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Block caving planning under metal price uncertainty

Sergio Fuentes S., Mining Civil Engineer, Universidad de Chile, M.Sc. (Eng), Queen’s University, 2003, Director, Metálica Consultores S.A., Chile

Abstract

The common practice in mine planning, irrespective of mining method, is to make decisions based on deterministic future metal prices. Later, during the economic evaluation of the project, stochastic tools are employed to identify and quantify risk factors such as metal prices when mine design and planning has already been completed. Given the capital-intensive nature and long preproduction periods of mining projects, especially in block caving, incorrect price assumptions present a significant source of uncertainty to project feasibility. This proposal outlines the introduction of a stochastic simulation method in the primary phase of mine planning, assigning metal prices based on probabilistic distributions. Utilizing this method combined with standard procedures for defining mining areas in block caving permits characterizing and prioritizing ore reserves based on price uncertainty, giving an additional decision tool to mine planners.

1. INTRODUCTION

Conventional mine planning encompasses all or part of

the development of a mine, including feasibility, profitability, detail development, scheduling of extraction sequences, operation of equipment and transportation. Mine planners usually estimate the different parameters used for the planning process from standard procedures available in the engineering field such as cost information databases from similar operations, experience and engineering judgement. This standard approach is usually based on the ‘state of the art’ associated with a given mining method. Nevertheless, these procedures, databases and experience are usually incomplete or have a large degree of uncertainty related to the nature of basic estimations on such as the heterogeneity of the rock mass, geological environment and etc. These uncertainties are present in every stage of the mine planning and design process and include:

Definition of the geological model.

Ore resource or mineral inventory estimation.

Rock mechanics behaviour of a design.

Metallurgical performance.

Operational performance.

Cost and economic estimations.

Local political conditions and regulations.

Market product price forecasting.

Environmental issues.

From the above abbreviated list, it is readily apparent that mining, and especially block caving, is inherently risky. Traditionally, the decision making process under uncertainty has been managed using standard risk and sensitivity analyses for the cash flows of projects. However, sensitivity analyses alone are not sufficient, and to be rigorous it is necessary to check and adjust major assumptions used to define a project such as the final exploitation limits and cut-off grade applied to ore, and further re-evaluate cash flows. The risk is greater with block caving as opposed to conventional mining because the response time required for adjustments of cut-off grades and mine costs, even if these are possible, is large. This paper proposes a method for managing uncertainty during the block cave mine planning process under a multi-

metal scenario, including identification and quantification of associated risks at an early stage of the planning process.

2. RISK RELATED TO COSTS, GRADES AND METAL PRICES

The mining business is intrinsically more risky than most other common business areas. Figure 1 shows a scheme of uncertainties for open pit planning associated with the stage of the development of the pit (Blackwell,1993), and this figure defines the uncertain information and conditions that apply to mining generally.

information and conditions that apply to mining generally. Figure 1: Uncertainty of Factors in Mine Planning

Figure 1: Uncertainty of Factors in Mine Planning versus Pit Development (Blackwell, 1993)

Traditionally mine planners have been managing uncertainty in the planning and design process by using iterative estimations and sensitivity analyses of project cash flows. This process demands substantial and intensive use of resources to identify the most important parameters influencing the results of mine planning and design.

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Currently, many tools are available to produce data, conduct sensitivity analyses, and produce ‘final numbers’ from a base scenario. These tools include geostatistical approaches for ore grade estimations, probabilistic risk and sensitivity analyses for cash flows, and economic indexes. In most cases, operating and capital costs and similar technical variables are defined within reasonable limits with limited impact on project economics. This is in contrast to the risk associated with external variables such as metal prices and market forecasts that have much greater impact. Although several tools are being used in the mining industry for risk management, low metal price trends of important commodities, along with the lack of availability of high grade deposits, are pressing the mining industry to produce, and improve on, more reliable designs and production schedules. This is especially true in low grade (marginal) and impurity rich (penalty producing) ore bodies where profit margins are small, if they exist at all.

3. RISK AND UNCERTAINTY

Decision theory literature indicates two distinct types of uncertainty (Rose, 1976):

Risk is a concept used to characterize situations where past data can be useful in predicting an occurrence in the future such as the probability of a road accident or the tossing of a coin.

Uncertainty is a concept referring to situations where there is no suitably supported past data or experience.

Metal prices fall more reasonably under the ‘uncertainty concept’ as it is not known when the metal price will return to some past value. The main questions here are, firstly how could we characterize this uncertainty factor, and secondly, how could we manage this characterization in block caving mine planning procedures.

4. METAL PRICES UNCERTAINTY

Metal price uncertainty and its impact have been under discussion for many years. The effects on mine planning are critical, hence the continuing recurrence in mining industry publications. Metal prices are critical inputs in defining ore and waste, and the foundations of the mining business, including ‘ore reserves’, are defined based on commodity (metal) prices. In 1903, Williams (in Rickard et al, 1907, page 1) wrote "It has been estimated that 95 per cent of the commercial and industrial enterprises which are started every year ultimately prove unprofitable. Such business failures are primarily due to incorrect estimation of the trade conditions which obtain in every field of commercial operation". This quotation shows that this problem has been of concern for at least a century. During the 1930’s, other authors affirmed that forecasting metal prices is perhaps the most doubtful and speculative of any of the elements in mineral valuation. At that time some of the important elements affecting price forecasts were identified, including relative rate of growth of supply and demand, competition, substitution of commodities, technology trends, and international market conditions being the most relevant. More recently, organizations, such as the Chamber of Mines of South Africa have stated (Storrad, 1981); "…the uncertainties associated with risk factors such as selling prices can not be defined in a completely objective way. Human judgement unavoidably plays the major part in assessing these uncertainties, and the quality of the final answer obtained therefore depends critically on the quality of the judgement involved at this stage".

The future is never certain and so metal price forecasts cannot be expected to be accurate. Indeed, it therefore follows that any economic evaluation will never be exact.

5. STOCHASTIC SIMULATION

"The fundamental rationale for using simulation in any discipline (whether or not this is economics or operations research) is man’s unceasing quest for knowledge about the future. This search for knowledge and the desire to predict the future are as old as the history of mankind." (Naylor, Balintfy, Burdick & Chu, 1968). Although simulation has been applied to some extremely diverse forms of model building, ranging from Renaissance painting and sculpture to the spacing and computing of neurological processes, it has come to mean something quite specific. Modern use of the word traces its origin to the late 1940’s with the work of Neumann and Ulman (Naylor, Balintfy, Burdick & Chu, 1968). They used an original mathematical technique termed "Monte Carlo Analysis" to solve certain nuclear-shielding problems (Monte Carlo simulation was named after Monte Carlo, Monaco, where the primary attractions are casinos and games of chance). At the beginning the term "Monte Carlo" applied only to the use of stochastic simulation methods for solving strictly deterministic problems. Later it was generalized and became "a popularized synonym for ‘simulation of stochastic processes’ " (Naylor, Balintfy, Burdick & Chu,

1968).

Generally speaking Monte Carlo simulation is a form of simulation where randomly generated values for uncertain variables are used over and over again to simulate a model (Goldman, 2000). Stochastic or Monte Carlo simulations are based on the generation of pseudo random numbers (usually between 0 and 1), which are introduced into the cumulative probability functions for predefined variables. As a result of this probabilistic definition of values, the model is fed a new state permitting the updating of the internal database describing the model. Consequently, this procedure is repeated 100 to 1000 times or more, each time prompting a random choice of one or more values for variables. A counter controls the simulation, and the counter is increased until a predefined condition or imposed constraint is met, as Figure 2 shows in a very simplistic scheme.

is met, as Figure 2 shows in a very simplistic scheme. Figure 2: Stochastic Simulations, Simplistic

Figure 2: Stochastic Simulations, Simplistic and Schematic Representation

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The number of times the simulation must be carried out depends on the confidence limits required for the final result.

6. GENERAL PROPOSAL FOR MINE PLANNING & METAL PRICE UNCERTAINTY

Figure 3 shows the traditional procedure used to evaluate metal price uncertainty in a project. In this example a Monte Carlo Simulation (MCS) of the cash flow varying under a random evaluation of a metal price distribution is used for the entire life of the project.

distribution is used for the entire life of the project. Figure 3: Traditional Mine Planning and

Figure 3: Traditional Mine Planning and Decision Process

During this standard deterministic mine planning process, no probabilities of outcomes are specified, so the decision maker (mine planner) must rely on personal judgement and intuition to put the sensitivities of the variables into perspective, and to assess what might happen with many inter-related sources of price uncertainty, especially in the case of a multiple metals ore body.

In this paper it is proposed to introduce probability metal price distributions for the different valuable metals present in the ore body in the primary economic evaluation of the resource. By providing a measure of this uncertainty will allow the mine planner to make decisions during the many stages of the planning process. As this measure represents the certainty generated from metal price variability, the author will name it the ‘Price Certainty Parameter’ (PCP), which will provide a value for the probability that any block has a chance to participate in a profitable design, i.e. be considered for mining in the planning process, even though

it may not be ore. This Price Certainty Parameter (PCP) will not reflect the exact final economic value of the mine plan and design, because detailed estimation is carried out downstream of this process. Even if the reserves are well scheduled, the final certainty of the project should be less than the average of the PCP when the discount rate and dilution are taken into account. Using a simple open pit ‘moving cone’ example, it is possible to deduce that the PCP is the probability of a resource block being considered inside a profitable design. That does not mean the block is profitable by itself, but, by

leading to ore, it might increase the value of the design as a whole. Cleary we could observe this concept if we analyse

a block of waste located above a high grade ore block in an open pit planning process as shown in Figure 4.

block in an open pit planning process as shown in Figure 4. Figure 4: Simple Open

Figure 4: Simple Open Pit Cross Section, Defining Price Certainty Parameter (PCP)

Assuming a metal price probability distribution was provided for the economic model, and each block was evaluated independently N times (with N large), then 100% of the time block W1 will be waste, but will always be included in the design because it leads to the mining of the highly profitable block O9. The Price Certainty Parameter for this waste block is 100%, and the block has a 100% economic certainty of being included in the design envelope for any given metal price and should be mined. On the other hand, if the peripheral block O6 were included only 50 % of the time in a series of open pit optimizations, then its PCP value is 50%. Figure 5 below shows a flow sheet diagram describing the proposed assignment and management of a stochastic certainty index to each ‘block of resources’ in the block model as a result of a mine planning evaluation.

the block model as a result of a mine planning evaluation. Figure 5: Proposed Mine Planning

Figure 5: Proposed Mine Planning Flow Sheet

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The Price Certainty Parameter of a ‘resource block’ could be defined as "The probability of that resource block being included in a specific design, taking into account metal price probability distributions". This probability could be estimated as a result of several random metal price evaluations of the mining limits for a given mining plan or method. For block caving the PCP parameter can be estimated by evaluating each column of ore using randomly obtained metal prices for each block in the column several times. In the case of an open pit those parameters could be obtained by carrying out several optimization evaluations (e.g. Lerchs-Grossmann (1965) or moving cone, Lizotte(1988)), where the PCP for each block is re-calculated several times. Using this characterization of "Certainty" as associated with metal prices, it is possible to generate alternative designs, envelopes and sequences, and make decisions by referencing PCP values as a numerical parameter. This parameter quantifies, in some way, the economic advantage of mining a defined volume of material (ore or waste) considered in the design before any economical evaluation is carried out. This characterization, with a numerical qualification of resources in the entire block model, will help support the making of decisions during the mine planning process. The assumptions used to assign a certainty ‘index’ (PCP) to each block in the block model are:

Unknown Metal Price in the Future The first assumption is that the market price of any given metal in the future is unknown; intuitions, opinions, short- term trends, etc. all produce a rough expected value range.

Metal Prices as Probability Distributions It is assumed that we can represent each metal price with a probability distribution describing possible future price behaviour. There are so many factors affecting metal price behaviour that it is impossible to demonstrate that metal prices are deterministic variables. It is also impossible to demonstrate that metal prices are truly random variables taking values in accordance with a probability distribution.

The author considers the characterization of the uncertain behaviour of metal prices as a random variable, and this is far more reasonable than the assumption of a deterministic model. The same assumption is made by all risk analysis software packages. There is a direct relation between the profitability of a column and PCP because a high PCP value is an indication of the profitability of the column for a wide range of metal prices as used in the metal price simulation.

7. MANAGING PRICE CERTAINTY PARAMETER IN BLOCK CAVING

Specifically in block caving, using the "Price Certainty Parameter" it is possible to characterize each column in the entire area, representing the probability of each column being included in a mine design for a given metal prices distributions. Additionally, as a result of the several evaluations for the columns, an expected economic value is available for each column and should to be used, together with PCP values, to make a single informed decision in the mine planning process without waiting for several economic evaluations to be completed. A footprint representation for PCP values associated to each column can be observed graphically in Figure 6.

to each column can be observed graphically in Figure 6. Figure 6: PCP Footprint Output for

Figure 6: PCP Footprint Output for a Block Cave Column Valuation

The ore reserves included as part as mineable envelop can be characterized using standard tonnage-"certainty" curves, as is shown in Figure 7. This "tonnage - certainty" distribution (or certainty/tonnage curve, comparable to a grade/tonnage curve) can be obtained and should provide a good general numerical measure of the risk in any particular design. This distribution can give a global indicator of the resources already considered in the mining envelope, including all non-profitable columns added to the design due to operational or geotechnical reasons.

to the design due to operational or geotechnical reasons. Figure 7: Tonnage – Certainty Curves This

Figure 7: Tonnage – Certainty Curves

This information provides the planning engineer some confirmation that the operational mine envelope developed is adequately mining with the available resource. For the definition of an operational area to mine, each project board should select the minimum "cut off certainty", taking into account PCP distribution resulting from the area under analysis, "risk guidelines" for the project, etc.

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At this stage, some of the most important definitions in block cave planning are achieved, only using mine planning outputs Once mineable envelope and final column heights to be exploited are defined, the mining sequence definition is made. Again, this situation could be solved using PCP values as a good guideline for profitability of the ore resources. Scheduling columns that show highest PCP values at the beginning of the mining sequence will imply highest profit resulting in the initial production periods of the project.

8. CASE STUDY

A case study was developed using information from Codelco-Chile, El Salvador Mine. The A- Norte Sector, located in the Northern part of the main ore body as shows Figure 8, was evaluated using the standard process (fixed metal prices) and also using this proposed and complementary methodology (stochastic metal price distributions).

methodology (stochastic metal price distributions). Figure 8: General Plan View of El Salvador Mine This

Figure 8: General Plan View of El Salvador Mine

This marginal area was studied using five deterministic copper prices (75, 80, 85, 90 and 95¢US$/lb), keeping constant Mo, Ag and Au prices.

90 and 95¢US$/lb), keeping constant Mo, Ag and Au prices. Figure 9: Trapezoidal Distributions Used The

Figure 9: Trapezoidal Distributions Used

The stochastic scenario considered trapezoidal probabilistic price distributions for Cu, Mo, Ag and Au. The specific distributions are shown in Figure 9. This probabilistic distribution is usually used when the behaviour of the variable is unknown, maximum and minimum values are defined, clearly highlighting best and worst commodity price scenarios. As well, a range with equal probability (uniform) in between indicates the most probable expectation, guess or feeling, etc., about the future trend of mean prices. In consequence, this probabilistic approach for our lack of knowledge appears as a reasonable representation of this ignorance and actual metal price forecasting. If we consider that this sector will not be in production before 2010, then the question is what metal price must be used for ore reserve definition. Generally speaking, to make the decision, we can use several metal price valuations, an economical envelope using our best "engineering judgement". Standard methodology used in block caving planning, permitted to obtain outputs associated with metal production, ore production rate and copper ore grade profiles as shown in Figure 10 to Figure 12.

ore grade profiles as shown in Figure 10 to Figure 12. Figure 10: Fine Copper Production

Figure 10: Fine Copper Production

in Figure 10 to Figure 12. Figure 10: Fine Copper Production Figure 11: Mine Production Rate

Figure 11: Mine Production Rate

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Figure 12: Mine Production Rate The main differences can be observed in 95 cents scenario

Figure 12: Mine Production Rate

The main differences can be observed in 95 cents scenario with longer exploitable reserves due to the grater area to mine. Indeed, this scenario has approximately three more times of ore reserves compared with the 90 cents or stochastic scenario. If we develop a standard economic evaluation, means deterministic metal prices for each of them, we obtain outputs such are shown in Figure 13.

each of them, we obtain outputs such are shown in Figure 13. Figure 13: Deterministic NPV

Figure 13: Deterministic NPV Evaluation

Same cash flows were evaluating using MCS, obtaining an expected NPV for several discount rates for each scenario, as is shown in Figure 14.

discount rates for each scenario, as is shown in Figure 14. Figure 14: Expected NPV Values

Figure 14: Expected NPV Values using MCS

Using the certainty characterization made in the Stochastic Scenario, it is possible to observe a direct relation between the mean PCP value of each scenario and NPV variability by metal prices and discount rate.

and NPV variability by metal prices and discount rate. Figure 15: NPV Variability & Certainty by

Figure 15: NPV Variability & Certainty by Scenario and Discount Rate

9. CONCLUSIONS

The introduction and estimation of a certainty parameter

during the primary definition of the (ore) block model in the block cave planning process, based on metal price probabilistic distributions and Monte Carlo simulation techniques, shows that:

There is a direct relationship between values of the price certainty parameter (PCP) and the profitability of a given resource block.

Independent of the cut-off certainty value used by the mine planner, it is possible to obtain in one step a complete picture of the economic potential of the

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resources under analysis, and consequently an advanced measure of the economic risk associated with any given design.

This proposed procedure provides mine planners with a safe and profitable exploitation envelope and mining sequence far more quickly than the standard (deterministic plus sensitivity) methodology.

The estimation of the certainty value for each resource block permits the concept of risk management to be applied during the entire block caving planning process, obtaining quantifiable support for many decisions instead of using "engineering judgement". Further, the identification of material in the (say) 40-50% and 50-60% certainty range by location and volume would provide an equivalent sensitivity analysis to several deterministic scenarios.

In a similar manner to the development of the metal price certainty concept, it would be advantageous to introduce the same concepts to other uncertain variables such as mineral inventory estimates (grades) and geotechnical parameters to provide a more complete characterization of the certainty of any given resource block.

The methodology developed can still be improved upon, especially the fixed ‘metal price probability distribution’ which will continue to be a subject for discussion. The basic objective of providing block caving planners with an additional tool for making decisions prior to reaching the stage of the final cash flow evaluation has been met. Without this tool, and without substantial investment of time and human resources, a single mine plan could lead to the rejection of the decision to start a mine, or the starting of a mine with no prospects of making a return on capital employed.

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Fuentes, S., (2003). Planning Block Caving Operations with Metal Price Uncertainty, M Sc Thesis, Queen’s University, Kingston, Canada.

Goldman, L., (2000). Risk Analysis and Monte Carlo Simulation, Decisioneering Inc.,

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• Metálica S.A., (2001). Ingeniería Básica A-Norte El Salvador, Internal Report.

• Metálica S.A., (1998). Manual de uso Módulo de Planificación Block Caving, MineSight, Internal Report.

Naylor, T., J. Balintfy, D. Burdick and K. Chu, (1968). Computer Simulation Techniques, John Wiley & Sons, U.S.A., pp 1 – 22; 68-71.

Rickard, T.A. and H.C. Hoover, (1907). The Economics of Mining, Ingalls, Gilman & Others (eds.), 2nd Edition, New York, Hill Publishing Co, pp 1.

Rose, L.M., (1976). Engineering Investment Decisions, Planning under Uncertainty, Elsevier Scientific Publishing Co., Amsterdam, The Netherlands, ISBN-0 444 41522 X, pp 42 – 136.

• Storrad, C.D. (1981). South African Mine Valuation, Chamber of Mines of South Africa, Johannesburg, ISBN 0 620 02155 1, pp 448 – 456.

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