Marginal Cut-off Grade With a Half-Empty Mill
You are the planning engineer at an underground gold mine. The 1.20 Mt/y mill is fed by a 0.90 Mt/y sublevel stoping operation, so 300 kt/y of mill capacity sits idle. A 300 kt stockpile averaging 0.90 g/t Au sits on surface from a development drive that was already mined and paid for. Milling costs $28/t and site G&A adds $6/t. Metallurgical recovery is 92% and the mill has no throughput headroom beyond 1.20 Mt/y without a capital upgrade. Gold is $2,300/oz (31.1 g/oz). A neighbouring contractor offers 80 kt of 0.60 g/t material, but it would need rehandling onto trucks and stockpiling at $12/t. The underground mine is expected to ramp to 1.10 Mt/y within 18 months.
1. Calculate the cut-off grade that applies to the stockpiled material and decide whether it should be milled. Show your working.
Read the worked answer
Value of a recovered gram
- Gold price per gram = 2,300 / 31.1 = $73.9/g
- At 92% recovery = 73.9 x 0.92 = $68.0 per (g/t) per tonne
Marginal cut-off for owned, already-broken material Mining is sunk. Only the costs you incur by sending a tonne to the mill are relevant:
- Processing $28/t + site G&A $6/t = $34/t
- Cut-off = 34 / 68.0 = 0.50 g/t
Decision The stockpile at 0.90 g/t returns 0.90 x 68.0 = $61.2/t against a $34/t marginal cost: +$27.2/t, about $8.2 M over 300 kt. Mill it.
State the caveat: this is a marginal cut-off, valid only while capacity is idle. The 300 kt exactly equals the idle capacity, so the opportunity is time-limited - schedule it before the ramp-up and re-run the calculation when the mill is full.
2. Should the contractor's 0.60 g/t material be accepted? Revise the cut-off and explain any second-order effects.
Read the worked answer
Revised cut-off
- Marginal cost = 34 + 12 rehandle = $46/t
- Cut-off = 46 / 68.0 = 0.68 g/t
- At 0.60 g/t the material returns 0.60 x 68.0 = $40.8/t, i.e. -$5.2/t, about -$416 k over 80 kt. Reject.
Second-order judgement
- It is not a free add-on. It competes for the same 300 kt of idle capacity that the stockpile already fills, so this is a straight substitution - and the stockpile wins ($61.2 vs $40.8 per tonne of capacity). Taking the contractor material would mean leaving better tonnes on the ground.
- Break-even rehandle cost is 0.60 x 68.0 - 34 = $6.8/t, which is not credible for trucking and re-stockpiling.
- The only case for it is if the mill is grade-limited rather than tonnage-limited (check actual mill feed grade), or as a small blend to smooth feed grade during the ramp-up.
3. What goes wrong if the site keeps using $34/t as the cut-off once the mill runs at 1.20 Mt/y?
Read the worked answer
The site would be applying a breakeven cut-off to a capacity-constrained system, which is the classic value-destroying error.
- Once the mill is full, adding a tonne of 0.90 g/t ore means dropping a tonne of, say, 2.5 g/t ore. The real cost of the decision is the margin forgone on the displaced tonne, not $34.
- Formally the capacity-constrained cut-off is roughly (processing + G&A + margin forgone per tonne of capacity) / (price x recovery) - the cut-off rises until the marginal tonne returns what the ore it displaces would have returned.
Consequences of getting it wrong
- Low-grade material is scheduled into a full mill; head grade, ounces and cash flow all fall while the total tonnes look healthy.
- The stockpile is consumed at the moment it is least valuable (when the mine is producing at capacity) instead of being preserved as a buffer for mill shortfalls, ramp-up gaps and breakdowns.
- Correct practice: hold sub-cut-off material as optionality, and re-derive the cut-off each planning cycle against the current constraint.