Beware Companies that use “Equivalent Grade”
Equivalent grade is the term used where mineralisation that is comprised of several metals of economic value is converted to a single metal. Typically the minor metals are converted by formula and added to the grade of the major metal. The formula can vary but is often only based upon price. Other factors can be included such as recovery to concentrate and net concentrate value.
We will use volcanic-hosted massive sulphide deposits 1 (VMS or VHMS) as an example because the use of “equivalent grade’ is unfortunately common in this type of deposit. By way of comparison, it would be unusual for porphyry copper-gold deposits to be reported as equivalent grade.
VMS deposits are a type of polymetallic deposit that can host some or all of the metals copper, zinc, lead, silver and gold. They usually have a dominant metal, say copper. In this case the other metals are converted to copper and a copper equivalent value is reported.
These deposits can also host many other metals, including cobalt, tin, selenium, cadmium, indium, bismuth, tellurium, gallium, arsenic, antimony and mercury. These elements may be economically significant, but then again they may equally be a penalty.
For example, mercury and antimony are usual suspects in a lead concentrate. If levels are high enough it could make the lead concentrate unsaleable. Similarly silver and/or gold in a zinc concentrate may not be payable by a zinc smelter. For example, the hurdle before payment for silver in zinc concentrates can be 100g/t or more of silver.
The term is also sometimes curiously used to convert the value of metals to an equivalent gold value, but that is another story for another time.
How is it Calculated
Continuing with our VMS example let’s assume that we have a deposit with the following grades:
1.0% copper, 2.0% zinc, 0.9g/t gold, 20g/t silver.
If we assume the following USD metal prices are (this article was first posted in 2012):
Copper $8,400 per tonne ($84 per 1% of grade)
Zinc $2,000 per tonne ($20 per 1% of grade)
Gold $1,657 per ounce ($53 per gram of grade)
Silver $31.50 per ounce ($1 per gram of grade)
Then the contribution of each metal to the in-ground value per tonne (grade times price) would be:
Now if we take the total in-ground value and assign it all to copper (191/84) we have a:
Copper Equivalent Grade of 2.27%
This is the most basic and most typical calculation. The principal remains the same when taking into account other factors.
It is sometimes said that the use of equivalent grades enables the investor to more easily understand the supposed complexity of multiple metals and grades. And that it better demonstrates the merit of the mineralisation in question. Others, perhaps unfairly, infer it is an attempt to improve the appearance of the results.
In Australia, ASX-listed companies are able to report metal equivalent grades provided they are accompanied by: all individual metal assays; commodity price assumptions; assumed recoveries; the formula; and confirmation that there is good potential for all metals to be recovered.
By its very nature, polymetallic mineralisation leads to metallurgical complexity. This in turn tends to have negative economic connotations. The processing circuit is more complex and therefore more capital intensive and processing costs are higher. Recoveries tend to be lower and the metals harder to cleanly separate. As discussed above the value of some metals in concentrates cannot be recovered and other metals may be penalised.
It is the author’s contention that an investor should never consider equivalent grade in making an investment decision. A combination of copper, lead, zinc, silver and gold is not at all the same as copper alone. An actual grade of copper of 2.27% will be worth substantially more than an “equivalent grade” of several metals.
1 Volcanic-hosted massive sulphide deposits, are analogous to the “black smokers” active on today’s sea floor. They were formed by the deposition of metals contained within hot fluids that were discharged at or near the sea floor. The host rocks are often volcanic but can also be sedimentary.