Lecture Outline - Ore Reserves

A) Preliminaries
1) Delineation: Exploratory Drilling
Development Drilling

2) Core Logging, Sampling and assaying

3) Physical Definition of the deposit:

Collar information
Downhole surveys
Lithology, Structures
Cross-sections, longitudinal sections, plans

4) Definition of ORE

B) Classification of Ore Reserves

Proven, Probable, Possible
Measured, Indicated, Inferred
Tonnage and Grade
Compositing

o
Lecture 3 - Ore Reserves

Introduction
Once a target has been established, either by geochemistry, geophysics, or geological
deduction, the next step is delineation.
1) • Delineation: - is the evaluation of a target
- typically involves drilling ( diamond drilling, rotary or percussion)
- exploratory drilling: no specific guidelines on hole spacing, diameter
or type of drilling because this depends on the
nature of the target and of the host rocks.
goal: determine if a detailed drilling program is
warranted.
rule: exploratory drilling stops when there is
reasonable assurance that an economic deposit
exists.
c.~. .C
o
\- _ .' •

_ development drilling: r (--

goal: to provide a three dimensional picture of the

mineralisation, so that tonnage, grade and
minability can be assessed.
how: Drill a fence line, ie, a series of regularly spaced
holes along a line perpendicular to the long axis
of the deposit, where the best results were
obtained during exploratory drilling. Repeat the
pattern two or three lines on either side until
barren ground is encountered.
If there is too much variation between sections,
then drill between sections. Ie, if computations
using intervening sections affect the grade, then
they are necessary.

o
-.

Cut-off Grade (COG)

The ore grade yielding an ore value equal to the
operating cost on a unit basis.

Costs included in operating cost:

• stoping
• transportation
• milling
• smelting
• refining
• selling
• administrative (administration, head office,
exploration, etc.)

Mineralized material greater-than-or-equal-to this

grade is ore; less than'this grade it's waste.

o
 )
)

ID.D.H. No. .\
FALCONBRIDGE LIMITED
o METRIC o IMPERIAL DIAMOND DRILL CORE RECORD PAGE ••. OF ...
-
AZIMUTH DIP NORTHING EASTING ELEVATION I DATE COMPLETED ILOGGED & VERIFIED BY I SECTION I DEPTH SIZE IPROPERTY

I I I I I
D.O. SETUP LOCATION REMARKS

DEPTH
I

DIP

AZIMUTH
NR FAR 'it S~!!E~No.. 'it ASSAYS (0/1 AND OR DESCRIPTION
FROM TO ROCK o ~KS CA
CA CA t-f';j-
LENGTH
NI Cu Co S Au P Pd Aa

~
Figure 3.-Vertical Section across the Orebody, showing
Generalized Ore Limits.
2) • Sampling and Assaying:

When core is available from diamond drilling, it is first logged. This means that a careful
record is made of: -rock type and lithologic description
-texture, weathering
-structure
-alteration features
-depth & length of core run
-condition of core, recovery
For more thorough geotechnical logging: -joint orientation, frequency and spacing
-relative strength of rock

After logging, mineralized zones are split along the axis of the core; one half remains in
the core librairy, and the other half is split into sample lengths (about 1m) and sent for
assay. There are several assay techniques: -wet or chemical assaying (leaching &
titration)
-fire assaying (roasted, get a button)
atomic absorption (chemical treatment
-puts minerals in solution and analysed
by atomic absorption)

4
5) • Classification of Ore Reserves
Ore reserves are classified in order to give the user (geologist, mining engineer, financial
analyst...), an estimate of the confidence level in the results.
Two classification schemes are in use at the moment: the original categories of
1)PROVEN, PROBABLE, POSSIBLE and INFERRED.
2)MEASURED, INDICATED and INFERRED.

1) PROVEN: historically, ore that is "blocked out", ie, measured, sampled, and assayed
on four sides. (Pamour definition: blocks outlined by drifts above and below, raises
through the blocks, and some drill holes).
PROBABLE: blocked on three sides. (Pamour : only partly developed).
POSSIBLE: blocked on two sides. (Pamour : only DDH, and a x-cut through the ore for
example)
INFERRED: ore grade material known only on on side.

2) MEASURED : " ore for which tonnage is computed from dimensions revealed in
outcrops, trenches, workings, and drill holes, and for which the grade is computed from
the results of detailed sampling. The sites for inspection, sampling and measurement
are so closely spaced and the geologic character is so well-defined that the size, shape
and mineral content are well established." (White Pine Michigan: sufficient drilling is
about 1000ft spacing).
INDICATED: " ore for which tonnage and grade are computed partly from specific
measurements, samples, or production data and partly from projection for a reasonable
distance on geologic evidence. The sites available for inspection, sampling and
measurement are too widely or otherwise inappropriately spaced to outline the ore
completely or to establish its grade throughout." (White Pine, Michigan: sufficient drilling
is about 3000 ft spacing).
INFERRED : "ore for which quantitative estimates are based largely on a broad
knowledge of the geologic character of the deposit and for which there are few, if any,
samples or measurements. "

4
I~) 1 ~
'- .' \...;'
-, \\
(._ t-:x..'j r \ \L
. '\Cbc u""'- .

In Canada most mines still use the older system of proven, probable and possible, but
in the USA where tabular, vein-type deposits are rare, people have mostly adopted the
USBM classification of measured, indicated and inferred.
People have however, felt the need for subdivision of these categories, to further reflect
the level of knowledge and confidence in the reserves. One major company uses the
sub-categories: developed, semi-developed and undeveloped, to further rank proven
reserves. "j \ ....
~. ,_\.:-... -~.7.1-
,~c:>,,-'r<""'> ()·O...:>-\..~ t-r'-c·.. . c·y, -_ Vvli
. \ "
Sl'~
.,
LC .. ,JJ...c. _..:...... .....
.1, 'V'
t .. L<.:..\;' ~\'\..Z..........L.~Ci\~ "
'.
v..;
,'.
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ll...\...~.'-~···'---v
\... (, ~ .. \ .

• (" .~'---~ ~-'L~ _.<.

_~'<'\,J...' .'-' ~c . , f'\

For some operations, particularly gold mines where the geology is extremely complex,
it is very difficult to adopt these classifications. They often generate their own. For
example, in 1948, prior to the start of production, the staff at Giant Yellowknife could not
call anything proven, even though it had been thoroughly drilled. Since it was
considered "impolitic" to call it only possible, and still go ahead with the project, they
proposed a new terminology: "Estimate of Developed Ore: Estimate of available ore (ie,
above a production level) outlined by diamond drilling in detail sufficient for stope
layouts."

In most cases, and particularly in base metals, by the time the exploration program is
finished, and the orebody is ready for development, there are generally two categories
of ore reserves: geological reserves and minable reserves.C$L. r\',~""':'" "::'»." -

1) Geological reserves mayor may not have been estimated using a cut-off grade.
2) Minable reserves were definitely determined with a cut-off grade, and also with mining
parameters such as : -minimum mining width
-minimum dip angle
-permanent pillars (Campbell Chibougamau which mined
under a lake, estimated a 50' crown pillar as not in the
reserves, and a further 30 feet as only probable.)
-metallurgical problems

5
 ORE RESERVES/MINERAL RESOURCES Falconbridge Limited
December 31, 1995
-his new classification system is compatible with the recommendations made by the
j Hoc Committee on Mineral ResourcelReserve Classification of the Canadian Institute
of Mining, Metallurgy and Petroleum.

Reserves/Resources (11

Sudbury Kidd Creek Collahuasi Raglan

Division Division Falcondo (2) Project (2)(3) Project

Percentage Ownership 100% 100% 85.26% 50% 100%

Reserves (rhousand tonnes)

Proven Reserves 14,777 24,551 29,199 4,488
Probable Reserves 10.762 2,488 1,070 1.983,942 8,834
Toral Proven/Probable 25.539 27.039 30.269 1,983,942 13,322
Possible Reserves 12,847 5.133 22.057 5.960
Total Reserves 38,386 32.172 52.326 1,983.942 19,282
Average Grades (principal metals only)
Proven and Probable Reserves
Nickel (%) 1.67 1.73 3.18
Copper (%) 1.55 2.79 0.83 0.87
Zinc(%) 5.53
Silver (grams per ronne) 69
Possible Reserves
Nickel (%) 1.25 1.72 3.04
Copper (%) 1.18 0.83 0.90
Zinc (%) 10.59
Silver (grams per tonne) 80
Resources (rhousand ronnes) (in addirion ro Reserves)
Me:lSured Resources 66
Indicated Resources 134 1.625 1.123.931 414
~
•nferred Resources 3.361 17,169 967
fatal Resources 3.561 17,169 1.625 1.123.931 1,381
Average Grades (principal merals only)
Measured. Indicated and Inferred Resources
Nickel (%) 1.59 1.32 2.62
Copper (%) 4.84 1.85 0.82 0.75
Zinc (%) 8.43
Silver (grams per ronne) 207

Notes:
1. All ore reserves are at December 31,1995. The ore reserves at the Sudbury Division, Kidd Creek Division, and Collahuasi are mineable
ore reserves. The are reserves at Falcondo and the Raglan project are geological ore reserves. The mineral resources are geological resources.
2. The ore reserves. at Falcondo and the Collahuasi project are shown on a 100% basis.
3. Falconbridge and Minorco have each agreed to sell a 6% interest to a Japanese consortium. This transaction is expected to close by mid-1996.

D Mineral resource - a deposit or concentration of minerals for which there

is sufficient sampling information and geologic understanding to outline
Possible reserve - determined from limited sampling information:}jnd
reasonable extrapolation. It does not stand alone but is an extension
a deposit of current or potential economic merit. of or addition to proven or probable reserves.

tAl Reserve - that part of a resource which can be mined at a profit under cur- easured resource - is very well established and the person responsible
li rent or reasonably anticipated economic conditions which are specified. In for the estimate has no reasonable doubt that any variance from the stated
addition to the information required for a resource estimate, technical, oper- grade and tonnage would not materially affect an economic appraisal
ating, legal and financial factors must be considered in a reserve estimate. which is based on it.

Proven reserve - that portion of a measured resource for which technical
and economic factors have been established at a high confidence level
and is generally restricted to that part of a reserve which is being devel-
oped or mined or for which there is a detailed mining plan.
Probable reserve - part of an indicated resource for which economic
viability has been demonstrated at a confidence level which would
;ustify a commitment to major expenditures.
Indicated resource - the part of a resource for which grade, tonnage and
other characteristics such as geology and continuity are so well estab-
lished that it can serve as a base for decisions on major expenditures.
Inferred resource - when sampling data and geologic understanding
are only sufficient to outline a deposit of potential economic merit.

25
 Increasing

Technical and Economic Assurance

I G
n e
c 0
r 1 Resource Reserve
e 0
a g
lr,VI;
s J.
J. C
n
f~..k/d '
g A
s
S
U
(ed' /
r
a
n
c
e
..
Fig.2 2 Axis System
 Exploration
Information

IResourc,es IReserves
Inferred

01-

Indicated ~~----------~. Probable

I
+
Measured ~.----------~. Proven
f
I
Economic, mining, metallurgical,
marketing, environmental, social and
governmental factors may cause material
to move between resources and reserves
6) • Ore reserve parameters

a) Tonnage: in metric tons, or tonnes, (1000 kg)

in short tons (2000 Ibs)
in long tons (22~0 Ibs)
b) Grades: in % metal (base metals)
troy ounces per ton, pennyweights per ton I or grams per tonne (precious
metals)
In order to obtain reliable estimates of ore reserves, one needs to collect, treat and
document larges amounts of data: - accurate assay information
- plans and sections
- details of ore control
- tonnage factor
- applicable cut-off grade
- potential mineral recovery
- minimum mining width
- anticipated dilution

6
Factors affecting the GRADE:

.'9;..W'd' €.
- ACCURATE ASSA-Y- INFORMATIOn: this is vital to the project and is dependent on
sample frequency, location, collection, preparation and analysis. This is not typically the
realm of mining engineers. Get experienced and conscientious people to work for you.
Types of samples: diamond drill core (split and assayed)
channel sampling (not as common now)
grab samples from scoop buckets
rotary drill cuttings

- ASSAYS should be done by at least two independent laboratories to gain confidence

(maybe 10% of all samples).

- Sometfmes- a STATISTICAL ANALYSIS of the samples is carried out. One problem

with this, is that samples from an orebody are rarely random, (ie, statistically
independent of each other) and distributions are rarely normal. (show fig. 1 from
Underground mining methods handbook, p20). These are the basic assumptions of
classical statistical techniques.

- DISCOUNTING IRREGULAR HIGH GRADES : If an anomalously high assay is

encountered, especially in gold and silver deposits, these assays are "cut" to either a
standard value, or to the nearest neighbour. This practice is common, and avoids
unrealistic expectations.

- CUT-OFF GRADE: "minimum grade which can be mined at a profit under economic
conditions existing at a particular point in time." The cut-off grade can thus vary in time
depending on prices, operating costs, taxes, etc...

7
 100 100

c.'"'"
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N= 380
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c.
In

E
0
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N =190

... ... 0 I
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I Fig. 1. Typical sample distribution. (i.
\
0 0
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0 1.0 1.5 0 typical of some stratiform and massi\
20 40
Grode - % Cu sulfide deposits. (b) Normal distributio.
Grode - % P2 0 5
(a) ( b) low variability, found in certain industri.
mineral, iron, and manganese deposits. (c
Lognormal distribution, common in mar
100 100 molybdenum, tin, tungsten, and precioL
metal deposits. (d) Bimodal distributic
which may be produced by sampling tw
'"'" ~'" distinct ore types, or sampling across
c. N = 320 Q,
E
E \ zonation boundary in the mineralizatior
0 0
en I
en
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Grode-O /T Ag
(c) (d) 2

Level I

I:ll:ll:ll:ll:l
u uuuL:J Sublevel

~r-:ll:ll:ll:l
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250 £
u u L:J L:J L:J 00 E
Level 2

o 50
1

Fig. 6. Longitudinal projection of an ore block. Metric

equivalent: 1 ft X 0.3048 m. =
 Factors affecting TONNAGE

Two things are required for tonnage calculations, VOLUME and TONNAGE FACTOR.
- VOLUME is obtained by multipying the area of mineralization outlined in plans and
. sections, by the thickness of material above cut-off grade. The area is measured either
by dividing it into small areas, or by using a planimeter, or nowadays, by digitizing it. In
all cases, measurements should be checked at least three times. The average is then
used as the final measurement.

- TONNAGE FACTOR converts from volume to tonnage.

In the metric system, it is simply the S.G. of the material: m 3 x S.G. =Tonnes
In the imperial system, it is expressed as cubic feet I ton: Fe I TF = Tons
TF = 2000 Ibs/torl-'
(S.G. x 62.5 Iblft3 water) = Ib/fe of ore

Other factors affecting reserves :

- ORE CONTROLS : these are geological considerations. When preparing sections and
plans for reserve estimates, one should NEVER project thrrebody across faults,
geological boundaries, fold axes, contacts, etc... , until there is strong evidence that this
can be done. The nature of the mineralization contacts , ie sharp or gradational,
presence of ore shoots, metal zonations, will become more apparent as the delineation
work progresses. These aspects, although determined entirely by site geologists, are
crucial to the mining engineer.

- MINING and METALLURGICAL RECOVERY : Metallurgical recovery is used in the

calculation of a cut-off grade. Achieving a better mill recovery is like raising the grade
of the deposit.
Once the orebody' s geometry is relatively known, the selection of a mining method can
commence, and with that an estimate of MINING RECOVERY and DILUTION can be
established.

8
METHODS OF CALCULATION

There are a few traditional methods for estimating ore reserves tonnage and grade.
These are: -calculation by mining block "-.-'j

-calculation by polygons
-calculation by triangles
? ["
-calculation by sections
There are also nowadays, sophisticated modeling tools available in commercial
packages. These can be grouped into three broad categories: -gridded model
-block model
-cross-sectional model
Companies involved in base or precious metals generally start with a preliminary
estimate, using the polygonal method. This is then refined using typically the cross-
sectional method with or without grade modeling. Many companies are now trying to use
block models of their deposits. Commercial packages, such as Datamine offer such
possibillities

Calculation by mining block:

This method was more prominent in vein type deposits. The vein is divided into blocks
which are assigned a width and an average grade from development work. A weighted
average gives the !he grade of the deposit.

9
 Calculation by polygons:

As stated earlier, this is still a popular first approximation when drill-hole data is
available. Polygons are constructed on plans, longitudinal or cross sections. The
method assumes that the area of influence of any sample point, extends half way
to the adjacent sample points. The procedure for constructing polygons is as follows:
a) connect lines between drill hole, b) draw perpendicular bisectors of lines between
adjacent drill holes, c) draw polygon.
Each polygon is then assigned the thickness and grade of the sample point within it.
A twist of the method is to assign a circular area of influence to each drill hole and
proceed in the same fashion.
Proven and probable reserve categories are often based on the "tightness" of the drill
pattern, or in other words, the area of influence of the drill holes. TThis can be
graphically represented by circles of various diameters on which each polygon is
overlain. If the polygon lies completely within a circle of a certain diameter, then it is
classified as either proven or probable.

Calculation by triangles

This is a modification of the polygonal method. Triangles are constructed simply by

linking adjacent drill holes. Each block is then assigned a grade and thickness which
are averages from the three sample points at the apices of the triangle.

10

------
0)
o o

d)
\ \ .., /l o
..x··········;y/
\ .

~
;'\.... ~" ;< /.:.
.
.~..... //

o
Fig. 9. Diamond drill-hole plan of the
8onanz~
.. .. ' "- Copper deposit. Metric
...
' "-
'0 o equIvalent: 1 ft X 0.3048 = m.

.:{

Fig. 7. Construction of polygons. (a) Drill-hole plan. (b)

Connecting lines between drill holes. (c) Construction of
perpendicular bisectors of connecting lines. (d) Construc-
tion of final polygon.

Table 9. Ore Reserves for the Ojala Copper Deposit

Triangle Drill Holes Tons' Ore Average Grade Tons x Grade

T-1 0-1, 0-4, 0-5 26,400 0.91 24,024

T-2 0-1,0-2,0-4 26,400 0.94 24,816
T-3 0-2, 0-3, 0-4 22,500 0.91 20,475
T-4 0-3, 0-4, 0-7 22,260 1.23 27,380
T-5 0-4, 0-6, D-7 18,550 1.15 21,332
T~ 0-4, 0-5, O~ 27,260 0.79 21,535
T-7 ~,0-7, 0-10 26,240 1.07 28,076
T-8 0-7, 0-9, 0-10 40,500 1.15 46,575
T-9 0-3, 0-7, 0-8 24,418 1.20 29,301
T-10 0-7, 0-8, 0-9 28,917 34,411
263,445 277,927
Tonnage 263,445 st =
277,927
. Average grade = = 1.05% Cu
263,445
• Metric equivalent: 1 st x 0.907 184 7 = t.

0-8

_ _ _"'0-9

100 feel

Fig. 10. Diamond drill-hole plan of

the Ojala copper deposit. Metric
equivalent: 1 ft X 0.3048 = m.
 /' '- /
" /
\

\ 1.95
/ '2t--..-
Q
/ 2.20
.........
_vl'-:'/,\ 12'
"
/9,
40
/ I
~
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10'
- ~1~141-

/ "
/
'\

\ /
\ /1. 98
45;-0-::13!- /
/
100 50 o SeQ I e 100 150 200 Feet
! :=::J

Figure 3.-Polygonal Block. Reserve Calculation.

Calculation by Section :
This method is based on regularly spaced cross sections, which define a block of ore.
- ~-- ... -------
Each section is divided into blocks, and an average grade is calculated. The total
volume is then calculated by multiplying each section by its distance of influence, which
is the section spacing, if it is regular.
There are various ways of interpolating between sampling points, either within a section
or between sections. The two simplest are: a) rule of nearest point (point is assigned
the value of the nearest DDH
intersection or section)
b) rule of gradual change ( linear change
of values between holes and between
..... '
sections)

These methods and variations of them have been used for many years, with success.
There is often however, a discrepancy between the tonnage and grade milled and the
original reserves. This is generally accounted for by adjusting the dilution and mining
recovery factors.

Quote from a geologist of Bralorne mine, B.C.,: " The staff of any gold mine that has
produced for 30 years, has been worried for 30 years, because calculated ore reserves
do not agree exactly with the ore mined."
South Africans have looked at all sorts of factors to try and explain these discrepancies
: .~athematical bias, underground sampling bias, assay problems, unaccountable
underground and surface losses of gold. This research has improved the technical status
from "factor of ignorance", (Mortimer, 1949), to one involving a "mine call factor", also
referred to as "assay plan factor". Finally people now call this dilution and use this
unsubstantiated number to match production with ore reserves.
So now we have the question: WHAT IS DILUTION??
Is it an adjustment to the ore reserves, or is it a true eftimate of waste material which
either has to be broken to recover the ore, or is mined unintentionally.

11
Fig. 8. Polygon classification by circular area of influence.
Left, incorrect method; right, correct method.

w T-I E

SECTION 100 N

o 50
1~=~=~!
Scole In f •• ,

w E

SECTION 200 N

Fig. 11. Cross sections of the Big Rat copper vein. Metric
equivalent: 1 ft X 0.3048 = m.
With computers becoming available and accessible, more sophi~ticated estimation
methods were devised. Ore reserve estimates give a fairly accurate picture of the total
amount of ore material. This is useful for preliminary work, and even for the feasibility
study, however, for daily production needs, one would like to be able to model the
orebody more accurately. This is why 3 0 modeling was developed, and although not
easy, it can provide a more detailed picture of individual mining blocks. There are three
broad categories of geological modeling packages:

Gridded Models

This method is useful with bedded, essentially 2 0 deposits such as coal or phosphate.
The gridded model is a set of two dimensional matrices, each representing a surface or
a value. These surfaces or values are obtained by interpolation from a set of irregularly
spaced data.

Block Models :

In a block model, the deposit is divided into regular blocks of given dimensions. Each
block is defined by the coordinates of its centre, and it carries a grade which is obtained
by computing the influence of all samples within a set distance.

Cross Sectional Models:

This is basically the same as outlined above.

12
Lecture 3 - Geostatistics,Geological Modeling and Cut-off Grade

1) Introduction
These are special topics which deserve special attention for different reasons.
The application of a cut-off grade and the economic analysis that follows are what turns
a mineral resource into ore reserves.

To review:

ADVANTAGES OF CLASSICAL METHODS

1. Easily applied, communicated and understood
2. Easily adapted to all orebodies
3. Easily adjusted

DISADVANTAGES OF CLASSICAL METHODS

1. Where high grades are assigned over large volumes, these methods can lead to
overestimation, (typically overestimate grades and underestimate tonnage). This is why
it is common practice to cut high grades and limit the extent of polygons.
2. The weighting by area or volume is arbitrary and is not mathematically optimal.
3. Constant grades are assumed over polygons which may not be realistic for some
deposits.

13
Many mining companies are turning to geological models and geostatistics to improve
their ore reserves estimates. Many packages are now available on the market and they
all offer various estimation or modeling tools.
Commercial packages popular in mining : Datamine (USA)
Gemcom (USA)
Vulcan (USA)
Med-Systems (USA)
Mrcfumine (Australia)
Geostat (Montreal)
These packages offer the entire range of modules, from drill-hole log entry, section
drawing, traditional and more sophisticated reserve estimates, to open pit and
underground mine design. Many of these programs were initially designed for geology
and / or open pit design, and are weaker in underground mine design.

2) What is Geostatistics ?
Geostatistics started in France, in the 1960's as an ore reserve estimation tool. It is
based on work by Georges Matheron and Danie Krige (from South Africa).
Geostatistical methods are smoothing methods involving the following steps:
• Generating a variogram
• Fitting a model to the variogram
• Using the variogram to determine search areas for assigning grades
• Smoothing the data on teh basis of the surrounding values

As previously mentionned, traditional methods (polygonal, cross-section, etc.. ) normally

give a good global estimate of average tonnage and grade, but not a reliable block by
block reserve inventory with an indication of confidence in the estimated grades (ie,
estimate of probable error at the desired level of confidence).

14
Standard deviation for normal distribution, random values:
Confidence limits Limits of M
68.26% x + u(x) > M > x - u(x)
95.46% x +2u(x) > M > x -2u(x)
99.73% x +3u(x) > M > x -3u(x)

The reliability of these estimates depends on the quality and number of samples, and
their distribution in space, but also on the continuity of the mineralization.
Classical statistics, as was said earlier, assume that samples are randomly selected and
independent of each other. This means that samples taken a metre apart should be no
more correlated than samples taken on opposite sides of a deposit. This is in fact, not
true and we don't want it to be true, because we want closely spaced samples to be
correlated, to indicate some measure of continuity in the mineralization.
Unlike classical statistics, geostatistics recognizes that samples in a deposit should be
spatially correlated with one another, and that closely spaced samples will probably not
be independent.
The technique is based on the idea of "regionalized" variables, ie, variables associated
with a volume (called "support" in geostatistics), and a position in space. It is thus
possible to understand the interrelationship between grade and geologic controls.
The amount of spatial correlation or continuity is determined by the primary geostatitical
tool: the VARIOGRAM.

15
RANGE:
The distance h at which the variogram levels off is called the range. This distance
reflects the concept of "Area of Influence", Beyond this distance, sample pairs are no
longer correlated and thus independent. (o~t.v"",,-,-,,,, ~~ <)f'-~: 2h ~ 3/4 ~ ~')

SILL: (C+C o)
This is the plateau value of the variogram function y(h). It actually represents the
variance of the assay values, because at a distance r > a, the sample distribution is
essentially random.

NUGGET EFFECT:
Co is the intercept of the variogram function at h = O. It is a measure of the dispersion
of assay values at very small values of h. This effect is particularly common in precious
metals.
A high nugget effect value with respect to the sill, is an indication that the mineralization
is either poorly disseminated, highly disjointed (ie, post mineralization discontinuities
have been ignored), or that sample preparation and assaying procedures were
inadequate.

DIRECTIONAL ANISOTROPY:
Since variograms are computed in various directions, they can lead to a much better
understanding of the grade distribution within the deposit.
The construction and interpretation of variograms are not trivial matters. This work
should be done by the mining company's geologists, since they possess the most
intimate knowledge of the deposit, and they can benefit the most from the information
contained in the variograms.

17
THE VARIOGRAM
a) The first step is to determine potential geologic controls on the grade of the
mineralization, either through geological deduction, or with the help of statistics,
correlating grade with rock type, alteration, fracture density, etc...

b) Then comes the computation of variograms within each geologic domain, identified
in a). The variogram will numerically describe the way in which an orebody parameter,
like grade, thickness, etc.. , is spatially correlated.
The variogram function to be plotted is:

n
y(-h) = 1/2n Li=1 [ Z(x i) - Z(x j + h)]2
where Z(x i) is the value of the regionalized variable (grade) at point Xi ,and Z(x j + h) is
the grade at another point, at a distance (h) from Xi' n is the number of sample pairs.
The vector notation indicates the directionality of the equation. All samples are taken
in the same direction, either along strike, across strike or down-dip, or in the direction
of maximum fracturing, to name a few possibilities. These directions would have been
identified in a).
The process is repeated for different values of (h), and then plotted as y(h) vs h. The
result is called an experimental variogram because it is based on samples.

c) Interpretation of the components of the variogram, increases the knowledge of

characteristics of the grade distribution. There are at least two models the De Wijsian
and the Transitive model. The parameters below are from the Transitive model.
r:,(3 h)

16
1. Conlinuous Type -
Parabo.ic behaviour of the '6(r)
variogram near its origin.
Excellent continuity of the
variable. Y(h) twice differen-
tiable in h=O. Very few de-
pos: show such excellent
:ity of mineralization,
is very similar to that ...,:::-----h c'
i.CONTINUOUS TYPE
01. ~se II in Figure 2 of this
paper.
2. Linear Type - lL-_ _--..:._.-.J r
Tangent oblique to the ori- r--a--i
gin. Moderate continuity of F' 13 _Diagrammatic example of a transitive
the variable. Y (h) is conti- v~;~:ram' obtained from assay v~lues distribute1
nuous near the origin but Y (h) in numerous rnicrobasins. The vanous elements 0
not twice differentiable. Ma- this variogram are its range (a), nugget effect
ny base-metal deposits show
this degree of mineralization .-------h
(Co), pitch (C) and sill (C' Co C). = +
2.L1NEAR TYPE
continuity. 0.25

3. Nugget Type -
Discontinuity at the origin.
Very poor continuity of the
variable. Y(h) does not tend
toward z e r 0 with h. This
type of dispersion is charac-
teristic of gold deposits,
which generally show a pro-
Y(hlL":h :>
0.20

0.15
~~~~~~~~~o/~:______

"
2 (selected

::.,.;:o...,...---........
"SPh.e~_c.a_I'.'_va_ri.oQ.ram

,...-__ ~.. -~::-::-"f=+~~~-~~·:1-;;<":';::;·1'-<~

·•.... ·-1
M
-~--"'~...".,,-:'"
Model.

>.:::~: . .
lJ
nounced nugget effect rep- 3. NUGGET TYPE
~~:~o :
U

resented by the discontinuity ,.e

~
at the origin. 0.10 / ./ I EXPERIMENTAL VARIOGRAMS
.' .. I D - - a NE -sw Direclion
.1. Random Type
Extreme discontinuity of the / fY'-', / "....
0' I • - -. NW-SE Direction

Y(hl=h
0.05
variable. Typical of pure ran- /,./' I + __ + Averoqe Horizontal
dom distribution of the vari- I
able and very similar to the lQet Eltecl_ I '" - - '" Vlrtical
'O_02(%Cuj1I-----
0.00 -l.- RanQI' 175 m - - - - - - +---l
.I
distribution shown in Case I, ~

Figure 2, of this paper. Re- o o o

latively rare in ore deposits, o o o
N .,o
perhaps for certain

k=
f ............. 4. RANDOM TYPE Distance H (meters)
I. mpurities or trace ele-
nH: ... ~.
Fig. 12. Variograms for the sec·
5. Transitive Type - ondary enrichment zone of a
Moderate continuity of the porphyry copper deposit based
variable within range "a", on a 15-m bench composite
followed by pure random be- Y (h) support.
haviour over longer distance
intervals. Found in certain
-a
-'
! h
sedimentary iron and ura-
nium deposits. 5. TRANSITIVE TYPE

~igure 3.-Diagrammatic Illustrations of Variograms.

(:)(h J

0.7

0·6
-- ---
II
-- - - - f---- ---
r~l-, - -- ----- ------1----

'~-~~ I
(~
0.5
(il I ~
@
c;> (~ (~-
(~ ~
(.
(~
0.4
/,; II I
--
- -roO'-
I
I--

0.3
IC . c'
~/f
I

02 I I I I I I I
O. IlL I
. 1. '
II I I

o
yOI
2
I
3
II
4 5
I
10 15 LAG
Figure IS.-Excellent transitive va rio gram from a large strata-bound Canadian uranium deposit, which
is believed by the writers to be of sedimentary origin. The regionalized variable in this case is the tenor
in uranium of a long \VNW-ESE line of vertical packsack D.D.H.s (100 per cent core recovery) at
regular 15-metre intervals. This transitive variogram shows the total lack of grade correlation when the
holes are separated by a distance greater than 63 metres (lag of 4.2). This significant metallogenic fea-
ture probably denotes the width of buried channels of uranium ·accumulation.
ORE RESERVE ESTIMATION USING KRIGING :
• Definiton : a) a method for correcting punctual grades from geometric
consideratons. ' ~ '."-c O ""-\,.,..~
b) The geostatistical grade interpolation method .

• How does it work?

Kriging calculates the grade of a block as a linear combination of the grades of nearest
samples. This linear combination requires coeffficients which are obtained indirectly from
the variogram. Kriging, (unlike other methods) also provides a confidence level on each
block estimate and on the overall reserves.

The kriging estimator has the following general form:

Z* = Li=1 n Ai Xi = A (X1 1 + A2 x2 + ....+ Anx n

where Z* is the estimated in-situ block grade,

Xi ' is the sample grade in the vicinity of the block
Ai ' is the weighing coefficient assigned to respective Xi

n , is the selected number of nearest neighbour samples used to estimate

the block grade.
The first step is to create a block model of the deposit. The grade of each block is then
estimated from near-by samples. Which samples and how many? If Z is the true block
grade, and Z* is the estimated block grade, the best estimation method will mininimize
the error. In other words, the variance of differences (Z-Z*) must be minimized.
The estimation variance (ie, variance of all (Z-Z*) errors) can be written as a function of
only the variogram, and of the weights Ai' This is the Kriging algorithm.

18
 ADVANTAGES OF GEOSTATISTICAL METHODS
1. Theoretically, mathematically optimal results are obtained

DISADVANTAGES OF GEOSTATISTICAL METHODS

1. Generally more computationally complex than other methods
2. At the feasibility study stage, limited data exists from which to generate meaningful
variograms. In most cases, only a pure nugget effect is produced, indicating the
apparent lack of drilling data. Fitting models to such data has most geologists and
mining engineers worried to say the least.
3. The concept of smoothing may be incorrect for some deposits. These are deposits
with true and significant variations in grade.
'-~~r -,4. Geostatistical methods do not cut high grades. They re-allocate them into the deposit
by reducing the high grade and lifting the low grade. The result is usually an increase
in tonnage and a decrease in grade with respect to classical methods.

19
DISTANCE WEIGHTING INTERPOLATION METHODS
Instead of the kriging algorithm, many packages offer distance weighting interpolation
methods to calculate grades, once the block model has been created. In this case the
weighting coefficients in the linear estimation function above, become:
Ai = (1 /dn /
e
Li=1 n(1/d j )

where d; is the distance between a particular sample and the centre of the block.
And e is the selected distance weighting exponent (1,2,3 ...).

In both methods, inverse weighting distance and kriging, a 3 D search ellipse is generally
set up. Information from the variograms is extremely useful to choose the appropriate
ellipsoid.

ADVANTAGES OF DISTANCE WEIGHTING METHODS

1. Quick and easy to implement by use of computer. Easier than kriging.

DISADVANTAGES OF DISTANCE WEIGHTING METHODS

1. They use search patterns (ellipse) of arbitrary sizes and orientations
2. The choice of power used in the weighting is arbitrary.
3. They are smoothing methods with similar consequences as described for geostatistical
methods.

NOTE
All methods assume corresct data. None allow for sample bias, so correction for this
must be done prior to ore reserve calculation, and is ususally based on experience.

20
Example of Japanese Smelter Contract for Copper concentrate (hypothetical)

Quality: Copper concentrates reasonably free of deleterious impurities and having the
following approximate analysis:
Cu 26% Ag 2.4 oz/dmt
Fe 30% Au 0.150z/dmt
S 33%

Quantity: Approximately 23,000 dmt per quarter, plus or minus 10% at seller's option

Delivery: F.O.B. vessel stowed and trimmed, Long Beach CA

Price: Copper: If final assay is less than 26% Cu, deduct 1.0 units; if greater
than 26% Cu, deduct 1.1 units; and pay for 98% of the
remainder at the LME Wirebar Settlement for the quotational
period
Silver Deduct 0.8 oz, pay for 95% of remainder at the London
Spot/US Equivalent for the quotational period, less $0.25/oz.

Gold Deduct 0.03 oz, pay for 95% of remainder at London Initial
and Final gold quotations averaged for the quotational period,
less $5.00/oz.

Treatment charge : $85 per dmt, subject to cumulative annual escalation of 7% per
year.

Refining charge: $ 0.008/lb of payable copper, subject to cumulative escalation of 7%

per year.
Price participation: For every $0.01/lb that settlement price for copper exceeds
$1.00 per Ib, refining charge increases by $0.001 per lb.
This increase in refining charge shall be limited to a total of
$ 0.04 per lb.

Quotational Period : Either month of arrival or month following month of arrival at

port of final destination, at buyer's option.
Payment: 90% provisional payment 30 days after arrival. Balance upon receipt of
final weights, assays and quotations.
Penalties: Arsenic: $1.00/dmt for every 0.1% over 0.5%.
Bismuth: $1.50/dmt for every 0.1 % over 0.1 %.
Antimony: $1.00/dmt for every 0.1 % over 0.5%.
Moisture: $0.50/dmt for every 1.0% over 8.0%.
fractions in proportion
Length: Two years beginning July 1, 1983
(from, Mine Investment Analysis, Gentry,D.W., O'Neil,T.J.,SME,1984, p87)

22
PROBLEMS WITH BEG

• The BEG is a single static criterion, which is independent of quantity, time or locality.
-- '_--.
Whereas the concept of ore and ore reserves and therefore CUT OFF GRADE is a
dynamic one which reflects "the cumulative effects of changes in geological, technical
and economic conditions in terms of material which can be mined at a potential profit."
So, Break-Even Grade is a static solution to a dynamic problem.

CUT-OFF GRADE: "is any grade that for any specified reason, is used to separate two
courses of action : ~~, to mill ~!..J~_d~."
Thus a cut-off grade is an ~i!:!-~~C?~~~~]"a~._
Pasieka and Sotirow describe cut off grade as a "standard of value, determined for the
purpose of classifying mineral reserves as economic or uneconomic in a specified time
frame."

Under a particular set of circumstances, Break-even and Cut-off grade may coincide, but
in some cases the use of break-eve~de can lead to illogical conclusions.
~---- ----....."-------------_.--..._--
..... ~ -._.~---

• T;here may\be a need for a different cut-off grade for the entire deposit, for lateral
fringes, for already broke~ rock which is no longer val"uable....

23
CUT OFF GRADE

Definition: "minimum grade which can be mined at a profit under economic conditions
existing at a particular point in time. " The cut-off grade can thus vary in time depending
on prices, operating costs, taxes, etc... \.

All existing mining operations use a cut-off grade, and if one were to do a fancy analysis,
they would probably arrive at the same result. Why? Because the mines have
optimized their system, so that in most cases, they are operating at the optimum level
within the limitations of their infrastructure. Where this may not be true, is for new
operations or planned expansions. This is when the "usual" cut-off grade may not apply
anymore.

METHOD OF CALCULATION
Traditional methods
These methods have traditionally been used to calculate a cut-off, which is actually a
break-even grade.
BREAK-EVEN GRADE: "grade from which the recoverable revenue exactly balances
the costs of mining, treatment and marketing however these may be defined."

Calculation of Break-Even Grade (BEG)

Break-even implies that all ore material must provide a cash surplus over bare working
costs, regardless of capital expenditure. I3E6 Co So r: e _
77 '1Ie;-A)(,;(
_C
R
Revenue = Cost 1<' e '--
Revenue = value of metal (+ profit, optional)
= BEG/100 x Mill Recovery x (price -vtreatment cost)
Cost = (mining cost + milling cost + other cost)
treatment cost includes smelting, refining, penalties and transportation to the smelter
other costs include transportation from the mine to the mill, administration and services,
and amortization and depreciation.

21
 '1. Price increases lead to a lowering of the BEG. This means that the _~r.9.ge-9!ade._______/
/ d~s, andJ:Lnless ~~_~, less t"IletaU~~~9IlXP!.od~c~d.Reasoni~~
I higher price is used to mine material which would otherwise stay in the ground. This
might sound good but does not necessarily
~--'-' ..-
lead
. __
.._ __ __ .- ._-- _-_.
to a higher profit. In fact, when prices
.. . ....

-- ---
are high, the mine should be increasing the quantity of metal produced, even if that
means permanently leaving lower grade material in the ground.
According to H.K. Taylor, "The profit from mining low-grade ore in a high price period
is always less than the profit forfeited by deferring the same tonnage of higher grade ore
to a later lower price period." In conclusion, unless mine and mill ca acities are
in~~d, a price increase should cause an increase in cut-off grade, and not a
decrease as the break-even method would suggest.

• The problem of non-included costs: There have been long-standing arguments over
this. For example sunk costs are unaffected by any future decision, however something
had to pay these costs .

• Any major change in mine or mill capacity (mine cannot produce, mine or mill
expansion, mill shutdown) can seriously alter the applicability of the accepted cut-off
grade during times of stability. This is particularly true if the rate of output, and therefore
the unit costs, are altered.

J~ !Ct:>i'- C .

IP'
AUQ,
24
HISTORICAL REVIEW
This review was prepared by Taylor and is presented in the paper, "General Background
Theory of Cutoff Grades", IMM, 1972.
He grouped previous work into five categories:
1) The first group starts with Berry in 1922. He applied the Present Value Theory to
justify an increase in Cut Off Grade as time goes by. He failed to recognize that the
financial advantage would decline as time went by.

2) In the second group, Carlisle published a series of papers in 1953-54, in which he

managed to show:
• the irrelevancy of sunk costs in many decisions.
• the limitations of output rates by physical rather than financial factors.

3) The third group includes Mortimer, Langton and Krige, amongst others (South African
perpesctive, dominated by gold mines of the Witwatersrand). Mortimer gave a definition
of the cutoff problem which, according to Taylor, "cannot be bettered" :
"The average grade of rocks mined must provide a certain minImum
profit per ton milled ... The lowest grade of rock mined must pay for
itself" But he did not say how.

4) The fourth group consists mostly of work on open pit mines and is contained mainly
in unpublished company reports.

5) The last group comprises authors who took grade distribution, tonnage balance and
economics into account.
Based on certain assumptions, Henning derived formulae for cutoff grade that showed
that:
a) sunk costs have no direct relevance.
b) that true maximization of Present Value demands a declining cutoff grade.

25
K.F. Lane is regarded as the pioneer of serious CUT OFF GRADE work. His great
contributions were:
a) to distinguish the three main stages of mining activity, which are:
Mining = Ore creation (U/G : Development, Open pit :Drilling, Blasting, loading and
hauling)
Treating = Ore treatment (U/G Stoping, Tramming, Hoisting, Crushing, Grinding,
Separating)
Marketing = Product Treatment ( Smelting, Refining, Selling)

b) he showed that capacity constraints in each stage imposed different Break Even
Grade requirements. These serve as markers, and the best cut off grade floats
between them.

c) he confirmed the need for a declining COG in order to maximize Present Value.

In the same paper, Taylor suggested a distinction between Planning and Operational
COG:
Planning COG: used to define the geological reserve (no mining constraints), and the
minable reserve and the intent here is to make a "fair prediction of the total ore that may
at some time be mined or treated."

Operational COG : during production, there is a need for an operational control to

differentiate ore from waste on paper, and once it is broken.

26
PROBLEMS WITH BREAK EVEN GRADE

• STATIC CRITERION
COG AS AN OPERATING CONTROL, OR AS A STANDARD OF VALUE

• DIFFERENT COG FOR ENTIRE DEPOSIT, LATERAL FRINGES OR ALREADY

BROKEN ROCK

• PRICE INCREASES LEAD TO A LOWERING OF THE BREAK EVEN GRADE

• PROBLEM OF NON - INCLUDED COSTS

• CHANGE IN MINE AND MILL CAPACITY CAN ALTER THE APPLICABILITY OF THE
ACCEPTED COG. PARTICULARLY TRUE IF RATE OF OUTPUT, AND THEREFORE
UNIT COSTS ARE ALTERED.

29
TAYLOR, 1972
HISTORICAL REVIEW

1) BERRY, 1922

2) CARLISLE, 1953-54, SHOWED IRRELEVANCY OF SUNK COSTS IN MANY

DECISIONS, AND THE LIMITATIONS OF OUTPUT RATES BY PHYSICAL RATHER
THAN FINANCIAL FACTORS.

3) MORTIMER, LANGTON, KRIGE

MORTIMER'S DEFINITION OF THE CUTOFF PROBLEM:

"The average grade of rocks mined must provide a certain minimum

profit per ton milled ... The lowest grade of rock mined must pay for
itself. II But he did not say how.

4) OPEN PIT APPLICATIONS

5) AUTHORS WHO TOOK INTO CONSIDERATION: GRADE DISTRIBUTION,

TONNAGE BALANCE, AND ECONOMICS.
HENNING SHOWED THAT:
A) SUNK COSTS HAVE NO DIRECT RELEVANCE
B) TRUE MAXIMIZATION OF PV DEMANDS A DECLINING COG

LANE: PIONEER OF SERIOUS COG WORK

A) THREE STAGES OF MINING
B) DIFFERENT BEG IMPOSED BY EACH CAPACITY CONSTRAINT. OPTIMUM
COG FLOATS BETWEEN THESE MARKERS.
C) HE CONFIRMED THE NEED FOR A DECLINING COG TO MAXIMIZE PV

30
TAYLOR, 1972

PLANNING COG: USED TO MAKE A FAIR PREDICTION OF THE TOTAL ORE THAT
MAY AT SOME TIME BE MINED OR TREATED.

OPERATIONAL COG: DURING PRODUCTION, THERE IS A NEED FOR AN

OPERATIONAL CONTROL TO DIFFERENTIATE ORE FROM WASTE ON PAPER, AND
ONCE IT IS BROKEN.

PASIEKA AND SOTIROW, 1985

LONG RANGE

GEOLOGICAL COG : ITS MAIN FUNCTION IS TO SEPARATE MINERALIZED

MATERIAL FROM WASTE. AT THIS EARLY STAGE, THE RESULT IS A
DISTRIBUTION OF IN-SITU TONNAGE (GENERALLY UNDILUTED) VS AVERAGE
GRADE, OR GEOLOGICAL CUTOFF GRADE.

PLANNING COG: THIS IS THE LOWEST GRADE OF ORE FOR WHICH THE MINING
OPERATION'S NET PRESENT VALUE IS ZERO (NPV= 0). THIS COG IS
CALCULATED ON THE PREMISE THAT EACH TON OF ORE WITH THIS GRADE
MUST GENERATE REVENUE EQUAL TO ALL ALLOCATED CAPITAL, OPERATING
AND FINANCIAL COSTS, INCLUDING ALL TAXES AND ROYALTIES DURING THE
MINE'S LIFE.

31
SHORT RANGE
This category of COG is used on a yearly basis and its economic basis is the net cash
flow (NCF).

BUDGETED COG : DEFINED IN PAPER AS ANNUAL HEAD GRADE REQUIRED

THROUGHOUT THE YEAR TO GENERATE A BUDGETED NET CASH FLOW FOR A
SPECIFIED CAPACITY. THE PURPOSE OF THIS COG IS TO CONVEY CORPORATE
NCF OBJECTIVES, TO THE OPERATIONS.

ACCOUNTING COG : DEFINED IN THIS PAPER AS, ANNUAL HEAD GRADE

SUFFICIENT, FOR A SPECIFIED CAPACITY, TO GENERATE REVENUE EQUAL TO
ALL OPERATING COSTS PLUS ANNUAL DEPRECIATION OF ALLOCATED FIXED
ASSETS (ON A FIXED COST BASIS), PLUS MININMUM PROFIT REQUIREMENTS.

BREAK EVEN COG: HEAD GRADE FOR WHICH THEANNUAL CASH FLOW EQUALS
ZERO (NCF = 0). IT IS THE GRADE THAT GENERATES A REVENUE EQUAL TO ALL
CASH EXPENSES (INCLUDING FIXED AND VARIABLE COSTS), CORPORATE AND
MINING TAXES AND ALL ALLOCATED CAPITAL- EXPENDITURES THROUGHOUT
THE OPERATING YEAR.

MINIMUM (MARGINAL) BREAK EVEN COG : SAME AS ABOVE BUT DOES NOT
INCLUDE ALLOCATED ADMINISTRATIVE AND OTHE FIXED OPERATING AND
CAPITAL COSTS. THIS COG COVERS ONLY THE VARIABLE OPERATING COSTS.
IT IS USED TO SEPARATE ORE FROM WASTE WHEN EITHER: IT IS ALREADY
BROKEN, OR MINING IT FREES UP MORE VALUABLE MATERIAL.

32