When assessing the economics of your mine, we begin by determining the breakeven cut-off value.
In simple terms, cut-off value (CoV) is the value of combined metal in one tonne of
rock at which revenue earned is enough to cover the cost of producing that tonne (and it is expected earn a certain amount of profit). Setting the right CoV is key to
achieving an optimal balance between competing priorities like annual production
rate, mine life and net present value.
Let’s assume we can produce one gram of gold for each tonne of ore mined. Applying a gold price of $1,650/oz (at one tonne, this is equivalent to $58/t of ore),
a 1% discount for payables (treatment, penalties, insurance, transport) and a
further 5% discount for mill recovery, we end up with an NSR (net smelter return)
after processing of just under $55/t.
If the cost to run our mine is $55/t, then our base-case cut-off grade of 1 g/t would be enough to break even. If the cost is three times higher, or $165/t (as we will assume for the sake of this hypothetical scenario), then our cut-off grade would also need to be three times higher, or 3 g/t, in order to break even.
In some cases, a mine may wish to add a certain profit factor, over and above the breakeven cut-off value. The profit margin involves adding a percentage or dollar value above the breakeven NSR. If our profit margin is zero, then the cut-off grade remains at 3 g/t. But in order to achieve a profit margin of $10/t, we would need a cut-off grade of 3.67 g/t.
Profit margin: $55/t - $10/t = $45/t
Breakeven CoV: $165/t ÷ $45/t = 3.67 g/t
Determining an optimal CoV can be completed by flexing modifying factors such as metal price, profit margin, costs, or production rates to determine the preferred
economics, life of mine or ounces of metal.
Although many companies prioritise high production rates, some have other goals. For example, when Dundee Precious Metals conducted a review of its Chelopech gold mine in 2020, its priority was to extend mine life and maintain a viable NPV while maintaining a consistent agreed annual production rate. (At this time, the mine applied a metal price of $1,250/oz with a profit margin of $10/t as a CoV). In order to achieve these goals, it was understood that it would need to bring in lower grade (profitable) material and move higher grades early in the mine plan.
SRK generated nine scenarios from a combination of three gold prices ($1,250/oz, $1,400/oz and $1,600/oz) and three profit margins ($0/t, $10/t and $20/t), calculating mine life, production and a cashflow model for each scenario. Mine schedules were imported into a Schedule Optimisation Tool (SOT) to produce an NPV-optimised productio schedule that considered the value of each zone. To select the preferred CoV, all scenarios were summarised into a Pugh Matrix ranking for each scenario weighted to favour Dundee Precious Metals’ objectives.
The exercise demonstrated that a gold price of $1,400 and profit margin of $10/t
would fulfill Dundee Precious Metals’ objectives by providing both robust economics and a preferred extended optimised mine plan.
No matter your mine’s priorities, generating multiple mine plans at different CoVs – and importing these into an SOT – is a great approach for selecting the best CoV for your mineral resource, mineral reserves and mine plan.
