In the early stage of investing in the resource sector, few issues are more divisive, confusing, and misunderstood than those of metal equivalent grades when reporting drill holes and mineral resource estimates. Including all the potential sources of in-situ metal value identified in a project is the prime objective for the more promotional explorers who seem bent on engaging in chrysopoeia to transmute base metals into gold. As such, using metal equivalency can be fanciful, distort the truth, mislead, and, arguably, be borderline fraudulent in egregious situations.

A metal equivalent converts the economic value of polymetallic mineralisation into a single metal value to supposedly make it easier for investors to compare the results of different projects. Since the definition is based on the economic value of the other metals, metals that cannot be recovered should not be included, although they often are, essentially because until there is an economic study, what is in and what is out cannot be determined.

A typical copper equivalent grade calculation from a polymetallic deposit such as a porphyry copper-gold-silver-molybdenum deposit is: CuEq% = Cu% + (Au grade in g/t x (Au recovery / Cu recovery) x [Au price in US$/oz ÷ 31] / [Cu price in US$/lb x 2204.623]) + (Ag grade in g/t x (Ag recovery / Cu recovery) x [Ag price in US$/oz ÷ 31] / [Cu price in US$/lb x 2204.623] + (Mo grade in % x (Mo recovery / Cu recovery) x [Mo price in US$/lb x 2204.623] / [Cu price in US$/lb x 2204.623])

Unfortunately, many retail investors take equivalent grades at face value. They shouldn't, as they can be inflated by using inappropriate prices for the by-products, deflating the main product's price, and by failing to consider that there will generally be lower recovery rates for the byproducts.

"It's a hugely misused metric and poorly understood in the business. If I were a regulator, I would say don't make it into an equivalent because the metallurgy is going to be different for every single element," said Liberty Gold COO Jon Gilligan. Metallurgy will be discussed below.

An illustration of this appears in Table 1 below. Assuming relatively defendable long-term prices, the molybdenum gives a 20% uplift to a copper equivalent versus the copper grade. At spot prices, the uplift increases to 45%, while depressing the copper price increases it to 54%. When recovery factors and payability are also considered, a molybdenum credit would likely add around 10% to the copper revenues and be of marginal importance.

The implication is potentially huge. An open pit project with 0.4-0.5% copper grade is worth investigating further, while one with 0.3% grade is uneconomic in a new project. Unfortunately, a junior will not take its calculations and assumptions down the payability route when putting out drill results. "A 0.3% copper deposit is marginal and won't get developed. Adding metal equivalents to get to 0.5% copper equivalent makes a big difference, and people are getting sucked into this sleight of hand," an experienced polymetallic mining engineer said.

An interesting example is Doubleview Gold, which said in April 2023 that it would report results from its Hat project in the Golden Triangle area of British Columbia, Canada, as copper equivalent, including gold, cobalt, and scandium. Thus, it delivered a drill result on 12 February 2024 of 438m grading 0.93% copper equivalent, in which the red metal grade was 0.05%! It also undermined its results, having previously said that the demand for scandium phosphate, which significantly increases the copper equivalent figures, "is limited with sale prices usually not disclosed" and cautioned that "copper equivalent estimates should not be unduly relied upon in any current evaluation of Hat project mineralisation."

         

Price Assumptions

Why does the price deck matter in calculating metal equivalent grades? The US Securities and Exchange Commission (SEC) guides companies to use a three-year trailing average to assess resources and reserves. Canadian stock markets or drilling results stipulate no such requirement, and consequently, one seed a range of price assumptions used, from the three-year trailing average prices to forward-looking consensus price forecasts, spot prices and combinations of the above. American Eagle Gold was going for maximum numbers in its NAK project in British Columbia, Canada, when it used near spot prices of $3.75/lb copper, $1900/oz gold, $20/oz silver and $25/lb molybdenum.

As the table shows, the pricing of volatile byproducts can affect huge swings in apparent value. Steel additive molybdenum is mainly mined as a copper by-product. Between 2015 and 2021, the molybdenum price averaged about US$10/lb. In March 2023, it spiked to more than $40/lb. Price downswings are also distorting. In metal equivalent calculations, also be wary of nickel, whose price has fallen more than 40% over the past year, and of zinc and cobalt, whose prices have fallen more than 20%.

Rather than use complex calculations, Continental Gold employed a simple-to-understand gold equivalent grade for the Buritica carbonate base metal (CBM) deposit in Colombia calculated using a silver:gold ratio of 60:1.

This is a metals price ratio that continually changes and does not take into account recoveries. It was on the conservative side, however, as Continental did not include the zinc and lead base metals in its 2019 resource update, which, after the mine came into production, new owner Zijin Mining (HK:2899) built a circuit to recover. Project developers focus on developing the primary product and maybe one byproduct to manage the initial capex. Third or fourth-string byproducts often do not figure in project economics.

Metal Recoveries

Most retail investors are unaware of the intricacies of metal recoveries, but they are a crucial modifying factor that can put quite a different cast on the apparent economic prospects of a project. Recovering 100% of the metal(s) from a deposit is impossible, yet, in the past, junior explorers have assumed 100% recoveries when reporting. Highgold Mining did this for gold, silver and copper for its April 2020 resource on Johnson Tract in Alaska, USA. To be fair to Highgold, a subsequent study in 2022 used a gold equivalent formula that utilised metal recoveries from locked cycle metallurgical test work that it did not have in hand in 2020. 

Interestingly, if a company assumes all metallurgical recoveries are the same, the actual recovery becomes irrelevant as the formula cancels out their impacts (Au recovery / Cu recovery or 80%/80% = 1). This was the case with American Eagle Gold's NAK copper equivalent calculation, which assumed 80% metallurgical recoveries for copper, gold, silver and molybdenum. It is also highly unlikely that each metal would recover to the same extent because the way metals recover into different concentrates means that improving the recovery of one metal is often at the expense of another.

"If copper is likely to generate 90% of a project's revenues, the mill and plant will be set up to maximise copper recoveries. Unless the molybdenum grade is sufficient to justify the construction of a molybdenum recovery circuit, the molybdenum will end up in the copper concentrate [and unlikely to be payable]," said the polymetallic mining engineer. 

Australian junior Southern Hemisphere Mining does a good job of explaining the copper equivalent used in its drilling results on February 19, 2024. It acknowledged that the results are exploration results with no allowance for recovery losses should mining eventually result. It used modest price assumptions of $3.20/lb copper, $1,700/oz gold and $12.50/lb molybdenum and recognised that historical test work showed that "recoveries of copper vary between 75% and 91% with the weighted average of the results being 84%. Recoveries of gold vary between 41% and 57% , which is in line with expectations given the relatively low gold grades within the deposit."

National Instrument 43-101 guidelines, which govern how companies listed on Canadian stock exchanges report drill results, are sufficiently vague to allow many reporting sins. "An issuer must not disclose a metal or mineral equivalent grade for a multiple commodity deposit, sampled interval, or drill intersection unless it also discloses the grade of each metal or mineral used to establish the metal or mineral equivalent grade."

No mention is made of whether that 0.1% copper can be recovered (or metal price assumption guidance) so that copper can add to the equivalent value of a drill intercept. NI 43-101 is tougher when reporting mineral resources: "When the grade for a multiple commodity mineral resource is reported as metal or mineral equivalent, report the individual grade of each metal or mineral and the metal prices, recoveries, and any other relevant conversion factors used to estimate the metal or mineral equivalent grade."

"It's tempting for dodgy junior companies to throw in everything under the sun in a metal equivalent based on their trace geochemistry. This is often nonsense that one operation will produce gold, silver and copper along with magnetite, lithium, platinum, rhenium, uranium, and rare earth elements," said Erik Ronald, principal consultant at SRK Consulting in a LinkedIn post.

Australia's JORC regulations require companies to have "a clear statement that it is the company's opinion that all the elements included in the metal equivalents calculation have a reasonable potential to be recovered and sold," as well as stipulating that the metal chosen for the reporting on an equivalent basis should be the one that contributes most to the metal equivalent calculation. JORC also says reporting based on metal equivalents "is not appropriate if metallurgical recovery information is not available or able to be estimated with reasonable confidence."

A mining executive should be able to guestimate a ballpark recovery figure for their deposit based on those achieved at similar deposits. Juniors quickly claim their deposit is geologically analogous to a proven world-beating deposit, so it is surely a short step to use analogous recovery data from that world-beater. Filo does this: "Sulphide copper equivalent assumes metallurgical recoveries of 84% for copper, 70% for gold and 77% for silver based on similar deposits, as no sufficient metallurgical test work has been done on the sulphide mineralisation." Some simple rules of thumb are commonly used as starting points, such as 70% recovery from an oxide gold heap leach and 50% molybdenum recovery from a copper deposit. However, equivalency calculations can change with time within the same organisation. Filo's January 2024 corporate presentation contains two different copper equivalent calculations, so reading the accompanying footnotes to any table that reports metal equivalent grades is essential.

Many junior executives put out misleading drill results because they do not know any better, they are disingenuous or they don't put the work in to produce a better result. While some welcome the opportunity to inflate their numbers to make their projects look better than they are. "In most cases, people don't know what they are doing or doing it wrong. Conversion is the biggest problem, particularly when you have base and precious metals, as people use ounces not troy ounces, and what type of tons: metric tons, tonnes or short tons," an experienced copper mining engineer said.

Payability

Most retail investors have never heard of payability, which is where the rubber hits the road for a metals project. Payability is how much of a metal a company will be paid for by the smelter or refiner, often well below the full apparent value.

For example, polymetallic operations often produce a lead concentrate and then float the tails to produce a zinc concentrate, and the copper often goes to the lead concentrate. However, an off-taker may not include a payable on copper in a lead concentrate. Similarly, silver will float into the zinc concentrate, but if the amount does not meet the off-takers hurdle rate, they will not pay for it. "A typical offtake has a 93gpt deduction on silver and only pays 70% of that. So, if you have 200gpt silver in a zinc concentrate, taking 90gpt off the top leaves 110gpt, and the off-taker pays 70% of that, about 80gpt. There is less than 50% payable silver in the zinc concentrate," said the copper mining engineer. A good question for investors to ask their favourite junior is: what concentrates will be produced? And follow this up with, what is payable in the concentrates and how much?

Conclusions

While payability should not be factored into the metal equivalent calculation for an early-stage exploration project, investors should be aware that the contribution to revenues of different metals is likely to be less than stated. That said, junior executives should ensure that the numbers presented are not misleading. The primary metal stated in reporting should ideally be that of the commodity with the largest contribution. Even if early-stage metallurgical tests have not been completed, realistic recovery rates should be assumed for byproduct metals, particularly if the main product will likely be the dominant revenue stream. Most importantly, realistic long-term price assumptions should be used. For results that include mainstream commodities, like copper and gold, pricing differentials may not be that important. Pricing assumptions can make a big difference for the more volatile metals such as cobalt and molybdenum, so investors need to read the small print.