In discussions with investors over the past few months, I have observed that most do not understand the relationship between gross metal value in a concentrate and the net percentage of that gross that the seller will actually receive. Further, there can also be significant costs associated with terms of sale that most investors do not understand.

Many metals are concentrated after mining and the resultant concentrate is often sold to an appropriate smelter. Most concentrates comprise various sulphides, some of which carry the metal of value.

Metals that are commonly sold as concentrates, often with several metals in a single concentrate, include copper, molybdenum, zinc, lead, nickel, gold and silver. Other less common metals sold as concentrates include antimony, arsenic, bismuth, cadmium, cerium, cobalt, gallium, indium, mercury, platinum, tellurium, tantalum, titanium and vanadium.

By way of example, a copper concentrate could include chalcopyrite (CuFeS2), containing 34.6% copper, possibly another sulphide such as pyrite (FeS2) and other waste (or gangue) minerals. The overall grade of the concentrate could be in the range 22% to 30% copper.

Concentrates are usually specific to particular smelters. Thus a lead smelter or a zinc smelter could not smelt a copper concentrate (the converse is also true). In fact any copper in a lead or zinc concentrate is generally problematic in the smelting/refining processes and would most likely incur a penalty charge (see more on penalties below).

Usually lead and zinc bearing concentrates are sold as a separate product but there is a market of a mixed lead/zinc concentrate, commonly referred to as “Bulk Concentrate”.   A typical lead-zinc concentrate will be used as an example of how treatment charges and penalties are calculated. First there is a deduction from the contained metal assay to compensate the smelter for processing metal losses. If the concentrate grades  around 50% lead and 20% zinc, then around 3% of the lead and 8% of the zinc will be deducted. This is effectively part of the treatment fee and is usually higher for lower grades.

With regard to accompanying precious metals, silver above an agreed minimum content will be paid but generally gold is not paid for. This is because the smelter can recover silver easily but may not be able to recover the gold at all. If the gold content is significantly high, silver/gold containing residue may be sold to a third party processing plant that specialises in treatment of such residue materials.

Next is a treatment charge per tonne of concentrate which is negotiated on an annual basis and the charge is set at a specified metal price . For example: US$ 130 basis $2000 LME  Cash Zinc Price. There is usually has an accompanying escalator/de-escalator to adjust the treatment charge to take account of rises or falls in the metal price.

Finally there are the penalties. Penalties apply to those elements that are toxic and expensive to dispose of, such as mercury. Penalties also apply to those elements that are contaminants to the principal metal and are difficult and/or expensive to remove.

For a lead-zinc concentrate typical penalties include bismuth, mercury, antimony, cadmium, nickel, cobalt and copper. There are many other penalty elements and if some elements are high enough, the concentrate may not even be saleable.

If we assume a gross metal value per tonne of concentrate of  USD1200, the net amount payable to the seller could be of the order of USD800, after all charges and penalties. Thus, only 67% of the value of the metal in concentrate is paid. Demonstrating that the net amount paid is often significantly lower than most investors realise.

Further, the terms of any contract to sell concentrates are as important as  the sale price. There are around a dozen terms of sale, and each can include up to a dozen services. The terms range from Ex Works (“EXW”), where the buyer pays for everything but warehousing costs, through to Delivered Duty Paid (“DDP”) where the seller pays for everything. The services include warehousing and related costs; loading and freight charges; arrival fees and duties; and taxes. Typically, base metal concentrates are sold on either a Cost, Insurance, Freight (“CIF”) or Free Onboard Vessel (” FOB”) basis.

Negotiating satisfactory sales terms is a minefield to the uninitiated and can be a very substantial cost. It is an arcane field that is definitely best left to experts.

Last Word

Valuing the net return on concentrates is fraught with risk. It will often be much lower than the novice seller assumes and the cost of sales is often ignored. The investor should be extremely wary of those companies that make optimistic net return and sales cost assumptions without substantial supporting detail.