Grade, Cut-off and the Arithmetic of an Open Pit

Stand on the rim of a modern open-pit gold mine and the first thing that fails is intuition about scale. The haul trucks at the bottom of the pit look like toys, and they are moving material at a rate that would fill a football stadium in a fortnight. The second thing that fails is intuition about content. Almost none of that rock contains gold in any quantity a person could see. The ore is a fine-grained grey andesite that looks exactly like the waste beside it, and the difference between the two is a number produced in a laboratory.

That number is the entire business. Everything else at a mine — the fleet, the mill, the tailings facility, the workforce, the community agreement, the closure bond — is machinery for turning grade into cash flow at an acceptable cost per tonne. To understand why gold mining behaves as it does through a price cycle, you have to understand the arithmetic that sits underneath the machinery.

Grams per tonne, and what that means physically

Gold grade is quoted in grams per tonne. A typical large open pit operates on ore in the range of roughly 0.6 to 2 g/t. One gram per tonne is one part per million: a single gram of metal — less than a wedding band — dispersed through a tonne of rock, which is about the load of a small pickup truck filled to the brim.

This is why the industry is a bulk materials business that happens to sell a precious metal. The operational problem is not finding gold; it is moving, crushing and chemically stripping tens of millions of tonnes of rock per year cheaply enough that a few parts per million pays for all of it. Every economy of scale in modern mining — the 400-tonne trucks, the semi-autogenous mills the size of houses, the heap-leach pads measured in square kilometres — exists to reduce the cost per tonne by fractions of a dollar.

Cut-off grade: where accounting becomes geology

Every tonne coming out of the pit is assigned to one of two destinations. If the value of the recoverable metal it contains exceeds the incremental cost of processing it, it goes to the mill and is called ore. If not, it goes to the waste dump. The grade at which those two quantities are equal is the cut-off, and it is calculated, not discovered.

The consequence is one of the least intuitive facts about the industry. When the gold price rises, mines do not simply earn more on the same ore; they lower their cut-off and mill rock that was waste last quarter. Total reserve tonnage rises, average grade falls, and the mine life extends — all without a new discovery. When the price falls, the process runs in reverse, and ounces vanish from the reported reserve of a deposit that has not changed at all.

This flexibility is also a trap. Milling lower grade to chase a high price fills the plant with rock that only works at that price, and mining companies have repeatedly destroyed value by doing it near a cycle top: the high-grade ounces get diluted into a longer, thinner mine life, and when the price retreats the operation is left with a stockpile nobody wants and a strip ratio it can no longer justify.

Strip ratio: the cost of getting to the ore

An open pit must be wide at the top to be deep at the bottom, because rock walls have to be cut back to an angle at which they do not fail. Every tonne of ore beneath therefore carries a burden of waste rock that must be removed to reach it. That burden is the strip ratio, and it climbs as the pit deepens.

A pit that starts at two tonnes of waste per tonne of ore may end its life at eight. Since the cost of moving waste is nearly identical to the cost of moving ore, and the waste generates no revenue, the strip ratio quietly sets the depth at which the pit stops. Mines do not usually close because the gold runs out. They close because the next slice of gold sits under too much rock.

Recovery: the ounces you do not get

Milling does not extract everything. Conventional cyanide leaching with carbon adsorption recovers something like 88 to 94 percent of contained gold from amenable ore. The remainder — locked in sulphide minerals, adsorbed onto carbonaceous material, or simply too finely disseminated — reports to the tailings and is gone for practical purposes.

Ore that resists leaching is called refractory, and it is an increasing share of the global pipeline as the easy oxide caps of known deposits are exhausted. Treating it requires pressure oxidation, roasting or bio-oxidation before leaching: capital-intensive processes that add hundreds of millions to a build and materially raise the price at which a deposit works. A large proportion of the undeveloped gold in the world is undeveloped for precisely this reason.

Reserves, resources and the honesty of the categories

Reporting codes distinguish resources — mineralisation with reasonable prospects for eventual economic extraction — from reserves, the subset demonstrated to be economically mineable under a stated set of assumptions. The distinction is routinely flattened in press coverage, which reports the larger number because it is larger.

• Inferred resource — estimated from limited drilling; cannot legally be converted directly into a reserve.
• Indicated and measured resource — denser drilling, higher confidence in grade and continuity.
• Probable and proven reserve — the measured or indicated material that survives a mine plan, a cost model and a price assumption.
• Stated price assumption — the figure that quietly determines all of the above, and which companies disclose but few readers check.

What all-in sustaining cost leaves out

AISC was introduced to replace an older cash-cost measure that flattered the industry by ignoring the capital required to keep a mine functioning. It was a genuine improvement. It is still not the cost of producing gold.

It excludes the initial capital that built the mine, which for a large greenfield project can exceed a billion dollars and is never recovered in the metric. It excludes exploration for the deposits that will replace the current one. It typically understates the full lifetime obligation for closure, water treatment and rehabilitation, some of which persists for decades after the last ounce is poured. A sector can report a comfortable margin over AISC across a full cycle and still, in aggregate, have returned less to shareholders than it consumed.

None of this is hidden. It is all in the annual reports, in the technical reports filed under the reporting codes, and in the closure provisions in the notes to the accounts. It is simply less quotable than a single dollar figure, and the industry has learned that a single dollar figure is what gets printed.