Differential Cut-Off Grades

T P Horsley1
ABSTRACT
Detailed underground mine design and optimisation studies undertaken by the author over the past few years have clearly demonstrated that additional value can be created by varying the cut-off grade (COG) spatially throughout a deposit as well as over time. This additional value can be particularly significant for marginal operations. This paper, by way of worked examples, illustrates the conceptual and practical considerations of applying a differential cut-off policy for an underground mine to both maximise value and manage risks associated with production and metal price volatility. Consideration is given to both the design stage of a new mine and to the strategic and practical application of a differential cut-off policy in an operating mine.

INTRODUCTION
The ability to add additional value by varying the cut-off grade over time is generally well understood within the industry. It is not so well recognised that varying the cut-off grade spatially within an underground mine can also add substantial value. It is easy to follow that if there are different mining regions with different operating costs and/or metallurgical recovery characteristics then there may be a case for different cut-off grades to be applied. It is not so intuitive as to why different cut-offs should be considered if the costs and metallurgical recoveries are the same. In an operating mine the ability to sustain design production rates on a shift-by-shift basis consistently over the mine life can present a challenge, particularly when unforeseen events occur. The additional flexibility provided by a differential cut-off grade policy potentially allows the mine schedule to be adjusted to ensure a more consistent mill feed. In this paper the term differential cut-off is used to mean the application of different cut-off grades spatially within an underground mine. Varying the cut-off in this way can add significant value to a project which can be illustrated by the following example of a simple gold project.

FIG 1 - Orebody A cross-section.

17

13

10 14

18 20

15 11

12

16 19

EXAMPLE ONE
Consider a high-grade steeply dipping gold bearing orebody to be mined by open stoping with backfill (Figures 1 and 2). In this example 20 large open stopes are mined in a fixed sequence. For simplicity each stope is assumed to be identical (ie same grade-tonnage curve for each stope) with a sharp geological boundary on the footwall and a cut-off grade variable boundary in the hanging wall (Figure 3). Reserve data over a range of cut-off grades are shown in Table 1. Initially let us assume that the mining sequence is fixed (Figure 2) with stoping commencing in the centre of the orebody and creating two mining fronts. Cost data is shown in Table 2. The capital cost for the mine is fixed at $40 M and the mill capital cost varies according to capacity. At 1.0 Mtpa the capital cost is $55 M and varies according to the 0.6 rule (eg Mill capex at 1.2 Mtpa is $55 M 1.20.6 = $61 M). Metallurgical recoveries are 94.5 per cent and royalty payments at 2.5 per cent of total revenue.
4 g/t

FIG 2 - Orebody A long-section.

10 g/t

1.

MAusIMM, Principal Mining Engineer, AMC Consultants, Level 8, 135 Wickham Terrace, Brisbane Qld 4000. E-mail: thorsley@amcconsultants.com.au

FIG 3 - Stope cross-section.

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TABLE 1
Reserve data for Orebody A.

120 100

Max NPV ($M)

Cut-off grade (g/t Au) 4 5 6 7 8 9 10

Total reserve tonnes (Mt) 4.2 4.1 3.6 3.5 3.5 3.0 2.0

Stope reserve tonnes (000) 210.4 205.3 180.3 175.3 175.3 150.3 100.2

Stope reserve grade (g/t) 10.6 10.8 11.6 11.8 11.8 12.4 14.1

80 60 40 20 0
4 5 6 7-8 9 10

Cut-Off (g/t)

FIG 4 - NPV versus cut-off grade at a fixed limiting production rate.

TABLE 2
Fixed and variable cost data.
Ore Production (Mtpa)

Fixed operating costs (A$M/year) Diamond drilling Mine development Mine production Haulage Crushing and hoisting Concentrating Mine administration $1.00 $2.00 $7.00 $5.00 $5.00 $5.00 $10.00

Variable operating cost (A$/t) $1.00 $2.50 $10.00 $3.00 $2.00 $15.00

2. 0 1.8 1.6 1.4 1.2 1.0 0. 8 0. 6 0. 4 0. 2 0. 0

$108.5M

8 g/t

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For a given production schedule cashflows can be calculated using a spreadsheet model and a net present value (NPV) determined. To keep the analysis simple depreciation, tax, mine closure and rehabilitation issues have been ignored. To facilitate the analysis of multiple production scenarios an automatic scheduling algorithm can be incorporated into the spreadsheet model. Ignoring stope scheduling dependencies, for a given limiting mine production rate, various scenarios can be run at different cut-off grades to select the cut-off grade that generates the highest NPV (Figure 4). In this case, with a gold price of A$500 and a production rate of 0.75 Mtpa, the best NPV of $108 M occurs with a cut-off grade of 7 - 8 g/t. The operating break-even cut-off grade for this production scenario is 5 g/t and would have generated an NPV ten per cent less than the maximum. Figure 5 shows the production profile for this scenario.

FIG 5 - Best NPV with fixed cut-off grade.

Simple cut-off grade optimisation over time

Ken Lanes cut-off grade theory (Lane, 1988) shows that, due to the time value of money (opportunity costs), additional value may be gained by varying the cut-off grade over time. Essentially, if the system is operating at full capacity, then there is a trade-off between mining higher grade early against shortening the life of the mine. For a long life project the value of the ore at the end of mine life discounted back to present day terms can be quite small and there can be a significant economic

incentive to trade-off mine life by lifting the cut-off grade in the early years. As the mine matures the present day value of the ore at the end of mine life increases by virtue of a shorter discount period and there is less incentive to increase the cut-off grade. Maximising the NPV of a mine by varying the cut-off grade over time can be done as an iterative process. This needs to be done on a source by source basis as it would be impractical, for example, to change a stope cut-off grade after it has commenced production. In this simple example there are 20 stopes, each with seven possible cut-off grade options. This gives rise to 720 possible combinations. Intuitively however, in a simple scenario such at this, a trial and error approach is not out of the question. By progressively lowering the cut-off grade of stopes at the end of mine life and increasing the cut-off grade of stopes at the front end of the schedule quickly reaches a solution. For more complicated scenarios spreadsheet search algorithms can be used. These may be available as a built-in spreadsheet function or as a third party add-in. The results shown in Figure 6 and were determined using a spreadsheet optimisation add-in. Figure 6 shows the results of a stope variable cut-off grade analysis for our example and generates a modest increase in NPV of less than one per cent by lowering the cut-off grade towards the end of the mine life.

Note that there is no change to the reserve between the 7 g/t and 8 g/t cut-off grades. Risk Optimiser from Palisade add-in genetic algorithm software for Microsoft Excel. In this case the optimisation process did not improve upon a quick manual attempt, which is fairly intuitive.

Production capability considerations

There is a flaw in this analysis however, and that is the assumption of a flat line production schedule over the life of the mine. For an underground mine the reality is somewhat different and production capacity can be significantly constrained by stope

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2. 0 1.8 1.6 1.4 1.2 1.0 0. 8 0. 6 0. 4 0. 2 0. 0

$109.1M

8 g/t 6 g/t

2. 0 1.8 1.6 1.4 1.2 1.0 0. 8 0. 6 0. 4 0. 2 0. 0

Ore Production (Mtpa)

Ore Production (Mtpa)

10 g/t

4 g/t

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FIG 6 - Best NPV with time variable cut-off grade.

availability and other mine activities. To be able to sustain a set production capacity over the life of the mine is by no means certain, particularly as the mine matures and there are fewer and fewer stopes to choose from. As production capacity is the most significant driver of value, there is the possibility that value will be lost by setting a production rate that is too conservative. To determine the best mill capacity the real production capacity of the mine must be assessed. By selecting a cut-off grade and running a production schedule that is constrained by practical maximum stope production and backfilling rates a more realistic scenario can be determined. If a maximum stope production rate of 40 kt/month is set with a 60 day backfill/cure time a saw-tooth production profile is produced (Figure 7).

Max NPV ($M)

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FIG 8 - Production profile variation with cut-off grade.

100 90 80 70 60 50 40 30 20 10 0
0.5 Mtpa 0.7 Mtpa 0.6 Mtpa 0.8 Mtpa 0.9 Mtpa 1.0 Mtpa

7-8

10

Cut-Off (g/t)

Ore Production (Mtpa)

FIG 9 - NPV versus cut-off grade with different limiting mill capacities.

8 g/t

The chart data can be alternatively presented in a 3D format to produce a Hill of Value surface (Hall, 2003). In this example increasing the mill capacity adds significantly to the NPV until the mine production reaches its limit at 0.9 Mtpa. Increasing mill capacity beyond this increases capital expenditure (lowering NPV) but does nothing to increase mine capacity.

In this example there is high production volatility due primarily to the mining method and the limited number of stopes that can produce concurrently. At start-up there will typically be a ramp-up to full production and also a tail-off towards the end of mine life. In many cases a mine might close on economic grounds before the reserve is fully depleted. To some extent cut-off grade will affect production capacity however, more significantly, it will impact on the life of mine, as illustrated in Figure 8. Production volatility can be managed by using stockpiles or other means, however, in this analysis a direct feed to the mill has been assumed.

Hill of Value
Figure 9 shows the NPVs generated from a range of production scenarios with different limiting mill capacities and cut-off grades.

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FIG 7 - Backfill constrained production profile.

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Sequence considerations
The curves in Figure 9 were generated assuming a fixed mining sequence. Figure 10 shows the effect of changing the mining sequence to allow four mining fronts. This demonstrates that mine design and scheduling can have a big impact on production capacity/volatility and hence on NPV. For a given limiting mill capacity more mining areas means there are more stopes available at any one time and production troughs are more easily filled, resulting in a higher sustainable average production rate. In this example (Figure 10) the sequence change has increased the value by 50 per cent significantly more than any cut-off grade adjustments would have produced. Mine design and scheduling optimisation however, are outside the scope of this paper and wont be discussed further. The following analysis will assume the original production (albeit lower value) sequence.

Findings
From Figure 9 the highest NPV (with the original sequence) for a fixed cut-off grade is $64.2 M. This was obtained from a limiting mill capacity of 0.9 Mtpa and a cut-off grade of 8 g/t. The production profile for this scenario is shown in Figure 11. This

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100 90 80

0.9 Mtpa 0.8 Mtpa

There are a number of factors impacting on cut-off grade selection in this example:

Max NPV ($M)

70 60 0.7 Mtpa 50 40 30 20 10 0
4 5 6 7-8 9 10

time variable (opportunity cost) as per Lane theory; minimising end-of-life negative cashflows; and maximising production capacity by minimising production
volatility. In a real mine there will also be other scheduling driven effects. For example; high grading a stope to bring forward a higher grade stope in the sequence. These effects are not shown in this example as it has been assumed that the grade-tonnage profile for each of the 20 stopes is the same. In this example the dominant factors driving cut-off grade selection are the production volatility and end of mine life effects. When the spatial variation of cut-off grade is analysed (Figure 13) it becomes apparent that there are essentially two zones: one with a 4 g/t cut-off grade and the other with a 9 g/t cut-off grade. Once the first two stopes have been mined and filled two independent blocks are created, one with eight stopes and the other with ten stopes. Higher NPVs typically occur when there is no residual production tail, ie if both blocks finish at the same time. This is achieved by lowering the cut-off grade in the West Block and increasing the cut-off grade in the East Block.

0.6 Mtpa

0.5 Mtpa

Cut-Off (g/t)

FIG 10 - Effect of changing extraction sequence.

2. 0 1.8 1.6 1.4 1.2 1.0 0. 8 0. 6 0. 4 0. 2 0. 0

Ore Production (Mtpa)

$64.2M

8 g/t

West Block

East Block

NPV is considerably lower than the fixed mining rate schedule of $108.5 M (Figure 5), which goes to show that simplistic scheduling assumptions may give rise to highly optimistic expectations of value. By applying a similar variable cut-off grade analysis as before then additional value can be gained. The results, however are quite different (Figure 12).

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FIG 11 - Best scenario with fixed cut-off grade.

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17 13 9 5 2 6 10 14 18 20
4 g/t 5 g/t 6 g/t 7 g/t 9 g/t

FIG 13 - Spatial variation of optimum cut-off.

Ore Production (Mtpa)

$73.8M
4 g/t 5 g/t 6 g/t 7 g/t 9 g/t

The optimisation process has also sought to increase the average mill throughput by reducing production volatility. This has been achieved by using an alternating cut-off grade sequence that sustains the maximum production rate for a longer period. Production volatility can be managed in a number of other ways including:

different mining methods, stockpiles, and varying stope sizes.

These have deliberately not been included in the example mine model in order to demonstrate the impact of production scheduling issues on cut-off grade. Any changes to mine design, extraction sequences, stockpiling policy, etc are all likely to have an impact on the optimum cut-off grade selection. It is interesting to note that in this Best Case scenario 30 per cent of the orebody is mined slightly below the calculated break-even cut-off grade (full costs). The opportunity cost effect would still exist in this example but it is not obvious because it is masked by the other effects described.

FIG 12 - Best scenario with differential cut-off grades.

Varying the cut-off grade on a stope by stope basis has increased the NPV by 15 per cent, which is not an insignificant amount and is certainly a worthwhile exercise. The results are particularly interesting and not what one would intuitively expect.

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The end of mine life production profile is an important consideration. It is typically characterised by erratic cashflows as it becomes increasingly more difficult to sustain production with fewer and fewer production sources available. It is fairly common that mines close, not by reserve depletion, but by the inability to sustain production rates and keep operating costs under control in line with a falling production rate.

EXAMPLE TWO Second low-grade ore source

Now consider an example with two orebodies, one low grade and the other high grade (Figure 14).

cycle then a decision to mine result in significant debate. In many cases a decision is made to exclude or defer mining low/marginal grade ore. If such decisions are made without due analysis, particularly if they have been based on simplistic perceptions of ore value, then significant value adding opportunities may be foregone. Unless a full life-of-mine analysis is undertaken with and without the inclusion of the low-grade ore it will not be possible to reliably determine the net value (positive or negative) that the low grade will make to the project. To illustrate this consider four mining scenarios:

mine Orebody A only at the break-even cut-off grade; mine Orebody B as a supplementary ore source; as above, but vary the cut-off grade for each orebody to
maximise NPV; and

mine A and B orebodies concurrently, varying cut-off grades

on a stope by stope basis.

Mine Orebody A only

This has been discussed in the previous section. The optimum mill capacity based on Orebody A alone is 0.9 Mtpa. At this production rate the break-even cut-off grade at a $500 gold price is 4.5 g/t. At a break-even cut-off grade of 5 g/t the NPV is $42 M. Figure 15 shows the production profile, and referred to subsequently as the Base Case.

FIG 14 - High-grade and low-grade orebodies.

The orebodies are close enough together to share the same access and service infrastructure. Orebody A is as described previously. Orebody B has the same number of stopes as Orebody A, however the tonnage rapidly drops off above a 5 g/t cut-off grade. Reserve data for Orebody B is shown in Table 3. TABLE 3
Reserve data for Orebody B.
Cut-off grade (g/t Au) 4 5 6 7 8 9 10 Orebody B total B Stope reserve B Stope reserve tonnes (kt) grade (g/t) reserve tonnes (Mt) 6.9 5.9 2.1 0.8 0.8 0.7 0.1 344.7 284.3 102.8 42.3 42.3 36.3 6.0 5.6 6.0 7.5 9.5 9.5 9.8 14.1

2. 0 1.8 1.6 1.4 1.2 1.0 0. 8 0. 6 0. 4 0. 2 0. 0

Ore Production (Mtpa)

$42.2M

5g/t

FIG 15 - Orebody A production profile at break-even cut-off grade.

Orebody B as a supplementary ore supply

Orebody B development has been assumed to start one year after Orebody A with the resultant production profile shown in Figure 16.

If Orebody A did not exist then the project would not be viable for Orebody B alone below a gold price of $770/ounce. Compared with Orebody A, Orebody B is low grade: at a 5 g/t cut-off grade the B stopes will deliver a head grade of 6.0 g/t compared with 12.4 g/t for the A stopes. Although this is not a real case study such scenarios commonly occur. If the grade of the low-grade orebody falls below the break-even cut-off during low points in the metal price

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Ore Production (Mtpa)

$105.6M

5 g/t

5 g/t

FIG 16 - Impact of Orebody B as supplementary mill feed, single cut-off grade.

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Ore Production (Mtpa)

Mining Orebody B increases the NPV from $42.2 M to $105.6 M and, at a gold price of A$500/ounce, clearly worthwhile. Only $4 M of this increase in NPV occurs by extending the mine life. Most of the value increase is due to a higher average mill throughput and, by virtue of the fixed operating cost components, a reduction in the average unit cost of ore treated. Asset utilisation is also significantly improved with the capital costs distributed over a larger ore reserve.

Varying the cut-off grade for each orebody

As was shown in Example 1 the highest NPV does not necessarily occur at the break-even cut-off grade. Figure 17 shows the production profile that generates the highest NPV if the cut-off is varied for each orebody. This increases the NPV by an additional 22 per cent over the previous scenario and the project now becomes viable above a $385/ounce gold price.

2. 0 1.8 1.6 1.4 1.2 1.0 0. 8 0. 6 0. 4 0. 2 0. 0

$211.0M
4 g/t 5 g/t 6 g/t 7 g/t 9 g/t

NPV ($M)

2. 0 1.8 1.6 1.4 1.2 1.0 0. 8 0. 6 0. 4 0. 2 0. 0

Not only has this scenario increased the NPV by 500 per cent over the Base Case (Figure 15) it has delivered a far more robust project, as can be seen from Figures 20 and 21.

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FIG 19 - Production sources by cut-off grade.

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Ore Production (Mtpa)

$129.3M
$250 $200
8 g/t

$150 $100 $50 $0

6 g/t

FIG 17 - Impact of different cut-off grades for each orebody.

Varying production rate and cut-off grade

The previous two production scenarios have assumed that the mill capacity has been sized to suit the mining of the high-grade Orebody A. Orebody B has only been mined to keep the mill full. In this scenario the mill capacity has not been limited to the production capacity of Orebody A. The optimum capacity has been determined for both orebodies mined together, and allowing the optimisation process to vary the mill capacity and cut-off grades on a stope by stope basis. The results are shown in Figures 18 and 19. Figure 18 shows the production profile colour-coded by orebody and Figure 19 by cut-off grade. The NPV has now increased to $211 M with the project break-even (zero NPV) occurring at a gold price of A$356/ounce.
FIG 20 - NPVs at A$500/ounce gold.

NPV ($M)

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Optimise Orebody A at + Orebody B Vary Orebody Production Cut-off B/E as 'Top-up' at Rate and C/O Grades B/E by Stope

$250 $200 $150 $100 $50 $0

Ore Production (Mtpa)

$211.0M

Orebody A at + Orebody B Vary Orebody Optimise B/E as 'Top-up' at Cut-off Production B/E Grades Rate and C/O by Stope

FIG 21 - NPVs at A$400/ounce gold.

PRACTICAL IMPLICATIONS
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FIG 18 - Impact of optimising mill capacity and cut-off grades on a stope-by-stope basis.

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Although the examples presented in this paper are not real case studies they serve to illustrate the potential value that can be unlocked by taking a flexible approach to cut-off grade selection. Many mines are faced with complex production schedules, difficulty in maintaining mill feed and pockets of marginal ore. Operational decisions can be difficult enough even with a fixed cut-off grade policy.

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So in many mine operators minds a variable cut-off grade policy sits well and truly in the too hard basket. In practice it need not be complicated. In the simple example shown the optimum differential cut-off grade solution is far from intuitive so in a real mine the analysis can only practically be done using a mine model (that can automatically schedule production and generate a cashflow). A search algorithm can be applied to cycle all of the input parameters to determine the best result. All this can be done using commercially available software. Most engineers these days are competent spreadsheet users and it would be unusual that an operating mine does not maintain a model of some description. Once a model has been set up it can be used to select the set of stope designs (and other parameters of choice) that generates the highest value (or other optimisation criteria). These stope designs dont have to be categorised on the basis of cut-off grade (eg Stope XYZ design A, Stope XYZ design B, etc). The optimisation process can be used to select which design gives a better return regardless of what design criteria have been applied. A licence to vary cut-off is also a double-edged sword. Additional value can be created for some mines but value can also be destroyed if changing cut-off is used to cover up production shortfalls due to less-than-optimum production management. Analysis, by itself, does not add value but can identify opportunities to add value. Value can only be added by implementing a change to the mine plan. The full impact of any such changes need to be considered over the life of the mine before implementation.

CONCLUSIONS
Production capacity is, almost without exception, the biggest driver of value for an underground mine. Applying a fixed cut-off grade to all of the resource can significantly underestimate the potential value of lower grade material. This can be particularly significant for marginal resources. Mining method, mine design, extraction sequence and cut-off grade will all impact on production capacity, and because they are inter-related, cannot be analysed in isolation of each other. Varying the cut-off grade throughout a mine can add significant value by giving more flexibility to sustain a higher maximum production rate and to reduce production volatility to increase the average production rate. An underground mine is plagued by uncertainty: metal prices, exchange rates, geological resource definition, rock mass properties, stope performance, equipment and support infrastructure performance and more. Production schedules will invariably change on a frequent basis to accommodate this uncertain world. The ability to also vary the design criteria that defines ore locally within the mine, and to evaluate the impact of such changes, can allow greater operational flexibility. This, in turn, can lead to higher sustainable production rates, higher realised value and lower risk.

REFERENCES
Hall, B E, 2003. How mining companies improve share price by destroying shareholder value, CIM Mining Conference, Montreal. Lane, K F, 1988. The Economic Definition of Ore, Cut-Off Grades in Theory and Practice (Mining Journal Books: London).

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