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Break Even Analysis - How to Calculate the Cut Off Grade

Break Even Analysis - How to Calculate the Cut Off Grade

For conducting a mining project's break even analysis, you first need to know about the operational expenses (OPEX). When the OPEX is known, you can calculate the mineral's cut off grade, which is the break even grade, below which it is not economically viable to mine the ore. To find out how I come up with the cost price per tonne (OPEX) if a feasibility study isn't available, I refer you to the note at the bottom of this page.

Before I can calculate the cut off grade, I first need to show a basic equation which converts a troy ounce into grams per ton:

1 troy ounce = 31.1034768 grams per ton = 28.349523125 grams per tonne 

As you can see, the difference between a ton and a tonne is approximately 10%.

Then, you need to be aware of the following conversions:

1 ton = 2,000 pounds

1 tonne = 2,204.62262 pounds = 1,000 kilograms 
1 kilogram = 2.20462262 pounds 
1% of a tonne = 22.0462262 pounds = 22 pounds (rounded) 

I believe this last conversion is really convenient, because when I read a mining company's press release in which they announce a drill result of 2% copper, I now quickly know this equals to 44 pounds (lbs), or - assuming a copper price of $ 3 per pound - a mineral value of $ 132 per tonne. To learn more about how you can determine the mineral value per tonne, I recommend you to read the metal value page.

In the following example, you will find the hypothetical cut off grade for an ounce of gold (which is actually the break even analysis for gold mining):

Mining Costs per Tonne (OPEX)  Current Price per Ounce  Cut-Off Grade (ounces per tonne) 

Cut-Off Grade (grams per tonne) 

$ 150  $ 1,500  ($ 150 / $ 1,500 =) 0.10 ounce / tonne  (0.10 x 28.349523125 =) 2.835 grams / tonne 

I have also included an example to find the hypothetical cut off grade for a pound of copper (which is actually the break even analysis for copper mining):

Mining Costs per Tonne (OPEX)  Current Price per Pound  Cut-Off Grade (pounds per tonne) 

Cut-Off Grade (percentage per tonne) 

$ 33  $ 3  ($ 33 / $ 3 =) 11 pounds / tonne  ((11 / 22) x 1% =) 0.50 percentage /tonne 

 

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Note: When the cost price per tonne can not be found in the mining company's feasibility study, I kindly ask the mining company's management to give me their best estimate. In order to be extra conservative in my calculation, I normally apply a discount rate of 20% on the numbers received.

 

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About Jeroen Snoeks

Jeroen Snoeks - UndervaluedEquity.com

Jeroen Snoeks is the founder of UndervaluedEquity.com, a website for investors passionate about investing in undervalued stocks. Through UndervaluedEquity.com, he shares his experience and knowledge and will soon reveal his personal stock portfolio.


 
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