Cut-Off Grade Strategy: How to Choose the Right Number for Indonesian Deposits

I’ve seen too many projects where the cut-off grade was picked in five minutes during a meeting, typed into the estimation script, and never questioned again. Then six months later, the grade-tonnage curve looks wrong, the resource is overstated, and nobody remembers why they chose 0.5 g/t Au in the first place.

The cut-off grade (COG) is the single most consequential number in your resource statement. Get it wrong and your entire resource estimate is fiction — too high and you’re reporting ore that can’t be mined economically; too low and you’re wasting drill meters on material that dilutes your grade and destroys your project economics.

This post walks through how to actually think about COG for Indonesian deposits, with real numbers from projects I’ve worked on.

What cut-off grade actually means

The cut-off grade is the minimum grade at which a block of material can be economically processed. Below it, the block is waste. Above it, the block is ore. Simple in theory. In practice, the number depends on at least six variables that all interact:

• Metal price — what the market will pay for your recovered metal
• Mining cost — what it costs to dig the material out
• Processing cost — what it costs to crush, grind, and recover the metal
• Metallurgical recovery — what percentage of metal your plant actually captures
• Dilution — how much waste gets mixed in during mining
• Mining method — open pit vs underground changes everything

The basic formula is straightforward:

COG = (Processing Cost + Mining Cost) / (Metal Price × Recovery × 1000)

But this formula assumes everything is constant. In reality, nothing is.

The Indonesian context

Indonesian deposits have specific characteristics that make COG selection harder than the textbook suggests:

Deeply weathered profiles. Most Indonesian gold and copper deposits have a lateritic cap that’s 20-80m thick. The transition zone between oxide and sulfide often has dramatically different metallurgical recoveries — 85% recovery in the oxide, 35% in the transitional sulfide. If you use a single COG for the entire deposit, you’re either over-reporting the sulfide resource or under-reporting the oxide.

Steep topography. I worked on a project in Sulawesi where the deposit sat on a ridge. The mining cost for material at 1,200m elevation was double the cost for material at 900m because of haul road construction. A single COG doesn’t capture this. You need elevation-dependent COGs or, at minimum, a sensitivity analysis.

Small-scale mining heritage. Many Indonesian deposits have been partially mined by artisanal operations. The high-grade zones are gone. What remains is lower-grade material that might have been economic at $1,800/oz Au but isn’t at $1,650. Your COG needs to reflect what’s actually in the ground, not what was there 20 years ago.

The three COG approaches

1. Break-even COG (minimum baseline)

This is the simplest: the grade at which revenue equals cost. Below this, you lose money. This is your floor — never report resources below break-even COG unless you have a very specific strategic reason (and disclose it).

For a typical Indonesian open-pit gold project:

• Mining cost: $2.50/t
• Processing cost: $8.00/t
• G&A: $1.50/t
• Recovery: 85%
• Gold price: $1,750/oz

COG = ($8.00 + $2.50 + $1.50) / ($1,750 × 0.85 × 31.1035 / 1000)
COG = $12.00 / $46.27
COG = 0.26 g/t Au

This is the absolute minimum. You would never use this as your reporting COG because it gives zero margin for error.

2. Operating COG (practical)

Add a margin — typically 15-30% above break-even. This accounts for price volatility, cost overruns, and recovery shortfalls. For the example above, a 25% margin gives:

Operating COG = 0.26 × 1.25 = 0.33 g/t Au

This is what most projects actually use for resource reporting. But it still doesn’t account for the full picture.

3. Strategic COG (what you should use)

This incorporates mining method, dilution, and the grade-tonnage relationship. The question isn’t “what grade breaks even?” but “what COG gives me the best NPV for this deposit?”

To answer this, you need to run multiple estimations at different COGs — 0.3, 0.4, 0.5, 0.6, 0.8, 1.0 g/t — and plot the grade-tonnage curve. Then overlay the mining schedule and calculate NPV for each scenario.

I’ve seen deposits where 0.4 g/t gives 2M oz at 0.7 g/t average grade, but 0.6 g/t gives 1.2M oz at 1.1 g/t average — and the 0.6 g/t scenario has a 40% higher NPV because the higher grade means lower processing cost per ounce recovered.

Common mistakes I see

Using a COG from a different deposit. “The project next door uses 0.5 g/t, so we will too.” No. Your metallurgical recovery, mining cost, and dilution are different. Run your own numbers.

Ignoring recovery by domain. If your oxide recovers at 88% and your transitional sulfide recovers at 45%, you need domain-specific COGs. A single COG will either overstate the sulfide resource or understate the oxide.

Forgetting dilution. Your model estimates in-situ grade. Mining mixes in waste. A 0.5 g/t COG with 10% dilution at zero grade means your mined grade is 0.45 g/t — which might be below your actual break-even.

Not revisiting COG when prices change. Gold went from $1,900 to $1,650 and back to $1,750 in 18 months. If your COG was set at $1,900, your resource is overstated at $1,650. JORC 2012 requires you to state the price assumptions. Update them.

Using COG to make a marginal deposit look bigger. I’ve seen reports where the COG was dropped from 0.5 to 0.3 g/t purely to push the resource from “Indicated” to “Inferred” tonnage thresholds. This is not what COG is for. The market will see through this in due diligence.

Practical workflow for Indonesian deposits

1. Start with break-even COG using current costs and a conservative price (15% below spot).
2. Run domain-specific recoveries — don’t use a single recovery number for a deposit with oxide/sulfide zones.
3. Test 4-5 COG scenarios and generate grade-tonnage curves for each.
4. Overlay mining method — open pit COG is usually lower than underground because mining cost per tonne is lower.
5. Apply dilution — 5-15% for open pit, 10-20% for underground.
6. Run NPV for each scenario if you have a mine schedule. If not, use the COG that gives you the best grade-tonnage balance for your deposit type.
7. Document everything — JORC Table 1 Section 1 requires you to disclose the COG and the rationale. “We used 0.5 g/t” is not a rationale. “We used 0.5 g/t based on a gold price of $1,750/oz, 85% recovery, $12/t total cost, and 10% dilution” is.

The bottom line

Your cut-off grade is not a number you pick. It’s a number you derive, test, and defend. For Indonesian deposits specifically, the interaction between weathering profile, metallurgical recovery, and topography means a single COG is almost never appropriate. Run the scenarios, document the assumptions, and be honest about what the number means — and what it doesn’t.

The geologists who get this right produce resource statements that survive due diligence. The ones who don’t spend three months re-estimating when the buyer’s technical team starts asking questions.