The operator’s relationship with the refinery depends entirely upon a well-defined written contract, good representation at the refinery and the use of reliable assay laboratories. While all contracts are similar in that they are meant to safeguard the interest of both refiner and miner, it is not unusual to find a single refinery writing a variety of contracts, each one responsive to the special needs of different mines.

Mine outturn can either be sold outright to the refiner or be “tolled” through the refinery. In the latter case, the refiner will process the shipment for a fee and return an agreed upon percentage of metals in the dore to the mine in a specific form (kilobar, 100 ounce bar, etc.) at a specified time and location. Contracts can also cover the sale of a single shipment or cover multiple batches of mine outturns for a period of time, typically one year. A long term contract provides more benefits for the miner than a single sale because the refinery will generally offer a volume discount. However, at times when many refiners are operating below capacity, a refiner may offer a “special” discount price for a single sale. This is usually the exception rather than the rule. A typical contract will address the following areas at a minimum:

1. Material Specifications and Quantity – This section will cover a range of concentrations for major and minor components and undesirable impurities, the approximate quantity that will be delivered in each shipment and the frequency of the shipments.
2. Delivery Procedure – The contract will designate an authorized person for the mine whose job it is to inform the authorized receiver at the refinery of all details about each mine outturn before it is shipped. These two individuals then retain responsibility for ensuring that the appropriate paperwork flow is activated.
3. Weighing and Sampling – This section will define how the shipment will be weighed and sampled when received at the refinery and the procedure to be followed should there be a difference between the net shipping weight and the net received weight.
4. Splitting Limits – If the mine’s assay and the refiner’s assay are different from each other by an amount within the splitting limit, an average of the two numbers is used for settlement. If the difference is greater than the splitting limit, a sample is sent to an umpire (an outside laboratory) who is chosen beforehand. Once the umpire’s results are in, the middle assay that is closer to the umpire’s is used as the basis of settlement. Typically, the cost of the umpire assay is borne by the party who is farthest from the umpire assay.
5. Metal Accounting – The contract will state how much of the metal in the shipment will be returned to the mining company or be paid for by the refinery. For example, a contract may state that 99% of the gold and 97% of the silver is “accounted for”. In this case, the remaining 1% of the gold and 3% of silver either represent process losses or, if the process losses are smaller than these amounts, represent an “overrecovery” of metals, which, in essence, is that part of the refiner’s charge for the refining service which is a function of the precious metal price.
   In some instances, trace precious metals will be paid for, but only if they exceed a specified level. Also, there are penalties for undesirable trace impurities such as arsenic, antimony, nickel etc. if present in significant quantities.
6. Refining Charge – A refinery will levy a specific refining fee per ounce, per pound or per ton of feed materials. This fee is not a function of precious metal prices.
7. Settlement – A wide variety of settlement options is available. Some mines may require an advance on the date of receipt. Typically, a refiner may pay 90% of the value of dore on this day, with final settlement to follow 4 weeks later.
8. Pricing – Since gold and silver prices fluctuate a great deal each day, many mines prefer to have the refinery buy the dore at an average price; for example, the London PM Fixing price for gold averaged for the week (or month) during which the dore was officially received by the refiner. Similar terms apply to the silver content.
9. Financial Vehicles – There are many pricing vehicles available through the use of the commodities futures market that benefit both the mine and the refinery. These financial services are made available by most sophisticated refiners to the mines.

For example, a mine can lock in the price of metal that has been produced with a forward price (earning interest/contango), or with some combination of the two. Within established parameters a mine can also sell future output in the same manner. Such a policy does not have to be speculative and does not have to “mortgage the future” by selling yet-to-be-produced metal. A conservative policy limiting the amount of metal to be sold forward to some percentage of production over the next 90 days would not be unreasonable. Such a strategy would be no more speculative than doing nothing and watching the market price fall.

An interesting way to participate in a rising market and still obtain some downside protection is to grant call options on some portion of existing or future production. With this financial instrument a mine can contract to sell metal at some price higher than the current market. The contract has a fixed expiration and the mine earns a premium for granting such a right. The premium earned is not unlike the “contango” on a futures contract or mine could purchase a put option, a right to sell metal at some fixed price (the strike price) thereby guaranteeing a floor for some of their output. For this the mine would pay a premium which could be incorporated into the selling terms, thereby avoiding a direct cash outlay.

It is readily apparent that the financial and trading vehicles available today can be important and useful tools for the mine that can improve profitability and/or reduce risk. These financial services include the ability to average the settlement price over a week or several weeks, the ability to foreward price, to hedge gold in possession against deleterious effect of a falling gold market, etc.

Settlement Procedures

Once the shipment arrives at the refinery, operators should have a representative present to witness the date of receipt, weighing, melting and sampling of dore, and to assess housekeeping practices. The representative will inspect the shipment before it is opened to be sure that it is intact and that no one has tampered with it. He will witness the weighing of the net contents of the shipping container and witness the drying, fluxing, melting, sampling of the entire melt and weighing of the ingots. It is important to establish the date of receipt of the shipment because many refining contracts guarantee at least partial payment within a specified number of days after receipt. The dore sample that is taken is divided into at least four portions – one for the refiner, one for the mining company, one for umpire (if needed), and one for reference. It is the representative’s responsibility to take the operator’s sample and either deliver it to the operator’s specified laboratory for assay. A good representative will be knowledgeable about good sampling practices and about general refining procedures. It is his responsibility to see that the refiner performs in accordance with good operating practices.

When both the refiner and the mining company have obtained assays on their samples, they should contact each other and arrange to exchange assays. A popular form of assay exchange is to “cross assays in the mail”. In this way neither party knows the assay value obtained by the other before the exchange is made.

All refining contracts have procedures by which the assays of both parties are compared and a settlement is reached on the assay value of the shipment. As noted earlier, the assays are within a narrow range of acceptable “splitting limits”, the assays will be averaged and accepted by both parties for final settlement. If the assays are outside the splitting limits, the mining company and the refinery can negotiate a settlement or can send the third split of the dore sample to an agreed upon umpire assayer. If the splitting limits are fairly close together, for example .05% on gold, the two parties will probably go to umpire 33 to 50% of the time.

Some mining companies send their material to a refiner but continue to retain title to the metal. The refiner changes a “refining” fee but holds the bullion metals on consignment for the operator’s account and the operator can sell the bullion to anyone he wishes at whatever price he can get at any time. In other cases, the operator may deliver the metal to the refiner and the refiner purchases the bullion at a price that is determined by an agreed upon procedure. For example, the price may be established as the London closing price on the day of settlement or it may be established as the average price over a specified time frame. These procedures must be defined in the contract.