The gross value fallacy

MINING EXPLAINED

—The following is an excerpt from Mining Explained published by The Northern Miner.

Mining companies and investors often make mistakes when calculating the value of mineral deposits. One of the most common errors is a simple calculation wherein reported percentages of metals are multiplied by the current market prices for those metals, yielding what is known as the gross value of the reserves. This figure is virtually meaningless.

Consider a lead-zinc orebody with reserves grading 8.5% zinc (85 kg of zinc per tonne of ore) and 4% lead (40 kg per tonne). If the current market price for zinc is 75 per lb. ($1.65 per kg) and the price for lead is 28 per lb. (62 per kg), a simple computation suggests that the ore has a gross value of $165.05 per tonne. But this calculation is misleading, and can, in some cases, be downright dangerous. The costs of transporting, smelting, refining and marketing all affect the payment made by a smelter to the mine. Premiums for valuable byproducts mined can be a bonus, but penalties that a smelter charges for elements that present metallurgical or environmental problems (like mercury and arsenic) can be costly.

After these deductions, we may find that our ore has a value of $65 per tonne, a drop of more than 60% from the gross value figure of $165, which had once seemed so promising. And it is this $65 received by the mining company that must cover the cost of mining, milling, administration and taxes, as well as provide a profit.

Studies have shown that a typical base metal mine will generally get about 45% to 65% of the gross metal value as a net return from the smelter. Some complex ores, which will tend to have higher smelting costs, can return as little as 35% of the gross metal value.

Gold mines differ somewhat in that smelter charges do not apply to simple gold ores (unless we are considering the gold content of a base metal concentrate). This is because a very high percentage of the gold contained in the ore can usually be recovered at the mine site without the need for shipping a concentrate to a third party. Typically, as much as 85% to 95% of the gold contained in a gold ore can be recovered at the mine site and a dor bar can be produced on-site. The only transportation charges involve the cost of sending the gold bars to a refinery or mint, whose charges are minimal. The same applies to the ores of silver and other precious metals.

The Mining Rate Risk

Economies of scale operate well in the mining industry: a big mine will produce significantly more output per unit of input than will a small mine. But not all orebodies can support a big mine.

The mining engineer has to match each orebody with an appropriate mining rate. Not uncommonly, he or she is forced to conclude that mining can only realistically occur at some fraction of the maximum rate because of the awkward shape of the deposit.

In the case of an ore deposit that is oriented more or less vertically, there is a good rule-of-thumb that can be used for selecting mining rates: the daily tonnage rate should be about 15% of the number of tonnes indicated or developed per vertical metre of depth. If, for example, the exploration program has proved up 6,500 tonnes of ore per vertical metre to some reasonable depth, a daily rate of 1,000 tonnes could be justified.

The width of an orebody will have a direct bearing on production rates as well. Ore in wide orebodies can be mined and handled much less expensively per tonne than can ore in narrow occurrences.

Rate of production is also related to the ore’s availability for extraction, because most mining methods require that the miner leave behind some ore in pillars to support the structure of the mine. It may be some time before this ore becomes available for stoping, and some of it may have to be left behind altogether.

The Risk of Dilution

In some mines, the physical characteristics of the wallrock may force a company to mine a considerable amount of unwanted, barren rock along with the ore. This waste rock must then be transported to surface with the ore, so naturally, such dilution of the ore costs the mining company money. In some cases, dilution can reach as high as 20% of what is mined, making the mine far less profitable than it could have been had the mining engineer been able to devise a method of mining only the mineralized rock.

Metallurgical Risks

Some of the most successful mines now operating were commercially worthless until serious metallurgical problems could be overcome.

Other mines’ ores contain metals that cannot be recovered until the ores are ground very fine or, in some cases, oxidized to liberate the valuable metals. The costs of grinding rise sharply with fineness of grind, and oxidation of small amounts of ore can be fairly expensive.

The role of the metallurgist is to select the best and most affordable process available for optimum recovery from a given ore, normally by testing drill core, pit or underground bulk samples. Care must be taken to ensure the material tested (and thus, counted on to represent the entire orebody) is fresh enough not to have oxidized or altered in any way and that there is enough of it to make a reasonable judgment of the orebody by extrapolation.

Still, even if the metallurgist is given up to thousands of tonnes of material from test mining, the sample may not be representative of the deposit. It could be from a high-grade zone, or from an area with poor ground conditions under study by the mining engineer for the risk of excessive dilution. It could also be from the top of an open-pit deposit that has been weathered more than what lies farther below.

To do a good job, the metallurgist must be provided with samples representing minable grades of each geologically different part of the deposit.