Thought i rehash a post of mine from a while back...do your due diligence well and keep it in the vault.
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Another really important piece of information for investors to take note of. Though there are several bits of formula in here, i would just advise all investors to get an idea of what this all means in the grand scheme of things. This is what the management of a junior exploration/development firm does when deciding on incorporating the two different types of mining into their projects.
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ECONOMIC FACTORS : Stripping ratios and cut off grades for deciding on using underground mining or surface [open pit] mining
1] Stripping ratios
Stripping ratios refers to the tons of waste that need to be moved in order to produce one ton of ore. As such, to make a type of mining decision; one can just use basic concepts and look at the 'point' where we are indifferent between mining on the surface and mining underground.
So at that 'point', our costs of underground mining will refer to the following formula;
UG = OP + SR X SC
where; UG refers to the costs of Underground mining and development per ton, OP refers to the costs of Open pit mining SR refers to Stripping ratio SC refers to Stripping costs
With the above formula, the management can then solve for the allowable stripping ratio [i.e. SR];
SR = [UG - OP] ------------ SC
Comments;
Let's take for example that the management gets a stripping ratio [or SR] of 5 tons of waste per ton of ore or 5:1
What this figure tells the firm is that if the stripping ratio is LESS THAN 5, they are better off to be surface mining and if the stripping ratio is GREATER THAN 5 then they are better of to be underground mining. This information is then taken by the management and incorporated into their deposit modeling.
They will then look at the cross sectional interpretation of their orebody and assume some form of pit slope angle [usually it is 45 degrees]. Management will then move the pit slope back and forth till they satisfy the 5:1 pit ratio. With this important analysis, they are then able to distinguish the boundary of the underground ore to surface ore. This tells them the potential of undertaking the relevant types of operation needed to be economical.
This is simply defined as the lowest grade that will generate adequate recoverable value to meet the operating costs. Therefore, revenue per ton will equal costs per ton.
Now usually the management will include all costs i.e. All direct costs and perhaps an allowance for mining equipment that's going to wear out within the particular stripping campaign.
The following is the calculation of break-even cutoff grade;
RV - PC = MP, with MP = 0
where; RV refers to recoverable value PC refers to production costs and MP refers to minimum profit
The formula above is for a break-even case. The management will then have to calculate the recoverable value or RV.
GR x RE x [PR - SM] x 2000 = PC
where; GR refers to the grade of the orebody RE refers to the recovery PR refers to the price SM refers to the smelting costs and utilising 2000 pounds per ton
Comments;
Let's take for example, the management do the calculations and find out that their cutoff grade is 50g/t Ag.
What this figure tells management is that anything less than 50g/t Ag will NOT contribute to profit and the management will leave it in place.
Conversely, anything MORE than 50g/t Ag zinc will generate profit and the management will mine it and send it through the process.
With these two important economic indicators in mind, it is glaringly obvious that stripping ratios closer to 1:1 inadvertently give management massive leverage in adjusting their boundaries and thereupon increasing their resources [more profit and better economics].
With cutoff grades, it is also clear that the lower the cutoff grade, the more economically feasible and lucrative the operation becomes. This is because anything above the relevant cutoff grade becomes profit and flows into the company's bottom line. A higher cutoff grade is not a good thing to have.
Also, if silver prices increase, management will be able to move the boundaries and expanding the pit and therefore more reserves can be classified as ore. Additionally, if pit slope angles can be increased from 45 degrees to 60 degrees or above through geo-technical evaluations at the site, the company's reserves are going to move higher too as the cross sections increase with very little additional increments of stripping. So geo-technical indicators are also critical when the management gets the mine to production.
Many people confuse the cutoff grade with the grade of the ore body.....these are two different indicators. We as investors always want to see a high grade ore body and lower cutoff grades with stripping ratios closer to 1:1.
(20min delay)