Question 11 of 13: Smelter Contract Penalties, Payments and Disputes

Question 5: Smelter Contract Penalties, Payments and Disputes (15 marks)

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Quotational period and payment – typical wording. The quotational period (QP) is the window of trading days over which the settlement metal price is averaged, defined relative to the shipment or arrival date – typical contract wording reads "the price shall be the average LME Cash Settlement quotation for the month following the month of arrival of the material at the smelter" (a QP = M+1 contract), or occasionally "the month of arrival" (QP = M). Payment terms describe the cash-flow timing against that price: typical wording is "the buyer shall pay 90% of the estimated value of the concentrate, based on provisional assays and the prevailing metal price, within 10 days of arrival; the balance shall be paid, or refunded, within 30 days of receipt of final assay and final QP-average price."

Given.

Find. Total penalties payable per year, the percentage of copper payable, and the gold payable per year.

Approach. Convert the dry-basis tonnage to wet tonnage for the moisture penalty (which is defined per wet tonne), apply each penalty schedule to its own excess above the free limit, apply the 1-unit copper deduction directly to the assay, and apply the smelter's marginal gold-payment rate to the excess above the 0.03 oz/t deductible.

1. Wet tonnage. With 10% moisture, dry tonnes = wet tonnes × (1 − 0.10): $$\text{Wet tonnes} = \frac{20{,}000}{1-0.10} = \boxed{22{,}222.2\ \text{wet t/yr}}$$
2. Arsenic penalty. Excess above the 0.1% free limit is 0.2% − 0.1% = 0.1%, i.e. exactly one 0.1% increment, charged per DRY tonne (the assay basis): $$\text{As penalty} = 1 \times \text{CAD } 4.00/\text{t} \times 20{,}000\ \text{t} = \boxed{\text{CAD } 80{,}000/\text{yr}}$$
3. Moisture penalty. Excess above the 8% free limit is 10% − 8% = 2%, charged per WET tonne as specified: $$\text{Moisture penalty} = 2 \times \text{CAD } 2.00/\text{t} \times 22{,}222.2\ \text{wet t} = \boxed{\text{CAD } 88{,}888.9/\text{yr}}$$
4. Total penalties. $$\text{Total} = 80{,}000 + 88{,}888.9 = \boxed{\text{CAD } 168{,}888.9/\text{yr}}$$
5. Copper payable. A 1-unit (percentage-point) deduction from a 22% assay leaves 21% payable, i.e. as a fraction of the assayed grade: $$\%\ \text{Cu payable} = \frac{22-1}{22}\times 100 = \boxed{95.45\%}$$
6. Gold payable. The 0.10 oz/t assay falls in the 0.09–0.15 op/t bracket, so the smelter pays 94% of the excess over the 0.03 oz/t deductible: $$\text{Au payable} = (0.10-0.03)\times 0.94 = 0.0658\ \text{oz/t concentrate}$$ $$\text{Annual Au payable} = 0.0658 \times 20{,}000\ \text{t} = \boxed{1{,}316\ \text{oz/yr}}$$

Umpire function and facilities. An umpire (umpire assayer/umpire laboratory) is an independent, mutually agreed third-party laboratory called in to resolve a dispute between the mine's assay and the smelter's assay when the two differ by more than the contract's agreed "splitting limit". Umpire services are provided by accredited independent assay laboratories with no commercial relationship to either party (major international umpire houses include ALS, SGS and Inspectorate).

When required, and splitting limits. Umpire assay is triggered only when the mine's and smelter's own assays disagree by more than the contractually agreed splitting limit – typical published limits are on the order of 0.20–0.30% absolute for copper, roughly 0.03–0.05 oz/t for gold, and roughly 0.05% absolute for arsenic (limits vary contract to contract and should always be confirmed against the specific smelter agreement, but are of this order for a sulphide copper concentrate).

Which assay governs, and who pays. (1 mark) Of the three assays available (mine's, smelter's, and umpire's), the umpire assay is compared to whichever of the mine's or smelter's own assay it falls closer to, and that CLOSER of the two original assays is the one adopted for settlement (the umpire result itself is not simply substituted in unless it happens to be exactly between them). The party whose original assay was FURTHER from the umpire result pays the umpire's fee, giving both sides an incentive to assay honestly rather than aggressively.

Charge per tonne of concentrate vs. charge per payable metal. A charge per tonne of concentrate supplied is a flat fee applied to every dry tonne shipped, independent of grade – it is simple to administer and predictable for both parties, but it penalizes a HIGH-grade concentrate less per unit of contained metal than a low-grade one (fewer tonnes need shipping for the same metal content), which rewards the mine for high-grading. A charge per payable metal in concentrate instead scales the refining charge with the actual quantity of PAYABLE metal delivered (e.g. cents per payable pound of copper, or dollars per payable ounce of gold) – it more directly reflects the smelter/refiner's true cost driver (the metal actually processed and refined) and is the more common structure for precious-metal refining charges, while base-metal treatment charges are more commonly quoted per tonne of concentrate because comminution/smelting cost scales more with mass throughput than with metal content.