In the world of mining, opinions can diverge on all sorts of topics, and experts are rarely in agreement with each other. However, amidst this cacophony of viewpoints, there stands an unwavering axiom, a consensus that rings true regardless of who you ask: in a mining context, grade is king.
In mining, grade is defined as the concentration of a certain target element - or elements - in an ore body. It represents the amount of valuable minerals contained in a given ore. For a mining company, these metals are the eventual revenue drivers, by which it can pay its costs and hopefully generate a profit for its shareholders. It is therefore no wonder that grades are one of the core focuses of mining investors when screening potential investments. Companies are well aware of this, and do their absolute best to market their ‘high-grade’ and unmistakable ‘tier 1’ resources to the public.
This information can be notoriously difficult to put into context. No two resources are the same, and whether a resource is economic or not - thereby becoming a reserve - is subject to a multitude of factors. One of the most important factors that investors should pay attention to is the spatial location of the deposit (e.g., is it under a lot of cover? Is its shape and size suitable for possible - economic and technical - extraction?). Another factor of great importance is the metallurgy, which is closely linked to recoveries. Core can be assayed by use of a multitude of techniques that accurately measure the total metal endowment in the ore. However, when this ore is processed by a mining company to produce a saleable product, there are some inefficiencies in the beneficiation process that lead to a loss of some of the valuable metal. This leads to a discrepancy between the assayed grade and the total recovered grade. Mining companies make estimations of these ‘recoveries,’ which are contingent on the deposit type and ore-specific grade. That’s why a resource can be defined as, for example, 10MT of 10% Zn, but the actual recoverable Zinc resource would be 10MT at 7.5% Zn (under assumed recoveries of 75%).
These recovery factors are especially pertinent when companies make use of ‘metal equivalents’ which can be recognized by the Eq abbreviation. Metal equivalents are used to give an indication of the metal endowment in ‘polymetallic’ deposits - that is, when a multitude of economically extractable metals are present in a resource. Examples of this are abound and some prime ones are Sudbury’s Ni-Cu-PGM deposits and the better-known Copper Porphyry deposits, which often consist of Cu-Au-Mo dominated mineralization. Regarding recoveries, the devil sits here in the details. Generally speaking, as the metal grade of a certain ore approaches zero, recovery rates generally decrease due to the increased complexity and cost associated with extracting and processing lower-grade ores. This is especially pertinent when looking at these polymetallic deposits.
It is important to consider that these complex factors can significantly impact the profitability and economic viability of mining operations. Lower-grade ores, in addition to their lower recovery rates, often require more extensive and costly extraction and processing methods, which can impact the overall costs and feasibility of a project. Additionally, the variations in recoveries and metal equivalents highlight the need for careful evaluation and assessment of a resource's true value.
To put this in context, a case study will be presented that showcases the effect of a relatively incremental increase in grade and how this can significantly boost profitability, particularly for companies operating with marginal profit margins.
Case Study
The two companies that are being studied both have a copper porphyry deposit that consists of Copper-Gold-Molybdenum mineralization. Both have a reserve of 1 million tonnes and have similar operational expenditures and production rates. The only difference lies in the fact that Company 1 has a resource of 1 MT at 1.0% CopperEquivalent and Company 2 has a resource of 1 million tonnes at 1.2% CopperEquivalent.
Assumptions for both Company 1 and Company 2:
Resource size: 1 million metric tons (1MT)
Operational expenditures (OpEx): $45 million
Other costs: $2 million
Copper price: $8,800 per metric ton (~$4/lb)
Gold price: $1,800 per ounce
Molybdenum price: $44,000 per metric ton (~$20/lb)
Assumptions specific to Company 1:
Resource of 1 MT at 1.0% CuEq
Consisting of:
Copper grade: 0.8% Cu
Gold grade: 0.15 g/t Au
Molybdenum grade: 200 ppm Mo
Recovery rates: 80% for copper, 65% for gold, 35% for molybdenum
Assumptions specific to Company 2:
Resource of 1 MT at 1.2% CuEq
Consisting of:
Copper grade: 0.92% Cu
Gold grade: 0.2 g/t Au
Molybdenum grade: 300 ppm Mo
Recovery rates: 90% for copper, 75% for gold, 45% for molybdenum
These assumptions were used to estimate the production volumes, revenues, operational costs, and profitability for each company based on the given recovery rates and metal prices.
Company 1:
Under the assumption of extracting 1 MT of ore this yields:
Copper Production Volume: 6,400 metric tons (80% recovery rate of 0.8% Cu)
Gold Production Volume: 3,135 ounces (65% recovery rate of 0.15 g/t Au)
Molybdenum Production Volume: 70 metric tons (35% recovery rate of 200 ppm Mo)
Copper Revenue: $56,320,000 (6,400 metric tons x $8,800/ton)
Gold Revenue: $5,643,000 (3,135 ounces x $1,800/ounce)
Molybdenum Revenue: $3,080,000 (70 metric tons x $44,000/ton)
Total Revenue: $65,043,000 (Copper Revenue + Gold Revenue + Molybdenum Revenue)
OpEx: $45,000,000
Other Costs: $2,000,000
—----------------------------------------------------------------------------------
Profitability: $18,043,000 (Total Revenue - OpEx - Other Costs)
Company 2:
Under the assumption of extracting 1 MT of ore this yields:
Copper Production Volume: 8,280 metric tons (90% recovery rate of 0.92% Cu)
Gold Production Volume: 4,792 ounces (75% recovery rate of 0.2 g/t Au)
Molybdenum Production Volume: 135 metric tons (45% recovery rate of 300 ppm Mo)
Copper Revenue: $72,864,000 (8,280 metric tons x $8,800/ton)
Gold Revenue: $8,625,600 (4,792 ounces x $1,800/ounce)
Molybdenum Revenue: $5,940,000 (135 metric tons x $44,000/ton)
Total Revenue: $87,429,000 (Copper Revenue + Gold Revenue + Molybdenum Revenue)
OpEx: $45,000,000
Other Costs: $2,000,000
—----------------------------------------------------------------------------------
Profitability: $40,429,000 (Total Revenue - OpEx - Other Costs)
This seemingly unnoteworthy difference in grade ends up having a profound influence on the mine’s profitability. It is not unthinkable for a resource investor to infer that a 0.2% difference in the resource grade, should be of marginal importance. However, looking at the actual economics, this gut feeling appears to be way off. It is good to emphasize that this analysis is made for illustration purposes only, and that factual numbers can differ dramatically. Also the influence of grade on profitability is most profound for mines operating with marginal profitability metrics.
But just to show, imagine it for yourself, looking at the following two headlines:
‘Copper Resources Inc. Announces Maiden Resource Estimate of 1 MT at 1.0% CuEq’
or
‘Copper Resources Inc. Announces Maiden Resource Estimate of 1 MT at 1.2% CuEq’
Following the case study, one of these headlines should make you shiver, while the other one fills you with joy… but do these really make you feel that way?
Most investors have difficulty telling the difference, and for good reason. The economics of mining projects are not always intuitive, and the true value of a resource can be elusive. Assessing early-stage projects and inferring eventual mine economics pose considerable challenges, often leaving investors to rely on rules of thumb for resource valuation.
Conclusion
In conclusion, the resounding truth remains: grade is king in the realm of mining. It is the concentration of valuable minerals in an ore body that ultimately drives revenue and profitability for mining companies. While opinions may differ on various mining topics, the importance of grade stands as an unwavering consensus.
However, evaluating mining resources goes beyond just grade. Factors such as spatial location and metallurgy play crucial roles in determining the economic viability of a project. Recoveries, influenced by the complexities of extracting and processing lower-grade ores, further shape the profitability of mining ventures. Polymetallic deposits, with their multiple economically extractable metals, add an additional layer of complexity to the equation.
The mining industry is a realm of complexity and nuance, where a thorough analysis of multiple factors guides success. Embracing this multifaceted approach will allow stakeholders to navigate the mining landscape with greater clarity, ensuring that grade truly reigns supreme in the pursuit of profitability.
For additional captivating articles on the intriguing world of mining, resource evaluation, and profitability, please visit my website https://www.juniorresources.com/
