With gold mining companies looking for ways of reducing costs amid the recent price decline, implementing area cost accounting analysis will help mining companies that do not already use this information to identify the profitable and non-profitable areas of their mining operations, says mining advisory firm Venmyn Deloitte MD Andy Clay.

Clay tells Mining Weekly that mining com-panies appear to resist the idea of introducing comprehensive area cost accounting, despite the obvious need to analyse costs at a more granular level.

He considers that understanding the various costs of different sections of a mine and how these costs change on a monthly basis can be helpful to the mining operator.

“Much of the technical information on operations is routinely available and can be integrated through systems applications prod-ucts, which, when combined with information with respect to costing, can provide an effective tool to aid monthly profitability monitoring.”

Clay adds that, while new innovation is not a primary concern for most mining companies, technological interventions tend to be favoured over other forms of innovation.

“It is important to choose the right forms of innovation for a business,” he says.

Crucial Aspects
Clay highlights that a thorough understanding of a mining operation’s pay limit and cutoff grades should also be prioritised and that it is important for the optimisation of profits when the gold price is low.

A mine’s cutoff grade is calculated by sub-tracting milling and corporate overheads from the total operational cost per ton and dividing it by the revenue per gram at a gold price that may be higher than spot, explains Clay, adding that this enables a count of all potentially economic blocks.

He explains that a cutoff is used to estimate mineral resources, or all ore blocks, that can be mined and could contribute to the project economics, while the pay limit is used to determine the mineral reserves and may be calculated at a low gold price to maximise profit.

“In the majority of cases, ore blocks with grades above the cutoff, but below the pay limit, will also be included in the production plan and will, therefore, be included in the mineral reserves as dilution or the old term, not in reserve.”

He states that some gold companies choose a low gold price to determine their pay limit, such as gold mining major Randgold Resources, which has used a gold price of $850/oz when the spot price of gold was $1 320/oz.

Clay advises the mining industry to use multiple pay limits, as areas of reserves have different associated costs relative to their acces-sibility, including factors such as the distance from the entrance to the shaft.

“We expect to see the multiple use of pay limits, but we do not find it in mining companies’ annual reports, as they are not reporting the technical knowledge available to them. We don’t really see advanced pay limit and cutoff calculations anywhere in the world,” he says.

Clay mentions that a thorough understanding of pay limits and cutoffs enable mining companies to identify the different costs associated with different grades and mining parameters and the revenue the blocks generate.

“For instance, a thick reef area is often amen-able to trackless mining and is a lower-cost section than a thin-reef section. Under these circumstances, two cutoff and pay limits will apply,” he highlights.

Clay states that, to achieve the optimal gain from this knowledge, mining companies need to link technical information to their accounting packages, adding that mining companies currently seem to focus more on the life-of-mine than on profit margins. He believes this has led to the overstating of reserves, “as has been pointed out consistently by [gold analyst] Dave Davis at SBG Securities”.

He adds that, in South Africa, there is a clear cutoff for surface sources, such as tailings dams, relative to underground operations, whereas underground operations adopt blanket cutoffs and pay limits.