much equipment and other infrastructure. Facilities such the explosive batch plant are often
externally owned. This position means that there has been some replacement by the mine owner
of early capital expenditure with future operating cost obligation. This situation has some
influence on cutoff grade determination as contractor usage will overinflate operating costs
(which appear in Lanes cutoff approach) at the expense of capital charges (which do not appear
in Lanes cutoff calculations).

Apart from mill capacity the processing plant imposes other consideration. Plant generally
attempt to balance the properties of different mineralisation types with a blend of various ores.
Mine profitability will be enhanced with a high grading policy. Accessible high grade
mineralisation should be mined first and if this changes the mix to the mill the effects on
operating cost and recoveries should be examined in detail.

ANALYSIS AND CONCLUSION

Most mines in the long term are mill treatment limited operation in which a number of strategic
long term directions can be taken.
- Set initial cutoff high. This will shorten resource life and potentially sterilise future resource;
this approach demands that cutoff is reduced frequently (annually) as opportunity cost factor
Cutoff Grade

F of holding the grologic deposit reduces.
- Maintain a low cutoff and simultaneously increase mine and mill throughput and in the
meantime continue to review cutoff strategy.

The longterm cutoff strategy should be reviewed annually and changed in line with the Lane
(19880 analysis. Some short term development investment may be needed to maintain increased
mine capacity. There will be some limitation in the short term tactical approaches available with
mine planning and scheduling to allow achievement of an optimised cutoff approach

REFERENCES

Hancock, GE, 2000. Taxation effects on mineral resource economics in Papua New Guinea.
Ph.D thesis (unpublished), University of Queensland, Brisbane.

Lane, KF, 1964. Choosing the optimum cutoff grade. Colorado School of Mines Quarterly, vol
59, no 4, pp811-829

Lane, KF and others, 1984. Cutoff grade for two minerals. 18
th
APCOM Symposium, pp485-492

Lane, KF, 1988. The economic definition of ore, cutoff grades in theory and practice. Mining
Journal Books, London

Cutoff Grade

APPENDIX A

ELEMENTS OF CUT-OFF GRADE THEORY

(This summary has been prepared with considerable input from Graeme Hancock, Director of
Mining, PNG Department of Mining)

INTRODUCTION

Taylor (1972, 1985) defines a cut-off grade as a grade that, for any specified reason, is used to
separate two courses of action, for example, to mine or to leave, to mill or to dump. The most
common use of the term refers to that grade which defines the economic ore: waste boundary.
As such a cut-off grade is usually used to define the minimum mineral concentration within a
mineralised rock, which is deemed sufficient to contribute positively to the profitability of a
mining operation. Some early writers in this area such as Mortimer (1950) defined the economic
cut-off grade primarily in terms of costs, and as the grade of ore from which the revenue exactly
equals the costs of production. This is now better known as the breakeven grade which may or
may not necessarily be the optimum cut-off grade. Mortimers definition is very succinct being
The average grade of rock must provide a certain minimum profit per tonne milled. The lowest
grade of rock mined must pay for itself.

Lane (1964) made a very important observation that the cut-off grade is not only a function of
the grade distribution but is also constrained by the capacities of the various components in the
mining operation. Each component part of the mine has its own set of costs and capacities and
therefore its own optimum cut-off grade. He argues that the overall optimum cut-off grade for
an operation is one which balances the capacities of the mine, mill and market. Lanes optimum
economic cut-off grade is the grade that maximises the net present value of the future cash flows.
Taylor (1972) also argued that any cut-off grade policy which truly maximises the net present
value of the cash flow in year zero of an operation must also maximise the remaining present
value of each successive period of operation. He states that maximum present value and constant
cut-off grades are incompatible.

Thomas (1976) also demonstrated that the net present value of an operation could be enhanced
by high-grading the deposit. He demonstrated that preferentially mining higher grade ore early
in the life of the mine maximised the net present value of the operation.

Taylor (1985) highlighted that not only should the grade distribution be considered in the
determination of cut-off grade, but also the spatial relationships of ore and waste as defined by
the chosen cut-off grade. This reflects that it is not always possible to achieve production at the
desired average grade as defined by a chosen cut-off due to the ore-body geometry limiting
access to high grade ore blocks. Taylor also drew the distinction between planning and operating
cut-off grades, and states that they may not always be the same. Planning cut-offs are those used
in the establishment of mine plans and in mine feasibility studies, whilst operating cut-offs are
necessarily variable due to changes in economic and operational parameters such as commodity
prices and input costs throughout the mine life. He also recognised that the actual operating
capacities of many major components of mine infrastructure often vary from the design or rated
Cutoff Grade

capacities. As an example, many concentrators operate in excess of rated capacity after a period
of commissioning and fine-tuning. In recognition of these factors the design cut-off grades may
not be realistic or optimum for the operational phase of the project and should be reviewed
following mine commissioning.

Lanes cut-off grade theory relates mainly to ores that contain relatively minor concentrations of
valuable mineral which require concentration prior to refining or marketing. Mol and Gillies
(1984) demonstrated that Lanes cut-off grade theory did not apply to direct shipping ores such
as bauxite or iron ore where the marketable product has specifications as to quality and
concentration. They demonstrated that the optimum cut-off grade policy in this situation is that
grade which maximises the marketable ore reserves.

Lane has expanded on the earlier works in his text The Economic Definition of Ore (1988)
which is currently viewed as the definitive work on cut-off grades for the precious and base
metals industries.

A DESCRIPTION OF LANES CUT-OFF GRADE THEORY

General Approach

The following section is a description of cut-off grade theory as outlined by Lane (1964, 1988,
and Lane et al 1984). Lane (1964, 1988) considers that the mining operation is a combination of
three stages, the mine, the mill or concentrator, and the market or refinery. Each of these three
components has its own limiting capacity to handle either ore or product and has its own set of
associated costs. In addition the whole operation has a set of fixed costs which do not
necessarily relate to any one stage.

Lane argues that the best criterion for optimising cut-off grade is that cut-off which maximises
the net present value of the cash flow of the whole operation. This, therefore, takes into account
the time value of money and reflects the costs and benefits of bringing forward or delaying
extraction of any one parcel of ore.

Lane first defines three limiting economic cut-off grades, one for each stage of the operation on
the assumption that each individual stage may be the limiting factor or capacity. These cut-off
grades are a function of the costs of each stage and are in fact a set of three breakeven grades,
one for each separate stage. The next stage defines three balancing cut-off grades, which balance
the capacities of each of the mine stages. These are independent of the costs and are a function
of the individual capacities of each mine stage and the grade distribution of the ore. He then
demonstrates that the optimum cut-off grade is always one of the above six potential cut-off
grades, either a limiting or balancing cut-off, which maximises the net present value of the cash
flow. Lane (1964) states ... the optimum cut-off grade is influenced by the economics of present
value, the capacities of the several stages in the mining operation, and the grade distribution of
the deposit.

Lane (1988) describes that each limiting capacity of the mine stages is dependent on the grade
distribution. In order to address this he defined terms to be used to describe the material handled
Cutoff Grade

by each stage. The mine handles mineralised material which comprises both ore and waste and
the proportions of ore to waste are a direct function of both the grade distribution and the cut-off
grade. Ore refers to that proportion of mineralised material which is selected to be milled or
concentrated. Mineral is that proportion of the ore or mineralised material which is to marketed
or refined.

In order to asses the economics of a mining operation, Lane groups the component costs and
capacities of each stage as well as fixed costs.

Using Lanes (1988) notation

Component Throughput Basic
Quantity
Variable Cost
(/ unit throughput)
Capacity
(throughput / yr)
Mining Mineralised Material
l
m
M
Milling Ore x
h H
Marketing Mineral
g x
k K

Where:
x is the proportion of mineralised material classified as ore.
g is the average grade of the ore expressed as a mineral:ore ratio.
Other variables used in notation include:
cut-off grade applied to mineralised material to define ore (mineral:ore ratio).
y yield or recovery in the treatment process.
f fixed costs per year.
p price per unit of mineral sold.
c cash flow per unit of mineralised material.
t time taken to work through one unit of mineralised material.
r discount rate, cost of capital.

Using the above notation the cash flow derived from one unit of mineralised material is:
ft m xh g xy k p c = ) ( ..........1

This is the basic cash flow expression for one unit of mineralised material mined and processed
in time t. This must be modified in order to maximise the present value of future profits rather
than just total profit. An expression must therefore be constructed which determines the increase
in present value resulting from that one unit of mineralised material.

Lane explains it as follows. Assume that the maximum possible net present value from the
operation is V. Also assume that the NPV after one unit has been mined is W. The cut-off grade
must be selected that maximises both the value of the cash flow derived from the unit mined and
also the NPV of future cash flows. By incorporating the present value formula:

t
r
W
c V
) 1 ( +
+ = ..........2
If t is short this can be approximated to:
Cutoff Grade

rVt c W V = ..........3

This expression is the change in present value that occurs as a result of mining one unit of
mineralised material. V is unknown and cannot be determined until the optimum cut-off grade is
known. This is achieved by an iterative process by making progressively better estimates. The
construction of the expression is valid only if V depends on the resource available not the time.
In the expression presented, rV is in effect the opportunity cost of investing the mines capital
elsewhere, call it F. The optimum cut-off grade is thus that grade which maximises the
expression:

Ft c ..........4

By substituting for c the following expression of incremental present value for each unit of
resource is derived, call it v:

t F f m xh g xy k p v ) ( ) ( + = ..........5

Limiting Economic Cut-off Grades

The time t taken to work through the one unit of mineralised material will depend on which stage
of a mining operation is limiting throughput. Lane (1988) develops equations for mine limiting,
concentrator limiting and market limiting situations. The concentrator is often the limiting factor
in mine production that restricts throughput and so this approach alone will be outlined. In the
case of the concentrator, one unit of mineralised material will give rise to x units of ore where x
is the proportion of mineralised material to ore. This quantity will take x/H time to process. The
expression for incremental present value with the concentrator limiting is therefore:

H
x F f
m xh g xy k p v
h
) (
) (
+
= ..........6

Mining costs are essentially irrelevant to the cut-off decision as they are a sunk cost which is
incurred irrespective of the decision to mill or to dump any one parcel of mineralised material.
Therefore the choice of optimum cut-off grade will be the one that maximises the expression:

)
) (
) ((
H
F f
h g y k p x
+
..........7
And the concentrator limiting cut-off grade
h
is given by:

H
F f
h y k p
h
) (
) (
+
+ = ..........8

or y k p
H
F f
h
h
) /( )
) (
(
+
+ = ..........9

Cutoff Grade

In this example the opportunity cost F is shown as a cost which relates to the time taken to
process the ore. It can be seen from this expression that as F declines so too does the optimum
cut-off grade. As the mine nears exhaustion the value of F declines to very low levels and as a
result the optimum cut-off grade trends toward the breakeven grade for the concentrator stage.

Limiting cut-off grades are calculated on the basis of costs and capacities without reference to
the grade distribution of the deposit. This only applies where one stage only is limiting
throughput. If two or more stages are limiting throughput simultaneously the grade distribution
within the mineralised material becomes a critical factor in the selection of the optimum cut-off
grade.

Lane introduces the concept of Balancing Cut-Off Grades. These have particular importance in
open pit mining where the ratio of total material mined to ore mined is high and balancing the
capacity of the concentrator for ore against the mine for material moved is of importance. The
same considerations are not generally significant in underground mining where the fraction of
waste (development) material mined is low.

The optimum cut-off grade for the overall operation is the grade that maximises the incremental
present value of the cash. This grade is the point of maximum defined by a limiting grade (or
balancing grade in the case of an open cut mine or both).

Calculating an Optimum Life of Mine Cut-off Grade Policy

The conversion of an optimum cut-off grade for a single point in time into a coherent life of mine
cut-off policy requires a different approach. Whilst a single point cut-off grade may maximise
the present value for that increment of ore it may not necessarily maximise the present value of
all future parcels of ore. In order to achieve this an iterative routine is required which maximises
the present value of cash flow for both the present and future years.

The calculation of an optimum life of mine cut-off strategy hinges on the calculation of the
opportunity cost factor F. F is comprised of two components, the opportunity cost of holding the
resource (value of future mine cash flows) compared with investment in some other opportunity,
and the potential costs caused by changing economic conditions. It is defined as the change in
present value of an operation due to time and may be expressed as:

dT
dV
rV F = ..........10
where rV is the opportunity cost of capital otherwise deployed elsewhere and
dT
dV
is the cost
associated with changing economic conditions.

The expression can be portrayed simply as the difference in present value of an operation
between the beginning of the year, and at the end of that same year in the event that no
production took place, that is, the amount of resource remaining is unchanged. In order to
explain more fully, if V
i
is the present value of an operation at the beginning of year i, and W
i
is
the present value at year end with the same resource remaining, then the only change to have
Cutoff Grade

occurred will be as a result of changing economic circumstances.

i i i
V W
dT
dV
= ) ( ..........11

Thus the above equation 10 can be simplified to:

i i i
dT
dV
rV F ) ( = ..........12

and
i i i i
W V rV F + = ..........13

The term (
i i
W V ) may be either positive or negative depending on whether economic
parameters change for the benefit or detriment of the mine. If all economic conditions remain
the same throughout the year and in all future years, this implies that (
i i
W V ) is zero and thus
the equation for F further simplifies to:

i
rV F = ..........14

This simplified formula for F establishes that under stable economic conditions the opportunity
or delay cost to be incorporated into the optimum cut-off grade calculation is simply the NPV of
future optimum cash flows multiplied by the discount rate.

From the formula presented for optimum limiting cut-off grade calculation (formula 6 for
concentrator limiting) it can be observed that the value of F can only be determined after the
optimum cut-off grade has been calculated, and that the optimum cut-off grade itself depends on
the calculation of F. Therefore an iterative process is required to progressively refine the cut-off
grade strategy until an optimum present value position is reached.

This is achieved by initially making an estimate or guess of the optimum cut-off policy and
allowing the grade to be refined to an optimum by the iterative calculation routine. Details of
iteration techniques currently in use in commercial software packages are provided by Lane
(1988).

F by its very nature must decline with time, and with declining resource, as the present value of
future cash flows declines. The value of F will be highest at the commencement of production
when the value of future cash flows is the highest. As each year passes a portion of the resource
is extracted and thus removes that portion of value from the available future resource. The value
of future cash flows now possible declines by that amount. As a result, F will ultimately decline
to zero at the end of the mine life. With F being treated as a mining cost in the formula for
optimum cut-off grade (6) it effectively adds a notional cost to the actual cost of mining and
processing each unit of ore. As a result F causes the cut-off to be elevated in the earlier years of
an operation, by raising the break-even grade through the incorporation of a notional cost. This
notional cost is incorporated to reflect the opportunity cost of holding the resource, as well as the
opportunity cost of deferring high grade ore until later in the mine life. Thus its influence on the
Cutoff Grade

cost structure of the mine will result in the selection of a declining cut-off grade with time. At
the end of mine life F declines to zero and the optimum cut-off grade becomes the break-even or
marginal cut-off grade of the limiting stage at that point in time. Due to the progressive lowering
of cut-off grade it is often the mill or concentrator which becomes the limiting stage at this point
in the mine life.

This feature can best be described by reference to a graph of the NPV profile of a mining
operation (Figure 1).

NPV Profile of a Typical Mine
3
4
3
5
9
2
9
0
6
0
6
9
8
7
5
4
6
5
8
4
4
0
1
6
8
1
1
4
8
9
7
7
7
6
4
7
7
4
2
2
5
3
7
0
5
0
6
4
6
6
5
8
2
9
6
2
4
2
9
0
5
8
0
1
7
7
5
3
3
2
0
9
4
8
2
4
9
1
4
2
7
7
2
4
3
6
8
5
8
1
3
0
4
7
1
1
2
3
5
7
3
5
1
6
1
2
4
1
8
0
7
8
8
0
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1000000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Operating Year
N
P
V
NPV of Future
Cash Flows
F at 8%
Discount Rate

Figure 1: NPV Profile and F for a typical Mine

Hancock (2000) gives an example of a mine NPV profile in Figure 1 plotted by calculating the
NPV of all future cash flows on an annual basis throughout the mine life. For example, in year 5
the NPV will include cash flows from year 5 to 18, year 8 would include years 8 to 18 etc. The
NPV initially rises from year zero to a maximum in the first year of production as the influence
of the negative cash flow on NPV, caused by the capital cost component of the project, is left in
the past. The NPV then progressively declines as the resource is utilised and the total value of
future cash flows declines. F is also plotted on the graph (defined as the value of future cash
flows multiplied by the discount rate), and declines synchronously with the declining NPV.

Practical Considerations Impacting on the Cut-off Decision

Many external factors can affect the final choice of cut-off grade which may be unrelated to the
underlying economics of a mining operation.

Environmental considerations may dictate the total metal content allowable in waste rock and
tailings. If the waste rock or tailings cannot exceed a certain concentration or grade of a
Cutoff Grade

particular metal, then the cut-off may be determined by the objective of meeting environmental
regulations rather than based on pure economics.

Stockpiling of intermediate grade mined ore for later processing may not be possible if broken
material oxidises. The availability of sufficient real estate for stockpiling of lower grade ore will
also impact on the cut-off decision. For example, a mine in a very mountainous region may have
no flat or stable land on which to place sub-grade material for later treatment. All waste is
permanently lost to the mine, and as such the cut-off grade must reflect a long term view of
prices and costs in order not to permanently sacrifice ore grade material.

Some orebodies have multiple mineral types for the same metallic element each with varying
mill recoveries. This is common in porphyry copper deposits where in excess of 5 primary and
secondary copper minerals may be present, each with its own set of throughput and recovery
characteristics.

Some cut-off grades may be parametric, meaning that optimum cut-off grades may change
within an orebody or with varying operating conditions. Examples include the changing
hardness of the ore in different parts of the orebody. Each may require different cut-offs to apply
to different domains within the orebody despite having the same primary ore mineralogy.

Parametric cut-offs may also be required in multi-mineral deposits such as porphyry copper-gold
and base metal massive sulphide deposits. Often these deposits are managed by way of
determining metal equivalent grades such as a copper equivalent grade in a porphyry copper-
gold deposit. However, the recovery characteristics of any two minerals in a flotation circuit are
rarely the same and a metal equivalent grade is therefore a poor approximation at best. This
issue is also dealt with by Lane (1988) in some depth.

Planning vs. Operational Cut-Off Grades

Planning cut-off grades are those determined during the feasibility phase for either a new
development or an expansion. Such studies are based on a large number of assumptions as to
costs and production rates and resource grades. Reality is often different from the plan due to
either conservative or over-optimistic assumptions. Most technical personnel in mines would
recognise this reality, although often the planning cut-off grade based on the feasibility study
remains in use for long periods despite the obvious differences between the plan and actual
operations.

Long term operational cut-off grades should be assessed as soon as an adequate database of
actual revenues, costs and mine and mill production performance is available. Re-optimisation
of the cut-off should be carried out whenever there is a significant change in one of the major
input parameters, whether it be the resource, production factors or capacity, commodity prices or
other market related factors.

In an operational sense mines are dynamic not static and as such many of the inputs into Lanes
models are constantly changing. For example, even the resource is a moving target. Additional
exploration during mine life almost inevitably adds resources and reserves as time goes by.
Cutoff Grade

There are certainly situations where exploration success has resulted in the reserves available at
the end of a year exceeding those available at the beginning of the year despite a full years
production having been achieved. Conversely a stability problem may quarantine ore from
production and the resource may decline by a figure well in excess of the resource actually
utilised. Situations such as these require the constant reassessment of cut-off grades with
changing circumstances.

CONCLUSION

Lanes cut-off grade theory is the first comprehensive work defining the economic
considerations inherent in the cut-off decision. It is both complex and sensitive to the various
cost, capacity and resource inputs one would find in any mine. Its primary function is to
maximise the NPV of a mining operation through strategic development of higher grade
resources early in the mine life. It is a useful tool in feasibility studies for the development of
planning cut-off grades and has significant value in its ability to provide insights into the
optimisation of the capacities of the mine, mill and market components of any mining operation.

Mine operators need to be aware that cut-off grades are also dynamic and should respond to
changing operating or resource parameters. Planning cut-off grades determined during
feasibility studies are based on a large number of assumptions, and need to be reviewed and
refined once actual operating cost and mine and mill performance data are available. Additions
to reserves or resources through successful exploration should also prompt a review of the cut-
off grade strategy for the remaining life of the mine.

Lanes cut-off grade theory is complex, and in most cases optimisation is carried out based on
pre-tax cash flows. Lanes theory covers a range of other topics including stockpiling,
parametric cut-off grades and aspects of grade control that have not been considered in any
detail.

To date no other comprehensive theory of cut-off grade calculation has been proposed. Lanes
work has been progressively introduced into the industry and is becoming widely accepted.
Recent developments focus around its application to a wider range of activities and
circumstances such as its application in mill optimisation and the development of specialised
software for the calculation of optimum cut-off strategies.

REFERENCES

Hancock, GE, 2000. Taxation effects on mineral resource economics in Papua New Guinea.
Ph.D thesis (unpublished), University of Queensland, Brisbane.

Lane, KF, 1964. Choosing the optimum cutoff grade. Colorado School of Mines Quarterly, vol
59, no 4, pp811-829

Lane, KF and others, 1984. Cutoff grade for two minerals. 18
th
APCOM Symposium, pp485-492
Cutoff Grade

Lane, KF, 1988. The economic definition of ore, cutoff grades in theory and practice. Mining
Journal Books, London

Mol, O and Gillies, ADS, 1984. Cutoff grade determination for mines producing direct shipping
ore. Proc AustInstMinMetall, No 289, Nov-Dec, pp283-287

Mortimer, G. J. 1950. Grade Control. Trans. Inst. Min. Metall. Vol 59, 1950 pp357-99

Taylor, HK, 1972. General background theory of cutoff grade. Trans. Inst.Min.Metall. sect A,
July, vol 81, pp160-179

Taylor, HK, 1985. Cutoff grades - some further reflections. Trans. Inst.Min.Metall. sect A, Oct,
vol 96, ppA204-A216

Cutoff Grade

APPENDIX B

LANE'S CUT-OFF GRADE FORMULAE

Lane's (1988) notation

Component Throughput Basic Variable Cost Capacity
Quantity (/unit throughput)
(/throughput/ yr)
Mining Mineralised 1 m M
Material
Milling Ore x h H
Marketing Mineral xg k K

Where:
x is the proportion of mineralised material classified as ore.
g is the average grade of the ore expressed as a mineral:ore ratio.

Other variables used in notation include:

r cut-off grade applied to mineralised material to define ore (mineral:ore
ratio).
y yield or recovery in the treatment process.
j fixed costs per year .
p price per unit of mineral sold.
c cash flow per unit of mineralised material.
t time taken to work through one unit of mineralised material.
r discount rate, cost of capital.
V maximum possible net present value from the operation.
rV equals F, the opportunity cost of investing the mines capital elsewhere.
v: incremental present value for each unit of resource is derived.

The cash flow derived from one unit of mineralised material is:
c = (p - k) xyg xh - m - ft
The optimum cut-off grade is thus that grade which maximises the expression:
Cutoff Grade

c-Ft
By substituting for c the following expression of incremental present value for
each unit of resource is derived, call it v:
v = (p - k) xyg xh m - (j + F)t
Present Value Analysis

Time T Resource Available R
Variables defining Short interval t
Exploitation Strategy O Small increment r
Time per unit of resource t Exploitation Strategy for t e

Present Value V = V (T, R, O) (also W)
Maximum P.V. V* = V* (T, R)
Opportunity Cost F = oV* - dV*/dT
Cash Flow C per year
c per unit of resource
Increment in P .V. v per unit of resource
Cost of Capital o (100o %)
Terminal Value I

Economic Model
Throughput Variable Cost Capacity
(/unit throughput) (throughput/year)
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 (100y %)
Cutoff Grade

Quantities q
Stockpile recovery cost s per unit of material
Stockpile size S units of material
Cut-off intercepts T
1
, T
2
mineral/unit of ore

Suffixes denote years or have particular significance in the context. Certain other
symbols are also used with strictly local definitions.

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