Mining is an inherently high risk and uncertain business for investors. In this post I will discuss some important technical terms, namely dilution, and high grading that have a large effect on the value of projects.
Dilution is a term that refers to the waste material in a mine that is mined with the ore but is not separated from the ore during the operation. This waste is mixed with the ore and sent to the processing plant. Dilution can be a problem in both open pit and underground mines.
Dilution happens in two ways: Low-grade pods of mineralization within a mining block that can't be separated is inevitable in open pit operation and is termed internal dilution. External (or Contact) Dilution is waste rock outside of the ore body that is mined within a mining block. This varies with the shape of the orebody, drill and blast techniques, and the scale of the operation. Unlike internal dilution external dilution can be controlled using good mining practices, and the appropriate mining techniques.
Dilution is expressed as a percentage and calculated using the formula below.
The main concern with dilution is the reduction of the mill feed grade (the grade sent to the mill). The dilution can vary significantly depending on the type of mineral deposit.
In the diagram above the deposit is relatively homogeneous, for example a Copper-Gold porphyry may have minimal dilution ~ 10%. Where as a vein hosted deposit is likely to have much higher dilution up to 50% or more.
The effect of the dilution on the mill feed grade can be determined using the formula below.
- Feedgis Mill Feed Grade
- Oreg is the grade of ore in the ground
- Wasteg is the grade of the waste rock
- Dilution is the dilution as a percentage
The table below shows the effect dilution has on Mill feed grade.
Another aspect of the problems with dilution can be shown in the Palabora Mine (Palabora Mining Company, PBOAF) in South Africa. Originally operated as an open pit, production finished in 2002, after a decision in 1996 to continue mining underground as a block cave operation. The underground mine that has since been developed is the deepest block cave in the world with the largest column height. It has the lowest average grade of any underground mine at 0.6% Copper. Full production was reached in 2002, with the main shaft designed to haul 30,000 tons but has managed 39,000 per day.
Since the closure of the open pit in November 2004, there was a major failure in the pit wall as shown in the photo below. So why should this be a big problem now the open pit is finished? Well this failure deposited an estimated 59,000 tons of waste rock onto the floor of the open pit. This is going to have a significant impact on the dilution in the block cave in the future. All of this waste will be drawn down with the ore into the block cave diluting the already low grade. This has been projected to lower the mine life by 7 years, which equates to a loss of 20% or 47Mt of the original ore body.
So while investors should be concerned about the grade of the deposit, they should look at the potential dilution, and how that affects the grades that are going to the mill.
High grading is the process of mining grades higher than that of the reserve grade. Mining plans are governed by the geology, so the shape of the ore body may determine that higher grades are mined at the beginning of the mine life. Although mining high grades at the beginning of a project is normal for many projects, main reasons are to improve the NPV, IRR, and payback period.
If a company plans to mine for 10 years at 2 grams per ton gold (g/t), in the first two years it could mine higher grades around 2.6 g/t. This lowers costs and increases production early in the mine life, and increases company's cash flows earlier.
By the third year, the mine's residual reserve grade is 1.85 g/t. The same amount of material goes through the plant, but production drops while operating costs stay the same. The company is spending the same to produce less gold; there is less profit.
In this example to maintain the gold production of the first 2 years (75,233 oz.), at a reserve grade of 1.85 g/t the required tonnage of ore through the mill will have to increase 1,405,405t per annum, thus an increase in costs and a reduction in profits. The alternative is of course to continue mining the higher grade which will eventually make the lower grade material uneconomic, and so reduce the overall mineral reserve.
Quarterly reports should contain information on the reserve grades and what the head grade is going into the mine. If the reserve grade is substantially lower than what is being mined, you know that eventually production will fall.
A good example would be Nevsun Resources who are mining well under their reserve grade at their Bisha Mine. It is a good position to be in because it means production can rise and cash cost could fall as the mine goes on. The companies with the very high-grade deposits are lucky enough to be able to mine under reserve grade.
Reserves change over time depending on commodity prices and the mine plans change over time with the geology of the deposit. Companies do high grade on purpose to increase production and lower costs, however this may have detrimental influence on the mines future costs
References and more information
EBRAHIMI, A. 2013. The Importance of Dilution Factor for Open Pit Mining Projects. SRK Consulting. Available Here
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.