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The Southern African Institute of Mining and Metallurgy
Platinum 2012
577
D.A. Cowen, V. Agnello, P.J. Petit
Evaluation of net smelter returns in the South African PGE industry by
application of base metal concentrate commercial treatment terms
D.A. Cowen Snowden Mining Industry Consultants
V. Agnello Snowden Mining Industry Consultants
P.J.Petit Snowden Mining Industry Consultants
Abstract
Toll and custom treatment of base metal concentrates have been performed for decades as
mines and concentrators are developed distant from capital and, energy-intensive smelting and
refining facilities. Commercial treatment terms have been developed and refined for over a
century, and are negotiated taking into account a complex array of quality and economic
factors.
Treatment of third-party concentrates in the South African platinum industry is a comparatively
recent development, brought about by the opening up of mineral rights and operations being
developed that are smaller than the critical size required to sustain capitalization of smelting or
refining plant. Published commercial terms have not been demonstrated to reflect the
complexities and subtleties of base metal concentrate markets.
This paper outlines some key elements and parameter ranges of base metal concentrate
treatment contracts, and applies similar principles to typical Merensky and UG2 platinum group
element (PGE) concentrates to determine potential value distribution between the mining and
treatment parties in tolling arrangements.
Introduction
Toll and custom treatment of base metal concentrates has been performed for decades as
mines and concentrators (miners) are developed distant from capital, energy-, and labour-
intensive smelting and refining facilities (processors). Commercial terms for the sale of copper,
nickel, zinc, and lead have been developed and refined for over a century and are negotiated
taking into account a complex array of quality and economic factors.
The ultimate objective of treatment and refining contracts is to endeavour to allocate the value
of the final saleable product and the costs of its production equitably. In order to provide
incentive for both parties (miners and processors), contractual arrangements must address the
risk-return balance of each business.
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Miners are intrinsically risk takers, facing unique uncertainties in resource definition and
commodity prices, whilst processors are more akin to industrial operations with controllable
raw materials and cost structures. High margins in commodity boom periods provide reward for
mining risk, while the reward for processing operations, is stable returns over the life of the
capital asset.
Factors within the miners’ control comprise delivery of concentrate of a quality acceptable to
the processing facility. The processor’s control area includes the cost and efficiency of recovery.
Key aspects of the concentrate sales contract should therefore embody appropriate allocation
of operational efficiency benefits, processing costs, and metal price risk.
The South African platinum industry
Treatment of third-party concentrates in the South African platinum industry is a comparatively
recent development, brought about by the opening of up mineral rights and operations being
developed that are smaller than the critical size required to sustain capitalization of smelting or
refining plant. Published commercial terms have not been demonstrated to reflect the
complexities and subtleties of base metal concentrate markets1.
There are currently several independent concentrate-producing platinum group element (PGE)
miners in South Africa, and four major integrated miner/processors1. A survey of PGE projects
in South Africa indicates that the number of stand-alone miners could increase significantly
over the next decade.
Platinum-bearing reef is found in three primary geographic localities in South Africa, referred to
as the western limb (WL), eastern limb (EL), and northern limb (NL) of the Bushveld Complex.
The WL is centred on Rustenburg, the capital of PGE mining in South Africa, and consequently
the centre of processing operations. Development of mining operations on the EL and NL is
limited principally to concentrate production.
The characteristics of ores and their concentrates are markedly different between the three
primary economic PGE reefs, namely the Merensky Reef (MR) and the UG2 Reef on the WL and
EL and the Platreef (PR) on the NL. The PGE distributions differ not only between reef types, but
between areas for each reef type, as illustrated in Error! Reference source not found..
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The Southern African Institute of Mining and Metallurgy
Platinum 2012
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Figure 1-PGE percentage distribution based on reef type and locality (modified1,2)
Merensky concentrates have a higher Pt/Pd ratio and contain significant amounts of nickel and
copper, while UG2 concentrates contain a larger percentage of lesser PGMs, such as rhodium,
and are lower in base metal values. Platreef concentrates may be similar to Merensky
concentrates in terms of base metal sulphide hosting of PGEs, but have different PGE
distributions. The EL concentrates tend to have more palladium and base metals than WL
concentrates1. The range of assay values for the various types of concentrate is large, although
certain thresholds and trends are noted.
Generalized characteristics in resource statements of company annual reports are shown in
Table I.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Merensky WL Merensky EL UG2 WL UG2 EL Platreef NL
PGE
Distribution (%)
Pt% Pd% Rh% Au%
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The Southern African Institute of Mining and Metallurgy
Platinum 2012
580
Table I-General resource characteristics1,2
Unit Western Limb Eastern Limb Northern Limb
Merensky Reef
Mineralogy Ni/Cu Sulphide Ni/Cu Sulphide N/A
Resource PGE Grade g/t 4E >5g/t >4g/t N/A
Pt content percent >60% >50% N/A
Resource Ni Grade percent >0.2% >0.2% N/A
UG2 Reef
Mineralogy Chromite Chromite N/A
Resource PGE Grade g/t 4E >4g/t >4.5g/t N/A
Resource Ni Grade percent 0.15%
Furthermore, the average recovery of metal to concentrate in flotation is variable across the
Limbs and across the reefs, with MR recoveries broadly being in the order of 5 per cent higher
than UG2 (for the same target grade) and Platreef concentrates being a further 5 per cent lower
(Table II).
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The Southern African Institute of Mining and Metallurgy
Platinum 2012
581
Table II-Typical ex-mine PGM concentrates1
Assay Unit Merensky UG2 Platreef
PGM g/t 4E 200.0 200.0 120.0
Pt % of 4E 63.5 56.7 45.1
Pd % of 4E 28.1 29.4 45.7
Rh % of 4E 4.4 13.0 3.2
Au % of 4E 4.0 0.9 6.0
Ni % 6.0 1.4 4.9
Cu % 3.4 0.7 2.5
Cr2O3 % 0.6 3.0 0.3
Sulphur % 15–20 4–6 10–15
These myriad factors results in a complex set of variables that determine the value of a
concentrate.
PGE concentrate processing operations are capital intensive with a high level of fixed costs,
power and labour being the principal cost drivers. Whilst technology development may change
this structurally in the medium to long term, the current route for stand-alone miners is to
engage the major processors for sale or toll treatment of their concentrates.
Commercial terms6,5,6,8
Typical pricing clauses in a commercial concentrate sales contract include components of
distribution of metal value, through deductions and price participation, and allocation of
smelting and refining costs, through application of treatment and refining charges1. Penalty
charges are applied to account for elements in the concentrate that affect process recoveries or
costs.
For a copper concentrate this may take the form of:
Deductions7 – The amount deducted from concentrate grades to calculate the metal paid for
by a smelter, e.g. copper concentrates typically deduct 1.0-1.5 units (grade percentage points).
The unit deduction is related to the grade of concentrate, with higher-grade concentrates
attracting a higher unit deduction.
Thus a concentrate grading 28 per cent copper would be paid as grading 26.9 per cent copper
(effective 96 per cent payability). This is subject to a minimum deduction, expressed as a
percentage of contained metal. Thus a minimum deduction of 5 per cent term for a 28 per cent
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The Southern African Institute of Mining and Metallurgy
Platinum 2012
582
copper concentrate would result in a maximum payability of 95 per cent of the contained metal
value to the miner.
Metal recovery in PGE smelting is typically reported to be between 92-95 per cent. and in
refining over 99 per cent. A deduction of 10 per cent (or 90 per cent payability) of contained
metal value would result in the processor receiving between 1-6 per cent of the contained
metal value, depending on smelting and refining operation recoveries.
Treatment charge (TC) – The charge paid by the miner to have its concentrate treated through
smelting to produce saleable metal. This is typically quoted in US$ per ton of concentrate, and
is theoretically a function of the cost of smelting. In practice, it fluctuates as a function of the
supply/demand balance in the concentrate market.
Refining Charge (RC) – The price paid by the miner to the processor for refining the contained
metals in their concentrate to produce a saleable metal. The refining charge is based on the
payable metal content, and is theoretically a function of the cost of refining. Similar to TCs, it
fluctuates as a function of the balance between supply of smelter matte and refinery capacity.
An analysis of 2011/2012 publicly-listed PGE companies’ annual financial statements and other
open-source documentation indicates that the cost of South African PGE smelting varies
between US$200-US$250 per ton concentrate, and refining US$250-300 per ton concentrate1.
Price participation – The price participation mechanism may increase TC/RC as the metal price
increases above an agreed base price, and occasionally reduces the TC/RC as the price
decreases below the agreed base price. This allows smelters to participate in rises/falls in the
metal prices, and is usually combined with ’floors’ and ’caps’ to limit the processor’s loss or
gains.
The authors have no evidence of price participation being applied in PGE smelting contracts in
South Africa. The number of economic metals in a PGE concentrate ’basket’ would require
extensive price participation negotiations, with potential benefits being cancelled by
uncorrelated or inversely-correlated metal price movements of the basket metals.
Penalty charges (penalty) – The penalty charge is specific to particular elements that result in
additional process activities being necessary to remove them from the final metal product, or
that need to be disposed of in an environmentally friendly manner. A penalty is usually specific
for a particular deleterious element, and is related to the cost of its removal and/or disposal, or
the extent to which it reduces the value of final metal product.
The key penalty component for platinum concentrates is chromite, which has negative effects
on both the smelting and refining processes9,10,12.
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The authors have not found any publicly reported ranges for chromite penalties in the South
African PGE industry. As a proxy for chromite penalties, this paper assumes that the rate at
which chromite penalties are applied will be equal to the TC of treating a chromite-containing
concentrate blended with sufficient mass of zero-grade concentrate to reduce the grade of
overall chromite values to below penalty levels.
It has been reported that concentrates with chromite content of above 1.0 per cent result in
metallurgical difficulties in the smelting operation9,10,11. Thus this analysis assumes that a
chromite penalty equal to the base TC will be applied to a concentrate grading 2 per cent
chromite; and a penalty equal to three times the base TC will be applied to a concentrate
grading 3 per cent chromite, etc.
South African PGE concentrate evaluation3,13
A custom MS Excel model has been developed to evaluate the relative effects of changing
concentrate parameters on the payment a miner could expect to receive for typical PGE
concentrate, thereby simulating the range of expected returns to miners' net of smelting and
refining charges.
The ’base case’ models a typical Merensky reef concentrate of quality indicated in Error!
Reference source not found.. The parameters applied are indicated in Error! Reference source
not found..
Table III-Snowden base case for PGE content in reef types1
PGE Unit Merensky UG2 Platreef
4E grade g/t 200 200 120
Pt split per cent 60.0% 55.0% 45.0%
Pd split per cent 30.0% 30.0% 45.0%
Rh split per cent 5.0% 10.0% 3.0%
Au split per cent 5.0% 5.0% 7.0%
Ni grade per cent 6.0% 1.0% 5.0%
Cu grade per cent 3.5% 0.5% 2.5%
Cr grade per cent 1.0% 3.0% 0.0%
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The Southern African Institute of Mining and Metallurgy
Platinum 2012
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Table IV-Metal prices and process charges for PGEs,1
Metal Prices Cost unit Metal Price
Platinum USD per ounce 1,700
Palladium USD per ounce 600
Rhodium USD per ounce 2,500
Gold USD per ounce 1,800
Nickel US cents per pound 700
Copper US cents per pound 200
Payability
PGE payability per cent 90%
Ni payability per cent 85%
Cu payability per cent 85%
Treatment charge
TC (smelter) USD per ton 250
Refining charge6
Pt RC USD per ounce Pt 25
Pd RC USD perounce Pd 25
Rh RC USD per ounce Rh 75
Au RC USD per ounce Au 10
Ni RC US cents per pound Ni 80
Cu RC US cents per pound Cu 20
Penalty basis
Max Cr per cent 1.50%
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The Southern African Institute of Mining and Metallurgy
Platinum 2012
585
The effects of different concentrate 4E grades, metal prices, PGE payability, TC, RC, and
chromite content are illustrated in Error! Reference source not found.–Error! Reference source
not found..
The charts present the gross unit metal value (GMV) of the concentrate per ton of concentrate,
based on the basket prices indicated, the net metal value (NMV) attributable to the miner on
the same basis (equal to GMV less deductions), TC/RC and penalties. In addition, the NMV:GMV
ratio is reflected as a percentage payment to the miner (PMT).
Figure 2-Effect of PGE concentrate grade on smelter return
The benefit to the miner producing a high-PGE concentrate grade is demonstrated, with the
unit value not only increasing threefold per ton of concentrate, but payability increasing over 7
percentage points over the range 50 g/t to 250 g/t 4E; the principal driver of the latter being
the treatment charge.
76%
81%
83%84%
85%
-
2,000
4,000
6,000
8,000
10,000
12,000
70%
75%
80%
85%
90%
95%
100%
50 100 150 200 250
GMV/NMV
(USD/t conc)
Mine payment
%
PGE Conc Grade (g/t 4E)
GMV NMV PMT
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The Southern African Institute of Mining and Metallurgy
Platinum 2012
586
Figure 3-Effect of metal price sensitivity on smelter return
The effect of metal price fluctuations is typified by a percentage point variation in payment to
the miner, demonstrating its higher exposure to metal price risk/reward.
Figure 4-Effect of PGE payability on smelter return
83%84% 84%
85% 85%
-
2,000
4,000
6,000
8,000
10,000
12,000
70%
75%
80%
85%
90%
95%
100%
-20% -10% 0% 10% 20%
GMV/NMV
(USD/t conc)
Mine payment
%
Sensitivity Factor (%)
GMV NMV PMT
94%
89%
84%
79%
74%
-
2,000
4,000
6,000
8,000
10,000
12,000
70%
75%
80%
85%
90%
95%
100%
100% 95% 90% 85% 80%
GMV/NMV
(USD/t conc)
Mine payment
%
4E Payment (%)
GMV NMV PMT
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The Southern African Institute of Mining and Metallurgy
Platinum 2012
587
For constant concentrate grades and metal prices, return to the miner will be directly
proportional to PGE payability. Smelter return, however, will be influenced by smelter
efficiency. The relationship between metal grade and payability has been excluded in this
analysis, but may be incorporated by linking payability directly to grade. This would encourage
miners to optimize concentrate grades, which will enable the smelter to operate more
efficiently.
Figure 5-Effect of treatment charge on smelter return
Payment variability over a wide range of treatment charges, between US$100-400 per ton of
concentrate, is typified only by a single percentage point either way. This is indicative of the
relative small quantum of smelter processing cost against the value of metal production, and is
a pointer to the value of efficient smelting.
86% 85% 85% 84% 84% 83% 83%
-
2,000
4,000
6,000
8,000
10,000
12,000
70%
75%
80%
85%
90%
95%
100%
100 150 200 250 300 350 400
GMV/NMV
(USD/t conc)Mine payment
%
Treatment Charge (USD/t conc)
GMV NMV PMT
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The Southern African Institute of Mining and Metallurgy
Platinum 2012
588
Figure 6-Effect of refining charges on smelter return
Similar to treatment charges, the mine return is relatively insensitive to mining charge, when
compared to recovery/revenue factors.
Figure 7-Effect of chrome penalty on smelter return
85% 85% 84% 84% 83%
-
2,000
4,000
6,000
8,000
10,000
12,000
70%
75%
80%
85%
90%
95%
100%
-40% -20% 0% 20% 40%
GMV/NMV
(USD/t conc)
Mine payment
%
Sensitivity Factor (%)
GMV NMV PMT
84% 84%83%
82%80%
-
2,000
4,000
6,000
8,000
10,000
12,000
70%
75%
80%
85%
90%
95%
100%
0.0% 1.0% 2.0% 3.0% 4.0%
GMV/NMV
(USD/t conc)
Mine payment
%
Concentrate Chrome Content (%)
GMV NMV PMT
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The Southern African Institute of Mining and Metallurgy
Platinum 2012
589
As modelled, the effect of chrome content is illustrated by an approximate 2 per cent reduction
in mine payment per percentage point above 1.5 per cent. Discussion with industry members
revealed that this is a typical structure in place in some contractsError! Reference source not
found.. It is notable that the return is asymmetric, with ’clean’ concentrate not attracting a
premium.
Error! Reference source not found. illustrates the effect of applying the standard parameters to
typical Merensky, UG2 and Platreef concentrates.
Figure 8-Effect of reef values on smelter return
The relative GMV value of concentrates differs as a result of metal content differences and
lower grade of PR concentrates. For the same grade of concentrate, absolute payment
percentages to miners for MR and UG2 are similar.
Error! Reference source not found. illustrates the different process charges for the three ore
types.
84% 84%
81%
70%
75%
80%
85%
90%
95%
100%
-
2,000
4,000
6,000
8,000
10,000
12,000
MR UG2 PR
Mine
Payment (%)GMV/NMV
GMV NMV PMT PCT
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The Southern African Institute of Mining and Metallurgy
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Figure 9-Commercial terms and charges for the three ore types
Chromite penalties for UG2 are largely offset by lower refining charges as a consequence of
lower base metal tenors in the UG2.
Conclusions
The strategy for maximizing return for a miner is to produce high-grade concentrate with low
penalties. Concentrate grade bears an inverse relationship to concentrate tonnage, and
concentrate quality (including chromite content) is controllable through concentrator
design/operating practice, operating, and capital cost. Consequently, there exists opportunities
for a miner to tailor its beneficiation operations to optimize returns under a given set of
concentrate sales terms. These possibilities should be considered at the pre-feasibility stage.
From a processor perspective, similar goals are beneficial, with high-grade clean concentrates
maximizing the smelter’s economic utilization. Further consideration could be given to the
economic value of other elements in a concentrate mix. For example, Platreef concentrate,
under the base terms, provides low payability to the miner, as a consequence of its low grade
and low payment when compared to Merensky and UG2 concentrates.
The benefit of Platreef as a source of sulphide concentrate is of important technical value, as a
diluent of chromite-bearing material has not been considered in the analysis. Smelting power
requirements are lower for Merensky and Platreef sulphide ores. There should be recognition
of this benefit in concentrate agreements.
PMT 1,072 PMT 962
PMT 609
TC 250 TC 250
TC 250
Cr R PEN 83
RC 293 RC 208
RC 197
-
200
400
600
800
1,000
1,200
1,400
1,600
1,800
MR UG2 PR
PMT
Components
(USD/t conc)
PMT TC Cr R PEN RC
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The Southern African Institute of Mining and Metallurgy
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From an Integrated producer perspective, separation and distinction of the above
considerations is important to ensure coherence in mining strategy and processing strategies,
particularly as the mix of ore availability, in asset portfolios change.
References
1. Anglo American Platinum, Impala Platinum, Lonmin Platinum, and Northam Platinum.
Annual Reports, 2008–2011. [Accessed May/June] 2012.
2. Lomberg, K. Mineral Resource and Reserve aspects of the Junior Miners on the Bushveld
Complex. http://www.samcode.co.za/downloads/MiningInAfrica/LOMBERG_2008.pdf
[Accessed 1 June 2012].
3. Snowden Mining Industry Consultants. Analysis of South African Smelter Costs and Metal
Prices. 2008–2012.
4. Cramer, L. What is your PGM concentrate worth? Journal of the Southern African Institute
of Mining and Metallurgy, Sep. 2008. pp. 387-394.
5. Minedesignwiki. Net smelter return.
https://www.minedesignwiki.org/index.php/Net_smelter_return [Accessed 8 March
2012].
6. Hay, M.P. and Roy, R. A case study of optimising UG2 flotation performance. Part 1:
Bench, pilot and plant scale factors which influence Cr2O3 entrainment in UG2 flotation.
Minerals Engineering, vol. 23, no. 11–13, 2010. pp. 855-867.
7. Söderström, U. Copper markets day. http://investors.boliden.com/afw/files/press/
boliden/Kokkola-2008-6_Smelters_Copper_US.pdf /November 2008. [Accessed 1 June
2012].
8. Goldie, R. Net smelter return models and their use in the exploration, evaluation and
exploitation of polymetallic deposits. Geoscience Canada, vol. 18, no. 4, Dec. 1991.
pp. 159-168.
9. Hundermark, R. et al. The smelting operations of Anglo American's platinum business: an
update. Southern African Pyrometallurgy 2011 International Conference, Cradle of
Humankind, South Africa, 6-9 March 2011. Southern African Institute of Mining and
Metallurgy, Johannesburg, 2011. pp 295-308.
10. Coetzee, V. Common-sense improvements to electric smelting at Impala Platinum.
Southern African Pyrometallurgy 2006 International Conference, Cradle of Humankind,
South Africa, 5-8 March 2006. Southern African Institute of Mining and Metallurgy,
Johannesburg, 2006. pp. 43-62.
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11. Eksteen, J. Cracking a hard nut: An overview of Lonmin's operations directed at smelting
of UG2-rich concentrate blends. Journal of the Southern African Institute of Mining and
Metallurgy, vol. 111, Oct. 2011. pp. 681- 690.
12. Georgalli, G.A. and Anderson, D.K. Optimizing concentrate allocation to Anglo Platinum
smelters. The 4th International Platinum Conference, Platinum in transition ‘Boom or
Bust’. Southern African Institute of Mining and Metallurgy, Johannesburg, 2010.
pp. 91-96.
13. Barr, G. et al. On-site processing vs. sale of copper concentrates. ALTA 2005, Perth,
Australia, June 2005. pp. 1-16.
The Author
Dennis Cowen, Divisional Manager – Corporate, Snowden
Dennis has 28 years of experience in the mining industry. He has been consulting for the the
last 13 years in techno-economic valuations, cash flow and financial modeling, risk modeling
and alternative valuation methods for resource related projects and companies, in platinum,
coal, gold and base metals fields. Clients range from large corporations including Anglo
American, Anglo Platinum, BHP Billiton, Konkola Copper Mines, Ivanhoe Nickel and Platinum
together with numerous junior mining companies, financial institutions and consultancies. Prior
to entering consultancy Dennis was at Gold Fields for 4 years, heading Coal and Base Metals in
the Mineral Economics Division and managing Gold Fields Coal New Business and Acquisitions.
Dennis practiced as an engineer for 10 years, running his own Process Engineering consultancy,
heading Davy South Africa process engineering division, performing project management and
engineering for Scientific Plant and Design and performing metallurgical research and
development for Anglo American after being trained in plant operations at Vaal Reefs.
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