The Gross Value Fallacy

Mining investors and companies often make mistakes when calculating the value of mineral deposits. One of the most common errors is a simple calculation wherein reported percentages of metals are multiplied by the current market prices for those metals,

yielding what is known as the gross value of the reserves. This figure virtually has no meaning.

Consider a zinc-lead orebody with reserves grading 8.5% zinc (85 kg of zinc per tonne of ore.) and 4% lead (40 kg per tonne). If the current market price for zinc is $1.65 per kg (750 per lb.) and for lead is 620 per kg (280 per Ib.), a simple computation suggests that the ore has a gross value of $165.05 per tonne. But this calculation is ambiguous, and can, in some cases, be downright dangerous. The costs of transporting, smelting, refining and marketing all affect the payment made by a smelter to the mine. Premiums for valuable byproducts mined can be a bonus, but penalties that a smelter charges for elements that present environmental or metallurgical problems (like mercury and arsenic) can be expensive.

After these deductions, we can find that our ore has a price of $65 per tonne, a drop of more than 60% from the gross value figure of $165 which had once seemed so promising. And it is this $65 received by the mining company that must cover the price of mining, milling, administration and taxes, as well as give a profit.

Studies have shown that a typical base metal mine will generally get about 45% to 65% of the gross metal value as a net return from the smelter. Some complex ores, which will tend to have higher smelting costs, can return as little as 35% of the gross metal value.

Gold mines fluctuate somewhat in that smelter charges do not apply to simple gold ores (unless we are considering the gold content of a base metal concentrate). This is because a very high percentage of the gold contained in the ore can usually be recovered at the mine site without the need for shipping a concentrate to a third party. As is typical, as much as 85% to 95% of the gold contained in a gold ore can be recovered at the mine site and a doré bar can be produced on the premises. The only transportation charges involve the cost of sending the gold bars to a mint or refinery, whose charges are minimal. The same applies to the ores of silver and other precious metals.