DECLINING GOLD & SILVER ORE GRADES FOR DUMMIES

By SRSrocco:

After receiving a great deal of emails and replies on my declining ore grade work in the top gold and silver miners, I thought I would write this post to clarify a few misunderstandings.

The industry practice of mining and processing lower grade ore from a section of the mine is a short term practice that will not impact the DECLINING OF ORE GRADES BY THE AGING OF THE MINE all that much.

First, I presented this chart on the top 5 gold miners declining gold yields since 2005:

Here we can see that the top 5 gold miners (Barrick, Newmont, AngloGold, Goldfields & GoldCorp) have seen their average yield decline 23% in six years or 3.8% per annum.  Secondly, I stated that the top silver miners have seen a 34% decline in 6 years or a 5.6% per annum.

Once I made this statement, I received replies through the email that mining companies alter their mining and processing of lower ore grades as the price of the metal increases.  Basically, they were stating that a portion of these declines may be due to mining companies processing low grade ores than higher grade ores from their reserves in the ground… or from waste rock and etc.

While this industry practice does take place, it is done on a short term basis.

For example, Fresnillo’s average yield has declined 24% since 2006:

(the chart should read average yield not grade)

This decline in average annual silver yield is not due to Fresnillo mining and processing lower grade ore to take advantage of higher metal prices, but rather they are now getting down to mining their reserve base ore grade which is 300-330 g/t.

Fresnillo has also stated that they will have to increase their processed ore from 8,000 tonnes per day (tpd) to 10,000 tpd to keep silver production flat around 26-28 million oz per year.  In 2011, Fresnillo PLC’s Fresnillo mine produced 30.3 million ounces of silver by itself.  Fresnillo PLC also has the Saucito mine that produces silver as well (start up 2010-2011).

So far this year, the Fresnillo mine has only produced 19+ million ounces of silver in the first 9 months of 2012.  They will probably only average about 26-27 million oz in 2012.  This will be another 10% decline in silver production due to lower ore grades and not because they are mining and processing lower grade ore due to higher metal prices.

This is also true for BHP Billiton’s Canningtion mine which has been one of the largest primary silver producing mines for a decade.  Cannington was producing silver at an average ore grade of 667 g/t in the quarter ending June 2000.  However, from their most report, Cannington is now mining silver at 332 g/t.  This is a 50% decline of ore grade in 11 years, or nearly 5% per annum.

BHP Billiton is not mining Cannington’s lower ore grade because of higher metal prices, but rather due to the aging of the mine itself.  Furthermore, if we go to BHP Billiton’s 2011 Annual Report we will see that Cannington’s reserve grade is now below 300 g/t and only has 6 years remaining in the life of the mine.  Of course they will extend that by drilling and proving up more reserves, but these reserves will not be above 400 g/t ever again.

This phenomenon of declining ore grades is also taking place in the majority of silver miners.

Again, the industry practice of mining and processing lower grade ore from a section of the mine is a short term practice that will not impact the DECLINING OF ORE GRADES BY THE AGING OF THE MINE all that much.

Here is one more example.  Pan American Silver was mining silver at an average yield of 7.1 oz/t:

According to its 2011 annual report, Pan American Silver produced silver at an average yield of 4.7 oz/t.  This is a 34% decline in 6 years.  Furthermore, if we look at their most recent Q3 2012 report, they are not yielding silver at 2.9 oz/t, because they have added their new acquisition of the Dolores mine that has an average silver ore grade of only 39 g/t. This lowered their average quite a bit due to the fact that they processed a great deal of ore.  If we were to take the Dolores mine out of the equation, Pan American Silver is yielding silver at 4.9 oz/t for the first 9 months of 2012.  This is a little better than what they achieved in 2011.

We must remember, declining ore grades are not a ONE WAY STREET.  That being said, the reserve grade of the major mines in Pan American Silver show much lower ore grades in the following years.  So we can safety assume, Pan American Silver will be producing silver on average at a lower ore grade in the coming years regardless of the industry practice of processing lower grade material due to higher metal prices.

I hope this clears up things a bit….