When a preliminary feasibility study for a mineral project is not yet complete, but you want to estimate the mineral deposit value, you can use the back-of-the-envelope calculation described in this article.
Before calculating the potential mineral deposit value, gather specific data about the ore body and individual drill results. This data can be found in the mining company’s press releases announcing their drill results. Ensure the data is announced according to the guidelines of National Instrument 43-101 (approved by a Qualified Person) or a similar international reporting standard to minimize the risk of fraudulent reporting.
Example for Calculating the Potential Mineral Deposit Value
In a company’s news release in which their drill are announced, you can find the following information:
- Average Grade: the concentration of a mineral in the ore body (in % or g/t) – 2% copper and 1.5 grams per tonne gold
- Strike Length: the length in which the mineralization is found in the ore body (horizontally) – 500 meters
- Depth: the depth in which the mineralization is found in the ore body (vertically) – 200 meters
- Width: the width in which the mineralization is found in a drill hole – 100 meters
- Specific Gravity: the density of the ore body (i.e., the rock) – 2.5
Whenever I conclude that (a part of) the required data is missing or incomplete, I always contact the mining company’s management directly to kindly ask them to provide me with the missing data. I also contact the management directly whenever I need some of the data provided in the mining company’s press release to be verified.
4 Steps in Calculating the Mineral Deposit Value
1. Calculate the Tonnage of the Mineral Deposit
|Strike Length x Depth x Width x Specific Gravity = “X” (in tonnes)||500 x 200 x 100 x 2.5 = 25,000,000 tonnes|
2. Multiply the Tonnage by the Grade
|25,000,000 x 2% copper =||500,000 tonnes of copper|
|25,000,000 x 1.5 grams per tonne gold =||37,500,000 grams per tonne of gold|
3. Convert Copper to Pounds and Gold to Ounces
|500,000 tonnes x 2,204.62262 =||1,102,311,310 pounds of copper|
|37,500,000 gram per tonne divided by 34.2857 =||1,093,750.4 ounces of gold|
To find out how I come up with the numbers 2,204.62262 and 34.2857, I recommend you to read the break even analysis page, on which I explained How to Calculate the Cut Off Grade.
4. Convert the Pounds and Ounces to the Corresponding Metal Value
|1,102,311,310 x $3.90* per pound of copper =||$4,299,014,1094|
|1,093,750.4 x $1,989 per ounce of gold =||$2,175,469,546|
*: prices as of March 17, 2023
As shown in the example, the deposit doesn’t have to be enormous in size (only 500 meters long, 100 meters wide and 200 meters deep) to contain a valuable deposit (approximately $6 billion worth of minerals).
However, it’s important to be realistic about this valuation. You cannot assume the entire ore body contains the same grade (i.e., 2% copper and 1.5 grams per tonne gold). Additionally, a typical ore body doesn’t fit into a right-angled box of three dimensions (strike length, depth, and width), as the shape and continuity of the minerals will vary in every deposit. It’s crucial to deduct a certain percentage of the calculated mineral deposit value to account for these variations. This percentage should ideally be your best estimate of the overburden and tailings combined from the right-angled three-dimensional box calculated in the example above. The result is the adjusted mineral deposit value.
You also can not expect that this adjusted mineral deposit value, is the price the mining company will receive from a buyer when this property is sold, as for instance, the costs of extracting the metal from the ore and other operating expenses are not deducted from the mineral deposit value. Therefore you could see a major or mid-tier mining company that wants to replace their mined reserves just pay a small percentage of this metal value for the deposit (i.e. 5% to 10%).
It’s important to note that the adjusted mineral deposit value is not the price the mining company will receive from a buyer when the property is sold. The costs of extracting the metal from the ore and other operating expenses are not deducted from the mineral deposit value. As a result, a major or mid-tier mining company that wants to replace their mined reserves might pay only a small percentage of this metal value for the deposit (e.g., 5% to 10%).