Standard Smelter Contract Terms: 24-MMP-A4 Mine Valuation and Mineral Resource Estimation, May 2018, Q21

Question 6.1: Standard Smelter Contract Terms (7 marks)

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6.1.4 Minimum payable. The smelter contract sets a floor grade below which NO metal in the concentrate is paid for at all (the mine bears the full loss on that portion), distinct from the unit deduction which reduces, but does not zero out, payability above the floor; concentrate assaying below the minimum payable threshold for a given metal earns zero credit for that metal entirely.

6.1.5 Deduction (unit deduction). A fixed number of percentage GRADE POINTS subtracted from the assayed metal content before any value is calculated, compensating the smelter for metal it cannot economically recover from the concentrate (Payable % = Assayed % − Deduction); it is a grade adjustment, not a cash charge, and is applied before the metal price is ever multiplied in.

6.1.6 Treatment charge (TC). A fee, in dollars per DRY TONNE of concentrate delivered, that the smelter charges to cover its own smelting cost (energy, labour, flux, maintenance) regardless of how much metal that tonne actually contains; because it scales with concentrate TONNAGE rather than metal content, a lower-grade concentrate bears proportionally more TC per unit of payable metal.

6.1.7 Refining charge (RC). A fee, in cents (or dollars) per pound (or per unit) of PAYABLE METAL, covering the smelter's cost of refining the smelted metal to market-deliverable purity; unlike TC it scales with payable metal content, so RC and TC compensate two economically distinct smelter cost bases and are always negotiated and quoted separately.

6.1.8 Price escalation and participation. A clause under which the smelter shares in metal-price upside above an agreed base/threshold price (e.g. an additional TC or RC charged, or a lower effective payability, once price exceeds a stated level) — compensating the smelter for taking on some of the price-timing risk between receiving concentrate and eventually selling refined metal, and giving it a stake in favourable market moves rather than bearing all downside with none of the upside.

6.1.9 Impurities. Elements in the concentrate (e.g. arsenic, antimony, bismuth, fluorine) that damage smelter equipment, create environmental/handling hazards, or contaminate the refined product; contracts specify penalty charges (per unit above a threshold) or outright rejection limits for each impurity, allocating the cost/risk of a “dirty” concentrate back to the mine that produced it.

Topic: Standard clauses that allocate metallurgical, market and handling risk between mine and smelter.

Key relations: Payable value = (Assayed grade − Deduction) × Price, subject to Minimum Payable; Net value = Payable value − TC − RC − impurity penalties, adjusted by price participation.

Why this works: Each clause targets a specific, separately-negotiable risk (unrecoverable metal, fixed processing cost, metal-scaled processing cost, price-timing risk, contamination hazard), so a concentrate's true realized value cannot be read off a single headline number without applying every applicable clause.

Common pitfall: Confusing TC (per tonne of concentrate) with RC (per unit of payable metal) — they scale differently and move independently when grade changes.

Source: Gentry & O'Neil, Mine Investment Analysis, Ch. on smelter contracts.

Question 21 of 23: Standard Smelter Contract Terms

Question 6.1: Standard Smelter Contract Terms (7 marks)