Negatively geared ore reserves: a major peril of the break-even cut-off grade.

Only small errors in the inputs are required to cause a large portion of an ore reserves estimate to have negative value, due to the preponderance of marginal-value material in many ore reserves estimates that rely on the use of a break-even cut-off grade. In some cases, rounding errors alone can result in a significant percentage of an ore reserve having negative value. An ore reserves estimate containing negative-value tonnages can still legitimately be called an ore reserve under the definition of the JORC Code (2012) if it is still economic as a whole, but negatively geared ore reserves will put a company at greater financial risk should commodity prices fall. The most common errors leading to negatively geared ore reserves include the assumption of a fixed processing recovery down to an inappropriate low grade, ignoring real laboratory or operational data, using median or modal values rather than mean values for parameters informing the analysis of the cut-off grade, cost errors, cost omissions, such as ignoring sustaining capital, and deliberate aggressiveness by companies to increase the ore reserve size without new discoveries. The ore reserves estimate should ideally be based on a cut-off grade that maximises the value objective of an organisation, such as net present value, but if a break-even cut-off grade must be used, it is essential that the cut-off grade calculation is undertaken using the best available data, preferably based on actual operation or suitably modified laboratory data, and a full set of cost data, including all contributory costs.
Only small errors in the inputs are required to cause a large portion of an ore reserves estimate to have negative value, due to the preponderance of marginal-value material in many ore reserves estimates that rely on the use of a break-even cut-off grade. In some cases, rounding errors alone can result in a significant percentage of an ore reserve having negative value. An ore reserves estimate containing negative-value tonnages can still legitimately be called an ore reserve under the definition of the JORC Code (2012) if it is still economic as a whole, but negatively geared ore reserves will put a company at greater financial risk should commodity prices fall. The most common errors leading to negatively geared ore reserves include the assumption of a fixed processing recovery down to an inappropriate low grade, ignoring real laboratory or operational data, using median or modal values rather than mean values for parameters informing the analysis of the cut-off grade, cost errors, cost omissions, such as ignoring sustaining capital, and deliberate aggressiveness by companies to increase the ore reserve size without new discoveries. The ore reserves estimate should ideally be based on a cut-off grade that maximises the value objective of an organisation, such as net present value, but if a break-even cut-off grade must be used, it is essential that the cut-off grade calculation is undertaken using the best available data, preferably based on actual operation or suitably modified laboratory data, and a full set of cost data, including all contributory costs.