Cut-off Grade Determination and Application(Draft)March, 2014TABLE OF CONTENTS1INTRODUCTION (1)2CUT-OFF GRADE DEFINITIONS (1)2.1Breakeven Cut-off Grade (1)2.2Incremental Cut-off Grade (2)2.3Mill Cut-off Grade (3)2.4Cut-off grade for an orebody with multiple metals (4)2.5Discussion (4)3CONCEPT OF NEXT BEST ORE (5)4COST ESTIMATION (6)5METALLURGICAL RECOVERY (6)6CUT-OFF GRADE REPORT REQUIREMENTS (7)7LIMITING CAPACITIES AND SUBSEQUENT STRATEGIES (8)7.1The Role of Stockpiles (8)7.2Possible Scenarios (8)No table of figures entries found.No table of figures entries found.1 INTRODUCTIONThis document is to provide a useful reference guide to enable consistent calculation of cut-off grades, encourage optimal strategy usage and communicate general stockpile philosophy among Huaao operations. Cut-off grades are used as the basis of mineral reserve estimations and for decisions influencing operating strategy, mine planning and design. In an effort to provide consistency between Huaao operations, there is a need to understand at least three distinct types of cut-off grades:• Break-even Cut-off Grade (BCOG) – is the grade of material, which will generate revenue from sale of the finished product that is equal to the cost of mining, transporting (including stockpiling and rehandling costs that may apply), processing and final refining of contained metal(s). (Underground and open pit BCOGs are derived somewhat differently; further discussion will appear later in this document).• Incremental Cut-off Grade (ICOG) – is the grade of material which will generate revenue from sale of the finished product that is equal to the further required variable costs to transport, stockpile, rehandle and process (including all necessary royalties, smelter fees and any other requisite expenses).• Mill Cut-off Grade (MCOG) –is the grade of the already mined material, which will generate revenue from sale of the finished product that is equal to that of the remaining processing and refining costs necessary to produce the final product. All applicable rehandling costs as well as royalties and relevant variable costs must be included in MCOG calculations.The following definitions attempt to unify and clarify industry standard nomenclature within the context of Huaao operations and development projects.2 CUT-OFF GRADE DEFINITIONS2.1Breakeven Cut-off GradeAlso referred to as a “fully-costed” or “site” cut-off, this calculation is used exclusive of other cut-off's when there is no excess mining or milling capacity (which is rarely the case). For an underground operation, a break-even cut-off must cover all fixed and variable costs (including mining, milling, general and administration [G&A], gross royalties, transport and shipping costs, smelting and refining costs, limits to payable metals and refining penalties for deleterious metals). In the case of an open pit, all mining costs as listed above are accounted for during the optimization phase of pit limit planning. This assumes, of course, that pit optimization is an ongoing process and takes place at least annually, or any time that costs, recoveries, actual results and/or other factors affecting the ultimate pit shell change. Ideally, the optimization process should use the same costs, recoveries and assumptions as used for cut-off grade calculations. Once the optimum pit extents have been determined the mining cost should not be included in the cut-off calculation. The decision to mine the material has been made, the cost incurred; the only task remaining then is to determine the routing of the material. Routing may be based on contained grade and mineralogy assuming contained value is sufficient to pay for the remaining costs to process and, if necessary, to stockpile and subsequently rehandle.A break-even cut-off calculation for an underground mine should not include sustaining capital (other than as noted below), capital development or taxes but must cover total site costs. Capital items or expenses deemed to be directly proportional to ore tonnage (tailings dam or leach pad expansions, for example) must be fully accounted for in the calculation of cut-off grade. The break-even cut-off grade will vary across a given site, depending on mining methods and their respectivecosts, transport distances, metallurgy, differing royalty regimes and/or other characteristics affecting the final costs of production.It is important to note that calculations of break-even cut-off grades contain no profit assumptions (hence the “break-even” designation). Because break-even cut-off grades are the basis for the estimation of mineral reserves, it is technically possible (although highly unlikely) to have an ore reserve that generates no profit to the company.The following is a simple example of the method used to calculate a break-even cut-off at an underground mine (g/t):U/G Break-Even Cut-off Grade (BCOG) is calculated from the following equation:Where:∙Revenue = BCOG x Recovery x (Metal Price – Refining Costs – Gross Royalties)∙Operating Costs = Mining Costs + Process Costs + G&A CostsThus,()Where:∙Mining Costs = total mine operating costs (include operating development costs, exclude capital development costs)∙Process Costs = total process operating costs∙G&A Costs = total general and administrative costs∙Recovery = planned recovery of metal∙Metal Price = gold price in $/oz.∙Refining Costs = smelter, refinery and transportation costs in $/oz.∙Gross Royalties = non-NSR or net profits royalties (if applicable) in $/oz.∙Recovery = metallurgical recovery as a percentage2.2Incremental Cut-off GradeAn incremental cut-off grade, also referred to as “Marginal Cut-off Grade”, is applied if either of the mill or mine is not operating at full capacity or if the concept of “next best ore” applies.At an underground operation, incremental material must carry only the variable portion of mining costs (drilling, blasting, mucking, hoisting haulage), process operating costs, G&A costs, gross royalties and, if stockpiled, the associated rehandling costs. Development costs, both capital and operating, should only be included in incremental cut-off grade calculations if the development is necessary only to mine the incremental ore and would not be carried out otherwise. Any incremental process capital costs required to process the incremental ore (i.e. tailings dam expansions) must be considered as well, if applicable, and be included in incremental cut-off grade calculations. Incremental grade ore should never displace the processing of break even cut-off grade ore if it is available. If the mill is operating at capacity and the mine has the ability to provide material for placement in stockpiles, then incremental grade material can be set aside for later processing, provided it can additionally bear the fixed portion of processing and G&A costs, as well as the costs associated with rehandling.In the case of an open pit, Incremental Grade ore must carry any incrementaltransport costs (i.e. any haulage and/or conveying costs over and above the cost required to move the material to the appropriate waste dump), incremental capital costs (tailings dam and/or leach pad expansions), gross royalties, and only the variable portions of process operating costs and G&A costs. In a similar fashion, if haulage costs to process facilities or stockpiles are lower than the haulage costs to waste pads the savings should appear in the ICOG calculation as a credit. If the pit is capable of producing more incremental grade material than the mill is able to process, the incremental grade material can be placed in stockpiles if it can bear the associated portion of the cost of stockpile construction, maintenance and future rehandling. In the case of long-term stockpiles (i.e. those that are planned to be processed once mining has been completed) the material must additionally be able to bear the fixed costs related to processing and G & A.The following is an example of a simple incremental cut-off grade (ICOG) calculation (expressed in units of gram/tonne) for short term stockpiling (variable cost inclusion only shown):Where:∙Revenue = ICOG x Recovery x (Metal Price – Refining Costs – Gross Royalties)∙Operating Costs = Variable Mine Costs + Variable Process Costs + Variable G&A Costs Where:∙Mine Costs = all direct mining operating costs beyond pit crest + variable mine support costs∙Variable Process Cost = portion of process operating costs attributable to incremental ore ∙Variable G&A Costs = portion of G&A costs attributable to incremental ore∙Recovery = planned recovery of metal∙Metal Price = gold price in $/oz.As discussed above, depending on U/G mining statuses, there could be several incremental cut-off grades for the same mining area.2.3Mill Cut-off GradeAs with an incremental cut-off grade, a mill cut-off grade is applied if the mine or mill are not at capacity or if the concept of “next best ore” applies. This cut-off grade is applied to low grade material that must be broken and removed from the mine but which does not meet either break-even or incremental cut-off grade criteria.In an underground mine, it is usually comprised of material from development headings. In order to qualify for milling, such material must be able to bear the additional portion of the variable costs incurred by additional material handling needs which would not be required if the material were to be treated as waste. Underground costs might include additional transport costs due to increased hauling or tramming distances, additional equipment operating expense, underground crushing, hoisting and others. Surface handling, process and refining expenses must be included in mill cut-off grade calculations as well. If the mill is operating at capacity with material at or above the break-even cut-off grade and the mine has the ability to provide material to stockpile, then the MCOG material can be set aside for later processing, provided it can bear the additional cost ofrehandling. Mill cut-off grade material should never displace break-even cut-off gradematerial as mill feed.The following is an example of a simple underground mill cut-off grade (MCOG) calculation expressed in gram per tonne:Where:∙Revenue = MCOG x Recovery x (Metal Price – Refining Costs – Gross Royalties)∙Operating Costs = Variable Mine Costs + Variable Process Costs + Variable G&A Costs()( ) Where:∙Variable Mine Costs = (ore handling costs – waste handling costs) + surface rehandle costs ∙Variable Process Costs = portion of processing operating costs attributable to incremental ore∙Variable G&A Costs = portion of G&A costs attributable to incremental ore∙Recovery = metallurgical recovery expressed as a percentage∙Metal Price = gold price in $/oz.∙Refining Costs = smelter, refinery and transportation costs in $/oz.∙Gross Royalties = non-NSR royalties (if applicable) in $/oz.For an Open Pit mining, MCOG is used for reporting reserves within an optimised pit.2.4Cut-off grade for an orebody with multiple metalsWhen significant revenue is recovered and received from more than one metal in the same orebody it is often convenient to use the concept of “an equivalent grade”. Ideally, an equivalent grade is expressed through the primary metal that is recovered (i.e., copper equivalent grades in Cu-Au deposits). In practice the preferred methodology is based on deriving the contained metal values per tonne of finished product (generally per tonne of concentrate) using the appropriate representative recovery rates for each metal and deducting the applicable penalties, smelter charges, transportation costs, refining fees and assay costs. When this is the case, the equivalent combined metal cut-off grade is calculated by relating the value of the two or more contained metals to each other.2.5DiscussionThe cut-off grades and concepts described apply across the full spectrum of reserve accounting, from summarizing global resources for an exploration project to making daily production calls in an operating mine. It is common to define a cut-off grade for ore reserves which is quite different for the actual cut-off grade applied to the operations. Usually the operational COG reflects the economic realities and the reserve COG reflects long term strategic plans.In practice, operations are likely to require more than one cut-off grade for each of these types due to differing mining and processing costs. Factors including the mining methods in use, variable ore types and mineralogy, different process streams and metallurgical recoveries, changes in work indices, ore source locations, related haulage distances and multiple royalty regimes can all cause significant variability in mining, milling and smelting costs. In order to obtain relevant cut-off grades to maximize NPV and optimize mine life we must ensure that costs are calculated accurately and fully for each of the combinations of factors throughout the mining cycle.All cut-off grades assume fully diluted and actual ore values that are deliverable to themill, not in-situ values. If planned grades are used in calculations but are not being achieved in mill feed, maximal NPV is not going to be obtained and possibly significantly reduced. It is imperative therefore that planned or designed grades be compared to those actually achieved and suitable adjustments be made to ensure that the most appropriate grade value be used for cut off grade calculations. Additionally, when more than one mining method is used at an operation, an accurate dilution factor should be applied per method, and, when adequate grade reconciliation data exists, should be adjusted to reflect actual results rather than assume that planned dilution properly represents actual results.There are a number of limitations, using cut-off grade for reserve estimation, including:∙Various categories of cost are totalled without consideration of timing. As the expenditure on underground development can precede the cost of stoping (and recognition of revenue from ore contained in stopes) by in excess of a year, the present value of this expenditure is larger than would be considered in a cut-off grade calculation.∙The tax implications of various categories of expenditure are not considered. Depreciation and amortisation of capital expenditures (including capitalized waste stripping and development) can have a significant impact on the magnitude and timing of cash taxes paid.∙Cost elements are seldom 100% fixed or variable. It is difficult to accurately estimate the true incremental costs associated with mining a particular stope without use of a bottom up cost model from which an incremental analysis of costs can be made.Consequently, best practice in reserve estimation should involve the following iterative approach, where the cut-off grade(s) is used only to identify potentially economic material.∙Cut-off grades are applied to the mineral resource model, based on the expected cost structure for the strategic option selected. These define resource blocks that are potentially economic.∙Stope outlines are designed for potentially economic resource blocks that are classified as measured or indicated. These outlines must take account of factors for mining recovery and dilution.∙An LOM schedule is generated for potentially economic stopes.∙Operating and capital cost estimates are prepared for the schedule and economic analysis performed. Stopes that are not economic are removed from the schedule and the remaining material is re-evaluated. This process should be repeated until no uneconomic material is included in the LOM schedule.∙The material included in the LOM schedule is classified as proven or probable reserves, based on the confidence of geological and economic estimates.∙Risk analysis should be performed to determine the sensitivity of reserve tonnage to factors such as metal price.It is the simplest way to use cut-off grades for reserve evaluation. One of the key assumption is the mine is mostly (if not totally) developed for an underground mine. If there is a new and isolated ore zone, which requires significant decline/incline developments and/or ventilation shafts, then a proper pre-feasibility (or feasibility study) is required.3 CONCEPT OF NEXT BEST ORETo maximize the value of mining/processing operations it is necessary to maximise the output of recovered metal as early as possible in the life of the mine. While it is normally not feasible to schedule mine production to deliver the highest production grades early on in the mine life followed by declining head grades as the mine matures and reserves are depleted, it should always be attempted (provided this strategy does not reduce operating efficiency or the optimal recovery of ore). The ongoing goal is to follow sound mining and processing strategies to make the highest grade material available and enable the most effective cashflow possible. This is significantly aided with the creation and utilization of graded stockpiles and well considered stockpile strategies.For an underground mine, the mining strategy/sequence must be thoroughly analysedbefore any detailed scheduling starts by using any schedule package. In general, the mine development is usually the critical path, which is required for stoping and diamond drilling. Once mine design is done, the in-situ oz per jumbo development metre may be used for determining the mining strategy/sequence. The higher priority should be given to the area with higher Oz per development metre.4 COST ESTIMATIONOperational costs fall into two categories, variable and fixed, so that the appropriate expenses can be suitably applied for cut off grade purposes. The following general definitions and examples are included to demonstrate the difference between fixed and variable costs and their inclusion in the calculation of appropriate cut off grades.Fixed Costs –Those costs which do not change directly with a change in production or throughput. Examples of fixed costs include labour, G&A costs (assuming extra staffing is not required as a result of increased throughput), overheads and others. BCOG calculations must include all fixed costs considerations, calculations of ICOG and MCOG should not except at the end of mine life when all site costs must borne by the remaining stockpiled material.Variable Costs –Any portion of operating costs that vary with a change in production or throughput. Examples of variable costs are power sources (e.g., diesel fuel consumption increases as tonnage moved rises), consumables, and equipment operating and maintenance costs among many others. It is noted that, in some cases, certain costs have both a fixed and a variable component and care must be taken to ensure that both are considered and used in cut-off grade calculations accordingly. An example of this instance is the case of electrical power consumption –the fixed portion of the electrical cost is that which would normally be incurred with lighting and heating power consumption while the variable portion is that which is additionally consumed with increased throughput due to the processing of incremental ore. Any changes in costs should be followed by recalculation of Cut-off Grades. For the calculation of incremental COGs, only variable costs should be included in calculation as it is considered that the fixed costs are borne by the material at or above BCOG. In essence then, any additional throughput, provided the material can cover all the variable costs associated with it, has the potential to add to the NPV of the operation and therefore should be segregated, stored and processed whenever possible, as long as it does not replace higher-grade material at BCOG or above. The exception, as previously noted, is when mining operations have ceased and no more BCOG material is produced. At this point in time, and beyond, the remaining material being processed must bear both variable AND fixed costs.It is critical that the costs used in cut-off grade calculations are as accurate as possible using current consumable pricing, labour rates, equipment operating and maintenance costs. Future price increases, as may be known or can be projected reasonably, should be considered as well.5 METALLURGICAL RECOVERYMetallurgical recovery is a critical variable in cut-off grade calculations as inaccurate values used in cut-off grade calculations will lead to misrepresentative COGs and could ultimately affect NPV and mine life. Metallurgical recovery is expressed as a percentage that indicates the portion of the contained metal mined and sent to the mill that may be recovered through processing. It is very important to monitor feed grade and throughput tonnages as best as possible so that recovery calculations are based on accurate data. Sampling techniques should be reviewed on a regular basis, an adequate number of samples to obtain representative results must be taken and weightometers and other instrumentation should be calibrated regularly to ensure valid results. Recovery is typically dependent on the type of ore, and it may be quite variable throughout a given deposit. When historical data does not exist, metallurgical recovery estimates are based on results from test work or pilot plant processing studies. In some cases, and with proper justification preferably based on full-scale experience, bench and/or pilot plant results may be adjusted(upwards or downwards) to reflect such experience. Proper supporting documentationis required. When, for the same ore body, historical data is available, efforts should be made to "calibrate" the laboratory procedures to simulate the actual plant performance. These models/procedures should be updated periodically. On that basis, plant historical performance can be taken into account to predict recovery and costs, while ensuring that the ores to be fed have been tested and it appears reasonable to use such database interpretation to confirm expected performance. In other words, ores to be fed to the plant that are included in the LOM and Reserve/Resources calculation should be tested to compare their response to the models and ensure that there is no significant deviation. Should significant deviation exist, further investigation to determine the nature and root causes must take place so that the best estimation of predicted recovery may be used for COG calculations.Typically, recovery is also dependent on grade, and therefore grade-recovery curves should be developed and utilized. Accurate definition of the recovery at and near the actual COG is very important and must be emphasized. The work index, the mineralogy and blending of the various ore types all affect metallurgical recovery. In addition, test work should focus on optimising recovery and thoroughly understanding the metallurgical characteristics within different areas and zones throughout the ore deposit. Cut-off grade calculations should be made and reported for all ore types which result in significantly different recoveries; if processing methods used vary with ore characteristics, appropriate costs and recoveries must be used for the determination of the best and most representative cut-off grades for each of the specific process methods.Personnel responsible for reporting resources and reserves must diligently monitor actual processing plant recoveries and compare them with the recovery parameters used for prior estimates to assure that they correlate. When reconciliations between the resource model and plant production indicate that adjustments are necessary, these must be communicated and implemented prior to the next reporting deadline.6 CUT-OFF GRADE REPORT REQUIREMENTSFor Cut-Off Grade reporting the following items must be included as appropriate, for both underground and open pit operations (and, if not applicable for a given site, it should be stated that the requirement does not apply, and why):•Concise mention of metal prices, and exchange rates used for both reserve and resource calculations.•Cut-off grades summarized in table format including O/P and U/G cut off grades with all pertinent cut-off grades included (BCOG, ICOG, MCOG) for all relevant locations (i.e.different pits, mine zones, mineralogy, mining methods etc.) for both reserve AND resource metal prices, sensitivities for based on dollar values (i.e., +/- $50/oz Au) or a percentage difference.•Multi metal mines, equivalent grade calculation methodology.•Tabular summary of cost centres (mining methods, locations, processing circuits, recoveries, G&A and smelting, refining, royalties information) for significant cost regimes.•Comments, explanations and rationale for price / breakdown of variable and fixed cost components, which are used for ICOG and MCOG along with implications at end of mine life for O/P stockpiles.•Mine, mill and, if appropriate, smelting/refining capacities stated with historical and projected throughputs stated, as well as reasons for changes included (i.e. upcoming mill expansions, equipment downtime impacts on past performance etc.). What is constraint at MCOG? How close are mill/mine outputs, rated and actual throughputs?•Stockpile strategies employed, past, present and upcoming changes based on current COG calculation.•Comparison of past, current and future COGS, both calculated and those used for operating strategies with clear rationale included.•Major cost drivers, consumable pricing strategy (upcoming more important than historical, though both should be included for comparison sake) with clearly stated currency unitsused, best estimates of future pricing based on material supply contracts,labour agreements etc.•When consumable pricing varies from corporate guidelines, explain reasoning for the variance.•Sustaining capital – perceived definition, upcoming needs and why?•Mining dilution factors used, as well as comparison of planned vs. actual dilution (with brief description of reconciliation methodology used).•Actual mill grade vs. planned mill grade with explanation of variances.•Process recoveries, actual performance, variances and rationale for values being used, Grade and recovery curves included, for varying process methods, mineralogy and for each valued contained metal.•Clear statement of royalties, royalty cost / oz., applicable local, regional (state) taxes, smelter charges, penalties, how by-product credits are handled in COG calculations, transportation costs, all other relevant expenses and costs.• A brief statement about development costs for u/g mines, what is considered capital and operating development, what determines if operating development costs are included and when, how operating costs are calculated and what is the strategy / decision making process regarding identification and pursuit of incremental ore?•Costs, often actual and 3 year averages should be stated consistently, currencies and units (metric or imperial) stated explicitly in every table.7 LIMITING CAPACITIES AND SUBSEQUENT STRATEGIES7.1The Role of StockpilesProvided space is available, material should be stockpiled when mine ore output exceeds the mill capacity to process ore at or above Break-Even Cut-off Grade. In this case the excess mine capacity is most efficiently used to create stockpiles. The following three cases may exist:The mine is producing all available break-even ore, but the total amount of break-even ore produced is less than the total ore producing capacity of the mine. Emphasis should be to increase availability of BCOG ore supply and use excess capacity in the short term to stockpile ICOG, then MCOG materials. In line with the “Next Best Ore” concept, the lowest grade or lowest net revenue material should be stockpiled and highest grade material available processed preferentially.If any stockpiled material remains unprocessed at the end of mining activities, this material must also bear the full burden of the remaining site costs (both fixed and variable). The quality of the ore after being in the stockpile must also be considered if, for example, the stockpiled material oxidizes and recovery will be reduced.A potential third case is the stockpiling of mineralized material that is below the mill cut-off grade in anticipation of an increase in metal prices and/or improvements in processing costs or recoveries that could make the material economic at some point in the future. Stockpiles containing material below the current mill cut-off grade should not be reported as reserves because the material is not economic and, thus should not carry non-cash costs, including depreciation and depletion. If the mill consistently runs at capacity while processing underground ore with grades at or above, the break-even cut-off and the mine frequently encounters material between the incremental cut-off grade and the break-even cut-off grade that is left unmined a potential opportunity may be lost. When this occurs, the feasibility of increasing mine production and expanding the mill should be considered.7.2Possible ScenariosMine limited production: Most underground mines fall into this category. Processing facilities are able to process as much tonnage as the mining operation can deliver due to mine production and materials handling limitations. In this case, operational strategy should be to keep the process facility operating at, or as near as possible, to full throughput. To achieve maximum metal recovery any material meeting at or above BCOG should be prioritized and delivered for processing,。
