Cut-Off Grade

Cut-Off Grade is the minimum concentration of a mineral or metal within rock that makes it economically viable to mine, process, and sell. Think of it as the dividing line between valuable Ore—rock worth digging up—and waste rock that will be left behind. This isn't a fixed number set in stone; it's a dynamic calculation that can change dramatically based on three key factors: the market price of the commodity (like gold or copper), the costs of extraction (including labor, energy, and equipment), and the efficiency of the mining technology. For an investor, the cut-off grade is a powerful lens through which to view a mining company's health and prospects. A company with a very low cut-off grade might boast about a massive deposit, but it could be highly vulnerable to a drop in Commodity Prices. Conversely, a high cut-off grade might mean a smaller, but more profitable and resilient, operation. Understanding this single metric helps you judge the quality of a company's assets and its Margin of Safety.

While it may sound like a term for geologists in hard hats, the cut-off grade is a fundamental driver of a mining company's value. It directly determines the size of the company's most important asset: its mineable ore. A company’s entire business model, from its projected profits to its lifespan, is built upon the cut-off grade it chooses. For a value investor, it's a critical tool for separating high-quality, durable mining operations from those built on shaky, optimistic assumptions.

A company's choice of cut-off grade involves a crucial trade-off between the size of the resource and its profitability.

• A High Cut-Off Grade implies the company is only targeting the richest parts of the deposit.
  • Pros: This leads to higher-quality ore, which is cheaper to process per unit of metal produced, potentially resulting in very high profit margins.
  • Cons: This shrinks the total size of the economically mineable resource, leading to a shorter mine life. It can also be a sign of “high-grading,” where a company cherry-picks its best ore to survive, a practice that is often unsustainable.
• A Low Cut-Off Grade means the company is including lower-concentration rock in its mine plan.
  • Pros: This can dramatically increase the stated size of the resource and extend the mine's projected life. Bigger numbers often look great in press releases and investor presentations.
  • Cons: The Operating Costs per unit of metal will be higher, leading to thinner profit margins. More importantly, the project becomes extremely sensitive to falling commodity prices, which could wipe out its profitability entirely.

The cut-off grade is not static. It breathes with the market and technology. The main drivers that can change a company's cut-off grade are:

• Commodity Prices: This is the heavyweight champion of influencers. When the price of gold, copper, or lithium goes up, previously worthless rock can become profitable ore, thus lowering the cut-off grade. The reverse is true when prices fall.
• Operating Costs: This includes everything from diesel fuel for trucks to worker salaries. Rising costs force a company to be more selective, pushing the cut-off grade higher.
• Technology: Advances in mining and processing can make it cheaper to extract metal from rock. Better technology can lower the cut-off grade, potentially turning waste into a valuable asset.
• Metallurgical Recovery: This is the percentage of metal that can be successfully extracted from the ore during processing. If engineers find a way to improve recovery from 85% to 90%, it allows for a lower cut-off grade.

Instead of just taking the numbers in a company report at face value, a savvy investor uses the cut-off grade to ask tougher questions. It helps you stress-test the company's claims and understand the real quality of its assets.

When reviewing a mining company, ask yourself these questions:

• What assumptions are being used? Scour the company's technical reports (like a Feasibility Study or Preliminary Economic Assessment) for the commodity price used to calculate the cut-off grade. Is it based on today's high prices, or a more conservative, long-term average? An overly optimistic price assumption is a major red flag.
• How does it compare to peers? Look at other mines in the same region. If one company is using a much lower cut-off grade than its neighbors, you need to find out why. Do they have a revolutionary cost advantage, or are they just being overly optimistic?
• How sensitive is the resource to change? The best company reports include a sensitivity analysis showing how the total amount of Reserves and Resources changes at different cut-off grades. If a small increase in the cut-off grade causes a massive drop in the resource size, the project is fragile.
• What is the average grade of the deposit? The most robust projects have a high average grade that is well above their cut-off grade. This gap is the mine’s built-in buffer; it can withstand lower commodity prices or higher costs far better than a mine where the average grade is barely above the cut-off.