MECANISMO DEL PARTO NORMAL
1.2 PARTO DISTÓCICO
When prices are rising, the break-even cut-off reduces and proportionally more of the rock is classified as ore. In an underground mine, mineralisation that was previously waste in areas already accessed by development becomes ore, so the pressure to extend development into new areas is reduced. In addition, the ore tonnes per metre
of development will increase with reducing cut-off, so the pressure on development is relaxed further. Similarly, in an open pit mine more of the exposed mineralisation will be ore and less will be waste. The stripping ratio reduces and a lower mining rate of total material is needed to maintain the same tonnage of ore though the mill. If prices remain high for a period of time, a new scheduling balance of access development, stope development and production of waste and ore mining will be established. In a desire to minimise spending, access development and overburden removal capital will not be spent until it is absolutely required.
The average grade of the ore produced must, however, decline. One possible outcome of this lowering of grade is that product targets are no longer met, even with the ore stream operating at capacity. Significant capital may be needed to increase ore treatment rates through the metallurgical treatment plant so that product targets can again be met.
All will be well until prices start to fall, and the larger or faster the fall, the worse the potential problem. Lower-grade material that was ore at low cut-offs will no longer be ore at the higher break-even cut-offs with lesser prices. The now sub-cut-off material will be removed from the production plan, resulting in a significant reduction in stocks of developed or exposed ore. Production will be rescheduled to maintain the planned rate from remaining sources above cut-off in the short-term, but there is potential for a major shortfall in available ore down the track. This results from the reduction in the rate of access development into new areas or overburden removal when prices were higher and cut-offs were lower, which will have restricted the amount of ore available above the new higher cut-offs in the medium term. At this stage, if previously developed but now sub-cut-off material is still available, it may have to be brought back into the production schedule to maintain planned ore production rates, but at lower grades. If it is no longer accessible, production targets may not be met.
It is hoped that such reintroduced low-grade material is at least above a marginal break-even cut-off. The author is aware of cases where the value of the low-grade material was below its direct variable costs of production, so additional production was actually losing money. If this were necessary to maintain the production rate above some minimum level necessary for the mill to operate, so be it, though in those circumstances periodic mill shutdowns and batch processing might have been a better solution. If, however, the additional material was simply meeting an arbitrary ore tonnage target, the potential cost of value-destroying management targets would have to be addressed.
Either way, a development or stripping rate crisis is now manifest. When prices were rising and cut-offs falling, the ore tonnes per metre of development or per tonne or cubic metre mined increased; however, with falling prices and rising cut-offs, the ratio will reduce. To maintain the planned ore production rate at the higher cut-off, the steady ongoing development or stripping rate must increase to a new level. On top of this, there must be a campaign of development or stripping to re-establish ore stocks so that production can be maintained. This will be happening at a time when prices are falling and cash availability is reducing. The pressure will be to reduce these costs at a time when the critical operational need is to increase them.
Simplistically, it is usually not possible to change the cut-off in an established operation without changing something else, such as the development or stripping rate as indicated. When prices are rising and break-even cut-offs are falling, the ‘new’ low-grade ore is gradually worked into the production schedule and the overall development or
CHAPTER 3 | Break-even Analysis stripping rate is adjusted downwards without any perceptible problems. The necessary changes are made but they may be unrecognised, or, if acknowledged, applauded as a cost reduction. The increase in reserves is also viewed favourably; however, when prices fall and the break-even cut-off is increased, potentially major changes to the schedule need to be made almost immediately. The price falls that are the immediate cause of the problem may also result in a reluctance or inability to spend the extra needed – in the short-term, for re-establishing the developed or exposed ore stocks, and in the longer- term, for maintaining an ongoing rate higher than before the cut-off increase. Production shortfalls may therefore occur for several years until stocks are slowly rebuilt and the appropriate balance between development or stripping and production is re-established.
Many of the reported problems in the mining industry in recent times, when prices for many commodities have reduced significantly after a period of substantial rises, can be attributed to this type of scenario. This is driven directly by a lack of appreciation by industry decision-makers and market analysts that simple 1D break-even cut-offs, when used to develop long-term mining strategies, do not result in maximised cash generation. They can actually drive a mine into a perilous financial position when prices turn down.5 This is discussed in more detail in Chapter 12.
SummArY
The implicit goal of a break-even cut-off is, in its most general terms, to ensure that every tonne classified as ore ‘pays for itself’ at the time it is treated. There are no industry- standard definitions of what this means or what costs go into a break-even calculation. Most companies using break-even cut-offs specify the costs that are to be included in perhaps several different break-even-style cut-offs.
An alternative definition of a break-even cut-off ensures that every tonne is dealt with by the course of action that generates most benefit. As a general principle, the costs used should be the differences associated with the two potential courses of action. If the decision is between classifying a piece of rock as ore or waste, it is only the differential costs of ore that need to be considered.
5. For many years, while prices were rising and break-even grades were falling, industry analysts and mining company executives seemed happy to accept the increased reserves and lowered operating costs (though costs per unit of metal did not necessarily fall significantly due to large tonnages of lower-grade material being brought into reserves). In more recent times, reports of discussions at a number of mining financial conferences suggest that analysts are now chastising company executives for not delivering more cash when prices were high, charging them with ‘deciding to reduce head grades’. With prices falling and what was previously considered ‘ore’ no longer being ore, analysts are complaining about production shortfalls. For those involved in strategy optimisation and long-term mine planning, all of this was predictable. It has happened in the past and will continue to happen again in the future as business cycles cause prices to rise and fall, unless things change. as long as the industry as a whole – mining executives, analysts who comment upon their decisions and technical staff who develop the plans that seek to implement corporate strategies – continues to believe that cut-off and break-even are synonymous, the situation will stay the same.
the author suggests that company executives did not ‘decide to lower head grades’, but passively accepted that cut-offs and hence head grades had to fall because the price was rising and cut-off is assumed to be a break-even grade. the key issue is that break-even cut-offs are not focused on maximising cash returns. Ounces and tonnes in reserves, the measures that managers and analysts appear to have focused on in the past, are negatively correlated with cash generation. this critical issue with break-even cut-offs is discussed further in Chapter 14.
In the case of an open pit, all planned material is mined from the pit regardless of whether it is ore or waste. The differential costs will therefore be the variable costs of dealing with ore and product through the treatment circuits of the metallurgical plant and downstream to the point of sale. Mining costs will typically not come into this calculation, except where there are different mining costs associated with ore and waste – perhaps as a result of different drill and blast patterns or haulage distances.
Underground, virtually all activities are associated with ore. The main exception is major waste access development, which is exposing new mineralisation within which ore to be produced can be delineated. This major access development typically does not depend on the amount of mineralisation exposed. It is a function of the lateral or vertical distance to be covered to access a remote zone of mineralisation or to expose the next sublevel block. Because the cost of this access does not depend on the amount of ore delineated, it does not change according to how much of the mineralisation is classified as ore rather than waste, and is therefore not a differential cost for a break- even calculation. Some access stope preparation development, though associated with and maybe even mined in ore, is also not directly related to the tonnage of ore to be extracted from a block and should similarly be excluded from a break-even calculation.
If there is spare capacity in both the ore and product circuits in the plant, material may be included in the production plan if its grade is above the break-even cut-off derived using downstream ore and product-related variable costs; however, not all such material can necessarily be added to the ore stream. Only the highest grade material that fills the capacity shortfall should be mined and treated, but the simple break-even cut-off mechanism does not facilitate this – it is typically an all-or-nothing scenario analysis.
There is no guarantee that the average grade of an orebody defined by a break-even cut-off will deliver a profit. Generating a profit is completely different from merely ensuring that every tonne pays for itself. The level of profitability comes from the average grade of material above cut-off. A simple break-even cut-off takes no account of the grade distribution of the mineralisation, nor the various stages of the mining and treatment process; however, many of the problems identified with break-even cut-offs have indicated that these must be considered. Unless they are specifically brought into the cut-off model, attempts to account for them will be arbitrary and suboptimal.
Using a break-even grade as a cut-off effectively surrenders responsibility for specifying what is ore and what is waste to uncontrollable changes in the market. In principle, a mining company should consciously decide what is ore and what is waste in order to achieve its corporate goals. Break-even cut-offs are incompatible with this.