Expert Analysis

The Economic Significance of Cut-off Grades in NI 43-101 Gold Resource Reports

Executive Summary

This white paper examines the pivotal role of cut-off grades in the determination of gold resources and reserves as per National Instrument 43-101 (NI 43-101) standards. Cut-off grades define the minimum grade at which a section of a mineral deposit can be considered economically viable to mine, serving as the cornerstone for resource and reserve estimation. This analysis elucidates the critical impact of accurately determining these grades not only on the valuation of mining projects but also on the integrity and sustainability of mining operations.

About the Author 

Larry Segerstrom is a bilingual senior mining professional with more than 37 years of exploration, operations, and business experience. He is currently consultant and Director for junior mining exploration companies in North and South America. His past positions include COO of Paramount Gold and Silver Corp. where he led the team in discovering new inferred resources of 750,000 ounces of gold and 60 million ounces of silver at the San Miguel project in Mexico, now a part of Coeur’s Palmarejo Mine. As Manager of Geology of the Grasberg mining district in Indonesia for Freeport McMoRan, he played a significant role in the development of new ore reserves of 3.4 billion pounds of copper and 3.6 million ounces of silver at Freeport-McMoRan’s at Grasberg. Mr. Segerstrom is a Qualified Person under the Canadian Institute of Mining (CIM) to write NI 43-101 technical reports, considered the gold standard for certifying gold resources.

Introduction

Cut-off grades are crucial in mining for delineating the ore from waste. They determine the lowest grade at which mined ore is considered economically viable, ensuring that the mining process is profitable. These grades are dynamic, influenced by factors including the market price of gold, mining costs, and technological advancements. Their accurate determination is essential for the ethical and economical management of mining resources.

Importance of Cut-off Grades

A cut-off grade is the minimum concentration of metal, in this case, gold, that must be present in the ore for mining to be economically viable. For instance, if a cut-off grade is set at 0.50 grams per ton, any material with a gold concentration above this threshold is processed as ore, while anything below is considered waste. This strategic delineation ensures that the mining operation is not wasting resources on processing material with too little gold to cover the cost of extraction and processing.

Deciding What Cut-off Grade to Use

The process of setting cut-off grades is complex and critical. The Canadian Institute of Mining, Metallurgy and Petroleum (CIM) provides overarching guidelines and standards, yet the actual determination of cut-off grades is left to the discretion of Qualified Persons (QPs). These professionals must weigh a variety of economic, environmental, and technical factors, adjusting their assessments as necessary to reflect changes in these variables.

The determination of cut-off grades, while inherently subjective, adheres to rigorous guidelines to ensure credibility and transparency in resource reporting. As mandated by the NI 43-101 Standards of Disclosure for Mineral Projects and supported by the CIM Best Practice Guidelines for Estimation of Mineral Resources and Reserves, the integrity of these estimations is paramount.

The guidelines explicitly state, “The Qualified Person(s) should be clearly satisfied that they could face their peers and demonstrate competence and relevant experience in the commodity, type of deposit, and situation under consideration.” This directive underscores the necessity for integrity and accountability in mineral resource estimation, empowering Qualified Persons to make decisions that reflect both their expert judgment and ethical considerations.

Bad Actor Behavior

In my professional opinion, there is not enough rigor in scrutinizing the validity or “reasonableness” of the assumptions used by many companies to establish cutoff grades, which often leads to misleading and/or disastrous economic outcomes.

One common strategy involves hyping up the deposit to appear as optimistic as possible by lowering the cutoff grade, which results in the overestimation of the size and grade of the gold resources or reserves, thereby generating an overly optimistic valuation of the deposit.

Another misleading strategy is to “update” NI 43-101 resource estimates whenever the price of gold rises, using the price increase to justify lowering the economic cutoff grade. While this can be justifiable under certain circumstances, it is sometimes exploited to inflate the overall number of gold resources.

Ensuring Credibility and Integrity

The International NatGold Council has established the NatGold Integrity Trust to oversee the application of these standards in digital mining projects. This body ensures that all cut-off grades used in digital mining are thoroughly vetted and that the resulting resource estimates are reliable. 

Composition and Oversight 

The NatGold Integrity Trust is comprised of three independent trustees who bring a wealth of experience and expertise to the oversight process:

  • Two Qualified Persons with a minimum of 20 years of experience each in the field of mineral resource estimation.
  • One lawyer with significant international mining expertise and at least 20 years of experience.

These trustees are tasked with unanimously approving any mining title before it is considered for tokenization into NatGold™. Their approval ensures that every step in the process meets the highest standards of integrity and professional ethics.

Conflict of Interest Policies

To maintain impartiality and objectivity, the trustees of the NatGold Integrity Trust are strictly prohibited from having any direct or indirect interests in the companies participating in the industry, including the NatGold miners and the entity managing the tokenization process, New York-based OroEx Corp. This policy prevents any potential conflicts of interest that could compromise the trustworthiness of the tokenization process and ensures that all decisions are made in the best interest of stakeholders and the integrity of the NatGold ecosystem. 

For clarification purposes, I am not a trustee of the NatGold Integrity Trust, as that would be a direct conflict with my position as an independent member of the Board of Directors of Great Eagle Gold Corp., a NatGold mining company.

Conclusion

The determination of cut-off grades is a foundational aspect of mineral resource estimation that significantly influences the economic outcomes of mining projects. Accurate and ethical determination of these grades is crucial for the sustainability of mining operations and the reliability of the mining industry. The NatGold tokenization model, supported by rigorous oversight from the NatGold Integrity Trust, exemplifies a commitment to upholding these high standards in the field of digital mining, thereby ensuring that resource estimations are conducted with the utmost integrity and professionalism. 

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FAQs

What is the Fifth Pachakuti, and what does it have to do with evolving ESG-consciousness?2024-04-21T16:00:14+00:00

The Fifth Pachakuti, as foretold by the Inca civilization, represents a period of profound transformation that began in 1992, marking the end of an era and the emergence of a new one characterized by balance, harmony, and sustainability. This concept resonates today as we face global environmental crises and a deeper understanding of our interconnectedness with nature. In Incan prophecy, a Pachakuti is a 500-year cycle of renewal, and the Fifth Pachakuti symbolizes the time when the path of the Eagle—representing mind, science, and industrialization—reunites with the path of the Condor, which symbolizes heart, intuition, and a spiritual connection to nature. This era is envisioned as a convergence of these historically divergent paths, fostering a united consciousness that is essential for global sustainability.

This transformative period aligns with the current shift towards Environmental, Social, and Governance (ESG) principles, reflecting a global move towards more sustainable, equitable, and environmentally conscious practices. The reawakening to these values under the Fifth Pachakuti supports the transition from traditional, often destructive economic activities like physical gold mining to more sustainable approaches such as those advocated by the International NatGold Council. This council promotes the tokenization of gold, preserving natural resources and minimizing environmental impact, which embodies the ESG-conscious change envisioned in this new era. This alignment suggests that our contemporary environmental and social reforms are not just modern necessities but are part of a larger, cyclic transformation echoing ancient wisdom—a true manifestation of the Fifth Pachakuti.

How is the baseline intrinsic value of NatGold calculated?2024-05-18T12:55:00+00:00

How is the baseline intrinsic value of NatGold calculated?

The baseline intrinsic value of NatGold is calculated using a global per ounce average profit comparative methodology developed by the International NatGold Council. This method assesses the profit potential of NatGold by comparing the global average cost of gold production, as indicated by the All-In Sustaining Cost (AISC), against the current market price of gold. This approach provides a robust framework for establishing the minimum intrinsic value of NatGold coins, emphasizing their potential profitability in the global market.

Calculating Production Costs: The All-In Sustaining Cost (AISC) is used as a key metric in this comparison. AISC is a global weighted average calculated quarterly by the World Gold Council, based on the reported costs of each publicly reporting mining company for that period. This figure reflects the comprehensive cost faced by publicly reporting gold mining companies to mine, refine, and market one Troy ounce of gold.

Above Ground Market Price Reference: The market price used in this calculation is derived from the latest daily average price for a Troy ounce of gold, as reported by authoritative sources like the London Bullion Market Association and the NYMEX spot gold price.

Intrinsic Price Value Baseline: For example, employing a 90-day AISC of US$1,342 for Q4, 2023, and a hypothetical market price of US$2,200 per ounce, the intrinsic profitability is calculated by subtracting the most recent quarterly global weighted average AISC from the market price. In this instance, the average global profit would be $858 per ounce. This serves as the baseline intrinsic value of gold before the expenditure of US$1,342 to physically extract the gold via traditional mining methods.

NatGold’s approach diverges from traditional practices by focusing exclusively on digital mining certified gold resources in an ESG-friendly way. Essentially, the intrinsic baseline value of an ounce of NatGold is theoretically equal to the average per ounce profit realized by global gold producers, which is calculated by subtracting the average global cost of extraction from the prevailing market price of gold.

This positions NatGold as a sustainable crypto-commodity, capable of attracting a significant ESG premium, potentially even surpassing traditional gold’s market value as global sustainability awareness increases. This valuation transcends conventional production cost-profit analyses, advocating for NatGold’s price to be independently determined by its own merits as a sustainable and innovative financial asset.

Who are “Qualified Persons,” and how is their independence guaranteed?2024-04-20T23:30:49+00:00

“Qualified Persons” (QPs) are integral to the Canadian National Instrument 43-101 (NI 43-101) standards for mineral project reporting. These professionals must have a minimum of five years of experience in the area of mineral exploration, mining, or project evaluation related to the deposit type and activity being reported on. Importantly, QPs are required to be members in good standing of a recognized professional association, such as the Association of Professional Engineers and Geoscientists of British Columbia (APEGBC), among others across Canada and internationally that uphold similar professional standards and ethical codes.

The independence of QPs is critical to maintaining the credibility of NI 43-101 reports. To ensure impartiality:

Professional Ethics and Standards: As members of reputable professional associations, QPs adhere to strict ethical codes that mandate integrity and objectivity in their assessments.

Regulatory Criteria for Independence: NI 43-101 defines clear criteria to prevent conflicts of interest, ensuring that QPs do not have a vested interest in the projects they report on, beyond their professional fees for services rendered.

Mandatory Disclosure: QPs must disclose any potential conflicts of interest in their reports, including financial interests or any relationships with the company that could be perceived as compromising their independence.These measures guarantee that mineral resource estimates and technical evaluations are conducted following the highest standards of professional conduct, offering a reliable and unbiased perspective to investors and the public.

What is the International NatGold Council?2024-04-20T23:26:47+00:00

The International NatGold Council, initially known as the International Green Gold Council, was founded in December 2023 in Geneva, Switzerland, by New York-based OroEx Corp. as a Swiss commercial foundation.

Structured as an independent governing body, the Council functions separately from industry participants, including its founding entity, OroEx Corp. Its Board of Directors consists of an exceptionally experienced and diverse team of individuals with international expertise.

Why are NI 43-101 Technical Reports automatically accepted by the U.S. Securities and Exchange Commission (SEC) under Regulation S-K 1300, whereas technical reports from other nations are not?2024-04-20T23:32:08+00:00

NI 43-101 Technical Reports are automatically accepted by the SEC under Regulation S-K 1300 due to their strict adherence to the regulation’s rigorous standards, which prioritize detailed, transparent, and reliable disclosures of mineral resources and reserves. These reports are developed by the Canadian Securities Administrators and set a high standard for the public disclosure of scientific and technical information concerning mineral projects. This includes stringent requirements for the qualifications and responsibilities of “Qualified Persons” who verify the reports, ensuring that the disclosed information is both accurate and verifiable.

In contrast, reports from other standards like JORC (Australia) or SAMREC (South Africa) might require additional reconciliation to align with S-K 1300. While these standards are internationally aligned to the CRIRSCO templates, which share common core definitions and guidelines with S-K 1300, they often have slight variations in definitions and reporting criteria. These differences mean that technical reports from these and other non-Canadian jurisdictions may need to demonstrate their compliance with S-K 1300’s specific requirements through detailed reconciliation, making them not automatically acceptable like NI 43-101 reports.