The choice of the cutoff grade in mining

In simple models, the cutoff grade has been shown to depend on the rate of growth of price net of the interest rate. But there is disagreement in the literature about whether the cutoff grade is positively or negatively related to this variable. In a model which involves two stages of production and a general grade distribution, we find that the rate of growth of price net of the interest rate has an influence, but that the sign of the effect is ambiguous because it depends on a complicated factor involving technical, mine-specific elasticities. This mine-specificity is consistent with the fact that engineering textbooks present the problem of optimal exploitation very simply, using a constant grade, and the fact that engineers use simulation in decision making. It also points to the possibility of moral hazard in exploitation, a possibility of potential concern to managers, shareholders and policy makers.