Dynamic Cut-Off Grade and its Application to

Maximize Mineral Reserves Inventory

Mario Alfredo Pacheco Lozano
Project Manager / Empresa Minera Los Quenuales S.A. /Glencore Peru
Jos Antnio Kurcewicz
Operations Manager / Minera Altos de Punitaqui Ltda /Glencore Chile
Pablo de La Cruz
Exploration and Mine Geology Superintendent / Minera Altos de Punitaqui Ltda /Glencore Chile

ABSTRACT
In the mining industry there are two events which lead to a mining business, the first is the
occurrence of ore and the second is the market condition (McIsaac, G. (2008). The most important
outcome variable to estimate is the cut-off to apply as a filter and quantify the amount of mineral
reserve technically and economically minable.
For open pit operations, the economic reserve around the resource block model is determined using
the Lerch-Grossman algorithm, or method of floating cones, which performs an optimization
process based on incremental prices, where only economic blocks within particular price limits are
defined as mineral reserves. This process is therefore a marginal cost analysis, which sensitizes the
mining cost (ore + waste), where higher value blocks absorb higher pre-stripping areas, and
marginal blocks only absorb the minor pre-stripping areas, giving a positive balance, thus leading
to the maximization of ore reserves.
Minera Altos de Punitaqui, operating an underground mine with the sublevel stoping mining
method, has quantified its mineral reserve inventory applying an analogy of the Lerch-Grossman
algorithm with marginal cost analysis, allocating a cut-off for each block. This process allowed us to
maximize our ore reserves.
The methodology, called the application of the dynamic cut-off, assigns a cut-off value to each block
of ore, according to the stage where the block is or will be each time the deposit is evaluated, and
assigns only remaining costs to be absorbed in any new status in the future. This demonstrates that
ore blocks with greater values support all the costs associated with the primary development phase,
and in many cases, the preparation of the exploitation phase. Consequently, the blocks adjacent to
these sectors should be evaluated only with costs that complement the process chain around the
mining business.
This methodology is applicable when there is cost management by activities, allowing the costs of
each mine process (primary development + preparation + mining + transport to metallurgical plant)
and subsequent processes to be defined, which will have an estimate of dynamic cut-off for each
block according to the status at each moment.

INTRODUCTION
In the process of estimating reserves, Minera Altos de Punitaqui follows the JORC code, while
applying an analogous method to the Lerch-Grossman algorithm, with the aim of applying it to
underground mining, specifically when using the sublevel open stoping method.
This method has allowed us to maximize our reserve inventory, increasing it by 12%, when
compared to static cut-off grade methods.
When applied to one block, the cut-off grade (COG) is the present net cash flow value generated,
which must be equal to the investment capital needed to exploit this block.
The relationship that can be attained with the Lerch-Grossman algorithm is:

For the exploitation of a block by open pit method, the COG must cover the mining cost
and marginal clearing, considering that adjacent and nearby blocks have already assumed
costs of clearing upper benches.

For the exploitation of a block using underground mining methods, the COG must cover
the cost of marginal mining development, considering that adjacent or nearby blocks have
already assumed the cost of primary development, and in some cases, the preparation
(Rendu, J. M. 2008).

METHODOLOGY
The mathematical principle can be explained using the Lane algorithm (Lane, K. 1988):

COG =

Where:

(cm + cp + f + i * NPV )
( p s) * r

NPV = f (COG )

For an Open Pit, with a Lerch-Grossman algorithm, in addition to the marginal cost of each mined
block, a capital or opportunity cost is added, which is the marginal cost associated with the
stripping of the block.

Figure 1 Open Pit Case

Block B also assumes the stripping cost of -2, since block A assumed a stripping cost of -4.

In our case, with Underground Mining, each mining block, in addition to its marginal cost, has a
capital or opportunity cost assigned, which is the cost of development and/or preparation.

Figure 2 Underground Case

MINED
ZONE

MINED
ZONE

Concluded Primary
Development

MINED
ZONE

MINED
ZONE
MINED
ZONE

MINED
ZONE

Concluded Primary
Without Primary Development

MINED
ZONE

For blocks that have already been prepared, the equation (i * NPV = 0) is equal zero, and hence
COG is less, since adjacent explored blocks have assumed the primary development and
preparation costs (Rendu, J. M. 2008).

CONVERSION OF MINERAL RESOURCES TO RESERVES USING DYNAMIC CUT-OFF

In order to apply this method, it is important to consider the following:

Have the mine infrastructure design according to the exploration method used in function
of the characteristics of the ore body, which will allow variables of primary development
ratios and preparation to be defined by sector.

Define mining recovery and dilution variables by sector. Ore grades, and subsequently ore
values, are adjusted with these variables.

Have proficient management of the Activity-Based Costing (ABC) method, which will
allow each block to be assigned a marginal and capital cost at each stage or process.

Table 1 Operation Processes

Primary Development
Preparation
Explotation
Transport to Plant
Plant Cost
Indirect Cost / Overhead cost
Concentrate Freight

(US$/t)
(US$/t)
(US$/t)
(US$/t)
(US$/t)
(US$/t)
(US$/t)

Figure 3 Cost according to Process

Profit
Financial

Unit Cost Analysis

Capex
Deductions
Smelting
Concentrate
Freight
Indirect
Mill
Transport
Explotation
Preparation
P. Development

10%
27%
5%

12%
7%

5%

100%
95%
90%
85%
80%
75%
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%

In terms of the following parameters, each mining block should be assigned a

status, which will change in time and in function of the depth and development,
hence the opportunity cost will decrease in time.

With this information assigned to each mining block, the COG for each block or
sector can be estimated.
Table 2 Technical and Economic Parameters
Parameter
Mining Dilution
Mining Recovery
Pillar Recovery
Primary Development
Preparation
Parameter
Explotation
Transport to Plant
Plant Cost
Indirect Cost
Concentrate Freight
Total Cost
Copper Price
Silver Price
Copper recovery
Silver recovery
Copper Conc.Grade
NSR Copper

Unit
%
%
%
(US$/t)
(US$/t)
Unit
(US$/t)
(US$/t)
(US$/t)
(US$/t)
(US$/t)
(US$/t)
(US$/t)
(US$/Oz)
%
%
%
(US$/tmf)

Amount
10
90
70
4.00
5.57
Amount
10.27
4.65
23.08
8.75
0.79
47.55
8,000
27
77
55
27
7,109

Table 3 Cut-Off-Grade Estimate (COG)

Parameter
No Primary Development (DP)
With Primary Development (DP)
With Prim. Develop. + Preparation

Type of
COG
COG 2
COG 1
COG 3

COG

Unit

Amount

1.07 %Cu
1.00 %Cu
0.89 %Cu

(US$/t)
(US$/t)
(US$/t)

57.12
53.12
47.55

COG 1 is applied to blocks (Rendu, J.M., 2008) that have already been through primary
development and need to go through the preparation stage and subsequent stages (DP).

COG 2 is applied to blocks that have not been through primary development or
subsequent stages (SDP).
COG 3 is applied to blocks that have been through the primary development and
pereparation stages, but have yet to undergo the exploration stage or subsequent stages (DP+ P).

RESULTS AND DISCUSSION

With the following parameters assigned to each mining block, one can proceed to convert all
indicated and measured resources to proven and probable reserves.
From a 5x5x5 block model, new grids and blocks (measuring 30m high x 10m wide x potency) are
generated, which are the units of exploration that must be greater than the Cut off Grade (COG) in
order to be considered reserve.

Table N 4
Block

Estimate of Reserves Applying Dynamic Cut Off Grade

Tonnes(M)

CuT (%)

CuS (%)

CuI (%)

Ag (g/t)

Au (g/t)

Sector I

1.92

1.34

0.08

1.26

4.82

0.01

Sector II

4.30

1.44

0.08

1.36

9.13

0.02

Total general

6.22

1.41

0.08

1.33

7.80

0.02

Tabla N 5
Block

Estimate of Reserves Applying Constant Cut Off Grade

Tonnes(M)

CuT (%)

CuS (%)

CuI (%)

Ag (g/t)

Au (g/t)

Sector I

1.69

1.37

0.08

1.29

5.00

0.01

Sector II

3.79

1.47

0.08

1.39

9.39

0.02

Total general

5.48

1.44

0.08

1.36

8.04

0.02

where:
CuT (%) Copper content;
Cu S (%) Copper soluble;
CuI (%) Copper Insoluble;
Ag (g/t) Silver content;
Au (g/t) Gold content.

CONCLUSIONS
This methodology allowed us to increase our reserves by 12.0% in tons of mineral and 11.4% in
metallic fine tons, increasing the life of the mine (LOM).
The total reserve value increased by 11.14% in tons of fine copper which is equivalent to an
additional 46.6 million dollars in the companys cash flow.
This dynamic cut-off grade estimation methodology assigns a cut-off value to each mineral block,
according to the stage in which it is found, each time the deposit is evaluated. This block is only
assigned the remaining costs, which will be absorbed in a future state.
This demonstrates that ore blocks with greater values support all costs associated with the primary
development phase, and in many cases, the preparation of the exploration phase. Consequently, the
blocks adjacent to these sectors should be evaluated only with costs that complement the process
chain around the mining business (Camus, J. P. 2002).
This methodology is applicable when there is cost management by activities, which allows one to
define the costs of each mining process (primary development + preparation + mining + transport to
metallurgical plant) and subsequent processes, which will have an estimate of dynamic cut-off for
each block according to the status in which it is at every moment.

REFERENCES
George McIsaac (2008), Strategic Design of an Underground Mine under Conditions of Metal Price Uncertainty
Jean Michel Rendu. (2008), An Introduction to Cut-Off Grade Estimation
Juan P. Camus (2002), Management Of Minerals Resources Creating Value In The Mining Business
Kenneth Lane (1988), The Economic Definition of Ore: Cut-Off-Grades in Theory and Practice