In yesterday’s edition of The IKN Weekly, IKN150, we ran a piece about resource cut-offs, how they’re calculated and a couple of et ceteras. To illustrate it we used Batero Gold (BAT.v) as an example. I’ve been told by a couple of readers that I should put it on the blog and as the top 2/3rds of it doesn’t contain anything particularly stock specific for subscribers, I don’t see why not. So here’s the top 2/3rds, bar the intro blurb.
“….so we’re having a second look at a bit of the math behind this weird and wonderful thing called the cut-off level.First up, we note again the formula that determines how a cut-off grade is calculated:Cut off = operating cost (per tonne) divided by (metal value X recovery)All fine. So in the case of Batero, we know the cut-off level it’s using (a low 0.16 g/t gold) and we also know it decided on a $1500/oz gold price chosen for its calculations (which we also noted was pretty darned high for a base case, but that’s for another chapter). Finally, according to the 43-101 technical report it might need a pretty fine grind on the rock but in a reasonably optimistic scenario 80% recovery levels are possible for the Batero-Quinchia deposit.Therefore, we can put together this line of math:0.16 g/t = operating cost (per tonne) divided by ($1500/oz X 80%)Now we need to get all that into common denominators, in this case grams, so….0.16 g/t = op cost (tonne) / ($48.23/g X 0.8)Now let’s make it easy to read by doing three things 1) let’s use symbol X for op costs 2) let’s do the calc that’s in brackets 3) let’s flick the formula around for easier reading:X / 38.60 = 0.16And for those of you watching at home, that means X = 6.18, which means in turn that BAT is saying it can operate the Batero-Quinchia property at an operating cost of U$6.18 per tonne of rock moved.Now that may be true, perhaps BAT.v can indeed run its eventual mine at $6.18 per tonne of rock operating cost if it gets a fast track approval, all permits in place, the money arrives for development, construction begins punctually and the mine is happily running production come, let’s say, 2016. I honestly don’t know, but what I can tell you here is that it’s a very tight costs presumption being made in what it still an early stage exploration project and from what we’ve seen in recent years, the cost profile is already above $6.18/tonne in your typical open pit operation of this size and costs are creeping up every single year.Or more bluntly, BAT has assumed what’s as near as a best case possible for operating costs in order to make the pit resource look bigger than it is if we consider mine economics as our benchmark rather than simple ounce counting. Or even more bluntly, a 0.16 g/t gold cut off is pure, unadulterated junior mining bullshit and we repeat (until blue in face if necessary), it doesn’t matter one monkey’s fart how many ounces you say you have in the ground, what matters is how many ounces you can get out of the ground at a profit. And if you don’t believe me on that, ask anyone who bought Exeter Resources (XRA) (XRC.to) in April 2010 when that company announced it had a resource of 24.3m oz gold at its Caspiche project, or in September 2010 when it announced an upgraded resource of 26.4m oz gold.
