Strategic Design

Strategic Design of an Underground Mine
under Conditions of Metal Price Uncertainty

by
George McIsaac
A thesis submitted to the
Department of Mining Engineering
in conformity with the requirements for
the degree of Doctor of Philosophy
Queens University
Kingston, Ontario, Canada
April 2008
Copyright c George McIsaac, 2008
Abstract
Long-term mine plans are based on forecast future metal prices. By the time the
development is put in place, the forecasts may have been proved wrong and the
production plan might not meet the companys nancial objectives. At that point,
the common reaction to this situation is to create a new revised long-term plan and
spend more capital, only to nd out at a later time that the metal prices have changed
again. This results in an inecient use of capital with low returns to the investors.
The objective of this thesis is to develop a methodology to determine the cut-o
grade and production rate of a narrow-vein underground mine such that the long-term
strategic plan is robust. As a requirement to do so, it is necessary to have a good
understanding of the resources, revenues, capital and operating costs as a function of
the design parameters. Also, the operational limits of the mine must be determined so
that the solution is practical. Afterwards, annual metal prices are randomly generated
with a Monte Carlo process on stochastic metal price model, and the combination of
production rate and cut-o grade yielding the highest net present value is identied
and recorded. This process is repeated many times, and the probabilities of the
solutions occurring at any given design combination are calculated. The results are
plotted on a bubble graph, where the size of a bubble is directly proportional to the
probability a solution occurs at that point. Finally, the combination with the largest
i
bubble is the solution, as this point has the highest probability of yielding the highest
net present value in most circumstances.
The model was rst tested on an actual gold-copper orebody where very detailed
resource and cost information was available. The methodology was applied with
success and the solution reected the important impact of the copper milling and
roasting process on revenues. Other tests were then done on an hypothetical gold
orebody and the results showed a great degree of sensitivity to the average grade of
the deposit, and less to the discount rate and to the gold price-reversion factor.
ii
Acknowledgments
The author would like to dedicate this work to his fathers memory.
The author would like to thank his wife and children. Going back to school at this
later stage of life puts enormous levels of strain on a family. The author wishes to tell
his wife all the appreciation and love he has for her as now comes the time to take
the next step forward.
A very kind and loving word is sent to the authors mother in recognition for her
unconditional support. This also extends to everyone in the authors fathers and
mothers families.
Special appreciation and thanks to Dr. Charles Pelley for his guidance and support,
the long discussions on the mining industry, and for sharing his experience. For their
invaluable support and advice, the author also extends his thanks to all the professors
and sta of the Department of Mining Engineering with whom he had the pleasure of
sharing during the many years spent working there. The author also thanks Professor
Leo B. Jonker of the Department of Mathematics and Statistics for his help with the
calculus in Chapter 3.
iii
Table of Contents
Abstract i
Acknowledgments iii
Table of Contents iv
List of Tables vii
List of Figures ix
Chapter 1:
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Problem Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Risk Aversion and Robustness . . . . . . . . . . . . . . . . . . . . . . 12
1.4 Thesis Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Chapter 2:
Literature Review . . . . . . . . . . . . . . . . . . . . . . 15
2.1 Production Rate and Cut-O Grade Selection . . . . . . . . . . . . . 16
2.2 Metal Price Forecasting Models . . . . . . . . . . . . . . . . . . . . . 47
2.3 Treatment of Ination in Discounted Cash Flow Calculations and Dis-
count Rate Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Chapter 3:
The Mathematical Model . . . . . . . . . . . . . . . . . . 60
3.1 Construction of the Model . . . . . . . . . . . . . . . . . . . . . . . . 60
3.2 Methodology to Determine the Production rate and Cut-O Grade
under Conditions of Metal Price Uncertainty . . . . . . . . . . . . . . 74
3.3 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
iv
Chapter 4:
Test on an Actual Mine . . . . . . . . . . . . . . . . . . . 82
4.1 Minable resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
4.2 Production and cash ow model . . . . . . . . . . . . . . . . . . . . . 98
4.3 Metal prices model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
4.4 Simulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
4.5 Results and analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
4.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Chapter 5:
Hypothetical Gold Mine . . . . . . . . . . . . . . . . . . . 154
5.1 Hypothetical gold mine model . . . . . . . . . . . . . . . . . . . . . . 155
5.2 Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
5.3 Base case results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
5.4 Sensitivity to the gold price model mean reversion factor . . . . . . . 162
5.5 Sensitivity to the discount rate . . . . . . . . . . . . . . . . . . . . . 171
5.6 Sensitivity to the average grade of the deposit . . . . . . . . . . . . . 173
5.7 Design analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
5.8 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
Chapter 6:
Conclusions and Recommendations . . . . . . . . . . . . 182
6.1 Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
6.2 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
6.3 Future work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
6.4 Closing remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Appendix A:
Modeling Procedures . . . . . . . . . . . . . . . . . . . . 201
A.1 Model construction procedures . . . . . . . . . . . . . . . . . . . . . . 201
A.2 Simulation procedures . . . . . . . . . . . . . . . . . . . . . . . . . . 202
Appendix B:
Capital Development . . . . . . . . . . . . . . . . . . . . 203
B.1 Mine A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
B.2 Mine B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
B.3 Mine C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
v
Appendix C:
Production & Development Indicators . . . . . . . . . 231
C.1 Metres of development per tonne of ore . . . . . . . . . . . . . . . . . 233
C.2 Percentage of ore coming coming from development . . . . . . . . . . 236
C.3 Tonnes of ore per metre of ore development . . . . . . . . . . . . . . 238
C.4 Compilation of data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
Appendix D:
Metal Price Model Validation . . . . . . . . . . . . . . 242
Appendix E:
Development Constraint . . . . . . . . . . . . . . . . . . 245
vi
List of Tables
2.1 Optimization Matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.2 Rate multipliers, from Tatman [65] . . . . . . . . . . . . . . . . . . . 18
3.1 Comparison of major design features of cost models . . . . . . . . . . 68
4.1 Dilution factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
4.2 Summary of minable resources and grades by vein . . . . . . . . . . . 90
4.3 Resources by vein and category . . . . . . . . . . . . . . . . . . . . . 91
4.4 Resources by vein and mining method . . . . . . . . . . . . . . . . . 92
4.5 Gold cut-o grades and levels of production . . . . . . . . . . . . . . 100
4.6 Production and development output . . . . . . . . . . . . . . . . . . . 101
4.7 Cash ow and indicators output . . . . . . . . . . . . . . . . . . . . . 102
4.8 Smelter contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
4.9 Capital development summary . . . . . . . . . . . . . . . . . . . . . . 109
4.10 Variable mining unit costs . . . . . . . . . . . . . . . . . . . . . . . . 114
4.11 Metal Price Equation Factors . . . . . . . . . . . . . . . . . . . . . . 125
4.12 Example of the production prole . . . . . . . . . . . . . . . . . . . . 131
4.13 Example of the nancial prole . . . . . . . . . . . . . . . . . . . . . 132
4.14 Risk analysis example . . . . . . . . . . . . . . . . . . . . . . . . . . 135
4.15 Coordinates of hot spots . . . . . . . . . . . . . . . . . . . . . . . . . 138
4.16 Occurrences as a function of hot spot and metal price quadrant . . . 141
4.17 Solutions for set metal prices . . . . . . . . . . . . . . . . . . . . . . . 142
5.1 Production prole for the gold-copper model . . . . . . . . . . . . . . 166
5.2 Production prole for the gold equivalent model . . . . . . . . . . . . 167
5.3 Financial analysis of the gold-copper model . . . . . . . . . . . . . . . 168
5.4 Financial analysis of the gold equivalent model . . . . . . . . . . . . . 169
5.5 Design parameters for the cases studied . . . . . . . . . . . . . . . . . 179
C.1 Calculations of development per tonne indicators . . . . . . . . . . . 234
C.2 Development per tonne indicators . . . . . . . . . . . . . . . . . . . . 235
C.3 Calculations of percentage production coming from ore development . 237
C.4 Calculations of percentage production coming from ore development . 238
vii
C.5 Tonnes of ore per metre development data . . . . . . . . . . . . . . . 239
C.6 Final table of tonne of ore per metre development . . . . . . . . . . . 241
E.1 Annual development . . . . . . . . . . . . . . . . . . . . . . . . . . . 246
E.2 Maximum production rate . . . . . . . . . . . . . . . . . . . . . . . . 248
viii
List of Figures
1.1 Metal Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1 Operating and capital cost as a function of production rate, from
Smith [62] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.2 Maximum Net Present Value as a function of production rate, from
Smith [62] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.3 Unit revenue and costs as a function of production rate, adapted from
Gray [28] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.4 Total revenue and costs as a function of production rate, adapted from
Gray [28] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.5 Eect of discount rates on dynamic optimization of production rates,
from Park [50] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.6 Unit revenue and costs as a function of production rate, adapted from
Hartwick and Olewiler [29] . . . . . . . . . . . . . . . . . . . . . . . . 29
2.7 Eects on cash ows of operating options of a mine, from Palm, Pear-
son, and Read [49] . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.8 Levels of recovery unit functions, from Carlisle [12] . . . . . . . . . . 33
2.9 Levels of recovery total functions, adapted from Carlisle [12] . . . . . 34
2.10 Eect of discount rates on dynamic optimization of cut-o grades, from
Park [50] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
2.11 Relationship between rate and level of recovery, from Carlisle [12] . . 40
2.12 Contour map of PVR in relation to cut-o grade and production rate,
from Wells [73] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.13 Relationship between rate and level of recovery, from Ding [19] . . . . 43
2.14 Cut-o grade unit functions, from Park [50] . . . . . . . . . . . . . . 44
2.15 Production rate unit functions, from Park [50] . . . . . . . . . . . . . 44
2.16 Low-grade zone development and project abandonment boundary, adapted
from Samis et al. [54] . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.17 Average annual gold prices from 1980 to 2005 . . . . . . . . . . . . . 48
2.18 Average annual copper prices from 1975 to 2005 . . . . . . . . . . . . 49
2.19 Average annual copper prices in 2001 dollars, from Tilton [69] . . . . 49
2.20 Falling prices due to a shift in the supply curve, from Tilton [69] . . . 50
ix
2.21 Copper mine costs (cents/lb, real 2001 dollars), from Tilton [69] . . . 51
2.22 Causes of market volatility, from Tilton [69] . . . . . . . . . . . . . . 52
2.23 Example of mean reversion . . . . . . . . . . . . . . . . . . . . . . . . 54
2.24 Components of real discount rates at dierent stages of project devel-
opment, from Smith [61] . . . . . . . . . . . . . . . . . . . . . . . . . 58
3.1 Example of lognormal grade distribution . . . . . . . . . . . . . . . . 70
3.2 Example of Grade-Tonnage curves . . . . . . . . . . . . . . . . . . . . 71
3.3 Example of NSR-Tonnage curves . . . . . . . . . . . . . . . . . . . . 72
3.4 Unit revenue curves as a function of the level of production . . . . . . 74
3.5 Flow sheet of program PeaRL . . . . . . . . . . . . . . . . . . . . . . 78
3.6 Flow sheet of subroutine Search . . . . . . . . . . . . . . . . . . . . . 79
3.7 Flow sheet of subroutine NPV . . . . . . . . . . . . . . . . . . . . . . 80
4.1 Actual and budgeted production rates . . . . . . . . . . . . . . . . . 86
4.2 Grade-tonnage curves based on gold grades . . . . . . . . . . . . . . . 94
4.3 Production level grades as a function of gold . . . . . . . . . . . . . . 95
4.4 Grade-tonnage curves based on copper grades . . . . . . . . . . . . . 95
4.5 Production level grades as a function of copper . . . . . . . . . . . . . 96
4.6 Metal grade scatter plot for low copper grades . . . . . . . . . . . . . 97
4.7 Metal grade scatter plot for low gold grades . . . . . . . . . . . . . . 97
4.8 High-grade copper resources associated with low-grade gold blocks . . 99
4.9 High-grade gold resources associated with low-grade copper blocks . . 99
4.10 Mineral processing general owchart . . . . . . . . . . . . . . . . . . 103
4.11 Value-added of roasting copper concentrate . . . . . . . . . . . . . . . 107
4.12 Capital development as a function of level of production . . . . . . . 108
4.13 Proportion of tonnes mined per mining methods as a function of the
level of production . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
4.14 Proportion of tonnes mined from all sources as a function of the level
of production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
4.15 Regular and capital development as a function of the level of production117
4.16 Variable mining cost as a function of the level of production . . . . . 118
4.17 Mine services unit cost as a function of the production rate . . . . . . 119
4.18 Mill variable unit cost as a function of the production rate . . . . . . 120
4.19 Mine monthly xed cost as a function of the production rate . . . . . 121
4.20 Mill and On-Site monthly xed cost as a function of the production rate122
4.21 Total costs over the life of the project for combinations of rates and
levels of production . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
4.22 Unit costs over the life of the project for combinations of rates and
levels of production . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
4.23 Gold price model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
x
4.24 Copper price model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
4.25 Feasible area of the possible solutions for the NPV function . . . . . . 128
4.26 Example of the output generated . . . . . . . . . . . . . . . . . . . . 129
4.27 Average net present value @ 5%, in million dollars . . . . . . . . . . . 133
4.28 Standard deviation of the net present value distributions, in million
dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
4.29 Probability of positive net present value, in percentage . . . . . . . . 134
4.30 Bubble chart of optimal net present value combinations . . . . . . . . 137
4.31 Metal prices yielding a solution occurring at hot spot A . . . . . . . . 139
4.32 Metal prices yielding a solution occurring at hot spot B . . . . . . . . 139
4.33 Metal prices yielding a solution occurring at hot spot C . . . . . . . . 140
4.34 Metal prices yielding a solution occurring at other locations . . . . . 140
4.35 Solutions for set metal prices . . . . . . . . . . . . . . . . . . . . . . . 143
4.36 Copper grade as a function of the level of production . . . . . . . . . 144
4.37 Copper NSR factors . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
4.38 Value of copper contained in ore . . . . . . . . . . . . . . . . . . . . . 146
4.39 Unit revenues and costs for copper price set at 10% condence interval 147
4.40 Unit revenues and costs for copper price set at expectation . . . . . . 147
4.41 Unit revenues and costs for copper price set at 90% condence interval 148
4.42 Prot as a function of copper prices . . . . . . . . . . . . . . . . . . . 148
4.43 Tactical plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
5.1 Gold equivalent tonnes histogram . . . . . . . . . . . . . . . . . . . . 157
5.2 Comparison of original and hypothetical models . . . . . . . . . . . . 157
5.3 Bubble graph for gold equivalent grade equal to 8.52 grams per tonne 161
5.4 Clustered bubble graph for gold equivalent grade equal to 8.52 grams
per tonne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
5.5 Base case combinatory table for NPV @ 5%, in million dollars . . . . 163
5.6 Comparison of the condence intervals sensitivity . . . . . . . . . . . 164
5.7 Combinatory table of NPV @5% for mean-reversion factor = 0.20, in
MM$ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
5.8 Bubble graph for mean-reversion factor = 0.20 . . . . . . . . . . . . . 170
5.9 Clustered bubble graph for mean-reversion factor = 0.20 . . . . . . . 170
5.10 Combinatory table of NPV @8%, in MM$ . . . . . . . . . . . . . . . 171
5.11 Bubble graph for discount rate = 8% . . . . . . . . . . . . . . . . . . 172
5.12 Clustered bubble graph for discount rate = 8% . . . . . . . . . . . . . 172
5.13 Combinatory table of NPV @5% for gold equivalent grade equal to
6.50 grams per tonne, in MM$ . . . . . . . . . . . . . . . . . . . . . . 173
5.14 Combinatory table of NPV @5% for gold equivalent grade equal to
10.50 grams per tonne, in MM$ . . . . . . . . . . . . . . . . . . . . . 174
xi
per tonne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
per tonne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
5.19 Average gold grade as a function of the level of production for the three
cases used in the sensitivity analysis . . . . . . . . . . . . . . . . . . . 177
5.20 Average revenues and costs as a function of the level and rate of pro-
duction for the three cases used in the sensitivity analysis . . . . . . . 178
5.21 Marginal revenues and costs as a function of the level and rate of
production for the three cases used in the sensitivity analysis . . . . . 178
B.1 Mine A, General outline of lateral infrastructure . . . . . . . . . . . . 204
B.2 Mine A, Level of production = 1 million tonnes . . . . . . . . . . . . 205
B.18 Mine B, General outline of lateral infrastructure . . . . . . . . . . . . 213
B.19 Mine B, Level of production = 1 million tonnes . . . . . . . . . . . . 214
xii
B.35 Mine C, General outline of lateral infrastructure . . . . . . . . . . . . 222
B.36 Mine C, Level of production = 1 million tonnes . . . . . . . . . . . . 223
D.1 Gold price model starting in 1980 . . . . . . . . . . . . . . . . . . . . 243
D.2 Gold price model starting in 1994 . . . . . . . . . . . . . . . . . . . . 243
D.3 Copper price model starting in 1975 . . . . . . . . . . . . . . . . . . . 244
D.4 Copper price model starting in 1994 . . . . . . . . . . . . . . . . . . . 244
E.1 Production rates vs. reserves . . . . . . . . . . . . . . . . . . . . . . . 247
E.2 Development rates vs. production rates . . . . . . . . . . . . . . . . . 247
E.3 Development rates vs. production levels . . . . . . . . . . . . . . . . 248
xiii
Chapter 1
Introduction
1.1 Context
The author worked extensively in the preparation of strategic and tactical long-term
plans for underground mining operations for many years. It is considered normal that
these plans have to be redone on a regular basis as new ore zones are added and older
reserves are depleted. However, this work is subject to rapid obsolescence as metal
prices change. If prices go up, there is a sudden urgency to mine more and faster,
producing a strain on the existing infrastructure. The operation may run out of ore
supply if the development cannot keep up with the extra demand. If prices drop,
the economically-extractable orebody shrinks and the existing development does not
suce to meet production targets. Extra development must be put in place rapidly
to access whichever ore is available, and the operation may not build enough capacity
for long-term survival.
Over the years, the author has pondered the problem of how a plan can be devised
to incorporate defences against metal price variations. It is obvious that such a mine
1
CHAPTER 1. INTRODUCTION 2
plan cannot be perfect. The concept of economical optimization would be replaced by
that of robustness, presenting the best possibility of surviving future variations and
providing a basis from which to adapt without compromising the deposit. It is hard
to compare the value of a robust plan with that of an optimal one; the optimal plan
is the best possible plan under specic conditions, whereas the robust plan is the best
possible plan under conditions of uncertainty. In the case of the optimal plan, it may
have a very high net present value at the time of conception, but changing orebody
and market conditions may reduce its value very abruptly; on the other hand, the
robust plans value may be relatively lower for the same basic conditions, but its value
will not be aected as much by varying factors.
With this in mind, this thesis proposes an approach incorporating reserve evalu-
ation, cost accounting, micro-economics and risk analysis with the objective of iden-
tifying the cut-o grade, the production rate and the level of investment to be used
in the development of long-term production plans.
1.2 Problem Statement
1.2.1 The Problem
In the time spent in mining operations, the author has observed that long-term mine
plans are based on constant metal prices. Cairns [9] reported the same practice, and
Whittle [76] stated that the metal price forecasts are usually provided by the nance
or business evaluation departments at the corporate oce. Deterministic models are
used, even though it is recognized that the metal prices will vary. Lane [38] suggested
to do sensitivity analysis to take this into consideration.
Based on accepted future metal prices, the value of each mineralized resource
block is calculated, a plan is built, capital and operating costs are estimated, and the
operation proceeds with the plan if it is accepted. However, whether this is a new
project with many years of preproduction development or an ongoing mine, metal
prices can vary signicantly in the short term, thus aecting the initial reserve base
used for planning. This may result in last minute modications to the development
program and in added strain on the operation.
If prices increase, the production plan of an underground mine can change in
dierent ways. Taylor [66] argues that the proper course of action is to concentrate
on mining higher grade material only, thus increasing the net present value (NPV)
of the mine even if that leads to condemning the future recovery of lower-grade ore.
However, most operations tend to lower the cut-o grade and increase the production
rate, hoping to maximize the extraction of the orebody. No matter which course of
action is taken, the development in place will probably not be adequate to sustain the
new strategy for a very long time. If Taylors approach is chosen, the production rate
will not be sustainable unless the development rate increases. If the option of lowering
the cut-o grade and increasing the production rate is accepted, the development rate
must again be increased. Both cases will also lead to congestion, ineciencies and
higher costs.
On the other hand, if metal prices decrease, reserves are lost, and the size and
shape of the orebody can be aected. Taylor classied underground orebodies into
two categories, named type A and B. In the case of vein-like deposits of type A, a price
decrease will result in smaller more isolated pods of economical mineralization. In the
case of gradational-grade massive orebodies of type B, the strike length, height and
width will decrease. In both cases, the ratio of tonnes of ore per longitudinal surface
area decreases, and in order to maintain the planned production rate, the development
rate must increase. Even if the operators decide to reduce the production rate, the
ratio of development per tonne of ore mined has to increase. This leads to an increase
in operating and/or capital costs.
In the development of a long-term plan, a base-case scenario is conceived. It is
designed for a constant production rate inspired from the reserves tonnage and its
physical distribution on a longitudinal projection. To limit the capital outlay, the
development of a given sector is done no more than six months ahead of its start of
production.
1
However, this limits the time available to do major modications to the
plan. First, the need to change the plan must be recognized, and that usually takes
a signicant time as people tend to look at variations as short-term events and fail to
recognize that a new long-term trend is being established. Once there is consensus to
change, a new plan must be developed and accepted before it can be implemented. By
the time the new plan is in place, metal prices have changed again, making the latest
plan obsolete before it can reap signicant benets. The capital that was spent as
part of the initial plan will probably have a low return or may even not be recovered.
Since this latest plan is based on metal price forecasts following the same approach
as in the previous plan, it may expose the mine to the same problem at some point
in the future.
The risks of a plan can be evaluated prior to its implementation. The two most
common methods are sensitivity and risk analysis. Both quantify how the economic
indicators can be aected if one or more revenue and cost parameters change. The
1
There is no hard rule justifying this, it is more an accepted industry rule-of-thumb that takes
into consideration the degradation of the rock mass of a drift that remains unused for too long a
time.
drawback of this approach is that the original plan is still used for comparison pur-
poses. Of course, a mine will make less money if revenues decrease while still mining
the same reserves at the same production rate. Risk analysis does not identify what
production rate and cut-o grade would yield better results if revenues decrease. The
same is true if metal prices increase.
Furthermore, prior to performing the risk analysis, there is no guaranty that the
plan is optimum at the outset. Smith [62] mentioned how the production rate is often
decided very early in the development of a project and is not adjusted later on if the
design meets the investors economic criteria. From this, it can be deduced that the
initial parameters used for the conception of the plan are not necessarily optimum
and the plan may not be very robust when operating conditions change.
Park [50] and Ding [19] recently developed methods to nd the optimal cut-o
grades and production rate yielding the maximum net present value for an operation.
In all cases, metal prices were xed for the life of the deposit and there was little
discussion on how robust their systems were in case of metal price variations.
Metal price uctuations are addressed to a certain point in the realm of Real
Options. However, the discussion limits itself to deciding if a mine, as designed,
should operate or not given uctuating prices. Again, there is no consideration as
to whether the design is optimal to start with. Also, the analysis is limited to yes
or no, operate or do not operate under the current design parameters, and it does
not extend to deciding if changing the production rate and/or the cut-o grade could
yield a better result.
These considerations support the requirement to develop a tool that can estab-
lish the cut-o grade and production rate of an operation under conditions of metal
price uncertainty. The plan produced would propose a constant production rate and
constant cut-o grade over the life of the plan. The plan thus obtained may not
be optimum for the metal prices at the time at which the plan is developed; i.e. it
may not yield the highest possible net present value for those metal prices. It should
however be seen as a defensive plan, one with the minimum risk of failure no matter
what the future may hold, without having to change the development and production
prole of the plan as conditions change. This plan would be designed to best survive
all possible outcomes. Having said that, the plan may not necessarily meet the mini-
mum economic criteria set forth by the operator, but then again, that guaranty never
exists when preparing a plan. However, the probability of meeting the indicators
yielded by this analysis should be very high.
1.2.2 Example
The problem presented can be complex, but it is one that commonly aects mines.
The following provides an example of this problem for an operation over a six-year
period during the last decade. A large underground operation had to be redesigned
yearly as metal prices decreased steadily over many years. To examine this problem,
a brief description of the mine is given; the decrease of gold and copper prices between
the years 1994 and 2000 is reviewed; the actions taken by the operation to counteract
this decrease are discussed; and the implications to the operations, revenues, costs
and reserves are analyzed.
The Mine
The mine contained various deposits consisting of many vein structures with strike
lengths reaching up to 2,000 metres and vertical extent of up to 600 metres. Each
deposit contained many anastomosing veins separated by faults. The widths of both
veins and faults could vary from less than one metre to more than twenty and their
dips ranged from thirty ve (35) to ninety (90) degrees. The dips and width of any
given vein or fault could vary signicantly within a distance of one hundred metres.
Four metals were mined, but gold and copper accounted for ninety percent (90%)
of the revenues. The metal distribution was uneven throughout the deposit. Some
veins were gold bearing, associated with pyrite in quartz. The background gold grade
was in the order of four grams per tonne, but locally, the grades could surpass 100
grams per tonne. The copper was found mostly in enargite (Cu
3
AsS
4
). Copper grades
averaged between four and eight percent but could run as high as fteen percent. Low
gold grades were also recorded in the copper veins. Silver and arsenic were associated
with the copper and they complemented the revenues.
Given the varying widths and dips of the veins, the proximity of faults, and the
presence of pockets of very high gold grades, many mining methods were employed.
The competence of the hanging wall and the continuity of the ore were the most
signicant factors in the choice of a method. Whenever possible, longhole stopes
were developed, provided that adequate ground support could be installed. In narrow
and relatively vertical veins, Avoca and Eureka were used, while primary-secondary
transverse sequences were established in wider areas of varying dips. If conditions
were such that only small areas of the hanging wall could be stabilized, cut and ll
was used. Many variations were employed, including mechanized, ramp-in-vein, drift
220
240
260
280
300
320
340
360
380
400
420
Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00
Date
G
o
l
d

p
r
i
c
e

(
$
/
o
z
)
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
C
o
p
p
e
r

p
r
i
c
e

(
$
/
l
b
)
Gold
Copper
Figure 1.1: Metal Prices
and ll combined with oor and back slashes, and underhand cut and ll in heavily
fractured ground.
Metal Prices
Between the years 1995 and 1999, gold and copper prices declined substantially (g-
ure 1.1). During 1994 and 1995, the price of gold had remained steady between $380
and $400 per ounce. However, over the next three years, the price of gold decreased
steadily to $258 per ounce, a decrease of 35%.
As for copper, 1994 was a good year during which its price increased almost 70%
from $0.80 to $1.35 per pound. This price level was maintained throughout most of
1995, but over the next three years, the price plunged by more than 50% down to
$0.62 per pound, followed by a slight rebound back to the $0.80 level.
2
2
Though there is no reason to believe there is a relation for the simultaneous drop in prices of
Eects of Metal Prices Variations on the Mine Operations
By 1995, the mine had been in operation for more than fteen years. Over that time,
it had grown from a small bonanza-grade operation, into a large scale mine with
production coming from many deposits. In late 1994, the mine started preparing the
1995 budget as well as the ve-year plan. It was estimated that the metal prices
of the time were to remain constant for the following ve years. Based on this, the
reserves were updated and a plan was constructed with a production rate of 3,300
tonnes per day.
During 1995, metal prices stayed constant, and production equalled the planned
rate. At that time, the deposit was still open along strike and at depth, and there
was a lot of optimism about both exploration potential and future metal prices. The
talks naturally drifted toward investigating the potential of increasing the production
rate. As dierent scenarios were drafted to study the possibilities, some development
was put in place in provision for a possible future expansion.
By 1996, metal prices had started drifting lower, but the decrease was not signif-
icant. No adjustments were made to the long-term plan. However, some weaknesses
in the plan were starting to become apparent. The expectations for the discovery
of much more bonanza-grade ore were not met, and the prices of gold and copper
started decreasing. The combination of lower average grade and lower metal prices
led to smaller operating margins. Still, no action was taken during that year.
In 1997, the situation remained the same and by March the need for change was
recognized. The mining reserves were revised and a new long-term plan was completed
both metals, it reminds one of a similar happening in 1982 when gold fell to $325 per ounce and
copper to $0.58 per pound. Many companies had to suspend production at that time and lay-o
many workers. Blais, Poulin, and Samis [5] calculated a correlation coecient of 0.51 between copper
and gold prices during the years 1998 and 2004.
at a rate of 2,200 tonnes per day, with an emphasis on mining copper since its price
was still relatively high at $1.10 per pound. That decision meant developing new
zones that had not been previously considered. By the end of the year, gold had
further dropped to less than $300 per ounce and copper to less than $0.80 per pound
and the plan was successively lowered to 1,800 and then 1,500 tonnes per day.
The mine was able to sustain that production rate throughout 1998, but by the
start of 1999, the prices had fallen to their lowest level in many years. A long-term
plan, based on extracting high-grade material, was established at 1,000 tonnes per
day. The actual production levels stabilized around 800 tonnes per day for the next
two years. High-grade reserves depleted rapidly and the mine eventually closed its
doors.
A mine with a large and valuable resource, dreaming of expansion just a few years
before, had been forced to shut down for lack of reserves. Had it be been able to
survive a few years more, it would have been in excellent position to take advantage
of todays very high metal prices.
Eects of Metal Prices Variations on the Planning Process
In general, in any change of plan leading to a production rate reduction, each sector
in development or production is re-evaluated. Based on this, each is either left in the
production plan, phased out, or abandoned. To complete the plan, new sectors must
be developed. In a typical vein-type deposit, the stopes in production are usually the
closest to existing infrastructure. The new sectors might actually be located further
than the ones developed ahead of time under the old plan. Furthermore, the new
sectors might be smaller because of the lower value of the ore. All of this implies
that a high quantity of new development must be put in place rapidly in order to
reduce the transition time to the new plan. More crews might be necessary, either
transferred from production, or employed as new employees or contractors. The cost
may appear either as new capital expenditure or as a higher operating cost.
The re-evaluation of the mining sectors rst starts through the revision of the
reserves and its value. Lower metal prices lead to smaller net smelter return (NSR)
factors and a decrease in the value of the reserve blocks, to the point that some reserve
blocks are no longer economical. The reserve base decreases and the expected life of
the deposit may be reduced.
Costs are also aected. Variable mining costs usually increase. Even if the mining
method does not change, the stope sizes decrease and there is proportionally more
stope development to do per tonne. Also, in vein-type deposits, there often exists
a correlation between the ore grade and the ground quality: the higher the grade,
the worse the ground. Therefore, in order to mine more high-grade material, more
expensive mining methods must be used. As discussed previously, more development
is required to bring new sectors into production. The xed cost spent every month
decreases but when that cost is distributed to the tonnes mined, it corresponds to
a higher unit cost. And nally, in parallel to this, there is a renewed interest in
exploration to replace the lost reserves.
The increase in unit costs aects the reserves as more blocks now might have
to be dropped, blocks which values are higher than the previous operating cost but
lower than the new one. If some of these blocks are included in the new plan, they
must now be replaced. New costs are calculated and the process is repeated until the
plan is satisfactory. This is an expanded case of what Ding [19] suggested with the
redistribution of development costs in the determination of a reserve base.
In summary, a reduction in metal prices leads to a lower production rate with a
higher grade and higher unit operating costs. The reserve base is smaller and the
mine life is shorter. The value of the long-term plan is thus much less than it was
previously, and the probability of an economical return is smaller.
1.3 Risk Aversion and Robustness
With all information available a priori, the mine manager might have designed the
mine such that these many variations in metal prices would have had less impact.
Walls and Eggert [72] have shown that by nature, most mine managers take action to
reduce the nancial risk associated with their investment decisions. Smith [62] and
Whittle [75] also discuss the fact that most decision-takers in the mineral industry
choose to operate mines at lower production rates, or to mine less reserves, than would
otherwise maximize the NPV in order to lower operating risks and give themselves
time to correct any mistakes made during the initial stages.
The proposed methodology to design a mine plan less sensitive to metal price vari-
ations would certainly allow mine managers to manage their risks without foregoing
too much value. Monkhouse and Yeates [43] refers to this as a robust plan, one where
the mine plan continues to give high values over a wide range of input assumptions.
1.4 Thesis Organization
The following is a summary of the work as it will be presented in the following pages.
Chapter 2 - Literature Review The existing models aiming to dene production
rates and cut-o grades will be examined, and it will be shown that very few of the
them can dene operating parameters under conditions of metal price uncertainty.
Following that, metal price simulation models will be looked at in order to determine
how metal prices will be generated in this thesis. Finally, a short discussion on
discount rates will be done to decide the rate that will be used.
Chapter 3 - The Mathematical Model Based on the models previously re-
viewed, modications and adaptations will be done in order to reect the information
commonly available to a mine planner, and a new cost classication system will be
proposed. Then, the revenue model will be developed and it will be shown that there
exists a direct correlation between the grade-tonnage curves used in resource classi-
cation and the revenue model. Finally, the structure of the PeaRL (Production Rate
and Level) methodology to solve for robustness against varying metal prices will be
described.
Chapter 4 - Test on Actual Mine A test of the methodology will be conducted
on data obtained from a gold-copper mine, which will be described rst. The mineral
resources will then be analyzed and a method will be proposed on how to classify
polymetallic ore when metal prices are ignored. The details of the production, rev-
enues, operating and capital costs functions will be developed, and the metal price
stochastic models will be constructed. The feasible area of the solution will then be
established and the simulation will be run. The chapter will end with a discussion of
the results and the analysis of the main factors inuencing them.
Chapter 5 - Hypothetical Gold Mine In this chapter, the procedures used for
building the gold mine model, from the construction of the grade distribution to the
revenue and cost functions will be discussed rst, and the simulation will be run
and its results analyzed. Afterwards, certain parameters of the price and cash ow
models will be changed in order to gauge the sensitivity of the methodology. Then,
the sensitivity of the model to the mine average grade will be tested and reviewed.
Finally, a discussion on how a manager may use the results of the simulation to design
a mine closes the chapter.
Chapter 6 - Conclusions and Recommendation This nal chapter will give a
summary of the work done, the original techniques developed, the main conclusions
to be drawn, as well as a number of suggested modications to the technique to adapt
it to other types of deposits, mines, and business opportunities.
Chapter 2
Literature Review
This chapter deals with the review of the work done in three general areas: the
optimization of production rates and cut-o grades under conditions of metal price
certainty and uncertainty, metal price modeling, and the use of ination rates and
the selection of discount rates in nancial evaluation.
Economic techniques were rst applied to nding optimal production rates by
Gray [28], and the idea of optimizing cut-o grades was introduced much later by
Carlisle [12]. Solutions to both problems were proposed, separately and jointly, using
a variety of methods.
It is believed that proper metal price models must be constructed in order to have
reasonable answers with the proposed methodology. The model has to go further
than a simple distribution within which prices are randomly generated. There are
some trends in metal price behaviour in both the short and the long term and they
must be taken into consideration.
The treatment of ination and the selection of a discount rate for the economical
evaluation of an orebody can inuence the value of any given plan. The eect of both
15
CHAPTER 2. LITERATURE REVIEW 16
factors are examined in order to guide the selection of the rates to use in this thesis.
2.1 Production Rate and Cut-O Grade Selection
The available literature can be subdivided into a simple matrix (table 2.1) where the
type of work presented by dierent authors can be quickly compared. The matrix is
divided into nine sections, three each for work done in relation with the determination
of optimal production rates, cut-o grades and combined production rate and cut-
o grade. The work done in these areas is further split into three, related to static
solutions under conditions of metal price certainty, dynamic solutions under the same
conditions, and solutions under conditions of metal price uncertainty. These nine
sections are further split into subsections based on the approaches taken to obtain a
solution.
Table 2.1: Optimization Matrix
Conditions of Metal Price
Uncertai nty
Static soluti on Dynami c solution
Production Rate Physical characteristics Micro-economics Linear programming
Taylor 1986 Gray 1914 Muell er 1994
Tatman 2001 Hotelling 1931 Real options
Economic optimality Campbell 1981 Brennan & Schwartz 1985
Glanvi lle 1985 Hartwick & Olewil er 1986
Bradley 1985 Cai rns 1998
Smith 1997
Differential equations
Corbyn 1985
Abdel Sabour 2002
Cut-Off Grade Carli sl e 1954 Lane 1991 Dowd 1976
Taylor 1972 Fuentes 2003
Lane 1991
Combined Carli sl e 1954 Park 1992 Samis 2000, 2002
Well s 1978
Ding 2001
Conditions of Metal Price Certainty
In the coming pages, the various solutions developed for each problem will be
reviewed and some models of interest will be identied for further development in
this thesis.
One thing that becomes obvious in the review of this matrix is that there is a lack
of work done in the area of optimization of both production rates and cut-o grades
under conditions of metal price uncertainty. This thesis proposes a solution to ll
that quadrant of the matrix
2.1.1 Production Rate Optimization
The selection of the production rate has a strong inuence on optimizing the value
of the orebody. Bradley [6] summarized the problem by noting that the capital
investment is directly proportional to the production rate, and that the level of capital
investment is signicant and is concentrated in an initial dose at the start of the
project. The level of capacity depends on the expectations about the future. If the
level is too big or too small, the value of the resource owners asset is reduced. The
expectations about the future are related to metal prices and the size and quality of
the deposit.
Tatman [65] also remarked that there is seldom an engineering-based reason for
selecting the production rate. He noted three methods of selecting a production rate:
general input requirement, economic optimization, and empirical formula.
Empirical static solution based on physical characteristics
The simplest way of choosing a production rate for a deposit is based on the size of
the reserves. The best known approach is that of Taylor [67]. Based on a review of
thirty mining operations, he produced a simple equation (2.1) that is still used today.
However, advances in computer applications and rock mechanics make it such that
better mine models and plans can now yield higher production rates.
Tonnes per year = 5.0 Reserves
0.75
(2.1)
Tatman [65] also developed an empirical equation for steeply dipping underground
deposits based on annual vertical depletion rates varying with the horizontal thick-
ness. He developed his formula after studying sixty deposits and noting the risk
associated with their mine plans. His formula expands a general rule of thumb that
is used in narrow vein deposits that states that the mine can produce at a rate equal
to 15 vertical centimetres per day multiplied by the tonnes of reserves per vertical
centimetre. His equation is noted as
Annual production rate = Rate factor Rate multiplier (2.2)
where the rate factor is the tonnes per vertical metre and the rate multiplier is the
multiple to calculate the annual production rate. The recommended rate multipliers
are listed in table 2.2. Based on this table, 15 centimetres per day would correspond
to a rate multiplier of 37.5, ranking as moderate risk for a narrow vein deposit.
Table 2.2: Rate multipliers, from Tatman [65]
Deposit thickness Rate multiplier
(metres) Low risk Moderate risk High risk
< 5 < 20 20 to 50 > 50
5 to 10 < 50 50 to 70 > 70
> 10 < 30 30 to 70 > 70
Figure 2.1: Operating and capital cost as a function of production rate, from
Smith [62]
Static solution based on economic optimality
Some authors recognize that the net present value of a deposit varies with the pro-
duction rate and that there has to be a rate for which this value is maximized. The
basic assumptions behind this work is that the capital cost is proportional to the
production rate and that the operating cost is inversely proportional as economies of
scale can be realized. Glanville [26] developed such functions for a high grade gold
deposits and added a function relating the preproduction time and the capital cost.
Bradley [6] and Smith [62] also developed the concept illustrated in gure 2.1.
The Net Present Value (NPV) and the Internal Rate of Return (IRR) of the
project can be calculated for various production rates, and the results can be drawn,
as shown in gure 2.2. The production rate corresponding to the maximum NPV is
the optimum production rate.
Figure 2.2: Maximum Net Present Value as a function of production rate, from
Smith [62]
One interesting fact developed by all the authors is that the net present value is
fairly insensitive to reductions in production rates around the optimal point, with
reductions between 5 and 10 percent for production rates set at half the optimal rate.
Risk aversion
There is an interesting dialogue in the literature concerning which approach to use to
dene the production rate. The proponents of empirical formulas say that, in order
to dene the maximum net present value, one must spend too much time and money
conducting feasibility studies at progressively higher production rates, without ever
being certain that the optimal solution can be found. Meanwhile, the proponents
of the maximum net present value nd that the empirical solutions are always sub-
optimal and that higher production rates can yield higher net present values.
Smith [62] compared the relationship between the NPV and production rate to the
stress-strain curve obtained by testing the strength of a rock sample. The maximum
point on this curve represents the failure point of the sample, where it is destroyed.
Smith judged that the maximum NPV is a failure point of the project, and if it is
designed at a higher production rate, the chance of failure of the project will be very
high. Given that the NPV is not much lower for production rates smaller than the
optimum, it seems reasonable that a mine be designed at lower rates, thus avoiding
the possible failure of the project without signicantly reducing its value.
Static solution mathematically derived
Corbyn [14] used dierential equations to describe the nancial performance of a
capital expenditure. This approach does not require the calculation of annual cash
ows. The basic parameters used in his equations are the discount rate, the unit
operating prot per tonne of ore, and the incremental capital cost of producing one
more tonne of ore annually. The equations are:
the marginal payback period as a function of the incremental capital cost;
the marginal increase in present value as a function of the payback period and
the project life, referred to as the wealth increase function. For any payback
period, there is a project life for which the wealth increase is maximized; and
the project life as a function of the production period and the discount rate.
Therefore, for any given discount rate, there is a payback period for which the
wealth creation is maximal, to which corresponds project life, and thus production
rate. Overall, this is a good approach, but with one signicant simplication: the
operating cost and margin remain constant, independent of the capital spent, or, in
other words, there are no economies of scale as represented in gure 2.1.
Abdel Sabour [1] based his work on that of Wells [73] (reviewed later in this chap-
ter), using Present Value Ratio to determine the optimal production rate. However,
instead of trying to nd the maximum of the PVR function, he developed a marginal
analysis where the production rate is optimal when the present value of marginal
revenues is equal to the present value of marginal costs. His equations are developed
from the prefeasibility cost models built by Camm [10], where the operating and cap-
ital costs of every mining method are represented by an equation of the form aQ
b
,
where Q is the production rate.
There are a few problems identied in this paper:
The optimal production rate tended to be equal to that where the marginal rev-
enue is equal to the marginal cost, a solution that is valid for general industries,
but too high for mines;
The author used a shrinkage mine as an example and comes to the conclusion
that it should operate at 3,662 tonnes per day, an unreasonable rate from an
operating point of view;
Abdel Sabour assumed that as the ore grade increases, the optimum production
rate increases also. Again, this makes no sense from an operating point of
view. Since reserves are constant, independent of the grade, the capital cost did
not change with grade. A higher present value of revenues resulted from this,
without a corresponding increase in costs.
Overall, the two approaches do have some merits, but the equations are too simple
and do not take important factors in consideration.
Dynamic solutions
Gray [28] introduced the concept of diminishing productivity. In a producing mine,
as the production rate increases, increasing operating costs yield lower returns until
eventually the marginal revenue is less than the marginal cost. This is illustrated in
gure 2.3. A land owner would operate at the production rate for which both are
equal in order to maximize the NPV (Q
m
), but the mine owner, faced with limited
resources would tend to operate at a rate for which the average prot is maximum,
or for which the average cost is minimal (Q
l
). If the discount rate is considered, the
present value of future returns is lessened, and the present value of a tonne mined
now at greater expense might be greater than that of a tonne mined in the future at
lesser expense.
Using a numerical example, Gray indicated that the mine would maximize its
prot during the last year of production, thus working at Q
l
, and that for each of the
prior years of operation, the production rate is equal to that for which the marginal
prot is equal to the present value of the marginal prot of the last year. This results
in a mine plan with declining production rates annually, where the rate in year 1 is
less than Q
m
and is equal to Q
l
in the last year of operation.
It is worth noting that, in this example, Gray worked with a coal mine. With
time, this model was adapted to other commodities, and now the general accepted
model is based on units of metal mined (e.g. pounds of copper), where production
rates are equal to units of metal mined per year and costs and revenues are expressed
Production Rate (units per year)
R
e
v
e
n
u
e
s

a
n
d

C
o
s
t
s

(
$

/

u
n
i
t
)
Price = Average Revenue = Marginal Revenue
Marginal Cost
Average Cost
Q
l
Q
m
Figure 2.3: Unit revenue and costs as a function of production rate, adapted from
Gray [28]
in dollars per unit of metal.
Hotelling [34] was concerned with the calculus of determining the adequate pro-
duction rate of a deposit such that the NPV is maximized over its life. As had Gray,
he recognized that the economic theory of the rm, in which the production rate
should be static, does not apply in a mine where the supply is nite, and that the
discount rate plays an important role in determining the optimal sequence of produc-
tion rate to maximize the NPV of the deposit. This principle is referred to as the r%
rule. However, the dierence between Gray and Hotelling is that Gray concentrated
on one mine while Hotelling was describing the behaviour of the whole industry, and
that the r% rule applies only in cases of scarcity of the metal supply. Nonetheless,
equation 2.3 describes both cases well.
max NPV (q) =
T
0
e
rt
[q(t)]dt (2.3)
where
NPV is the net present value
q is the production rate
T is the life of the mine
r is the discount rate
t is the time
q(t) is the prot associated to the production rate at time t
Crabbe [15] compared the work of both authors, and listed their major assump-
tions. In the case of Gray:
1. Perfect competition and constant price: The price of the metal remains constant
through time;
2. Grade homogeneity: The grade throughout the deposit is constant;
3. Independence of cost functions from cumulative production: The cost functions
do not change as the operation progresses from mining of principle stopes to
pillar recovery;
4. Time autonomy of cost functions: The cost functions remain the same through-
out the life of the mine;
5. U-shaped curves: The concept of diminishing productivity discussed previously;
6. Free horizon: The life of the mine is not xed a-priori;
7. Fixed stock:The in-situ resources are xed;
8. Perfect malleability and shiftability of capital: There is no xed capital, and
capital can be increased and decreased instantaneously;
9. No storage: the ore is sold immediately upon extraction.
Hotellings assumptions are similar, but include:
#1, Perfect competition and rising prices: The price of the commodity increases
at the same rate as the rate of interest;
#5, Long-run equilibrium in the mining industry: All rms have identical costs.
As a consequence, the individual mines cannot adjust their production rate
marginally and must either operate or close. The marginal changes in produc-
tion rate are achieved through the opening or closing of mines.
Since this thesis is interested in the design of individual mines, Grays model will
be used from now on in this chapter and will be revisited later in chapter 3.
Another aspect of Grays model that is of interest is that the xed cost of operating
a mine is constant for all production rates. This can be better understood by looking
at the total functions corresponding to the unit functions in gure 2.3, illustrated in
gure 2.4.
Park [50] examined the eect of discount rates on the distribution of production
rates in time. Using an hypothetical mine as an example, he produced gure 2.5, in
which he showed that high discount rates force operations to work at high production
Production Rate (units per year)
R
e
v
e
n
u
e
s

&

C
o
s
t
s

(
$
)
Revenues
Costs
Fixed
Figure 2.4: Total revenue and costs as a function of production rate, adapted from
Gray [28]
Figure 2.5: Eect of discount rates on dynamic optimization of production rates, from
Park [50]
rates in order to minimize the eect of discounting, whereas low discount rates allow
the operation to work at rates where the annual prot can be increased.
Gray recognized that there were some problems with his model:
The capital outlay required to produce at high production rates early in the
mine life may be wasted as production rates decrease with time. He suggested
it may be better to have uniform production rate to smooth out the capital
outlay. This rate would be between the two extremes dened as the maximum
rate occurring in the rst year and the minimum in the last year of production;
A mine may increase or decrease productivity from one year to another based
on the work done in the mine;
Metal prices variations would inuence the extraction rate.
Campbell [11], Hartwick and Olewiler [29], and Cairns [9] wrote about the rela-
tionship between capital outlay and production rates. The problem lies in the fact
that equation 2.3 does not include the capital outlay. The equation can now be
rewritten as follows:
max NPV (q) =
T
0
e
rt
[q(t)]dt K
q
(2.4)
where K
q
is the capital outlay as a function of the production level. This equation
yields a solution where the production rate is constant for most of the life of the mine,
as illustrated by Hartwick and Olewiler in gure 2.6.
Based on this, although dynamic models have higher net present values than static
models, they are not implemented in operations because of the constraint associated
to the initial capital expenditure.
Figure 2.6: Unit revenue and costs as a function of production rate, adapted from
Hartwick and Olewiler [29]
Solutions under conditions of metal price uncertainty
Under conditions of metal price uncertainty, the literature is limited to modeling the
behaviour of rms when metal prices change. There is no attempt to develop a mine
plan taking metal price uctuations into consideration. Instead, the objective is to
maximize the value of a plan that is already in place by modifying the behaviour of
the rm when the prices change.
The rst model of interest is that of Mueller[44] in which he built a model relating
mine development (referred to as Eort in the paper), reserves, and the production
rate. He states that reserves change annually through production, discoveries, and
adjustments based on information gathered during the year (geological and price
uncertainty). After statistically testing a few models with data from the oil industry,
he came to the conclusion that rms consider that both geology and metal prices
stay constant through time and try to maximize the NPV using a static model.
Eventually, when the conditions change signicantly, a new plan is built with the
objective of maximizing the NPV based on the latest values.
The second paper is from Brennan and Schwartz [7], in which the concept of real
options is introduced as a way to evaluate the true worth of a mine under conditions of
metal price uncertainty. In this model, the mine manager has the option to temporar-
ily suspend the operations of the mine if the metal prices are too low and the cash
ows are negative. The manager can decide to incur the one-time cost of temporarily
shutting down the mine and that of maintaining it ready to reopen, thus losing less
money than if the decision was made to keep it open. The overall eect is that the
total cash ow over the life of the mine will be greater in this case as lower loses are
incurred and as the mine operates only during years of higher metal prices. Figure 2.7
Figure 2.7: Eects on cash ows of operating options of a mine, from Palm, Pearson,
and Read [49]
illustrates this concept. Slade [59] and Moel and Tufano [42] demonstrated that mine
managers of copper and gold mines in North America were actually following this
approach during the 1980s and 1990s.
As mentioned earlier, these two papers show that it is possible to maximize the
value of a mine plan under conditions of metal price uncertainty, but there is no
demonstrated way to choose the production rate of a mine under those conditions.
2.1.2 Cut-O Grade Optimization
Pasieka and Sotirow [51] dened two general types of cut-o grades:
For strategic planning purposes, the cut-o grade achieves a positive net present
value. It includes geological and planning cut-o grades, used to dene mine
reserves and for general design purposes; and
For operational and corporate planning, the cut-o grade achieves positive net
cash ows. It includes average annual budget cut-o grades for operational
planning, and break-even cut-o grades for ore-waste separation along stope
boundaries.
Taylor [66] oered a detailed breakdown of the points of planning and operational
cut-o grade estimation for Type A and B underground mines and for open-pit mines,
based on the amount of geological information and the costs to incur.
This thesis deals with the denition of the cut-o grade for strategic purposes,
with the objective of dening the reserves and determining the size and capital cost
of the mine. Because of this, the review of cut-o grade optimization deals only with
the rst type.
Static solutions
Carlisle [12] introduced the idea that orebodies are not homogeneous and that it
might be more protable to extract only a fraction with higher average grade. Apart
from the economic aspects, he recognized that the complete extraction of ore has
some practical limitations with respect to the mining method and recovery of pillars
and the mill recovery of low grade ore. In an approach similar to Gray [28], he
talked about economies and diseconomies of scale and related them to the level of
recovery of metal resource, best described as a portion mined from the total metal
resource. Implicitly, it is assumed that, for a given level of recovery, the portion
dened constitutes of resource ore tonnes with the highest available grade, such that
there exists a direct correlation between the level of recovery and the cut-o grade in
Figure 2.8: Levels of recovery unit functions, from Carlisle [12]
which the cut-o grade is inversely proportional to the level.
As seen in gure 2.8, the mine is a price-taker and the price it receives is constant
for all levels. The average total cost curve is u-shaped (ATUC) as is the marginal
cost curve (MC
L
). For a discount rate equal to 0%, the NPV, i.e. the cash ow, is
maximized if the mine operates at a level for which MC
L
= price, and the annual
prot is maximized at a level for which the average cost ATUC is at its minimum.
If the discount rate is greater than 0%, the optimum NPV occurs at a level located
between the two end points just mentioned.
In this thesis, Carlisles work will serve as a basis for the development of the
mathematical model. For this reason, it is worth examining more the construction
Level of recovery (units of metal)
R
e
v
e
n
u
e
s

&

C
o
s
t
s

(
$
)
Revenues
Costs
Capital
Figure 2.9: Levels of recovery total functions, adapted from Carlisle [12]
of the graph. The best approach to this is to build the total function graph as a
complement to the unit graph discussed above. This graph is presented in gure 2.9.
Based on Carlisles paper, it can be deduced that the variable cost V C
L
is the sum of
the xed and variable mine operating costs. What he refered to as the Total Fixed Cost
is actually the capital cost of mobile equipment and mine development, regardless of
the tonnage recovered, and is represented by the intercept of the cost curve with the
abscissa. The elements of this construction will be revisited in chapter 3.
Whereas Carlisles model is conceptual, Lane [37] derived mathematical equations
in order to determine the cut-o grade with the objective to maximize the cash ow
within the operating constraints of the mine. His equation is listed in 2.5. Taylor [66]
also described the same.
c = (p k)xy g xh m(f +F) (2.5)
where
c is cash ow
p is price per unit of mineral
k is marketing cost
x is the proportion of mineralized material classied as ore
y is mill recovery
g is average grade of ore
h is treating cost
m is mining cost
f is time (or xed) cost
F is the opportunity cost
is the time to progress through a unit
In other words, the cash ow is equal to the revenues (as a function of production,
grade, metal price, and smelter contracts) minus mining, treating, and xed costs.
Within the context of an underground mine, Lane considered that the mining activ-
ities include all lateral and vertical development, and the treatment activities range
from the stoping, tramming and hoisting to surface to crushing, grinding, and sepa-
rating at the mill. Smelting, rening, and selling are considered within the marketing
costs.
The time to progress through a unit is limited by the slowest of the mining,
treating, or smelting, and Lane derived equations to determine the optimal cut-o
grade maximizing the cash ow while remaining within the operating constraints.
Recent examples of the application of this technique in underground mines are made
in Tatiya [64], Wheeler and Rodriguez [74], Poniewierski, MacSporran, and Shep-
pard [53], and Henry [33].
The basic equation presented by Lane is of interest for the development of the
mathematical model in this thesis and will be revisited in chapter 3.
Dynamic solutions
Lane also developed a dynamic solution for optimizing the NPV of a mine. Intuitively,
his solution is easy to understand, with higher cut-o grades employed earlier in
the mine life in order to have higher cash ows and thus higher NPVs. Park [50]
showed that the solution was sensitive to discount rates, as shown in gure 2.10. It
is recognized in the industry that Lanes solution is easier to apply to open pits than
to underground mines, as it is possible to create lower-grade surface stockpiles that
can be later sent to the mill, whereas low-grade material from underground must
be discarded as waste or blended into the mill feed. The geometry of underground
orebodies and the required sequence of extraction makes it very dicult to establish
strict cut-o grade policies as dictated by Lane. In future work, Lane [38] suggested
that a cut-o grade policy may be a poor one if the early metal prices are low.
Figure 2.10: Eect of discount rates on dynamic optimization of cut-o grades, from
Park [50]
As in the case of production rates, there is a fair amount of literature on how the
cut-o grade of an operating mine should be adjusted when metal prices uctuate.
Taylor [66] is the best-known author, and he concluded that the cut-o grade of a
mine should increase with metal prices in order to increase the cash ow and thus
increase the net present value of the mine. He noted that it contradicted the observed
behaviour in most mines, where the cut-o grade is lowered in hope of increasing the
reserves. He argued that current practices lead to mining more tonnes for a greater
total cost while producing the same amount of metal. The revenues from production
would be higher however, and might protably oset the increase in costs.
Dowd [21] used dynamic programming to determine the sequence of annual cut-o
grades with the objective to maximize the net present value. Even though the title
of his paper mentioned production rate optimization, his examples are constrained
by the mill which remains full in all the cases presented, and his work showed only
cut-o grade optimization. He developed a stochastic distribution of metal prices,
with Bayesian probabilities of getting a metal price j in year n + 1 given a metal
price i in year n. He developed and solved two examples, one for a deposit with an
homogeneous grade-tonnage distribution throughout, and one where ve production
levels are dened, each with its own grade-tonnage relationship. He recognized that
his model was oversimplied, but that it served the purpose of introducing a general
model to generate a solution.
Fuentes [24] looked at the eect of metal price uncertainty on the planning of
block caving operations. He wanted to develop a methodology to determine which
mineralized columns to mine and the order in which to mine them to increase the
economic robustness. He introduced the concept of the Price Certainty Parameter
(PCP), the probability that a column can participate in a protable design, ie. be
considered in the mining plan.
Each ore column must be evaluated individually. Therefore, for each column, one
must:
Randomly generate a metal price from a predetermined distribution;
Evaluate the operating benet of each resource block in the column;
Calculate the cumulative block benets from the bottom up, including the cost
of development and mine preparation to the bottom block;
Identify the maximum cumulative benet and its corresponding column height;
and
The PCP is equal to the percentage of times a simulation generated a positive
maximum cumulative benet.
For mine design purposes, a given column is included if it adds to the overall
prot or if its inclusion permits the addition of columns that increase prot. Once
the boundaries of the area to mine are determined, the sequence of extraction is set
by starting in the highest PCP sector and progressively adding lower PCP sectors
over time.
In a case study, the stochastic model was compared to plans built with various
metal prices. In general, the stochastic plan was very similar to that generated with
a metal price equal to the average of the metal price distribution. However, upon
doing a risk analysis for each plan, it was shown that the stochastic plan was more
robust, with a higher probability of achieving a positive net present value.
2.1.3 Combined Models
Static solutions
Carlisle [12] combined his recovery level model with Grays production rate model
and suggested that, for a mine trying to optimize its annual cash ow, the cut-o
grade should be increased such that the total average cost is at a minimum and the
production rate should be increased such that the marginal cost is equal to the metal
price. In the case of a mine trying to maximize its total prot over the life of the
mine, the level of recovery should be such that the marginal cost is equal to the metal
price and the production rate is such that the average total cost is at a minimum. He
Figure 2.11: Relationship between rate and level of recovery, from Carlisle [12]
produced a graph (gure 2.11) showing the relationship between levels of recovery,
production rates, and average and marginal cost curves, with the objective to identify
operating conditions.
Wells [73] used the Present Value Ratio
1
to determine the best combination of
production rate and cut-o grade. In the paper, the PVR is equal to the ratio of
the present value of the positive cash ows (PVOUT) divided by the present value
of the negative cash ows (PVIN), and the mine is economical if the PVR is greater
than 1. He developed the relationship of capital cost as a function of production
rate and assumed that the preproduction time is equal to four years, independently
of the production rate, and that production starts after that time. Positive cash
1
Gentry and ONeil [25] refers to this as the Benet Cost Ratio
ows assume a constant operating cost independent of the production rate, thus no
economies of scale. As for the cut-o grade, he used an approach similar to Lanes,
where each tonne mined must pay for its variable operating cost. The last step in his
optimization process was to calculate the PVR function for many other cut-o grades
and plot a contour map of the PVR as a function of the production rate and cut-o
grade, as shown in gure 2.12. An island of PVRs greater than 1 can be dened and
the economical engineering designs can thus be constrained to the ones within the
island.
Ding [19] developed an iterative process to dene the optimal cut-o grade and
production for an underground mine. An initial production rate is selected and the
cost and revenue curves common to Gray and Carlisle are constructed, and from these
curves, the optimum production level is dened as the one for which the marginal cost
is equal to marginal revenues. Using the grade-tonnage curves of the deposit, a new
reserve base is calculated. Accordingly, the cost and revenue curves are adjusted to
reect this new information, and the production rate for which the NPV is maximized
is chosen as the optimal. This production rate is now the basis for the next iteration of
the optimization process, and the process ends when there is little dierence between
two consecutive optimal production rate determinations. The process is presented in
gure 2.13.
Dynamic solutions
Park [50] proposed an iterative process to nd a dynamic solution to nd the optimal
set of varying annual production rates and cut-o grades. The process is very similar
to Dings static solution, with the dierence that another level of iteration is added
Figure 2.12: Contour map of PVR in relation to cut-o grade and production rate,
from Wells [73]
Figure 2.13: Relationship between rate and level of recovery, from Ding [19]
by optimizing each year of production. The process starts by assuming that the
deposit is in its last year of production. In this case, the objective is to maximize the
total prot, and this is achieved by operating at a cut-o grade for which the unit
prot is maximum, or point C
B
in gure 2.14, and at a production rate for which
the maximum unit prot is achieved, rate X
A
in gure 2.15. For each consecutive
step of the iteration, as time proceeds back towards the start of the mine life, the
cut-o grade and the production rate increase as a function of the discount rate.
For each year of production, an iterative process is necessary to nd the equilibrium
between the optimum cut-o grade and production rate as each function inuences
the other. The production rate is rst calculated and is integrated into the cut-o
grade functions which are then optimized. The latest solution is fed back into the
production rate functions which are then optimized again. The process is carried on
until the solution becomes stable.
Figure 2.14: Cut-o grade unit functions, from Park [50]
Figure 2.15: Production rate unit functions, from Park [50]
Samis [55] and Samis, Laughton, and Poulin [54] looked at the case of a mine exploit-
ing the high-grade core of an orebody and studying whether to mine the low-grade
extension. Three options are open:
Mine the high-grade until depletion and close the mine;
While mining the high-grade, develop the low-grade extension, increase the mill
capacity, and mine both sectors simultaneously; or
Deplete the high-grade and put the low grade in production without having to
increase the mill capacity.
Samis developed xed production plans (FPP) for many variations on the three
options, including dierent timing for the introduction of the low-grade expansion
during the mining of the high-grade. He combined all these variations into a exible
discrete mine production (XDFP) project structure. This structure was used to de-
velop a tool to be used by the mine manager to decide on which previously-mentioned
option to incorporate at any point in the mine life based on the current metal price.
This tool is illustrated in gure 2.16. For example, if the metal price is equal to
$0.60 per unit of mineral with 5 years left in the mine life, the high-grade zone alone
should be mined; if the price is greater than $0.70, both zones should be operated. In
essence, this tool analyzes all the options available under many metal price conditions
and later allows the mine manager to chose both the production rate and the cut-o
grade of the operation based on the current metal prices.
Figure 2.16: Low-grade zone development and project abandonment boundary,
adapted from Samis et al. [54]
2.1.4 Summary of reviewed literature
In general, the existing literature concentrates mostly on two aspects:
The optimization of the Net Present Value through the variation of the produc-
tion and/or the cut-o grade and examining the eect of the marginal prot
of the total value. Production rate variation equations were shown to be in-
complete as they did not consider the impact of capital costs and also to be
impractical at the operations themselves. Cut-o grades variations were shown
to be impractical underground because of the impossibility to create low-grade
stockpiles on surface.
The optimization of the Net present Value through the option to suspend a
given mine plan when metal prices are low and projected losses are too high;
the mine can be put back in operation when metal prices increase again. Mine
managers were shown to exercise this option when times were bad.
In other words, almost every paper talks about developing an optimal mine plan
under conditions of metal price certainty or optimizing an existing plan under condi-
tions of metal price uncertainty. Only Samis proposed a method to choose between
operating options such that the choice has the highest probability of success, or the
highest degree of robustness.
2.2 Metal Price Forecasting Models
This section discusses a metal price generation model. One must rst take a look
at long-term trends in gold and copper prices, in terms of both nominal and real
dollars and explain why long-term tendencies are towards increasing production and
lower prices. The next step is to look at factors that drive short-term price volatility.
Finally, this section reviews stochastic model for generating metal prices for use in
Monte Carlo application.
2.2.1 Long-Term Metal Price Tendencies
The author began investigating average annual gold and copper prices in nominal
terms, starting in 1980 for gold (gure 2.17) and 1975 for copper (gure 2.18). In
real dollars (gure 2.19), the obvious long-term trend in copper prices is downward.
Tilton [69] and [70] said that this tendency is due to a downward shift in the supply
curve, represented by the marginal production cost curve. Such a shift not only
results in a decrease in metal prices but also in an increase in production, as seen in
gure 2.20. Tilton continued by showing that the marginal copper production cost
curves have gone down over the years, mostly as a result of technological advances
0
100
200
300
400
500
600
700
800
900
1000
1980 1985 1990 1995 2000 2005
Year
A
v
e
r
a
g
e

a
n
n
u
a
l

g
o
l
d

p
r
i
c
e

(
$
/
o
z
)
Figure 2.17: Average annual gold prices from 1980 to 2005
and scale eciencies (gure 2.21).
2.2.2 Short-term price volatility
Whereas long term variations in metal prices are related to supply conditions, Tilton
went on to describe how short-term volatility is driven by demand and the slow
reaction time of the industry to add productive capacity. Figure 2.22 illustrates a
condition where the demand for a metal increases rapidly, shown as a shift of the
demand curve to the right. As the demand increases, mines increase their production
as best they can, but after relatively small short-term increases, the operating mines
simply do not have the capacity to develop new reserves, either by expanding current
operations or by developing new deposits. This inability to react in the short term
is illustrated as a capacity constraint, forcing the supply curve upwards and driving
0
20
40
60
80
100
120
140
160
180
1975 1980 1985 1990 1995 2000 2005
Year
A
v
e
r
a
g
e

a
n
n
u
a
l

c
o
p
p
e
r

p
r
i
c
e

(
c
e
n
t
s

/

l
b
)
Figure 2.18: Average annual copper prices from 1975 to 2005
Figure 2.19: Average annual copper prices in 2001 dollars, from Tilton [69]
Figure 2.20: Falling prices due to a shift in the supply curve, from Tilton [69]
Figure 2.21: Copper mine costs (cents/lb, real 2001 dollars), from Tilton [69]
prices to vary signicantly with small changes in demand.
Over the medium and the long term, new productive capacity will be added, thus
pushing the capacity constraint line to the right and bringing prices down.
2.2.3 Stochastic metal price models
In the realm of Real Options, metal price models are used to study the eect of
metal prices on the value of production plans. Dixit and Pindyck [20] went through
the more common ones in their book. However, one particular model seems to be
preferred by most authors. This model, which takes into consideration both the
short-term volatility of prices and the general long-term tendencies, is referred to as
a mean-reverting process. Amongst others, Brennan and Schwartz [7] used the model
with real options to evaluate the practice of temporary mine closure when prices are
Figure 2.22: Causes of market volatility, from Tilton [69]
low, Davis [16] used the same process to evaluate mines using various metal price
models, and Samis et al. [54] adapted it to take production decisions in a multi-zone
orebody. Schwartz [56] analyzed fteen (15) years of gold and copper price series to
establish the main characteristics of each metals model.
The model is described as a Wiener process or a Brownian motion with a mean-
reversion process. The Wiener process is a continuous-time process with three charac-
teristics. First, it is a Markov process, meaning that all future values can be calculated
from the current one. Second, it has independent increments, meaning that the prob-
ability distribution for the change in the process is independent from one time period
to another. And third, changes in the process are distributed normally and with the
variance increasing over time. This model however tends to wander far from its start-
ing point. As presented by Tilton, metal prices tend to have long-term average prices
related to the marginal production cost. Therefore, the Weiner process is modied to
include mean-reversion, thus forcing the model to tend towards a long-term average
price, as shown in equation 2.6.
x
t
= E(x
t
) + dx (2.6)
Where
x
t
is the metal price at time t,
E(x
t
) is the expectation of the price at time t, and
dx is the short-term metal price variation
The rst argument of the equation is the expectation of the price in the future,
and is a function of the tendency for the price to revert to a long-term average, also
50
60
70
80
90
100
110
120
130
140
150
0 2 4 6 8 10 12 14 16 18 20
Time (years)
M
e
t
a
l

p
r
i
c
e

(
c
e
n
t
s
/
p
o
u
n
d
)
100
25 . 0
=
=
x
Figure 2.23: Example of mean reversion

referred to as the degree of mean-reversion. It is expressed by equation 2.7, and
gure 2.23 shows an example of how prices would revert to a long-term average for
various initial prices. Schwartz [56] noted that both copper and gold tended to revert
towards long-term averages, though golds degree of reversion is very weak, ie. it
takes much more time for gold to revert.
E(x
t
) = x + (x
0
x) exp(t) (2.7)
Where
x is the long-term average of the metal price,
x
0
is the price at time zero, and
is the degree of mean reversion.
The second argument is the short-term shock resulting in sharp increases or de-
creases in price over short time intervals. This variation is a random function known
as a Wiener process.
dx = dz (2.8)
Where
is the variance of the metal price variation, and
dz is an increment of a Wiener process. dz =
t where is a normally distributed

random variable with a mean of zero and a standard deviation of 1.
2.3 Treatment of Ination in Discounted Cash Flow
Calculations and Discount Rate Selection
2.3.1 Treatment of Ination
It is widely recognized that cost ination has an impact on cash ow, and much
literature shows the eect of dierent types of ination
Heath, Kalcov, and Inns [32] stated that ination rates can be reasonably predicted
for a period of three to ve years, but are hard to project afterwards.
Gentry and ONeil [25] showed that ination negatively aects after-tax cash ows
when considering the eect of rising costs on depreciation, working capital and capital
gains taxes. In all their examples, revenues and costs increase at xed or variable
rates, and the resulting after-tax nancial indicators are considerably lower than the
cases where ination is not considered. Smith [60] proceeded to the same type of
exercise with the same conclusions.
Gentry and ONeil then discussed how projects at the evaluation stage should
be studied without adjustments for ination to be able to identify variations due to
technical factors without being obscured by economic eects.
Smith [63] considered that economic analysis without considering ination, the
bare bone case, is the indicated way to compare many projects by using a common
reference point. He added that, if the bare bone scenario is attractive, scenarios with
ination and other assumptions will be attractive also.
For the project considered in this thesis, ination is not included for a number of
reasons.
ination has a greater impact on after-tax analysis. Since this thesis deals with
pre-tax cash ows, the impact of ination is not as important,
all studies on ination assume that both costs and revenues increase at the same
rate. In this thesis, the annual price of metals varies as per a stochastic process,
and the model does not consider that long-term metal prices increase with time.
It could be argued that revenue uctuates according to a variable ination (and
deation) rate, thus concentrating any eect of ination on revenues only.
In order to identify the elements driving the methodology developed in this
thesis, cost ination is assumed to be equal to zero to truly concentrate on
technical aspects of the problem.
2.3.2 Discount Rate Selection
There are two major lines of thoughts in literature aimed at selecting a discount
rate. The rst is based on the CAPM model and the second tends to assign risk in a
project according to the available information for that project. The two approaches
are summarized here.
Gentry and ONeil [25] considered that the discount rate must be sucient to cover
base opportunity costs, the transaction cost, the increment for risk varying with the
nature of the project, and an increment for ination. This rate is calculated as the
weighted average cost of acquiring capital for a given company and is a function of
the cost of debt and the cost of equity calculated as a function of the correlation of
the risk of the companys equity to that of the market in general. This correlation
factor is referred to as the Beta factor.
Smith [61], [63] discussed the same concept. He then pointed out that the Beta
factor measures the variability of an entire company, and not of individual projects.
As practiced in the industry, the discount rate varies from project to project, based
on its location in the world and the type of metal mined. The total discount rate
is equal to the sum of an risk-free rate, the project-related risks, and the country
risk. The project risks include the mine life, the revenue factors (reserves and metal
prices), and the operating and capital costs. He then showed how the discount rate
diminishes throughout the life of the project as more information is available, as
shown in gure 2.24.
In this thesis, the mine on which the proposed methodology is tested is in ad-
vanced stages of production, at a point somewhat similar to mid-life as referred to
by Smith [61]. At this stage, he considered that the discount rate should be equal to
Figure 2.24: Components of real discount rates at dierent stages of project develop-
ment, from Smith [61]
5% including revenue risks equal to 1.5 or 2%. Based on this, the discount rate to be
used in this project is 5%.
Chapter 3
The Mathematical Model
The objective of this chapter is to build the mathematical tools required by the
engineer to solve the problem of preparing a strategic mine plan under conditions of
metal price uncertainty.
Two principle points are covered in this chapter:
The construction of a micro-economic model dening revenues and costs as a
function of production rates and cut-o grades, and
the development of the methodology to select the production rate and cut-o
grade of a mine under conditions of metal price uncertainty using this micro-
economic model.
3.1 Construction of the Model
The purpose of the model that is developed in this chapter is to permit the mine
planning engineer to have a tool that he or she can manage easily. For this reason, the
60
CHAPTER 3. THE MATHEMATICAL MODEL 61
theoretical models that were of interest in Chapter 2 will be briey presented again,
with the emphasis on identifying their limitations in the eyes of the engineer. The
new model will then be built on the foundations of previous work while incorporating
elements of revenues and costs managed on a daily basis by the mine planner. It
will then be shown that there is a direct relationship established between the Grade-
Tonnage curves of an orebody and this model.
3.1.1 Characteristics of Existing Models
Three models are of interest for the construction of the new one: Grays production
rate model, Carlisles level of recovery model, and Lanes cut-o grade model. Each
will be briey discussed in the light of identifying the elements that the mine planner
can and cannot manage easily.
Gray
The main characteristics of Grays model are the following:
All functions are related to units of metal produced, pounds of copper for ex-
ample;
The production rate is expressed as units of metal produced per time period;
Revenues are equal to the sale price of the metal;
Costs are equal to the variable cost of extracting and treating a unit of metal;
Fixed costs are constant for all production rates; and
Capital costs are a function of production rates, as per Campbell and others.
Carlisle
Carlisles level of recovery model has the following characteristics:
As in Grays model, all functions are related to units of metal produced;
The level of recovery is inversely proportional to the cut-o grade of the deposit.
A low level of recovery corresponds to a high cut-o grade and only the portion
of the deposit with a grade equal or greater than the cut-o is mined;
The capital cost of the mine is constant for all levels of recovery.
Lane
Lanes general equation (2.5) has the following characteristics:
Revenues are a function of the cut-o grade and are expressed in terms of tonnes
of ore mined and its average grade;
Mining and treatment costs per tonne of ore mined are constant for all produc-
tion rates and cut-o grades;
Mine development costs are constant for all cut-o grades and production rates;
Fixed costs are constant for all production rates and cut-o grades.
3.1.2 The Cost Model
The models reviewed above are found to be limited and lacking in the representation
of the activities found in an underground narrow-vein mine. In this part, these models
will be expanded upon by integrating many aspects of costing and revenue generation
that are drawn from the experience of the author. The purpose is to create a more
realistic model taking into account the many activities found in a mine.
At this time, the model is built for a mine already in production, with the mill
commissioned, the ore handling system in place, and with some of the vertical and
lateral development infrastructure in place. Some aspects that are developed are
limited to this condition, akin to that of a mine in the rst third of its life. A project
at the feasibility stage would carry all the elements of the present with additional
considerations. That case will be discussed in Chapter 6.
Observations of a Mining Engineer
In this section, general background information will be compiled from professional
experience.
Working units In nancial reporting, it is very common to explain to all stake-
holders the protability of an operation by comparing the realized price of sale of the
metal produced with the cost of producing one unit of metal. These numbers are
calculated by dividing the total operating cost at the mine by the number of metal
units produced, and are very easy to produce once all the cost accounting information
has been compiled. However, during mine planning, costs are measured exclusively
as a function of the quantity of tonnes of ore to move, with no direct reference to the
quantity of metal that can be extracted from the rock. Given this information, the
main working reference should therefore be the tonnes of ore sent to the mill.
Based on this: the production rate axis is scaled in tonnes of ore sent to the mill
per day, month, or year; the level of recovery axis is scaled in tonnes of ore; and
costs and revenues are expressed in dollars per tonnes or ore. For the purpose of this
model, the term level of production will be used as a replacement for level of recovery
to describe the tonnes of ore with an average grade higher than the cut-o grade.
This relationship will be expanded upon later in this chapter.
Capital costs For a mine in production, there are three circumstances in which
capital can be spent. The rst case is for the preparation of development for the
purpose of accessing new ore zones, the second is for the replacement of mobile and
xed equipment in the mine, and the third is for the replacement of equipment in the
mill and other surface installations. Each case can be better described as a function
of either the level of production or the rate. Each case will be studied individually.
Capital development in underground mines consists of shafts, ramps, raises, and
lateral transport drifts required to access ore zones with expected utility greater
than one year. In the typical Taylor [66] Type A deposit under study in this thesis,
mineralization is erratically distributed along large horizontal and vertical extensions.
Given this nature, it is reasonable to assume that the amount of capital development
required would vary with the level of production. As the best million tonnes is
developed, a certain amount of development is required. If the next best million
tonnes is developed, part of the increment would already be included within the rst
million tonne envelope, but extra development would be required to encompass the
rest. This incremental relationship would continue until all resources are included,
and would result in a exponential mathematical relationship of the style aL
b
where
L is the total number of tonnes mined in the orebody, and b would be less than zero.
Sustaining capital for the mine, mill and on-site would consist mostly of replace-
ment for xed and mobile equipment necessary for operational purposes. In this case,
it is logical to assume that this cost is related to the quantity of equipment required
to produce and thus to the production rate. A mine producing at twice the produc-
tion rate would need twice as many drills, shovels, and trucks and twice the number
of processing circuits at the mill. The relationship is obviously not so linear, and
the function would be modeled by the formula aQ
b
, where Q is the production rate,
as discussed by OHara [48]. However, one must also consider the resources mined.
A deposit exploited at a given rate will obviously need more sustaining capital if
more resources are mined and the life is much longer. Therefore, one can expect the
relationship to be of the form aQ
b
L
c
.
Variable costs Variable costs are incurred directly in the production process and
are constant independent of the quantity mined and processed. This cost includes the
ore and waste development of individual stopes, the actual stoping activities, the mine
services providing logistical support to the miners, and the milling and processing of
the ore at the plant.
In a Type A mine, if the whole resource is mined, large contiguous mining areas
are formed, where low-cost bulk-mining methods are used. As the level of production
decreases, these areas become smaller and smaller, requiring the adoption of expensive
selective mining methods in increasing proportions. Furthermore, if the grade across
the width of the vein varies, the stope widths become narrower, again forcing the use
of selective mining methods. Therefore, one can expect the variable cost of mining
to be inversely proportional to the level of production.
Associated to the mining method, the ore and waste development of individual
stopes is also aected. In general, more selective mining methods require more de-
velopment per tonne of ore mined. Because of this, the development unit cost is also
inversely proportional to the level of production.
Mine services include ancillary services (ventilation, compressed air, industrial
and potable water, waste water disposal, etc.), denition diamond drilling, mobile
equipment maintenance, and ore handling from the orepass to the mill (including
ramp and hoist). In this case, it would be reasonable to assume that the variable cost
is as a function of the quantity of service provided, and that if more ore is produced
on a daily basis, more equipment is required and more services are necessary. Most
ancillary services are provided by a number of large xed pieces of equipment (com-
pressors, fans, pumps) and handle xed quantity of air or water. For high production
rates, every piece of equipment would be functioning, and as the production rate
decreases, the individual pieces would be taken o-line one by one as their capacity is
no longer required. Therefore, the total cost of each service would be a step function
consisting of constant cost within the equipment operational range, and increasing to
the next step of the function at production rates where more pieces of equipment are
required. However, when all services are considered together, the production rates at
which the steps occur are dierent for each service, and the total cost curve can now
be approximated as a continuous function of the form aQ
b
.
Similarly, in the mill, processes are carried out in a number of rod and ball mills,
cyclones, and otation cells that are put in or taken out of operation as the production
rate varies. Individually each process is a step function but, combined together,
they can be considered as continuous. It could be argued also that there is some
relationship between the cost of processing and the level of production as consumption
of reagents can change signicantly if the average feed grade is much higher or much
lower that for which the plant was designed. This aspect is not considered in this
thesis.
Fixed costs Fixed costs are incurred by the operation on a time basis, at a steady
rate every month or year, independently of the number of tonnes mined or units of
metal produced. These costs usually include the cost of general and area management,
engineering, geology, accounting, surface maintenance, human resources, logistics,
sales, and many more. Generally speaking, small variations in planned production
do not aect the xed costs, but signicant changes force management to review the
number of people required to service the operation. As in the case of mine services
variable costs, each cost center would be represented as a step function, but the sum
of all centers would give a continuous curve.
For the purpose of this model, xed costs can be split into two groups, the mine
xed costs and the mill and on-site costs, where the items directly related to mine
operations are regrouped under that banner, and all the rest, including general man-
agement, are regrouped in the mill and on-site category.
The Resulting Cost Model
The resulting model is quite dierent from those currently available in literature. It
is based on tonnes of ore mined and milled, and it takes into consideration the actual
subtleties related to the various cost centers considered in a mine budget. Table 3.1
briey summarizes the dierences between the new model and the classic ones.
3.1.3 The Revenue Model, Relationship with the Grade-Tonnage
Relationship
Revenues are also expressed as a function of tonnes of ore, and thus directly as a
function of the average grade of the ore. This grade is independent of the production
Table 3.1: Comparison of major design features of cost models
McIsaac Gray et al. Carlisle Lane
Units Tonnes ore Metal units Metal units Tonnes ore
Operating Cost
Variable Costs
Mining Level
Regular Development Level
Mine Services Rate
Milling Rate
Subtotal Rate Rate Level
Fixed Costs
Mine Rate
Mill & On-Site Rate
Subtotal Constant Constant Constant
Capital Costs
Capital Development Level
Other Mine Capital Rate & Level
Mill & On-Site Rate & Level
Total Capital Cost Rate Constant Constant
rate but is related to the level of production. The revenue component of Lanes
equation (2.5), presented here as equation 3.1, serves as the starting point for the
development of the model derived in this thesis.
R = (p k)xy g (3.1)
where
R is the revenues,
p is the price per unit of mineral,
k is the marketing cost,
x is the proportion of mineralized material classied as ore,
y is the mill recovery, and
g is the average grade of ore
Lets declare as a constant representing the net smelter return factor, equal to
revenues generated by selling one unit of mineral from the mine to a smelter.
= (p k)y (3.2)
and the revenues are now equal to
R = x g (3.3)
Based on this, the objective now is to develop this relationship as a function of
the level of production to then be able to estimate the average and marginal revenue
functions. Thus equation 3.3 becomes:
R
l
= x g
l
(3.4)
where
R
l
is the revenues as a function of the level of production, and
g
l
is the average grade as a function of the level of production
The grade-tonnage curves
The relationship between the cut-o grade, tonnage above cut-o, and average grade
of the tonnes above cut-o are commonly represented by the grade-tonnage curves.
Grade
T
o
n
n
e
s
Figure 3.1: Example of lognormal grade distribution
The construction is derived from the frequency distribution of grades within the
deposit, as shown in gure 3.1.
The level of production is the total tonnes of ore mined given a particular cut-o
grade given by the formula as:
T
gc
= T
0

g
c
f(x)dx (3.5)
where
g
c
is the cut-o grade,
T
gc
is the tonnes of ore with grade greater than g
c
,
T
0
is the total tonnes of resources in the deposit of production, and
f(x) is the frequency distribution function of rock of grade x in the deposit
Cut-Off Grade
T
o
n
n
e
s

a
b
o
v
e

c
u
t
-
o
f
f

g
r
a
d
e
A
v
e
r
a
g
e

g
r
a
d
e

o
f

t
o
n
n
e
s

a
b
o
v
e

c
u
t
-
o
f
f
Tonnes
Average Grade
Figure 3.2: Example of Grade-Tonnage curves
The metal contained in tonnes of ore T
gc
is
M
g
c
= T
0

gc
xf(x)dx (3.6)
and the average grade of tonnes of ore T
gc
is
g =
M
g
c
T
gc
(3.7)
and these relationships are usually presented in graphical form as in gure 3.2.
The grade-tonnage curves can easily be transformed in revenue-tonnage curves by
multiplying all grades by , the NSR factor, as seen in gure 3.3.
Formally, the total revenue function is equal to the metal contained multiplied by
the NSR factor.
Cut-Off NSR ($/tonne)
R
e
s
o
u
r
c
e
s

A
b
o
v
e

C
u
t
-
O
f
f

N
S
R

(
t
o
n
n
e
s
)
A
v
e
r
a
g
e

V
a
l
u
e

o
f

R
e
s
o
u
r
c
e
s

A
b
o
v
e

C
u
t
-
O
f
f

N
S
R

(
$
/
t
o
n
n
e
)
Tonnes
Average NSR
Figure 3.3: Example of NSR-Tonnage curves
R
g
c
= T
0

gc
xf(x)dx (3.8)
A direct relationship can be established between the NSR-tonnage curves and the
unit revenues as a function of the level of production.
The average revenue curve is thus
AR
T
gc
=
R
g
c
T
gc
(3.9)
As for the marginal revenue curve, note that
MR
gc
=
dR
g
c
dg
c
=
d
dg
c
(T
0

gc
xf(x)dx) = T
0
g
c
f(g
c
) (3.10)
and that
dT
g
c
dg
c
=
d
dg
c
(T
0

g
c
f(x)dx) = T
0
f(g
c
) (3.11)
Using the chain rule to combine these last two equations:
MR(T
gc
) =
dR
g
c
dT
g
c
=
dR
g
c
dg
c
1
dT
gc
dgc
=
T
0
g
c
f(g
c
)
T
0
f(g
c
)
= g
c
(3.12)
Therefore the marginal revenue as a function of the level of production is equal to
the cut-o grade multiplied the NSR factor. Based on this, the construction of the
unit revenue curves as a function of the level of production becomes very simple:
1. Build the Grade-Tonnage curves of the deposit (gure 3.2);
2. Convert to NSR-Tonnage curves by multiplying all grades by the NSR factor
constant (gure 3.3);
3. Shift the Tonnes above cut-o NSR from the y to the x-axis and shift the cut-o
NSR from the x to the y-axis; and
4. Positioning the average grade of tonnes above cut-o grade on the y-axis allows
calculation of the average grade as a function of the tonnes.
Figure 3.4 presents the resulting graph.
Level of Production (tonnes)
U
n
i
t

r
e
v
e
n
u
e

(
$

/

t
o
n
n
e
)
Marginal Revenue
Average Revenue
Figure 3.4: Unit revenue curves as a function of the level of production
3.2 Methodology to Determine the Production rate
and Cut-O Grade under Conditions of Metal
Price Uncertainty
Now that the cost and revenue models are set up, the next step consists in developing
the procedure to solve under conditions of metal price uncertainty.
The general approach is inspired by the Brennan and Schwartz [7] model in which
the cash ows of a given mine plan are repeatedly evaluated under many metal price
conditions generated from equation 2.6 and a Monte Carlo simulation process. Monte
Carlo simulations are typically used in economic analysis to calculate the risks associ-
ated with a particular project; by combining the possible outcomes of many uncertain
variables, the probabilities of success can be estimated. It is not used for this purpose
in this model, as the generation of many possible outcomes is the feature of interest.
The purpose is to generate many combinations of possible yearly metal prices over
the life of a project, based on the same metal price stochastic models.
For each simulation, metal prices are forecast and the net present value function
is calculated as a function of production rates and production levels. This function
is convex and has an optimal solution corresponding to its apex. After each run, the
combination of rate and level of production with the maximum NPV is recorded, and
the process is repeated. This data is then compiled and analyzed. The coordinates
of the maxima found during each run are plotted in a scatter diagram with levels of
production on one axis and production rates on the other, and the density of plotted
points is calculated. This information is transformed into a bivariate probability
function, which is analyzed to determine its mode. The production rate and level
corresponding to this mode are chosen as the design parameters. In other words,
given the many possible outcomes of future metal prices, it is most probable that the
project NPV will be maximized if the mine is designed along these parameters.
3.2.1 Structure of the Computer Program PeaRL
In this section, the ow sheets of the program to solve the decision model are pre-
sented. The process is fairly simple, and consists mostly of a number of repetitive
subroutines. A general description of the process is provided in the following para-
graphs.
The general process consists of calculating the combination of production level
and production rate for which the net present value is maximized for a randomly-
generated set of metal prices, and this process is repeated two thousand times to
generate a graph where all combinations are plotted
1
.
In particular, for each generated set of metal prices, a three-dimensional function is
drawn showing the net present value as a function of production rate and production
level. The objective is to identify the maximum NPV combination. The process used
to identify this point is called the Method of Steepest Ascent, using a modication
of the Golden Section Search approach to solve it. See Winston [77] for the details
of the process. Generally, this approach is a systematic search process that allows
one to zoom in on the maximum point of a function by comparing the values of a
number of close points on the function, determining the highest gradient vector, and
repeating the process in an area further along that vector. This process is repeated
as often as necessary until the maximum point is found. The nal steps of the search
are rened by reducing the distance intervals between the points.
The program is called PeaRL (Production Rate and Level) and the general ow
sheet is presented in gure 3.5; the two main subroutines Search and NPV are illus-
trated in gures 3.6 and 3.7.
List of symbols
The symbols that are used in the ow sheets are described below.
q is the production rate (tonnes per day),
Q is the production rate for which the Net Present Value is maximum for a given set
of metal prices,
l is the production level (tonnes),
1
Trials were conducted for various numbers of repetition and 2,000 seemed like a reasonable
compromise between replication of results and process time
L is the production level for which the Net Present Value is maximum for a given set
of metal prices,
MP is the set of metal prices over the life of the mine ($/oz or $/lb),
t is time (years),
T is the mine life (years),
Delta is the degree of renement of the search pattern in the Golden Search subrou-
tine. Delta increases from 1 to 3, and the size of the search pattern decreases
with each increase in Delta,
dl is the size of the search interval of the level of production as a function of Delta,
dq is the size of the search interval of the production rate as a function of Delta,
P(m,n) is the relative coordinate of production level and production rate during a
search step,
s is the search step counter used to track the progress of a search in the Golden
Search subroutine.
n is a counter
3.3 Summary
It was seen in this chapter how the general aspects of Grays, Carlisles, and Lanes
models are adapted to conditions seen in the industry to formulate a new cost model
relating operating and capital costs to production rates and levels based on tonnes of
Program
PeaRL
Do for n = 1 to 2000
Generate a set of metal prices MP
Run subroutine Search to find
production level L and rate Q
yielding maximum NPV
Store L, Q,
production and financial summaries
Next n
Plot graph of all L and Q
combinations
End
Figure 3.5: Flow sheet of program PeaRL
Subroutine Search
Calculate P(m, n) for
m = {-1, 0, 1} and n = {-1, 0, 1}
where P(m, n) = (l+m*dl, q+n*dq)
Run Subroutine NPV for all P(m,n)
Let (L,Q) be P(m,n) with Max NPV
l = 5,000,000 tonnes
q = 2,000 tonnes per day
P(0,0) = (l, q)
Delta dl dq
(tonnes) (tpd)
1 1,000,000 500
2 250,000 250
3 100,000 100
Transform coordinates of (L,Q)
s
into starting coordinates for the
next search step s+1
P(m
L
,n
Q
)
s
= P(-m, -n)
s+1
(L,Q) = P(0,0)?
Delta = 3?
Do for Delta = 1 to 3
Set search step s = 1
If s>1,
(L,Q)
s
= (L,Q)
s-1
?
Y
N
Y
N
Next Delta
Set dl, dq
Y
s = s+1
Maximum NPV
is found at
(L,Q)
Return
N
Figure 3.6: Flow sheet of subroutine Search
Subroutine NPV
Calculate mine life T
Calculate annual revenues
Do for t = 1 to T
Calculate annual cash flow
Calculate net present value
Return
Calculate annual operating
and capital costs
Next t
Figure 3.7: Flow sheet of subroutine NPV
ore moved. This provides a tool to the mining engineer working at the mine site to
generate cost equations in a system related to the mine accounting structure.
It was then demonstrated how the grade-tonnage relationship is directly related
to the average and marginal revenue as a function of the level of production. This
tool will be very useful in the analysis of polymetallic ore distribution in chapter 4
and in the understanding of the solutions in chapter 5.
The procedure for determining the production rate and cut-o grade under con-
ditions of metal price uncertainty was then presented along with the structure of
the program PeaRL designed to carry out the procedure. A summary of the proce-
dures for the construction of the model and the execution of the model is listed in
appendix A.
With the tools in place to solve the problem, the process will be used in the next
chapter to determine the strategic parameters of an actual mining operation.
Chapter 4
Test on an Actual Mine
In this chapter, the model is tested on data obtained from an actual mine. A practical
example is based on the data accumulated at the mine described earlier in Chapter 1.
That mine is chosen because detailed cost accounting data was available. There are
six years of information from which to determine xed and variable operating costs,
along with capital expenditures for production rates varying between 800 and 3 300
tonnes per day and various levels of production, from one hundred percent of the
deposit to almost nothing.
The practical example allows performing certain verications that cannot be done
on a theoretical model. First, the construction of true micro-economic curves will help
identify the limitations of this exercise. The second advantage of solving a practical
example is that the methodology developed can be immediately validated.
In this chapter, the objective is to determine the design parameters for a life-of-
mine plan starting in 1996. As mentioned before, the mine at that time was scheduled
to work at 3,300 tonnes per day based on historically-high gold and copper price
forecasts. As the prices decreased in the following years, the plan had to be revised
82
CHAPTER 4. TEST ON AN ACTUAL MINE 83
downward as the reserves were shrinking, prompting many new plans with smaller
and smaller production rates. By conducting the validation work on that mine, it
will be possible to compare the results of the model with the actual outcomes.
The mine that so graciously provides the information for this work has asked
for anonymity. This thesis must provide sucient information to give a sense to
the numbers being presented, while holding back details that could help identify the
operation. Also, information of condential nature cannot be revealed. This includes,
but is not limited to, the details on capital expenditures, the smelting contracts, and
the nancial statements. That information is necessary for the completion of this
work, but is presented in a very general way.
4.0.1 Description of the operation
The orebody consists of a large number of parallel echelon veins, varying in horizontal
thickness from one to 8 metres, and dipping between forty-ve and ninety degrees.
These veins are spatially distributed over a volume of approximately two kilometres
along strike, by 600 metres in height, and 500 metres in thickness. As such, this
volume is divided into three operational areas, each with its own lateral and vertical
mine infrastructure, but all connected to a central ore haulage system. In these three
mines, a total of 15 veins are extracted economically, and are the only ones considered
in this thesis.
The mine economically exploits three metals: gold, copper, and silver, with the
rst two generating more than ninety percent of all revenues. Copper is usually found
in enargite (copper arsenic sulphide), with grades reaching as high as 15%. Gold can
be found with enargite or in quartz associated with pyrite. The grade in enargite is
usually around 4 grams per tonne, but can average 20 grams per tonne in quartz,
with extremes of more than 3,500 grams per tonne in some veins.
The quality of the rock mass varies considerably throughout the deposit. Faults
are present between the veins as well as in the footwalls and hanging walls, with
thicknesses comparable to those of the veins, and many of them are directly on the
hanging wall of some veins. Their quality can be described as ranging from very
bad to bad, and most will readily cave into open stopes when exposed. The veins
themselves have rock masses varying from very bad in the upper part of the mine to
very good and excellent in the lower sectors. As a result of these conditions, stopes
in the upper sectors are developed in very bad ground and require very selective and
expensive mining methods, stopes in the central elevations require cut and ll mining,
and lower sectors are mined by long-hole.
The orebody is accessed by adits at many elevations. Inside, two main ramps
connect all the levels, and a winze allows hoisting the ore from the lower sectors to
the elevation of the mill. Many ore passes are laid out throughout the mine, reaching
a lower main transport level where the ore is trucked to the hoisting facilities. At the
mill elevation, the ore is transported by train through an adit. Although most of the
ore reaches the mill through the shaft, a certain proportion is trucked from isolated
stopes.
The mill is designed for copper sulphide otation and roasting of the concentrate.
The concentrate resulting from otation (green concentrate) contains high levels of
arsenic. The roasting process allows the separation of the arsenic from the copper,
as well as further concentration of the copper, thus adding signicant value to the
product. The mill has a capacity of 3,500 tonnes per day and the roaster has an equiv-
alent capacity of 2,200 tonnes per day. Four concentrates are sold: copper calcine,
commercial-quality arsenic trioxide (As
2
O
3
), electrostatic precipitation (ESP) dust
with high levels of contaminants, and green concentrate when the roasters capacity
is exceeded.
4.0.2 Production prole
In order to relate costs and production rates, it is important to take a close look
at the production prole over the time period for which accounting data exists, and
establish domains over which costs can be grouped and analyzed separately.
Figure 4.1 shows the average daily actual and budgeted production rates on a
monthly basis from January 1996 to December 2000. The year 1996 was budgeted at
a rate of 2,500 tonnes per day (tpd), but the actual rate was lower in the rst half
of the year and tended to be higher for the second half. In 1997, budget was set at
3,200 tonnes per day, but the rst four months averaged 500 tonnes per day less, and
the production rate afterwards was ranging between 1,400 and 2,000 tpd as a result
of an important reevaluation of the mine plan. Afterwards, production went from
1,500 tpd in 1998 to 1,000 in 1999 and 2000. Over that three-year period, actual
rates closely followed the budget. One notable exception occurred in the second half
of 1999, when production rates could be maintained at 1,000 tpd even though the
budget was set at a much lower rate.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01
Month
P
r
o
d
u
c
t
i
o
n

r
a
t
e

(
t
o
n
n
e
s

p
e
r

d
a
y
)
Budget
Actual
Figure 4.1: Actual and budgeted production rates
4.0.3 Available information
The mathematical model can only be as good as the information used to construct
it. A great number of reports were made available to the author and include the
following:
Long-term mine plans;
Annual budgets;
Production forecasts produced on a regular basis as updates to the budgets;
Monthly accounting summaries providing detailed budgeted and actual spend-
ing by cost centre and account number;
Monthly actual and budgeted development and production details broken down
by work place;
Detailed listing of reserves and resources blocks;
Mine plans and sections for each vein indicating existing development; and
Mill and roaster owsheet with capacities and metal recovery equations.
In brief, monthly and annual information was collected for a ve-year period ranging
from 1996 to 2000, and even though some months are missing, more than 85% of all
data was recovered, leaving the author satised that enough information was gathered
to make the analysis signicant.
4.1 Minable resources
The resource estimation is based on that compiled for the January 1996 ocial re-
serves. The database contains information for a great number of veins that may or
may not be included in the mine plans. As such, the following analysis of the resources
will limit itself to the 15 economic veins. For each block, the following information is
known:
Vein;
Mine in which it is located;
Block reference number;
Bottom elevation of the block;
Section of the block corresponding to the centre;
Category
1
(proven, probable, possible)
In-situ horizontal width in metres;
In-situ tonnes;
In-situ gold grade in grams per tonne;
In-situ silver grade in grams per tonne; and
In-situ copper grade in percent.
For sake of anonymity, the real names are not used here. However, since the mines
and veins are often referred to in this document, a nomenclature must be agreed upon.
Therefore, the three mines are called A, B, and C. Mine A contains six veins labeled
A1 to A6, Mine B also has six veins, labeled B1 to B6, and Mine C has three veins
labeled C1 to C3. Veins A1, A6, B4, B5, B6 and C3 are sulphide veins, generally
steeply dipping with horizontal widths greater than 3 metres. Veins A3, A4, A5, B1,
B2, B3, C1, and C2 are quartz veins, generally dipping around 60 degrees and width
between 1 and 4 metres. Vein A2 starts o near the top of the mine as a at-dipping
quartz vein and changes into steeply dipping sulde vein at around elevation 270.
At this stage, it is important to select the blocks with a suciently-high level of
condence, i.e. the proven and probable blocks (2P reserves). For each of the veins
previously enumerated, the proven and probable blocks are drawn on a longitudinal
projection. With the idea that a certain level of continuity must be present for
mining to be practical, isolated blocks are identied and eliminated from the database.
1
These reserve categories were determined before the current resource classication standards
were established.
Conversely, some 2P blocks can be put in production if some possible blocks are
located between them and are added to the planning reserves.
Next, the in-situ resource blocks are transformed into minable blocks by adjusting
each one by the expected dilution as a function of the mining method required for each
block. Originally, each block is adjusted to a minimum working width of 3 metres.
All blocks measuring less than that have internal dilution added to them. Then, each
block is located on its vein longitudinal projection and is assigned a mining method
and expected external dilution as per the available information in the mine plans. The
internal and external dilution criteria are listed in table 4.1. The resulting database
on which the model is built is now composed of minable resource blocks.
Table 4.1: Dilution factors
Mine method dilution minimum width (m.) external dilution rate
A Long Hole low 3 15%
Long Hole high 3 25%
Cut & Fill low 3 15%
Pillar recovery high 3 25%
B Long Hole regular 3 20%
Pillar recovery high 3 25%
C Long Hole low 3 12%
As a result of these operations, minable resources total 15,700,000 tonnes aver-
aging 2.9 grams per tonne of gold and 3.5% copper. Summaries are presented in
tables 4.2, 4.3, and 4.4.
Table 4.2: Summary of minable resources and grades by vein
Mine Vein Tonnes Gold (g/t) Silver (g/t) Copper (%)
A A1 235,810 4.0 36 2.9
A2 252,194 7.1 18 1.8
A3 35,742 4.1 29 1.5
A4 440,597 5.1 39 3.7
A5 1,990,146 1.5 40 4.0
A6 774,894 2.0 47 5.9
A Total 3,729,383 2.6 39 4.1
B B1 1,351,186 1.6 45 4.5
B2 2,804,945 2.6 27 2.1
B3 435,647 8.2 11 1.2
B4 564,682 7.5 26 2.6
B5 425,926 3.0 11 0.3
B6 883,398 3.1 46 4.4
B Total 6,465,783 3.3 31 2.8
C C1 470,601 3.9 15 0.7
C2 271,738 5.5 44 1.8
C3 4,761,038 2.4 54 4.4
C Total 5,503,378 2.7 50 4.0
Grand Total 15,698,543 2.9 40 3.5
Table 4.3: Resources by vein and category
category
Mine Vein Proven Probable Possible Total
A A1 178,284 1,026,788 146,114 1,351,186
A2 739,744 1,515,434 549,766 2,804,945
A3 249,516 186,131 435,647
A4 266,252 298,429 564,682
A5 73,436 352,489 425,926
A6 124,493 758,905 883,398
A Total 1,631,726 4,138,176 695,880 6,465,783
B B1 69,933 89,312 76,565 235,810
B2 75,282 170,482 6,430 252,194
B3 7,414 28,328 35,742
B4 328,063 112,534 440,597
B5 237,426 1,729,306 23,413 1,990,146
B6 373,053 280,685 121,156 774,894
B Total 1,083,758 2,389,734 255,891 3,729,383
C C1 326,901 143,701 470,601
C2 109,723 162,016 271,738
C3 994,587 2,737,475 1,028,976 4,761,038
C Total 1,104,310 3,226,391 1,172,677 5,503,378
Grand Total 3,819,794 9,754,300 2,124,449 15,698,543
(tonnes)
Table 4.4: Resources by vein and mining method
Mining Method
Mine Vein Cut & Fill Longhole Pillar Recovery Total
A A1 55,307 1,235,542 60,337 1,351,186
A2 736,803 1,832,143 235,998 2,804,945
A3 380,488 55,159 435,647
A4 489,682 74,999 564,682
A5 425,926 425,926
A6 75,343 635,466 172,589 883,398
A Total 2,163,548 3,703,150 599,084 6,465,783
B B1 230,501 5,309 235,810
B2 217,010 35,184 252,194
B3 35,742 35,742
B4 153,770 185,973 100,855 440,597
B5 20,549 1,936,299 33,297 1,990,146
B6 102,132 602,254 70,508 774,894
B Total 759,703 2,724,526 245,153 3,729,383
C C1 470,601 470,601
C2 271,738 271,738
C3 4,406,901 354,138 4,761,038
C Total 5,149,240 354,138 5,503,378
Grand Total 2,923,252 11,576,917 1,198,375 15,698,543
(tonnes)
4.1.1 Determination of the primary metal
The next step consists of constructing the grade-tonnage curves of the deposit in order
to determine the relationship between cut-o grades and levels of production. In a
deposit producing one metal or in a polymetallic orebody with one main economic
metal, the problem is fairly simple. However in this deposit, two metals, gold and
copper, contribute almost equally to the revenues of the mine
2
. In a case where metal
prices are given, this problem would be resolved by calculating the net smelter return
of each resource block and then working with NSR-tonnage curves, and an example
of this can be found in Baird and Satchwell [3]. However, in this thesis, the main
assumption is that metal prices are stochastic, and thus the value of every block
changes with each simulation as well as the relative ranking of each block. Therefore,
it is dicult to dene which metal should be used to construct the curves.
As a main consideration, the use of one metal as primary reference must not
compromise the recovery of the secondary metal. In other words, high-grade gold
blocks must not be left behind when the copper cut-o is low, and vice-versa.
Starting with gold as the primary metal, a standard grade-tonnage curve is built
and presented in gure 4.2. Based on the work in chapter 3 for the development of
the average and marginal revenues as a function of the level of production, the same
development used for calculating the marginal revenue function in equation 3.12 can
be used for calculating the marginal metal grades, as seen in gure 4.3. The grade-
tonnage curves show that for low gold cut-o grade, the average copper grade is
between 3.5 and 4 percent, but it is impossible to deduce more information. Using
gure 4.3, it becomes evident that the marginal copper grade decreases to zero as
2
The revenue model will demonstrate that in an upcoming section of this chapter.
0
2
4
6
8
10
12
14
16
0 1 2 3 4 5 6 7 8
Gold cut-off grade (g/t)
R
e
s
o
u
r
c
e

a
b
o
v
e

c
u
t
-
o
f
f

g
r
a
d
e
(
m
i
l
l
i
o
n

t
o
n
n
e
s
)
0
3
6
9
12
15
18
21
24
Average gold grade (g/t)
Average copper grade (%)
Resources above cut-off
A
v
e
r
a
g
e

g
r
a
d
e

o
f

t
o
n
n
e
s

a
b
o
v
e

c
u
t
-
o
f
f

g
r
a
d
e

(
g
/
t

A
u
,

%

C
u
)
Figure 4.2: Grade-tonnage curves based on gold grades
the level of production tends towards 16 million tonnes and the gold cut-o grade
reaches zero. From this, it can be deduced that low copper grades are associated with
resource blocks with low gold grades.
The same comparison can be made by setting copper as the primary metal. The
resulting graphs are in gures 4.4 and 4.5. In this case, the marginal gold grade has
a tendency to increase with high levels of production. This indicates that gold could
be left behind if the copper cut-o grade is low, thus making copper a bad candidate
as the primary metal.
Further analysis is required to conrm these observations and to quantify the
possible loss of metal production in each case. The rst step is based on the ob-
servation of the scatter diagrams showing the pairings of gold and copper grades of
resource blocks. In gure 4.6, pairings are shown such that the analysis can be concen-
trated on resource blocks with low copper grades. The gure clearly shows that there
0
2
4
6
8
10
0 2 4 6 8 10 12 14 16
G
r
a
d
e
s

(
g
/
t

A
u
,

%

C
u
)
AG
MG
AC
MC
Level of production = tonnes above cut-off grade
(million tonnes)
AG = average gold grade (g/t)
MG = marginal gold grade (g/t)
= gold cut-off grade (g/t)
AC = average copper grade (%)
MC = marginal copper grade (%)
AG
MG
AC
MC
Figure 4.3: Production level grades as a function of gold
0
2
4
6
8
10
12
14
16
0 1 2 3 4 5 6 7 8 9 10
Cut-Off Copper Grade (%)
R
e
s
o
u
r
c
e

a
b
o
v
e

c
u
t
-
o
f
f

g
r
a
d
e

(
m
i
l
l
i
o
n

t
o
n
n
e
s
)
0
3
6
9
12
Average gold grade (g/t)
Average copper grade (%)
Resources above cut-off
A
v
e
r
a
g
e

g
r
a
d
e

o
f

t
o
n
n
e
s

a
b
o
v
e

c
u
t
-
o
f
f

g
r
a
d
e

(
g
/
t

A
u
,

%

C
u
)
Figure 4.4: Grade-tonnage curves based on copper grades
0
2
4
6
8
10
12
0 2 4 6 8 10 12 14 16
Level of production (million tonnes)
G
r
a
d
e

(
g
/
t

A
u
,

%

C
u
)
AG
MG
AC
MC
AC = average copper grade (%)
MC = marginal copper grade (%)
AG = average gold grade (g/t)
MG = marginal gold grade (g/t)
AG
MG
AC
MC
Figure 4.5: Production level grades as a function of copper
are resource blocks with very high gold grades independently of the blocks copper
grades, conrming the previous observation. The corresponding graph concentrating
on blocks with low gold grades (gure 4.7) also supports the observations made in
gure 4.3, as the number of high-grade copper blocks decreases along with the gold
grade.
The nal step is to quantify the amount of high-grade secondary metal tied into
low-grade primary blocks. Dening what constitutes as a high grade is somewhat
arbitrary. For the purpose of this exercise, high-grade is dened as the minimum grade
required for a resource block to be economical when only one metal is considered.
Then again, this denition implies that the revenues from the metal sales are known,
implying that the metal price is known. Since that is not the case in this problem,
arbitrary numbers based on the experience of the mine operator are chosen. Therefore,
the gold high-grade is dened as any grade greater or equal to 10 grams per tonne,
0
5
10
15
20
25
30
35
40
45
50
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Copper Grade (%)
G
o
l
d

G
r
a
d
e

(
%
)
Figure 4.6: Metal grade scatter plot for low copper grades
0
3
6
9
12
15
0 1 2 3 4 5 6
Gold Grade (g/t)
C
o
p
p
e
r

G
r
a
d
e

(
%
)
Figure 4.7: Metal grade scatter plot for low gold grades
and copper high-grade is equal to 8.5%
3
. Based on this, two graphs are compiled and
presented in gures 4.8 and 4.9.
Figure 4.8 demonstrates well that there are no high-grade copper resources for
a gold cut-o grade less than 2 grams per tonne. Within the following gold grade
interval, from 2 to 3 g/t, some high-grade copper starts to appear. These resource
blocks correspond to 1.5% of the total resource tonnage, and contain 1.3% of all the
gold and 4.6% of all the copper. These percentages decrease as the the gold cut-o
increases. In gure 4.9, the picture is completely dierent. Within the copper grade
cut-o interval ranging from 0 to 1%, high-grade gold resource blocks count for 1.3%
of the tonnes but almost 8% of all gold contained in the orebody. More than 6% of
all the gold is found in the next interval.
The consequences of this are signicant. If copper were to be chosen as the primary
metal, large quantities of gold contained in economic resource blocks would be lost.
The situation is the opposite if gold were to be the primary metal. Based on these
observations, gold is chosen as the primary metal. The relationship between cut-o
grades and levels of production is represented by the marginal gold grade curve in
gure 4.3, and, as a reference, in table 4.5.
4.2 Production and cash ow model
In this section, the objective is to build the equations that will be used in the simu-
lation. These equations will be based on actual and budgeted production, revenues,
and costs gathered at the mine site over a period of many years, during which time,
3
This number seems ridiculously high, but it is the result on a combination of factors including
low smelter payback for concentrates containing arsenic as a deleterious element and high operating
costs
0%
1%
2%
3%
4%
5%
0 to 1 1 to 2 2 to 3 3 to 4 4 to 5
Gold cut-off grade intervals (g/t)
P
e
r
c
e
n
t
a
g
e

c
o
n
t
a
i
n
e
d

i
n

i
n
t
e
r
v
a
l
% resource tonnes
% total gold resources
% total copper resources
Figure 4.8: High-grade copper resources associated with low-grade gold blocks
0%
1%
2%
3%
4%
5%
6%
7%
8%
0 to 1 1 to 2 2 to 3 3 to 4 4 to 5 5 to 6
Copper cut-off grade intervals (%)
P
e
r
c
e
n
t
a
g
e

c
o
n
t
a
i
n
e
d

i
n

i
n
t
e
r
v
a
l
% resource tonnes
% total gold resources
% total copper resources
Figure 4.9: High-grade gold resources associated with low-grade copper blocks
Table 4.5: Gold cut-o grades and levels of production
Gold Level Referred
cut-o (tonnes) to as
5.59 1,000,000 1 mt
4.05 2,000,000 2 mt
3.32 3,000,000 3 mt
2.84 4,000,000 4 mt
2.58 5,000,000 5 mt
2.32 6,000,000 6 mt
2.17 7,000,000 7 mt
2.07 8,000,000 8 mt
1.91 9,000,000 9 mt
1.78 10,000,000 10 mt
1.57 11,000,000 11 mt
1.33 12,000,000 12 mt
1.08 13,000,000 13 mt
0.72 14,000,000 14 mt
0.40 15,000,000 15 mt
0.00 15,698,543 16 mt
the mine experienced many variations in production rates. It is believed that this
wide range of data can give a good estimate of the actual situation.
All the production and cash ow information that is required to run the model
and that is generated by it, is summarized in tables 4.6 and 4.7. To aid the reader,
the table also indicates the section of this chapter in which each item is discussed.
4.2.1 Revenue model
This model mimics the actual owsheet of the mill and roaster complex, presented
in gure 4.10. The mill has a capacity of 3,500 tonnes of ore per day, where the ore
is crushed and ground and oated to produce a green concentrate containing copper,
gold, silver, and arsenic. The green concentrate is sent to a roaster with the equivalent
Table 4.6: Production and development output
Item Section where item is discussed
Production and Development
Resource (tonnes) Simulation input variable
Average grades Gold (g/t) see Section 4.1.1
Copper (%)
Production Rate (tonnes per day) Simulation input variable
Development (metres)
Regular see Section 4.2.5
Deferred see Section 4.2.2
Total Development
Production (tonnes) see Section 4.2.5
Cut and Fill
Longhole
Pillar Recovery
Ore Development
Total production
Mill recovery (%) see Section 4.2.1
Gold
Copper
Metal Recovered Gold (000 oz) see Section 4.2.1
Copper (000,000 lbs)
Table 4.7: Cash ow and indicators output
Item Section where item is discussed
Cash ow (MM$)
Revenues Gold Sales
By-product credits
Total revenues see Section 4.2.1
Operating costs Variable mining see Section 4.2.5
Regular development see Section 4.2.5
Mine services see Section 4.2.6
Variable milling see Section 4.2.7
Subtotal variable
Fixed mine see Section 4.2.8
Fixed mill see Section 4.2.8
Subtotal xed
Total Operating
Capital costs Deferred Development see Section 4.2.2
Mine sustaining see Section 4.2.3
Mill sustaining see Section 4.2.4
Total Capital
Cash Flow
NPV @5%
Indicators Net Smelter Return ($/t)
Operating cost ($/t)
Operating margin ($/t)
Operating cost ($/oz)
Mine Mill
Roaster
Ore
Tailings
Green Concentrate
Sales
Calcine
ESP Dust
As
2
O
3
Figure 4.10: Mineral processing general owchart
capacity of 2,200 tonnes of ore per day. All unprocessed green concentrate is sold to
smelters. The roasting process generates three salable products, a copper calcine
containing very little arsenic, a high-quality arsenic trioxide concentrate, and small
quantities of electrostatic precipitation dust containing very high levels of arsenic
contaminants.
Revenues, or Net Smelter Return (NSR), correspond to the net value of the ore
once physical losses in the mill and smelting charges are taken into consideration.
Goldie and Tredger [27] provided examples of typical calculations for various types
of metal concentrates. As part of the calculations, NSR factors for each metal are
also estimated. These factors constitute very simple indicators of the relative value of
each metal, allowing for a rapid comparison as feed grades and metal prices change.
See Laeur [36] for sample calculations.
Physical losses occur in the otation of the ore and in the roasting of the green
concentrate, where typical recoveries are in the order of 95% for copper and 90% for
gold, with actual recoveries uctuating as a function of the feed grades.
The general contract parameters of each concentrate sale is presented in table 4.8.
As a general rule for the design of this model, the characteristics of the mines actual
smelter contracts are respected, but the real numbers used in the contracts are not
quoted. Instead, the numbers used are derived from these contracts and from spot
contract numbers published regularly in the Mining Journal magazine, taking into
consideration the variations to key elements as the prices of copper and gold changed
over the years. The factors included in the Net Smelter Return calculations include:
Metal deductions (D);
Treatment charges (TC);
Price participation (PP);
Transport, loading and representation (TLR);
Penalties for content of contaminants (PC); and
Rening charges (RC).
Concentrate charges Treatment charges, Loading, and penalties are charged ex-
clusively to the copper, and not to gold and silver. The reasoning behind this is that
the mill produces and sells copper concentrates, and the aforementioned charges are
applied to the concentrates independently of the quantity of precious metal contained
in the concentrates. For this reason, only metal deductions and rening charges are
applied to gold and silver.
Price participation Price participation is the mechanism through which the treat-
ment charge is adjusted for copper price variations. In this exercise, the base metal
copper price is $1.00 per pound, and any variation is charged at a rate equivalent
to 10% of the dierence between the current and the base prices. That way, copper
prices lower than $1.00 result in a decrease in total charges and vice-versa.
Table 4.8: Smelter contracts
Green Concentrate Copper Gold Silver
Metal deduction 1.15 unit 4% 10%
Treatment Charge $150 per tonne of concentrate nil nil
Price Participation Payable pounds of copper per tonne of
concentrate multiplied by 10% of the
difference between current price and
$1.00
nil nil
Transport, Loading,&
Representation
$45 / tonne concentrate nil nil
Penalties $60 / tonne concentrate nil nil
Refining Charge $0.10 per pound for base copper price of
$1.00 per pound. Charge varies
proportionally with the price of copper.
$7.50 per
ounce of gold
$0.37 per
ounce of silver
Calcine Copper Gold Silver
$1.00
nil nil
Representation
$7.00 per
ounce of gold
$0.37 per
ounce of silver
ESP Dust Copper Gold Silver
$1.00
nil nil
Representation
$7.50 per
ounce of gold
$0.40 per
ounce of silver
Silver sales Since silver revenues count for a very small proportion of total revenues,
the silver price is kept constant at $5.00 per ounce.
Arsenic trioxide Arsenic trioxide sales calculations are simplied in this model,
assuming the sales price per tonne of concentrate includes all transport and transfor-
mation costs, and this price is kept constant independently of all other metal prices.
For calculation purposes, all As
2
O
3
credits are applied to copper since the arsenic is
mineralogically associated with it.
Value-added of roasting The sales of green concentrate sent to the roaster and
afterwards sold as three separate concentrates is treated as one revenue stream, re-
ferred to as calcine. This simplication makes it easier to compare the value added
of roasting. In gure 4.11, one can readily compare the NSR factors of copper sold
as a green concentrate or as a calcine at dierent copper prices. In this example, the
copper grade of the ore fed to the mill is equal to 3.50%, and the roasting adds $6.70
per percent of copper or approximately $0.30 per pound of copper. The eect on gold
price is negligible as roasting does not aect the quality of the gold sold.
4.2.2 Capital development
Capital (deferred) development is the development required to extend the mine infras-
tructure in order to put new sectors in production and to haul the ore to surface. This
includes extensions to the main ramp, development of transport drifts and ventilation
raises to bring fresh air to the new work levels.
The procedure to determine the relationship between the metres to develop and the
level of production is the following: rst, for each mine, draw a longitudinal projection
-5.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25
Copper price ($/lb)
N
S
R

F
a
c
t
o
r

(
$

/

%
)
Calcine
Green concentrate
Figure 4.11: Value-added of roasting copper concentrate
showing the existing infrastructure; then draw the position of every resource block
included in the level of production equal 1 million tonnes, corresponding to blocks
with a gold grade equal to or greater than 5.59 grams per tonne, and determine
the metres of ramp, lateral development and ventilation raise required to put all the
blocks in production. Repeat the process for increments of levels of production of 1
million tonnes until the whole resource is examined. The gures used to calculate
these numbers are found in Appendix B.
The unit cost per metre of development is calculated from information gathered in
the production and accounting records dating from 1997 to 1999. Over that period,
7,068 metres of capital development was done for a total cost of $8,466,331, equivalent
to an average cost of $1,198 per metre. Over that period, capital development was
0
5
10
15
20
25
30
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
C
a
p
i
t
a
l

D
e
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o
p
m
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n
t

c
o
s
t

(
m
i
l
l
i
o
n

$
)
Data
Regression
CD = -0.0015 l
4
+ 0.0526 l
3
-0.647 l
2
+4.7781 l
R
2
= 0.9974
Figure 4.12: Capital development as a function of level of production
done by mine contractors; the cost included direct mining costs as well as supervi-
sion, mobile equipment maintenance and provision for replacement, xed costs and
overhead.
A table summarizing the information is in table 4.9 and in gure 4.12.The equation
used for modeling capital development costs as a function of the level of production
is:
CD = 0.0015 l
4
+ 0.0526 l
3
0.647 l
2
+ 4.7781 l (4.1)
where
CD is the capital development cost in million dollars; and
l is the level of production in million tonnes.
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4.2.3 Mine sustaining capital costs
The mine sustaining capital is based on life-of-mine plans developed yearly between
the years 1994 and 2000. These plans cover levels of production between 1,026,000 and
14,224,000 tonnes and production rates between 937 and 3,897 tonnes per day. Life-of-
mine plans are used because they provide an estimate of all foreseeable expenditures
required over the remaining life of the project. Actual numbers (as compared to
forecasted) are never really available because conditions change constantly over time,
especially when the production rate of the mine changes constantly.
Mine sustaining capital includes mobile equipment, fans, pumps, electrical and
communications systems, equipment for the underground maintenance shops, and
auxiliary underground development.
As discussed in chapter 3, a power function is calculated as a function of the rate
and level of production and the resulting equation is
MSC = 7.09 10
6
q
1.634
l
0.886
(4.2)
where
MSC is the mine sustaining capital cost in million dollars;
q is the production rate in tonnes per day; and
with a correlation coecient of 0.88.
It is surprising to notice that the production rate power factor is greater than 1.
This implies that the cost increases exponentially as the production rate increases,
which would not make sense under normal circumstances. This high factor is ex-
plained in this case by the fact that the life-of-mine plans were constructed for a mine
already in production. Every time a new plan was built, economic conditions had
worsened, and the production rate was smaller. A mine reducing its production rate
winds up with some spare capacity and under-utilized equipment. This results in
lower replacement costs than if the mine were built from scratch and did not possess
any equipment to start with.
4.2.4 Mill and On-site sustaining capital costs
The same data is used for the mill and sustaining capital cost. It includes mechanical
and electrical supplies for the mill, roaster, assay laboratory, central maintenance and
other surface installations, mobile equipment for surface work, tailings dam expan-
sions, and other purchases for management, accounting and human resources.
The resulting equation is as follows:
OSC = 9.19 10
10
q
3.04
l
0.04
(4.3)
where
OSC is the mill and on-site sustaining capital cost in million dollars;
q is the production rate in tonnes per day; and
with a correlation coecient of 0.92.
As in the case of the mine sustaining capital, the production rate power factor
is very high, and can be explained by the same reasoning. The level of production
factor is very close to zero, and the analysis of the regression reveals that there is a
very high probability that that factor is equal to zero. That would imply that the
mill sustaining cost is really only a function of the rate of production and that the
life of the mine has little inuence on the cost. That can be understood by the fact
that the very high cost items in a mill have very long lives and might actually have
useful life left over once the mine is closed.
4.2.5 Variable mining and regular development costs
The cost of mining varies as a function of the level of production. As a starting point
for this exercise, each resource block in the database is assigned a mining method
based on the continuity of the ore and the quality of the rock mass of the ore, footwall
and hanging wall where it is located. The blocks located in the older sectors of the
mine generally have lower dips, narrower horizontal widths, and bad rock mass quality
and are assigned with cut and ll or pillar recovery, based on historical considerations.
At depth, the dip tends to be steeper, the width increases, and the rock mass quality
tends to increase. In these sectors, long hole mining is assigned.
This relationship between the mining methods and the levels and production can
be clearly understood by looking at gure 4.13. For low levels of production, the
high-grade ore is primarily located in the upper portions of the orebody where min-
ing conditions are more complicated, resulting in a higher proportion of ore coming
from pillar recovery and cut and ll. As the cut-o grade decreases and the level of
production increases, more ore is located in better ground and long hole becomes the
principal method of extraction.
Variable mining costs include the direct costs of ore and waste development of the
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
P
e
r
c
e
n
t
a
g
e

o
f

t
o
n
n
e
s

m
i
n
e
d

p
e
r

m
i
n
i
n
g

m
e
t
h
o
d
Pillar Recovery
Long Hole
Cut & Fill
Figure 4.13: Proportion of tonnes mined per mining methods as a function of the
level of production
drifts around and in the stopes, and drilling, blasting, and mucking the ore out of
it. The costs also include those of all the activities indirectly related to production
such as ground support, stope ventilation, and other services. Regular development
includes the costs of developing through waste from the capital infrastructure to the
stopes and the ore development required to put the stope in production. All costs
include labour, materials, contracts, and others.
In order to calculate the variable mining cost function, data had to be extracted
from dierent sources. The cost centers were set up such that development and
stoping expenditures could be tracked for each mining method in each mine. The
actual development metres and production tonnes were compiled on a monthly basis,
with each heading and stope clearly identied. From this, the overall cost per metre
development and the cost per tonne of ore can be calculated for each mining method.
Table 4.10: Variable mining unit costs
Activity Cost (MM$)
Development 23,888 metres 18.4 772 $/metre
Cut & fill 130,040 tonnes 2.6 19.96 $/tonne
Longhole 1,209,251 tonnes 9.9 8.22 $/tonne
Pillar recovery 256,496 tonnes 5.6 21.66 $/tonne
Actual Unit Cost
These costs are summarized in table 4.10. This cost was based on information covering
45 months.
However, this information is not enough to determine the variable mining cost as
a a function of the production level. This function must take into consideration the
following points:
Metres of regular development per tonne of ore: It is important to know how
many metres of development are required to prepare one tonne of ore. It follows
from this that each mining method has a dierent proportion, and that further
variations occur between the veins as the quality of the rock mass and the
widths of the veins have an inuence on the size of the stopes.
Percentage of ore coming from development: For any given stope, part of the
ore sent to the mill comes from the development done in the ore. Again, this
factor varies with the mining method and the vein.
Tonnes per metre of ore development: For each metre of development driven in
ore, a certain number of tonnes of ore are generated, and this quantity varies
with the method and vein.
For each point, constants are calculated for all combinations of mining method
and vein. From them, it now becomes possible to calculate for each resource block
in the database the expected metres of ore and waste regular development required
to develop it, the tonnes of ore expected to be generated by the ore development,
and the tonnes of ore coming from stoping activities. When looking at each resource
block individually, these numbers are not truly representative, but their sums over
large numbers of resource blocks will tend to give a good picture of what can be
expected.
Once combined with the information presented in gure 4.13, it becomes possible
to calculate a number of level of production functions:
1. A breakdown of production tonnes, split into the three mining methods and the
ore development;
2. The metres of regular development;
3. The variable cost of stoping activities (variable mining cost); and
4. The variable cost of regular development.
The development of the indicators is given in appendix C and the results and
functions are summarized here.
Regarding sources of production as a function of the level of production, gure 4.13
must be modied to include the breakdown of development and stoping. The result
is shown in gure 4.14, and the equations are listed below.
CFT = 0.00015 L
4
+ 0.00563 L
3
0.0731 L
2
+ 0.490 L (4.4)
0%
20%
40%
60%
80%
100%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Level of Production (million tonnes)
R
e
l
a
t
i
v
e

s
o
u
r
c
e

o
f

p
r
o
d
u
c
t
i
o
n
Pillar Recovery
Long Hole
Cut & Fill
Ore Development
Figure 4.14: Proportion of tonnes mined from all sources as a function of the level of
production
LHT = 0.0018 L
3
+ 0.050 L
2
+ 0.218 L (4.5)
PRT = 8.28510
6
L
5
+0.000311L
4
0.00343L
3
+0.000588L
2
+0.207L
(4.6)
ODT = 4.59 10
5
L
3
+ 0.0016 L
2
+ 0.162 L (4.7)
where
CFT are cut and ll tonnes;
LHT are longhole tonnes;
0
20
40
60
80
100
120
140
160
180
0 2 4 6 8 10 12 14 16
D
e
v
e
l
o
p
m
e
n
t

(
t
h
o
u
s
a
n
d

m
e
t
r
e
s
)
Operating Development
Capital Development
Figure 4.15: Regular and capital development as a function of the level of production
PRT are pillar recovery tonnes;
ODT are ore development tonnes; and
all tonnages are in million tonnes.
The metres of regular development as a function of the level of production are
graphed in gure 4.15 alongside the capital development requirements for sake of
comparison. The regular development function is as follows:
RD = 0.0195 L
3
0.582 L
2
+ 14.714 L (4.8)
where RD is regular development, expressed in thousand metres.
The variable mining operating and regular development costs as a function of
the level of production can now be calculated based on the information in the new
0
20
40
60
80
100
120
140
160
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
Production Level (million tonnes)
V
a
r
i
a
b
l
e

M
i
n
i
n
g

C
o
s
t

(
m
i
l
l
i
o
n

$
)

Figure 4.16: Variable mining cost as a function of the level of production
database. The variable mining cost equation is graphed in gure 4.16.
V MO = 0.0227 L
3
0.696 L
2
+ 15.031 L (4.9)
RDC = RD 772 1000 (4.10)
where V MO is the variable mining operating and RDC is the regular development
cost in million dollars.
4.2.6 Mine services costs
Mine services include ancillary (ventilation, drainage, etc.), diamond drilling, main-
tenance, and transport. Actual monthly costs for the period from 1996 to 2000 is
divided by the actual production to get average monthly costs on which a regression
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
0 500 1,000 1,500 2,000 2,500 3,000 3,500
Production Rate (tonnes per day)
C
o
s
t

(
$

p
e
r

t
o
n
n
e
)
Figure 4.17: Mine services unit cost as a function of the production rate
is done, which can be seen in gure 4.17.
MSUC = 2104 Q
0.6199
(4.11)
where MSUC is the mine services unit cost in dollars per tonne.
4.2.7 Variable mill costs
The mill variable costs include direct milling and roasting costs, as well as services.
Costs are calculated from the same information as for the mine services. The data is
graphed in gure 4.18.
MUC = 328.23 Q
0.3356
(4.12)
where MUC is the mill unit cost per tonne.
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
Production rate (tonnes per day)
M
i
l
l

u
n
i
t

c
o
s
t

(
d
o
l
l
a
r
s

p
e
r

t
o
n
n
e
)
Figure 4.18: Mill variable unit cost as a function of the production rate
4.2.8 Fixed costs
Fixed costs are split into two, the mine xed and the mill and on-site xed costs. The
mine costs include the mine administration and planning of services. The mill costs
include the administration of the mill and roaster. On-site costs are more general and
include management, accounting, human resources, engineering, geology, purchasing,
legal, etc., as well as surface maintenance.
The data used to determine the relationship between costs and the production
rate was based on actual costs over periods of six months. The reasons for this were:
Certain costs, such as labour, occur on a monthly basis. However, some equip-
ment purchases and contracted work occur on a less regular basis. It was judged
that monthly data would show too much variance and that six-month averages
would tend to include all relevant costs; and
y = 204.32x + 21403
R
2
= 0.8218
0
100
200
300
400
500
600
700
0 500 1,000 1,500 2,000 2,500 3,000 3,500
A
v
e
r
a
g
e

c
o
s
t

(
'
0
0
0

d
o
l
l
a
r
s

p
e
r

m
o
n
t
h
)
Figure 4.19: Mine monthly xed cost as a function of the production rate
As metal prices changed, budgets had been invalidated and new forecasts were
built. Those were usually put into action in the second half of the calendar
year, leading to changes in production and costs.
Therefore, the average monthly xed costs are calculated for data ranging from
1996 to 2000, split in the two halfs of the calendar year, with the data and regressions
shown in gures 4.19 and 4.20. To calculate the cost over the life of the mine, these
costs are multiplied by the mine life expressed in months.
4.2.9 Cost curves analysis
Figures 4.21 and 4.22 show the total costs over the mine life and the average unit
cost per tonne mined for every combination of production rates and levels. The rst
gure gives a good impression of the levels of expenditures required, and shows how
costs escalate rapidly at low production rates, a result of increasing xed costs.
y = 687.2x + 314507
R
2
= 0.824
0
500
1,000
1,500
2,000
2,500
3,000
0 500 1000 1500 2000 2500 3000 3500
A
v
e
r
a
g
e

c
o
s
t

(
'
0
0
0

d
o
l
l
a
r
s

p
e
r

m
o
n
t
h
)
Figure 4.20: Mill and On-Site monthly xed cost as a function of the production rate
The unit costs curves are particularly interesting. It would be most improbable
that the mine would function at a rate of 500 tonnes per day as the unit cost would
be greater than $155 per tonne, requiring either very high metal prices for very long
periods, or more practically the extraction of the very highest grades available in
the deposit. Options at 1,000 tonnes per day seem more possible as costs of $120
per tonne can more easily be met by high-grading the deposit, and this condition
would be best if metal prices are low. Between production rates of 2,000 and 3,500
tonnes per day, costs do not vary by more than 10% and it could be conceivable that
optimum operating conditions might exist within that range under other metal price
conditions.
0
500
1,000
1,500
2,000
2,500
0 500 1000 1500 2000 2500 3000 3500 4000
C
o
s
t
s

(
M
M
$
)
1 Mt
2 Mt
3 Mt
4 Mt
5 Mt
6 Mt
8 Mt
10 Mt
12 Mt
15 Mt
Level of Production
Figure 4.21: Total costs over the life of the project for combinations of rates and levels
of production
80
90
100
110
120
130
140
150
160
170
180
0 2 4 6 8 10 12 14 16
T
o
t
a
l

u
n
i
t

c
o
s
t

(
$
/
t
o
n
n
e
)
500 tpd
1000 tpd
1500 tpd
2000 tpd
3500 tpd
Figure 4.22: Unit costs over the life of the project for combinations of rates and levels
of production
4.3 Metal prices model
In this section, the equations 2.6 to 2.8, introduced in chapter 2, are developed to
mimic gold and copper price behaviour so that they can be used in the simulation.
Both have dierent characteristics with signicantly dierent factors. Some insight
can be found in literature, but a subjective approach is relied upon to choose the
model factors.
Dixit and Pindyck [20] presented some numerical examples of their equations and
used a long-term average of $1.00 per pound of copper with a variation of 0.20 and
various reversion factors. Schwartz [56] studied the data of the previous ten years
to estimate the factors for copper, and gold. He calculated that coppers long-term
average was equal to $1.28 per pound, with a variance of 0.233 and a mean-reversion
factor of 0.369. As for gold, Schwartz did not notice any mean reversion over a ten-year
period. Davis [16] looked at the eect of the factors on the evaluation of gold mines.
He considered a long-term average price of $326.26, with reversion rates ranging from
0.2 to 0.4, and price variations ranging from 5% to 15%. In a subsequent article,
Davis [17] used a gold price variation of 20%. Samis [55] studied the impact of price-
reversion on deciding wether or not to operate sectors of a multi-zoned copper mine.
In his study, he used a long-term average copper price of $1.00, a mean-reversion
factor of 0.223, and a price variation of 25%.
The author combined his observations and understanding of the actual metal
price variations over the last twenty-ve years with the information discussed above
to dene the factors to be used in the simulations. These factors are summarized in
table 4.11. Furthermore, in addition to the models used in the literature, the gold and
copper models used in this thesis have oor prices established, such that the prices
Table 4.11: Metal Price Equation Factors
Metal Long-Term Average Variation Mean Reversion Floor Price
Gold $400 / oz 0.15 0.03 $250 / oz
Copper $1.00 / lb 0.25 0.25 $0.50 / lb
200
300
400
500
600
700
800
1995 2000 2005 2010 2015
Year
G
o
l
d

p
r
i
c
e

(
$
/
o
z
)
10% confidence interval
expectation
Figure 4.23: Gold price model
can never go below these numbers.
Based on these factors, the 10% and 90% condence intervals can be drawn for
both metals. Gold and copper are presented in gures 4.23 and 4.24. The 10%
condence interval and the oor price lines are merged into one. As can be seen
in the gures, the top condence interval for gold diverges with time because the
factor of mean reversion is very small, whereas that of copper becomes constant after
seven years because of a higher degree of mean reversion. A discussion covering the
validation of the models to be used in the simulation is given is appendix D.
40
60
80
100
120
140
160
180
1995 2000 2005 2010 2015
Year
C
o
p
p
e
r

p
r
i
c
e

(
c
e
n
t
s
/
l
b
)
expectation
Figure 4.24: Copper price model
4.4 Simulation
At this time, all the elements are in place to do the simulation. In this section, the
details of this particular simulation are discussed, with particular attention to the
denition of the feasible area, and to the general modications brought in as a result
of the fact that the NPV function can be bimodal in certain cases.
The life-of-mine plan starts in 1997. The standard planning process, as done at
the mine site, is followed here where the plan is built approximately six to eight
months before the start of the year. The annual metal prices are known up to the
year 1995, meaning that for the purpose of this exercise, the metal price simulation
starts with the year 1996.
4.4.1 Feasible area
The limits of the feasible area are established. The rst obvious one is the total
resource, such that the total production over the life of the mine can not exceed the
available resource. The second one is set by the mill capacity, such that the daily
production rate can not exceed 3,500 tonnes per day.
The third one is the development constraint and is related to the rate of develop-
ment that is possible in the mine as a function of the rate and level of production.
For low levels of production, there are a limited number of available stopes and de-
velopment headings thus restricting the daily development capacity, and reducing
the potential to produce many tonnes on a sustainable basis, thus leading to low
production rates. It can be expected that as the level of production increases, the
sustainable production rate also increases. The calculation of this constraint is based
on the analysis of historical data and is presented in appendix E.
All three constraints are drawn in gure 4.25, and the feasible area is identied,
area within which solutions are possible.
4.4.2 Review of the unimodal assumption for the NPV func-
tion
Before running the simulations, it is now important to verify the assumption of uni-
modality of the Net Present Value function, discussed in chapter 3, as this assumption
is necessary to be able to get a solution using the Method of Steepest Ascent and the
Golden Search. The way to check the hypothesis is to calculate the NPV function for
many points within the feasible area and look at the results. The test is run for levels
of production between 1 and 16 million tonnes in increments of one million tonnes,
0
2
4
6
8
10
12
14
16
18
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
P
r
o
d
u
c
t
i
o
n

l
e
v
e
l

(
m
i
l
l
i
o
n

t
o
n
n
e
s
)
Feasible Area
Resource constraint
Development constraint
Milling
constraint
Figure 4.25: Feasible area of the possible solutions for the NPV function
and for production rates between 500 and 3,500 tonnes per day in increments of 500
tonnes per day.
As it turns out, the NPV function is sometimes bimodal, and the process suggested
earlier is not valid. However, the process can easily be adapted by calculating the
NPV for all the incremental points within the feasible area, picking the maximum,
and then follow up with the the Method of Steepest Ascent, starting from that point
in order to determine the true maximum combination for much ner increments.
4.4.3 Procedures
The procedure for one run of the simulation is better presented with an example.
First, gold and copper annual prices are generated. The long-term metal price aver-
ages used are $400 per ounce for gold and $1.00 per pound for copper, with copper
15 -212 -147 -77 -93 -139 -159 -181
14 -196 -112 -46 -71 -106 -123 -150
13 -180 -85 -28 -57 -76 -89 -126
12 -163 -59 -19 -34 -49 -67 -88
11 -146 -34 -6 -16 -23 -54 -50
10 -136 -22 -6 -2 -17 -31 -28
9 -125 -21 0 9 -12 -4 -19
8 -114 -34 5 12 7 6 -13
7 -106 -42 6 11 20 5 -18
6 -97 -38 9 29 22 4 -27
5 -80 -21 20 38 23 0
4 -77 -12 29 33 12
3 -63 0 21 20
2 -46 -8 -1
1 -12 6
500 1,000 1,500 2,000 2,500 3,000 3,500
L
e
v
e
l

o
f

p
r
o
d
u
c
t
i
o
n

(
m
i
l
l
i
o
n

t
o
n
n
e
s
)
Net Present Value @ 5%
Figure 4.26: Example of the output generated
showing a high degree of mean-reversion and gold showing very weak mean-reversion.
The seed prices at the start of the simulations are the average metal prices for 1995,
set at $384 per ounce of gold and $1.33 per pound of copper. Second, the net present
values @ 5% for many combinations of levels and rates of production are calculated
and presented in table form, referred to as a combinatory table as seen in gure 4.26.
The values shaded in gray are negative, and the value in red is the highest, with
coordinates of 5,000,000 tonnes and 2,000 tonnes per day and a value of 38 million
dollars in this example.
The next step consists of conducting a detailed search around the coordinates
of the highest value until the maximum NPV is found, using the process discussed
previously. For the purposes of this exercise, it is judged that a resolution to the
nearest 100,000 tonnes and 50 tonnes per day is sucient. In this example, the
maximum is found at 4,750,000 tonnes and 1,750 tonnes per day with a value of 40.9
MM$. The production prole of this combination is shown in table 4.12 and the
nancial prole is in table 4.13. The rst numerical column of these two proles is
the total over the mine life and this column is saved for further analysis.
Therefore, for each metal price generation, the combinatory table of NPVs and
the production and nancial proles of the combination with the maximum NPV are
saved. This procedure is repeated 2,000 times.
4.5 Results and analysis
4.5.1 Combinatory tables
The data of all 2,000 combinatory tables is compiled to calculate the average net
present value and the standard deviation of every combination, as well as the proba-
bility of yielding a positive NPV. See gures 4.27 to 4.29. The information in these
three gures is read as in the following example: for a production rate of 2,500 tonnes
per day and a level of production of 7 million tonnes, the distribution of the 2,000
NPV calculations has an average of 47 MM$ with a standard deviation of 123 MM$,
and 61% of the NPVs are positive.
There is a general northeast-southwest trend in this table, showing a small gradi-
ent when both the production levels and rates vary proportionally and a very steep
gradient when they do not. In other words, if the mine wants to change its operating
point without varying too much the expected NPV, it would increase or decrease
both the production rate and the production level. Any other action would result in
a large variation of the expected NPV.
For any given column (where the production rate is held constant), the highest
NPVs are always associated with the lowest feasible production level. This seems
Y
e
a
r
1
9
9
7
1
9
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F
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s

(
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Net Present Value @ 5% (M$)
15 -243 -213 -164 -131 -146 -160 -178
14 -226 -181 -125 -96 -107 -119 -137
13 -210 -152 -90 -65 -74 -84 -98
12 -193 -123 -56 -36 -42 -51 -61
11 -177 -97 -27 -11 -15 -22 -31
10 -165 -79 -10 8 4 -3 -15
9 -152 -62 7 23 22 15 1
8 -140 -48 19 36 36 29 16
7 -129 -36 26 47 47 39 28
6 -112 -20 39 59 58 51 36
5 -89 2 55 74 72 65
4 -65 20 66 83 80
3 -38 36 71 89
2 -14 42 65
1 30 62
500 1,000 1,500 2,000 2,500 3,000 3,500
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Figure 4.27: Average net present value @ 5%, in million dollars
very reasonable, as the mine is being high-graded. For a given production rate, the
highest-grade ore is mined, resulting in higher revenues per tonne and a shorter mine
life, decreasing the eect of discounting on the cash ows.
For any given row (where the production level is kept constant), the highest NPV
is associated to the highest production rate, again resulting from the fact that the
mine is delineated in less time, thus reducing the eect of time discounting. So, in
general, it is not surprising that the better values are located along the limits set by
the development and milling constraints, as it is always more valuable to mine the
ore as fast as possible .
The combinatory tables can be looked at as having done metal price risk analysis
for a great number of projects corresponding to each combination reported in the
tables. For example, three mine plans are analyzed in order to take a production
decision. In this example, based on certain considerations, management decides that
three options should be studied : 1500 tpd - 2 Mtonne; 2500 tpd - 4 Mtonnes; and
Standard Deviation (M$)
15 47 88 118 142 160 177 191
14 50 91 121 145 163 180 193
13 52 94 124 146 165 181 193
12 55 97 126 147 166 180 192
11 57 98 127 148 165 178 189
10 59 99 125 144 160 171 181
9 61 98 122 140 153 163 172
8 62 97 118 133 144 153 159
7 62 93 111 123 132 139 144
6 63 89 104 113 120 125 129
5 63 85 96 103 108 111
4 62 78 85 89 92
3 58 66 70 73
2 49 51 52
1 36 35
500 1,000 1,500 2,000 2,500 3,000 3,500
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Figure 4.28: Standard deviation of the net present value distributions, in million dol-
lars
Probability of Positive NPV (%)
15 0 2 9 17 17 17 17
14 0 4 15 23 23 22 21
13 0 7 21 29 29 29 27
12 1 10 29 36 36 34 33
11 1 16 36 42 41 40 38
10 2 19 42 46 45 44 41
9 2 23 47 51 50 49 46
8 3 28 50 56 56 53 49
7 3 31 53 61 59 56 53
6 5 36 59 67 65 62 56
5 8 44 69 75 73 70
4 14 54 77 83 80
3 22 66 86 90
2 33 78 91
1 78 99
500 1,000 1,500 2,000 2,500 3,000 3,500
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Figure 4.29: Probability of positive net present value, in percentage
Table 4.14: Risk analysis example
Case Production rate Level of production Average NPV @ 3% Standard deviation
(tonnes per day) (tonnes) (million $) (million $)
1 1,500 2,000,000 65 52 91%
2 2,500 4,000,000 80 92 80%
3 3,500 6,000,000 36 129 56%
Probability of
positive NPV
3500 tpd - 6 Mtonnes. A standard risk analysis would consist of collecting exactly
the information that is seen in the combinatory tables. A risk-neutral mine manager
would thus look at table 4.14 and probably declare that case 2 is the best because of it
having the highest NPV, and even though the standard deviation might be high, the
scenario still has eighty percent probability of being positive. A risk-adverse manager
might choose case 1 because of the highest probability of success.
Up to now, there is nothing new under the sun. A mean-variance risk analysis
(limited to metal prices only) has been conducted on many mine plans. The risk
analysis technique is well known, though probably not used often at mine sites. What
may be considered as a contribution here is the fact that the risk analysis is done on
so many mine plans at once. The only reason why this is possible is because there
is a very detailed knowledge of all cost functions. This ties in with Smith [62] who
said that, too often, a production decision is taken after having considered only one
option because calculating others would take too much time and eort.
As a tool for the mine manager, the combinatory tables add more information
that what is commonly available at the time of making a decision - a manager may
only have two options to choose from. As such, it is nice to have this information,
but the decision will still be inuenced by the managers level of risk adversity.
4.5.2 Bubble graph
Now the mine manager is also shown the bubble graph (gure 4.30). The bubble
graph adds other dimensions to the analysis, dimensions that will be revealed by
analyzing the graph and its components.
General observations The graph is built such that its presentation has the same
orientation as the combinatory tables in order to refer between them rapidly. The
constraints and feasible area are easily identiable. Each circle represents the coor-
dinates for which the maximum NPV is realized at least once during the simulation.
The size of the circles is proportional to the number of times the maximum NPV oc-
curred at those coordinates. For example, the addition of all bubbles at and around
2000 tpd and 3 mtonnes is equal to 33%, meaning that in thirty three percent of all
simulations, the optimal NPV occurred at or near that combination.
Approximately two thirds of all results are located on the perimeter set by the
development and milling constraints, with the majority occurring along the devel-
opment constraint. The rest of the answers are distributed within the feasible area.
Most of the bubbles are concentrated in specic points, where high concentration
areas are formed, surrounded by areas of nil probability. This is a surprising result,
as it was expected that high concentrations would occur with probabilities decreasing
concentrically around them. This aspect will be revisited in the upcoming pages.
Dierence between being on periphery or within the feasible area Any
result located within the feasible area and not on the periphery indicates that the
string of metal prices generated consists of low prices at the start and higher prices
later in time. The mine would probably generate negative cash ows in the early
0
2
4
6
8
10
12
14
16
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
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33%
28%
6%
Figure 4.30: Bubble chart of optimal net present value combinations
years followed by large positive cash ows osetting the early years. The proportion
of results located in this area should be proportional to the discount rate. If a higher
discount rate were to be used in this exercise, the discounted value of future cash
ows would be much smaller, eventually forcing these combinations to yield negative
NPVs. As a consequence, more results would be found along the periphery and less
in the north-west quadrant of the graph.
The fact that most results are located on periphery indicates that, in general, the
short term behaviour of metal prices is more inuential than the long-term, again
for reasons of time discounting. If a higher discount rate were to be used, near-term
metal prices should be more inuential.
4.5.3 Hot spots
The hot spots are combinations of production rates and levels around which the
results accumulate and form high concentrations. As mentioned earlier, there should
be only one hot spot, and not a number of isolated ones like seen in the bubble graph.
Three main hot spots are identied and are listed in table 4.15.
Table 4.15: Coordinates of hot spots
Hot Spot Production level Production rate
(tonnes) (tonnes per day)
A 1,000,000 1,000
B 3,000,000 2,000
C 4,750,000 2,850
Many factors may inuence the formation of these hot spots, and they will be
reviewed individually in this section with the objective of identifying the main one.
Under review will be metal prices, the cost and the revenue functions.
Metal prices Metal prices play a role in the formation of the hot spots. To illustrate
this, the combinations of gold and copper prices are plotted for each hot spot, where
the metal prices are equal to the average price sold over the life of the mine in each
case. In each gure, the chart area is divided into four quadrants
4
, separating sectors
above and below the expected long term prices of $400 per ounce gold and $1.00
per pound copper. Four graphs are plotted, one for each of the three hot spots and
one for the rest of the data. See gures 4.31 to 4.34. Also, table 4.16 indicates the
distribution of occurrences as a function of the hot spot and the quadrant.
Hot spot A corresponds to mining the very best fraction of the orebody at the
4
The quadrant are numbered as in classical mathematics, with Quadrant 1 being the top right-
hand, and the others following clockwise.
0
20
40
60
80
100
120
140
0 100 200 300 400 500 600 700
Gold price ($ / oz)
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2%
21%
60%
17%
Figure 4.31: Metal prices yielding a solution occurring at hot spot A
0
20
40
60
80
100
120
140
160
0 100 200 300 400 500 600 700 800 900
Gold price ($ / oz)
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26%
23%
3%
48%
Figure 4.32: Metal prices yielding a solution occurring at hot spot B
0
20
40
60
80
100
120
140
160
180
200
0 100 200 300 400 500 600 700
Gold price ($ / oz)
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51%
0%
0%
49%
Figure 4.33: Metal prices yielding a solution occurring at hot spot C
0
50
100
150
200
250
300
0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000
Gold price ($ / oz)
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56%
6% 0%
37%
Figure 4.34: Metal prices yielding a solution occurring at other locations
Table 4.16: Occurrences as a function of hot spot and metal price quadrant
Hot Spot Metal Prices Quadrant
1 2 3 4 Total
A 0% 6% 16% 5% 28%
B 8% 8% 1% 16% 33%
C 3% 0% 0% 3% 6%
others 19% 2% 0% 13% 34%
Total 31% 16% 17% 36% 100%
fastest rate possible, an approach commonly referred to as high-grading the deposit.
Figure 4.31 shows clearly that this solution occurs when both gold and copper price
averages are below the long-term expected prices (third quadrant), and furthermore,
based on the information in table 4.16, lower metal prices almost always result in the
high-grading solution.
Hot spot B does not correspond to any particular operating situation, and yet
one third of all cases fall on that spot. Looking at the metal prices distribution in
gure 4.32 does not yield any real insight, though it seems that there is a better than
fty percent chance that hot spot B will be the preferred operating design if the gold
price is high and the copper price is low (second quadrant). However, this situation
occurs only eight percent of the time and does not really explain the formation of a
hot spot at this location. Furthermore, most of the hot spot B solutions are obtained
when copper prices are higher than one dollar, conditions that are equal to those at
hot spot C and all other cases.
Based on this, metal prices seem to have a denite inuence on the high-grading
solution but not the others, and therefore do not explain the hot spots.
Cost functions The cost functions seem to have no inuence on the the formation
of hot spots. Figure 4.21 indicates that the total cost function seems very smooth,
without discontinuities that could favor the accumulation of results in a particular
point.
Revenue functions The easiest way to see how revenues can inuence the forma-
tion of hot spots is by analyzing said functions with set metal prices. Nine combi-
nations of prices are tested, combining the 10% condence interval, the expectation,
and the 90% condence interval of gold and copper, as traced in gures 4.23 and 4.24.
The results of these tests are in table 4.17 and plotted in gure 4.35. From this table,
it seems evident that the results are very sensitive to the price of copper: the high-
grading solution occurs when copper prices are low; the solutions occur mostly around
hot spot B when the copper prices are equal to the expectation, and the solutions are
associated to high levels of production when copper prices are high. Meanwhile, the
price of gold does not seem to inuence the results. Therefore, the analysis must be
concentrated on the copper revenue functions.
Table 4.17: Solutions for set metal prices
Copper
10% condence interval expectation 90% condence interval
Gold (tonnes-tpd) (tonnes-tpd) (tonnes-tpd)
10% c.i. 1,000,000 - 1000 1,100,000 - 1050 9,950,000 - 2850
expectation 1,000,000 - 1000 3,100,000 - 1900 10,950,000 - 3150
90% c.i. 1,250,000 - 1125 4,750,000 - 1750 11,250,000 - 3250
Two factors aect copper revenues: the annual capacity of the roasters and the
average grade of the mill feed. The roasters have the capacity to receive 114,000
tonnes of green concentrate per year. All excess production from the mill is sold
0
2
4
6
8
10
12
14
16
18
0 500 1,000 1,500 2,000 2,500 3,000 3,500
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10 - 10
10 - Exp
Exp - 10
90 - 10
Legend
1st number is "Gold price"
2nd number is "Copper price"
where
"10" = 10% confidence interval
"Exp" = expextation
"90" = 90% confidence interval
Exp - Exp
90 - Exp
90 - 90
10 - 90
Exp - 90
Figure 4.35: Solutions for set metal prices
directly to the smelters at a lower value. Depending on the copper grade of the mill
feed, the roaster capacity is reached when the mine works at close to 2000 tonnes per
day.
The copper grade varies with the level of production, as discussed in section 4.1.1.
Figure 4.36 shows that it increases as the level of production increases from 1 to 6
million tonnes where it reaches a maximum.
For the remainder of this section, the numbers and relationships that are analyzed
are all conned to the axis represented by the development constraint. This axis is
chosen because the three major hot spots are located on it, as well as most of the
solutions obtained for the set metal prices presented in table 4.17.
By combining the average feed grade to the mill as well as the production rate at
which it is fed, it is possible to calculate the Net Smelter Return factor of one percent
copper at dierent copper prices. Figure 4.37 shows how the factors change as values
2.00
2.50
3.00
3.50
4.00
4.50
0 1 2 3 4 5 6
C
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(
%
)
Figure 4.36: Copper grade as a function of the level of production
increase along the development constraint axis. As expected, the factors are higher
for higher copper prices, and it is clear that at a rate of 2,000 tonnes per day and
a level of 3 million tonnes, the roaster capacity is reached, resulting in progressively
lower NSR factors beyond that point.
By multiplying the copper grade by the copper NSR factors, gure 4.38 is gener-
ated. Of interest here is the fact that the curves have dierent shapes for given copper
prices. This is due to the fact that, proportionally, the variations of the copper NSR
factors for low copper prices are much greater than for high prices. As a result, for
low copper prices, the value of copper in the ore sent to the mill reaches a maximum
around 2000 tpd - 3 mt, and decreases afterwards. As the copper price increases, this
rate of decrease is less signicant until eventually the value of copper in the ore stays
0
5
10
15
20
25
30
1000 tpd - 1mt 1500 tpd - 2mt 2000 tpd - 3mt 2500 tpd - 4mt 3000 tpd - 5mt 3500 tpd - 6mt
Production rate - level (tonnes/day - million tonnes)
C
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Cu price = 10% c.i.
Cu price = 90% c.i.
Cu price = expectation
Figure 4.37: Copper NSR factors
constant when copper prices are high. This would tend to indicate that under condi-
tions of high copper prices, there are more opportunities for solutions to be obtained
at high production rates and levels, whereas for low copper prices, solutions would
tend to happen around 2000 tpd - 3 mt.
The shape of the copper unit revenue curve thus has an inuence on the total
unit revenue curve. Three gures, 4.39 to 4.41 illustrate this point. Using gure 4.39
as an example, the copper unit revenue curve for the copper price equal to the 10%
condence interval is reproduced. The total value of the ore is equal to the value of
the copper plus that of gold for gold prices equal to expectations. And nally, the
unit cost curve is included on the graph to get an understanding of the relationship
between revenues and costs. By comparing the three gures, the slope of the total
value of the ore increases as a function of the copper price, reaching a point where
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Figure 4.38: Value of copper contained in ore
the costs and revenue curves are almost parallel in the case of high metal prices.
The eect of this can clearly be seen by comparing the total prot curves for the
three copper price conditions. Figure 4.42 gives a very clear indication that prots are
maximized at 1,000 tonnes per day when the copper prices are low, at 2,000 tonnes
per day when copper prices are at expectation, and above 3,000 tonnes per day when
copper prices are high, corresponding well to the solutions obtained under known
metal prices conditions.
Based on this information, it is easier to understand the formation of the hot spots
resulting from the simulation. For low copper prices, the solutions would naturally
tend to 1,000 tonnes per day and 1 million tonnes. Again, for most cases averaging
close to the expectation, the solution would tend to converge towards the 2,000 tonne
per day solution. In the case of high metal prices, the total prot curve does not
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Total cost
Total value of ore
Figure 4.39: Unit revenues and costs for copper price set at 10% condence interval
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Figure 4.40: Unit revenues and costs for copper price set at expectation
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Figure 4.41: Unit revenues and costs for copper price set at 90% condence interval
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Cu price = 90% c.i.
Figure 4.42: Prot as a function of copper prices
show a unique maximum and solutions would be more dispersed.
It is thus very clear that, although this mine is considered as a gold mine and
that all relationships should be developed with that in consideration, the mine design
parameters are most sensitive to copper prices.
4.5.4 Mine design
Using the information compiled in the bubble graph, the following design is suggested
for the mine:
Based on the highest concentration of solutions, design the mine for a production
rate of 2,000 tonnes per day and a level of production of 3,000,000 tonnes. The
important aspect of this rst decision is the establishment of the level of capital
investment that is to be done. This decision establishes the extents of the lateral
development to be done, thus xing the nal envelop of the mineralization to consider
in the plan. Another aspect is that the upper limit for the production rate is xed.
This means that parts of the mill can be moth-balled and put on care and maintenance
in case new nearby deposits can be brought in production in the future.
This solution can be considered as the nal step of the strategic design. In sum-
mary, this plan has an expected value of 89 million dollars with a standard deviation
of 73 million dollars and a 90% probability of being positive. However, more impor-
tantly, this design has a 33% probability of being the best design given uncertain
metal prices, the best probability available.
This level of probability is very low and a manager might be hesitant to use this
design based on these criteria. However, the manager might also want to consider that
other available designs would not be as robust as this one, and that choosing to go
with a design with lower probability would certainly mean that any variation in metal
prices would lead to a plan that is far from optimum, and would force management
to redesign the mine in very short order.
A note on tactical planning Up to now, the objective of this work has been to
develop a static mine plan, one where the production rate and cut-o grade remain
xed throughout the life of the mine. However, once in place, tactical planning can
start in order to rene the extraction sequence and also to conduct marginal analysis
on sectors not included in the strategic plan.
The design, as it stands, considers only the best 3 million tonnes of the deposit,
but the envelope of the reserve contains much more mineralized material that could
be considered for extraction. As such, all the capital lateral development is considered
covered by the reserves. This development goes by mineralized areas contained within
the reserves envelope, and only regular development would be required to bring them
in production. Graphically, this could be shown as in gure 4.43. The new feasible
area would be limited to the right by the strategic production rate set at 2,000 tonnes
per day. Also, the grade-tonnage curves of the mineralization contained within the
reserves envelope can be estimated, meaning that the feasible area now nds itself
shrunken in height and in width. The overall eect on the tactical plan would be a
shift upwards from the strategic design.
Once this plan is in place, metal prices will uctuate, and adjustments might
be made on a temporary basis to take advantage of higher prices or to mitigate the
eects of lower prices. The practice to adopt in these cases is to limit modications to
movements along the new tactical constraint lines, either up or down the production
constraint to include or exclude new ore from within the reserves envelop, or sideways
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Strategic Design
Tactical Design
Less Resources
Constrained Production Rate
Figure 4.43: Tactical plan
along the development constraint. The advantages are that no new capital investment
would be required as the mineralized envelop remains xed and no equipment is
purchased as the production rate does not increase. This approach would lead to a
robust plan able to weather any situations.
More work would be required to expand on this subject, and it is suggested that
the topic of tactical planning be studied at some further time as part of another study.
4.6 Summary
In this chapter, a detailed model was constructed and solved for a polymetallic mine.
This mine was chosen because of the large quantity of available information concerning
its resources and costs.
The fact that two metals contribute signicantly to revenues complicated the
task of determining the main metal on which to base the model. An innovative
approach was developed to make that determination, where the relationship between
the resource base and revenue functions developed in section 4.2.1 was combined
with an analysis of the quantity of high-grade secondary metal contained in low-
grade primary blocks. It became obvious that gold was omnipresent in various grades
independently of the copper grade whereas copper was not present when the gold
grades were low. For this reason, gold was chosen as the primary metal for this
deposit.
Revenues functions were developed, incorporating the various streams of products
coming from the mill and roaster, and taking into consideration the eect of metal
prices on the treatment and rening charges for each product.
The relative spatial position of the resource blocks was reviewed and this informa-
tion was combined to the available operating and capital cost information to generate
the various cost functions classied as per the proposal made in table 3.1.
Gold and copper metal price models were prepared, for the purpose of running
the Monte Carlo simulations.
The feasible area within which solutions are possible was shown to be constrained
by the available resources, the milling capacity, and the physical limitation of devel-
oping sucient work places to sustain given production rates as a function of the
level of production.
The simulation was run and the results were presented in the form of a bubble
graph, showing a few design combinations with the higher probabilities of occurrence.
This result was counter-intuitive as it was thought that there should be only one
solution to the problem. The analysis showed that the multiple solutions were due to
the inuence of the copper feed grade and the roaster capacity.
Chapter 5
Hypothetical Gold Mine
Chapter 4 showed that the methodology produced viable results, but that they were
grouped into hot spots. As discussed, these hot spots were not expected as it was
thought that the solution would consist of a single higher-probability combination
surrounded by concentrically decreasing probabilities. The objectives of this chapter
are to determine if this expected solution would be generated if the eect of the copper
revenue function were eliminated, and to evaluate the sensitivity of the model to its
composing factors.
This chapter is divided into seven parts:
The creation of a new mine model will be described. The cost functions remain
the same as in the previous chapter, but the revenues are based exclusively
on gold. In order to compare the results between the actual mine and this
hypothetical model, copper grades are converted into gold grades;
The assumptions used in the simulation will be discussed along with the pa-
rameters on which sensitivities will be run;
154
CHAPTER 5. HYPOTHETICAL GOLD MINE 155
The results of the simulation on the base case will be reviewed and compared
to those of the gold and copper model from the previous chapter;
The sensitivity of the model to the discount rate will be presented;
The sensitivity of the model to the gold price mean-reversion factor will be
examined;
The results of a sensitivity analysis based on the deposit average grade will be
presented; and
Finally, the chapter will close with a discussion on how a mine manager might
use the results to decide on the mine design.
5.1 Hypothetical gold mine model
In creating a gold mine model, the objectives are: to have an orebody with similar
grade and spatial distribution as the original one in order to use the same costs as
a function of the level of production; and to simplify the milling process such that
revenues as a function of the production rate are smoothed out with the elimination of
the roasting process. In this section, the assumptions used to create the hypothetical
gold mine are discussed, the PeaRL simulation is run on the new model, and the
results are discussed.
5.1.1 Grade distribution of the mineralization
The rst step is to create a gold orebody with similar grade-tonnage functions as the
original polymetallic orebody. The approach to do so is the following:
Using the long-term metal price expectations, calculate the NSR factors for the
average metal grades of the total resource;
Using these NSR factors, calculate the value in dollars per tonne of each resource
block;
Calculate the average NSR of the deposit and the standard deviation;
Divide the average and standard deviation by the gold NSR factor to get the
average gold equivalent grade and standard deviation.
The deposit has an average value of $89.17 per tonne and the gold equivalent
grade is equal to 8.52 grams per tonne with a standard deviation of 6.53 grams per
tonne. The histogram of deposit resources expressed as gold equivalent (gure 5.1)
seems to have two modes as would be expected from a polymetallic orebody with two
dominant metals.
The orebody model is simplied by transforming it into a unimodal log-normal
distribution with average grade and standard deviation equal to those calculated.
The grade-tonnage curves of the original and hypothetical models are compared in
gure 5.2. The tonnage curves are almost equal, but the average grade curves diverge
for cut-o grades higher than 11 grams per tonne, corresponding to levels of produc-
tion less than 4 million tonnes, with the real model having much higher grades. The
fact that the real model is bimodal plays a role in this as the highest mode tends to
be truncated and the high-grade values present in the deposit are under-evaluated.
However, since the purpose of this section is to test the shape of the results of the
simulation, the hypothetical model is accepted.
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Figure 5.1: Gold equivalent tonnes histogram
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Lines in red represent the original model
Lines in black the hypothetical model
Figure 5.2: Comparison of original and hypothetical models
5.1.2 Spatial distribution of the mineralization
In order to keep the same cost functions as developed in chapter 4, it is assumed that
the resources of the hypothetical model have the same spatial distribution as that
of the polymetallic model. In other words, the resources corresponding to a level of
production of 2 million tonnes are at the same location in the mine for both models.
Furthermore, the mining methods and relationships between sources of production
and levels of production do not change.
5.1.3 Milling process
The roasting process is eliminated and all the gold is recovered through otation
using the same metal recovery equations. The green concentrate NSR factor for gold
is used for revenue calculations, thus eliminating the eect caused by green and calcine
concentrate dierentials.
5.1.4 Operating and capital costs
All cost functions remain exactly the same. In the case of milling, although only
otation is considered, the full costs of the roaster are kept in order to produce a fair
comparison. Since there are no changes to the spatial distribution of the resources,
all development and mining costs as a function of the level of production stay the
same.
5.1.5 Solution feasible area
The constraints remain identical, resulting in the same feasible area.
5.1.6 Numerical modeling procedures
The modeling procedures remain the same except for two small modications:
Only the price of gold is simulated; and
the annual gold NSR factors are based on the sales of green concentrate. It
must be noted though that the dierence with the sale of calcine is one cent or
approximately one tenth of one percent.
5.2 Assumptions
The assumptions used for the simulations are the following:
Average grade of the deposit As discussed previously, the average grade of the
deposit is equal to 8.52 grams per tonne of gold. To gauge the sensitivity of the model
to the grade, this base case will be compared to a low-grade deposit averaging 6.5 g/t
Au and to a high-grade deposit averaging 10.5 g/t Au.
Discount rate The discount rate to be used in the base case will be 5% since the
mine is already in production and the capital and operating costs and the reserves
are well understood. However, it could be assumed that the mine recently went into
production and that some of these revenue and cost functions are still ill-dened.
Therefore, the model will be run with a discount rate of 8% to gauge the eect.
Gold price model parameters As in the previous chapter, the long-term average
price is equal to $400 per ounce with a oor price of $250, the price variation is equal
to 0.15, and the mean-reversion factor is equal to 0.03. In the sensitivity analysis, the
mean-reversion factor will be increased to 0.20 to estimate the eect on the solution
of reducing the possibility of obtaining very high gold prices on the solution.
5.3 Base case results
The base case results are presented in gure 5.3. The dierences are quite marked
from the original model in gure 4.30:
The hot spots have disappeared. The elimination of the revenue function dis-
continuities has resulted in the smoothing out of the results along the constraint
lines, thus proving the initial assumption.
There are no results associated with the high-grading option at 1,000 tonnes
per day, and the lowest production rate along the development constraint line
is located at a rate of 1,575 tonnes per day. This tends to conrm the points
made in the previous chapter about the inuence of copper prices in the nal
solution; when copper is taken out of consideration, the bias towards high-
grading disappears and the unique solutions related to various copper prices
are also eliminated;
The proportion of results located on the constraint lines has decreased from two
thirds to one half. Given the fact that the gold price model variance increases
with time, there are more opportunities to have very high gold prices in the
future, thus leading to more situations where the production rate should be
reduced in order to be in production when prices are high. This in turn leads
to solutions located to the left and above of the constraint lines.
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Base Case
Average grade = 8.52 g/t Au
Discount rate = 5%
Mean reversion factor = 0.03
Figure 5.3: Bubble graph for gold equivalent grade equal to 8.52 grams per tonne
It is very hard to determine the nal design from this graph as there is too much
information on it. The gure is therefore simplied by grouping all the individual
results into clusters measuring 250 tonnes per day and 500,000 tonnes. The resulting
graph is shown in gure 5.4. There is a shift of the bubbles towards the right,
indicating that higher production rates and levels might be indicated. The highest
concentration of results is located between 1,750 and 2,500 tonnes per day along the
development constraint line, but there is no clear-cut design to be chosen from this
graph. The mine design is analyzed later in this chapter.
The values in combinatory tables (gure 5.5) are remarkably higher, with the
NPVs twice as high as than those observed in the gold-copper case. The variation
might come from a two factors:
The copper concentrates have higher treatment and rening charges than the
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Base Case
Discount rate = 5%
Figure 5.4: Clustered bubble graph for gold equivalent grade equal to 8.52 grams per
tonne
golds. By converting the copper into a gold equivalent, the associated charges
are eliminated, yielding higher revenues and thus higher NPVs.
The gold price model has a low mean-reversion factor than that of the copper.
It is therefore possible that higher revenues can be generated from gold alone.
5.4 Sensitivity to the gold price model mean re-
version factor
To test the inuence of the mean-reversion factor on the results of the base case, this
factor will be increased in order to reduce the probability of achieving very high gold
prices in the future. The results should be closer to those obtained in the previous
15 -213 -167 -115 -75 -49 -34 -30
14 -194 -133 -75 -32 -4 12 17
13 -174 -99 -34 11 40 57 63
12 -152 -65 4 51 81 98 104
11 -131 -33 39 86 116 133 138
10 -109 -3 70 117 147 163 167
9 -87 26 98 143 172 186 189
8 -64 52 122 166 192 204 204
7 -40 77 144 185 208 218 216
6 -14 101 164 200 220 227 223
5 13 123 180 211 226 231
4 41 140 189 214 226
3 64 149 187 205
2 77 139 165
1 66 99
500 1,000 1,500 2,000 2,500 3,000 3,500
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Figure 5.5: Base case combinatory table for NPV @ 5%, in million dollars
chapter.
For this exercise, the mean-reversion factor was increased to 0.20, compared to
0.03 in the base case. This results is a narrower band of probable answers, as shown
in gure 5.6.
The results of the simulation are presented in the combinatory table in gure 5.7.
5.4.1 Eect of treatment charges
The values read in the combinatory table are very similar to those in the base case,
which seems to show that the mean reversion factor plays a very small role in the
increase of the NPV. Therefore, one must assume that the role of the copper treatment
and rening charges is very important. It is possible to get a feel of their impact by
comparing the gold-copper case to the gold equivalent case for a given combination
of production rate and level under known metal price conditions. For the sake of this
exercise, a production rate of 2,500 tonnes per day and a level of production of 4
200
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Figure 5.6: Comparison of the condence intervals sensitivity
15 -235 -197 -144 -101 -69 -50 -43
14 -217 -164 -103 -56 -22 -2 5
13 -197 -128 -61 -10 24 44 53
12 -176 -94 -21 32 67 87 96
11 -155 -60 16 70 104 124 132
10 -134 -28 50 103 136 156 162
9 -111 2 81 132 164 181 185
8 -88 31 109 157 186 201 203
7 -62 60 133 178 204 216 216
6 -34 88 156 196 218 226 224
5 -4 113 175 209 226 232
4 27 134 187 214 226
3 56 146 186 206
2 74 139 166
1 66 100
500 1,000 1,500 2,000 2,500 3,000 3,500
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Figure 5.7: Combinatory table of NPV @5% for mean-reversion factor = 0.20, in
MM$
million tonnes was evaluated at metal prices equal to their respective expectations.
The production proles are presented in tables 5.1 and 5.2 and the nancial analyzes
are in tables 5.3 and 5.4. It is very evident from these tables that, for equal conditions,
the revenues and the operating margin are much greater, thus showing that most of
the variation seen in the values in the combinatory table in the last section is due to
the copper concentrate charges.
5.4.2 Eect of the mean-reversion factor
The simulation bubble graphs are presented in gures 5.8 and 5.9. Their analysis
shows that the mean-reversion factor plays an important role in the distribution of
the results:
The number of results located in the top left corner of the graphs have decreased
noticeably. This is due to the lower probability of having very high gold prices
in the far future, where the solution would be to mine the deposit very slowly
to take advantage of the future high prices;
There is a shift of the solutions towards the milling and development constraint
lines, resulting in a tighter distribution. This can also be explained by the
elimination of the probability of very high gold prices in the future.
The higher concentration of bubbles has moved slightly towards the right along
the development constraint line. This can be explained by the fact that, as
the probability of very high future gold prices decreases, the time value of cash
ows favours the rapid mining of the orebody, thus pushing the results to the
right.
Table 5.1: Production prole for the gold-copper model
Year 1997 1998 1999 2000 2001
Metal Prices Average
Au ($/oz) 386 385 385 386 386 387
Cu ($/lb) 112 118 113 110 107 105
NSR Factors
Au ($/g) 10.35 10.33 10.34 10.35 10.36 10.38
Cu ($/%) 13.78 14.71 13.84 13.40 12.93 14.42
Production Total
Tonnes 4,000,000 912,500 912,500 912,500 912,500 350,000
Grade
Au (g/t) 6.61 6.61 6.61 6.61 6.61 6.61
Cu (%) 3.83 3.83 3.83 3.83 3.83 3.83
Tonnes per day 2,500
Mine life (years) 4.38
Regular 50,795
Deferred 9,803
Total 60,598
Mining (tonnes)
Cut & Fill 1,112,952
Long Hole 1,563,600
Pillar Recovery 688,404
Ore Development 635,044
Mill Recovery
Gold 88.6%
Copper 96.6%
Metal recovered
Gold ('000 oz) 1,257 172 172 172 172 66
Copper ('000,000 lbs) 785 74 74 74 74 29
Table 5.2: Production prole for the gold equivalent model
Year 1997 1998 1999 2000 2001
Metal Prices Average
Au ($/oz) 386 385 385 386 386 387
NSR Factors
Au ($/g) 10.84 10.82 10.84 10.85 10.86 10.87
Production Total
Tonnes 4,000,000 912,500 912,500 912,500 912,500 350,000
Grade
Au (g/t) 15.51 15.51 15.51 15.51 15.51 15.51
Tonnes per day 2,500
Mine life (years) 4.38
Regular 50,795
Deferred 9,803
Total 60,598
Mining (tonnes)
Cut & Fill 1,112,952
Long Hole 1,563,600
Pillar Recovery 688,404
Ore Development 635,044
Mill Recovery
Gold 92.8%
Metal recovered
Gold ('000 oz) 3,359 422 422 422 422 162
Table 5.3: Financial analysis of the gold-copper model
Year 1997 1998 1999 2000 2001
Financials ('000,000 $) Total
Revenues
Gold Sales 273.6 62.3 62.4 62.4 62.5 24.0
By-Product Credits 235.1 56.9 53.8 52.3 50.7 21.4
Total Revenues 508.7 119.2 116.2 114.7 113.1 45.4
Operating Cost
Variable Costs
Mining 50.4 11.5 11.5 11.5 11.5 4.4
Regular Development 39.2 9.5 9.5 9.5 9.5 1.3
Mine Services 65.9 15.0 15.0 15.0 15.0 5.8
Milling 95.0 21.7 21.7 21.7 21.7 8.3
Subtotal 250.6 57.7 57.7 57.7 57.7 19.8
Fixed Costs
Mine 28.0 6.4 6.4 6.4 6.4 2.4
Mill & On-Site 106.6 24.3 24.3 24.3 24.3 9.3
Subtotal 134.6 30.7 30.7 30.7 30.7 11.8
Total Operating Costs 385.1 88.4 88.4 88.4 88.4 31.5
Capital Cost
Capital Development 11.7 2.8 2.8 2.8 2.8 0.4
Other mine 8.6 2.0 2.0 2.0 2.0 0.8
Mill & On-Site 18.9 4.3 4.3 4.3 4.3 1.7
Total Capital Costs 39.3 9.1 9.1 9.1 9.1 2.8
Cash Flow 84.3 21.6 18.7 17.2 15.6 11.1
Net Present Value @ 5% 74.0
Indicators
Net Smelter Return ($/t) 127.17 130.58 127.34 125.74 124.00 129.84
Operating Cost ($/t) 96.28
Operating Margin ($/t) 30.89
Operating Cost ($/oz Au) 119
Table 5.4: Financial analysis of the gold equivalent model
Year 1997 1998 1999 2000 2001
Financials ('000,000 $) Total
Revenues
Gold Sales 672.8 153.2 153.4 153.5 153.7 59.0
By-Product Credits
Total Revenues 672.8 153.2 153.4 153.5 153.7 59.0
Operating Cost
Variable Costs
Mining 50.4 11.5 11.5 11.5 11.5 4.4
Regular Development 39.2 9.5 9.5 9.5 9.5 1.3
Mine Services 65.9 15.0 15.0 15.0 15.0 5.8
Milling 95.0 21.7 21.7 21.7 21.7 8.3
Subtotal 250.6 57.7 57.7 57.7 57.7 19.8
Fixed Costs
Mine 28.0 6.4 6.4 6.4 6.4 2.4
Mill & On-Site 106.6 24.3 24.3 24.3 24.3 9.3
Subtotal 134.6 30.7 30.7 30.7 30.7 11.8
Total Operating Costs 385.1 88.4 88.4 88.4 88.4 31.5
Capital Cost
Capital Development 11.7 2.8 2.8 2.8 2.8 0.4
Other mine 8.6 2.0 2.0 2.0 2.0 0.8
Mill & On-Site 18.9 4.3 4.3 4.3 4.3 1.7
Total Capital Costs 39.3 9.1 9.1 9.1 9.1 2.8
Cash Flow 248.4 55.7 55.8 56.0 56.2 24.7
Net Present Value @ 5% 217.6
Indicators
Net Smelter Return ($/t) 168.20 167.87 168.07 168.26 168.44 168.66
Operating Cost ($/t) 96.28
Operating Margin ($/t) 71.92
Operating Cost ($/oz Au) 115
0
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Figure 5.8: Bubble graph for mean-reversion factor = 0.20
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Figure 5.9: Clustered bubble graph for mean-reversion factor = 0.20
15 -145 -129 -101 -74 -54 -40 -36
14 -133 -108 -72 -40 -16 -1 5
13 -121 -84 -41 -5 21 39 45
12 -109 -61 -11 28 57 75 82
11 -96 -38 17 59 89 107 114
10 -83 -15 43 87 117 134 141
9 -69 7 68 112 141 157 163
8 -54 28 91 135 162 177 181
7 -38 50 113 154 179 192 194
6 -20 73 134 172 194 204 204
5 1 95 152 186 205 212
4 24 116 165 194 208
3 47 128 169 190
2 63 126 154
1 60 94
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Figure 5.10: Combinatory table of NPV @8%, in MM$
5.5 Sensitivity to the discount rate
The choice of the original discount rate was a function of the state of production of
the mine. It was judged that the mine had been in production long enough to have a
good control of its costs and a good denition of its resources, and for those reasons,
the discount rate was selected to be equal to 5%. It could be argued that the mine
had not been in production long enough to reduce the risk associated to these factors,
and that the discount rate should have been set higher, equal to 8%. The results of
this simulation are presented in gures 5.10 to 5.12.
The combinatory table shows that the NPV values have decreased by a small
factor as it would be expected when a higher discount rate is used. The bubble graphs
show fewer results in the top left corner of the graphs, meaning that the higher rate
overcomes the eect of very high gold price in the very far future. However, the
overall result is unchanged, and it could be said that the outcome is not sensitive to
the discount rate.
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Figure 5.11: Bubble graph for discount rate = 8%
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Figure 5.12: Clustered bubble graph for discount rate = 8%
15 -307 -329 -319 -306 -296 -294 -299
14 -290 -297 -278 -260 -247 -243 -247
13 -271 -262 -234 -211 -196 -190 -192
12 -251 -226 -191 -164 -146 -139 -140
11 -230 -191 -149 -119 -101 -92 -93
10 -209 -157 -110 -79 -59 -50 -51
9 -186 -123 -74 -41 -22 -13 -14
8 -162 -90 -39 -7 13 21 18
7 -136 -56 -5 27 45 52 48
6 -105 -20 29 60 76 80 75
5 -71 16 64 91 104 106
4 -33 51 94 117 126
3 6 81 116 133
2 37 95 119
1 47 79
500 1,000 1,500 2,000 2,500 3,000 3,500
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Figure 5.13: Combinatory table of NPV @5% for gold equivalent grade equal to 6.50
grams per tonne, in MM$
5.6 Sensitivity to the average grade of the deposit
The objective of this section is to test how the simulation results are aected by the
average grade of the deposit. In order to do this, the base hypothetical model is
modied by changing its average grade while keeping the same standard deviation.
All other assumptions discussed previously remain. To test the sensitivity, two cases
are analyzed, a low-grade deposit averaging 6.5 grams per tonne and a high-grade
deposit averaging 10.5 grams per tonne.
5.6.1 Results
The variation of the average grade has a marked eect on the results of the simulation.
The low grade case (gure 5.15) shows a strong shift towards high-grading whereas
the high grade case (gure 5.16) shows a shift towards the maximal utilization of the
mill. The clustered data is presented in gures 5.17 and 5.18.
15 -128 -20 70 133 176 203 216
14 -107 13 108 172 216 243 256
13 -86 46 144 209 252 279 291
12 -65 77 176 240 283 309 320
11 -44 105 203 267 307 332 342
10 -23 130 226 287 326 348 356
9 -2 152 244 302 338 357 364
8 18 171 258 311 344 361 364
7 39 187 268 316 345 358 359
6 60 200 273 316 339 349 348
5 81 209 273 309 327 334
4 98 211 264 293 306
3 109 201 242 263
2 107 173 200
1 80 114
500 1,000 1,500 2,000 2,500 3,000 3,500
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Figure 5.14: Combinatory table of NPV @5% for gold equivalent grade equal to 10.50
grams per tonne, in MM$
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Discount rate = 5%
Figure 5.17: Clustered bubble graph for gold equivalent grade equal to 6.50 grams
per tonne
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Figure 5.18: Clustered bubble graph for gold equivalent grade equal to 10.50 grams
per tonne
5.6.2 Analysis
These results can be directly related to the available quantity of high-grade ore in
each model. This is illustrated in gure 5.19 in which the average grades of the three
models are plotted as a function of the level of production.
The grades can be transformed into NSRs by multiplying them by a factor of
$9.60 per gram corresponding to the long-term expected gold price of $400 per ounce,
thus resulting in a graph similar to the average revenue curve presented in gure 3.4.
These unit revenues can now be combined to the average cost curves of gure 4.22
to create the average revenue and cost curves in gure 5.20. This gure shows that,
for a gold price of $400 per ounce and a production rate of 1,500 tonnes per day, the
low-grade case has ve million tonnes of ore with a value higher than the average
5
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High-grade case
Base case
Figure 5.19: Average gold grade as a function of the level of production for the three
cases used in the sensitivity analysis
cost. For the base and high-grade cases, the reserves are equal to 8 and 13 million
tonnes. Thus the greater the reserves, the greater the tendency to operate the mill
at full capacity.
The marginal revenue and cost curves are drawn in gure 5.21, and this graph
might bring some insight into the results of the simulations. As discussed by Gray [28],
Hotelling [34] and others, an operation will maximize its value when the marginal
revenue is equal to the marginal cost when the discount rate is nil or very small, as
is the case under study. For the low-grade case, the intercept between the revenue
and cost curves is at two million tonnes and 1,500 tonnes per day. For the base case,
the lowest intercept occurs at 4 Mt and 2,500 tpd, and for the high-grade case, at 7
Mt and 3,500 tpd. These intercepts correspond closely to the coordinates with the
highest concentrations of results in each simulation.
80
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Figure 5.20: Average revenues and costs as a function of the level and rate of pro-
duction for the three cases used in the sensitivity analysis
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Figure 5.21: Marginal revenues and costs as a function of the level and rate of pro-
duction for the three cases used in the sensitivity analysis
One can now imagine how the marginal revenue curves move laterally as gold
prices change in the simulations, yielding new solutions each time. The compilation
of all solutions obtained is comparable to the bubble graphs presented. Based on these
observations, there seems to be a correlation between the results of the simulations
and the marginal analysis.
5.7 Design analysis
Table 5.5 summarizes the design parameters for the three cases under study. In
the rst instance, the highest percentage combinations are reported, and secondly,
high-probability operating ranges are indicated.
Table 5.5: Design parameters for the cases studied
Average gold
equivalent grade
Best case
combination
Percentage Operating
range
Percentage
(g/t) (tpd - mt) (%) (tpd - mt) (%)
1250 - 1.50
2000 - 3.00
1750 - 2.50
2500 - 4.00
2500 - 4.00
3500 - 7.50
10.5 3500 - 6.00 14% 42%
8.52 2250 - 3.50 9% 35%
6.5 1750 - 2.50 17% 56%
It is apparent that no single design is robust. It would be dicult to convince a
mine manager that a design with 15% probability is the one to use, even though it
is the highest percentage available. It would be necessary to look at the proposed
operating ranges where the combined probabilities are more signicant.
For the base case, the mine could be designed at 2,500 tonnes per day and 4,000,000
tonnes. This is based on the general consideration related to the possible exibility
that could be built into the tactical plan. By limiting the mine to 2,500 tpd, and by
applying the concepts discussed at the end of the previous chapter, the operations
would have exibility to modify its budgeting parameters while still keeping all the
robustness of the plan. A more conservative evaluator may decide that the design
should be made at 2,000 tonnes per day and 3,000,000 tonnes with similar reasoning.
Nonetheless, it is clear that the possible solutions are located within a very narrow
range between 1,750 and 2,500 tpd. This model and simulations have provided this
very useful information.
Applying the same logic, the low-grade case design would be set at 1,750 tpd
and 2,500,000 tonnes. The high-grade case would be set at 3,500 tpd and 6,000,000
tonnes.
5.8 Summary
It was shown that the simulation run on the gold-equivalent model resulted in a
continuous distribution of solutions as originally thought, and that the hot spots
generated in the work of the previous chapter were due to discontinuities in the
revenue functions.
The transformation of the copper to a gold equivalent resulted in much higher
net present values as the copper concentrate treatment and rening charges were
eliminated. This shows that one must be aware of all related charges when one
decides to work with metal equivalents in the evaluation of a deposit.
A higher mean-reversion factor had little inuence on the net present value. How-
ever, it had the eect of eliminating the combinations related to high gold prices far
in the future. It also resulted in shifting the high concentrations of results to the right
of the bubble graph.
A higher discount rate had the expected eect on the net present values, resulting
in slightly lower values. In the bubble graphs, the higher discounting had a similar
eect to that of the mean-reversion factor with the elimination of the high future gold
price eect.
It was also shown that the solutions are sensitive to the average grade of the
deposit, and that the concentrations represented on the bubble graphs tend to shift
position as the average grade is varied.
None of the solutions are particularly robust however, and it is much easier to
identify an operating range than a single design parameter. The level of risk-adversity
of the mine manager would play a great role in nalizing the choice.
Chapter 6
Conclusions and Recommendations
The objective of this thesis was to develop a methodology to select the cut-o grade
and production rate of a mine under conditions of metal price uncertainty. It was
demonstrated that the approach and procedures developed in this thesis produce
results that can be used for selecting these strategic parameters and come up with a
nal design. This process is very important as a design tool as it provides information
to the mine manager that is not currently available through standard sensitivity
and risk analysis. The method pinpoints the design criteria that will increase the
robustness of the mine, by increasing its ability to survive under conditions of various
possible metal prices.
This chapter reviews the original elements that were incorporated in order to
make this work possible, discusses the conclusions that can be drawn from this work,
and proposes several lines of research to expand on the possible applications of this
research.
182
CHAPTER 6. CONCLUSIONS AND RECOMMENDATIONS 183
6.1 Contributions
Some existing concepts were reviewed and expanded upon, other concepts were born
of necessity in order to solve specic problems encountered in this work, and the
nal improvements were developed with the objective of deriving a general solution
to the problem set in this thesis. This section summarizes the new elements that are
introduced.
Addition to the existing models For the past one hundred years, most of the
models have been concentrating on selecting production rates such that the net
present value of the mine is maximized for specied metal prices. More recently,
models were introduced where the objective was to solve for the cut-o grade or for
the combination of both parameters. There has been less literature dealing with
conditions of metal price uncertainty, and only recently has Samis [55] dealt with
robustness by developing a methodology to establish the production rate and cut-o
grade of a deposit under these conditions. This present work adds to the existing
models by going beyond the study of xed mine plans and by determining at the
design stage which strategy would be the most robust.
Development of a novel analysis of polymetallic grade-tonnage relation-
ships In general in the industry, and as discussed by Baird and Satchwell [3], metal
grades are transformed into dollar values and resource blocks are sorted on this mea-
sure. Obviously, this system works only if metal prices are assumed. Since this is not
the case in this work, a new method was developed to analyze metal distributions
and to determine the main metal on which to sort resources.
Establishment of the relationship between the grade-tonnage relationship
and the revenue function It was demonstrated that there is a direct correlation
between the grade-tonnage curves representing the distribution of resource blocks
and the average and marginal revenues as a function of the level of production. This
relationship is useful to understand metal distributions in polymetallic deposits and
to do marginal prot analysis.
Generation of a new underground capital and operating cost classica-
tion scheme The schemes presented in literature are derived from general micro-
economics principles where xed costs are not as sensitive to production rates vari-
ations and where capital development is not considered. The proposed scheme de-
scribes much more accurately the existing relationships.
Creation of a methodology to choose the production rate and the cut-
o grade of an underground mine under conditions of metal price uncer-
tainty A new methodology was developed permitting determination of the most
robust combination of production rate and cut-o grade such that the design has the
best possibility of success independently of future metal prices.
6.2 Conclusions
As this work was progressing, many problems were encountered and their solutions
brought some insight on the general process. This section discusses these aspects.
More comprehensive classication of costs in a narrow-vein underground
mine The major cost classication systems found in literature tend to regroup costs
into major components (variable and xed operating, and capital) and very often
concentrate in solving problems by varying only the variable operating costs. The
cost classication discussed here is much closer to the actual cost accounting found
in operating mines, and the relationship between these costs and the main design
parameters is important to solve the relationship between capital and operating costs
and production rates and cut-o grades.
Problems related to the grade-tonnage analysis of a polymetallic deposit
Polymetallic deposits are usually analyzed by converting the various metal grades
into revenues, and classifying the resource blocks by value. However, this requires the
engineer to make assumptions about metal prices, and this assumption is voluntarily
not made in this study. Thus another approach must be developed to classify resources
as a function of the level of production.The solution provided in this thesis is based
on the study of the distribution of each metal contained within low-grade resource
blocks, and it ensures that few high-value blocks are left behind in the mine. The
method is not perfect and there is room for improvement when detailed analysis of
sectors is conducted during the tactical planning phase.
Limits of the feasible area In this study, the feasible area was dened by three
constraints, the available resources, the mill capacity, and the ability to have enough
development fronts to sustain a given production rate. Apart from the available
resources, these constraints are not universal and would change from case to case. For
example, this exercise may be done on a grass-roots project where no infrastructure
is present and therefore no milling capacity is preset. Would it be reasonable to
assume that the milling restriction could be replaced by a sustainable production
rate restriction, something akin to Taylors rule where the production rate would
increase as a function of the level of production? As for deposits that require a very
strict control on the sequence of extraction, could there also be a rock mechanics
or mine sequence constraint that would reduce the sustainable production rates as
a function of the level of production?
Robust solutions The PeaRL procedure yielded solutions in every case tested,
with actual and hypothetical mine data. The results obtained during the sensitivity
analysis of the hypothetical mine mimic the behaviour of Taylor Type A mines as is
observed broadly in the industry. In general, low-grade deposits tend to be mined by
extracting the high-grade ore using high operating costs and low production rates,
whereas high-grade deposits are mined at higher production rates while trying to
recover as much of the resource as economically possible by using lower-cost bulk
mining methods. However, one would contend that is common sense mining and not
necessarily robustness. It is obvious that an operator with many years experience will
have a good idea of how a mine should be designed, and this design might include,
purposefully or otherwise, some degree of robustness. However, PeaRL will dene the
operating parameters more objectively than reliance on instinct.
Low probability of one robust design The results of the simulations done on
the hypothetical mine showed that it is very complicated to come up with one specic
design and that the level of risk adversity of the manager may play an important role
in the nal selection within a reasonable range of possible solutions. A risk-adverse
manager might want to expand the mine at a later date if the operating results are
good, while this work proposes that further capital spending be avoided.
Inuence of all metals on the solution for a polymetallic orebody It seems
very evident from the work done in this thesis that equivalent metal grades should
not be used for evaluating an orebody. Metal price behaviour, mineral processing
recoveries, and treatment and rening charges are signicantly dierent for each one,
and thus revenue functions should be estimated for each major metal in an orebody.
Baird and Satchwell [3]s approach might be justied in deposits where one metal
dominates all others but it is necessary to understand the inuence of all metals,
not just in the geological context as discussed previously, but also in the economical
aspects.
Sensitivity to the discount rate and the mean-reversion factor Higher
mean-reversion factors and discount rates tighten the distribution of possible combi-
nations in the bubble graph by eliminating the possibility of having high metal prices
in the future or by decreasing their eect. However, their eect on the solution is
very weak.
6.3 Future work
The methodology presented here is denitely not limited to narrow vein mines and
some possible applications are presented here.
Development of the tactical planning methodology based on the results of
the strategic design Once a strategic design has been chosen, the resource base
is reduced to reect what is readily available within the limits of the envelope of the
mine development. While the mine is in operation, metal price variations will occur
and the mine manager will want to maximize cash ows by varying the cut-o grade
and at times reducing the production rate. The notes on tactical planning that are
presented at the end of chapter 4 should be expanded upon in order to develop a
practical methodology.
Expansion of this methodology to include underground Taylor type B de-
posits Taylor type B deposits are more compact and grade distributions in space
are more continuous, meaning that their sensitivity to capital development and min-
ing operating costs should be lower. The solution to the problem now becomes a
boundary problem where the question could be simplied to determining the lateral
extent of the development and guring out the rate at which to mine it.
Expansion of this methodology to consider grass-root projects at the fea-
sibility stage As discussed above in the conclusions, a dierent set of constraints
must be understood to dene the feasible area, reecting the productive limits of
an orebody as a function of its shape and size and the restrictions dictated by the
sequence of extraction.
Expansion of this methodology to include open pit mines The computerized
systems used in open pit optimization can determine production phases and nal pit
limits such that the net present value is maximized for a given set of metal prices. In
the absence of this set of prices, the problem becomes the identication of the nal
envelope to be mined.
Evaluation of the sensitivity to Real Options In this model, very high metal
prices occurring far into the future result in combinations where the mine operates
a very low production rates for a very long time in order to take advantage of those
prices. In practice, this would never happen as the mine operator would certainly
choose to postpone the operation to a later date rather than operating at a loss
in the present. The work of Brennan and Schwartz could be incorporated into the
methodology developed in this thesis to evaluate the impact of incorporating the
postponement of mining the deposit.
Also, the application of individual discount rates to the various components of
the cash ow equations, reecting the risk directly related to each component, could
be studied as a comparison with the classic method used in Discounted Cash Flow
analysis.
Evaluation of the sensitivity to Conditional Simulation In this thesis, it is
assumed that the mine operator has perfect information on the resources and the
individual resource blocks, but in practice, the grade of each resource block will
vary from its estimate. Conditional simulation could be incorporated to measure the
sensitivity of the methodology to the uncertainty of the resource estimation.
Inclusion of operating and capital cost variations in the simulation In
this thesis, it is assumed that the operating and capital costs are well known; a more
complete analysis should include the addition of these two factors. It seems reasonable
to assume that the results would show more diusion.
Comparison of mutually-exclusive scenarios In essence, the model compares
many possible mine operating conditions in order to choose the best alternative.
By extension, this model could be used to compare two or more mutually exclusive
investment alternatives. Some examples:
Keep operating the mine at current levels or go ahead with a mill expansion to
increase the production rate in the future. The mine would build a life-of-mine
plan for each alternative, and the methodology would determine which of the
two is more robust to metal price variations.
A large mining company may have many projects under consideration, but
may be constrained by the cash available. Projects could be ranked using this
model, thus providing one more tool to make decisions. Furthermore, projects
with low rankings could be redesigned and tested with this methodology in
order to increase their general robustness before being presented again to the
board.
6.4 Closing remarks
This thesis addressed some problems that had been bothering the author for many
years. Throughout the development of this thesis, he was able to elaborate on con-
cepts in ways that cannot be done while working in the industry, and he hopes that
some of these tools can now be transferred back to the mines and that they can
stimulate the imagination of other engineers.
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Appendix A
Modeling Procedures
This appendix provides a summary of the procedures to follow for the construction
of the mine model and for the execution of the PeaRL simulation.
A.1 Model construction procedures
This section deals with the information to gather and the steps to follow to prepare
the mathematical model prior to the execution of the simulation.
1. Estimate the diluted and recovered resources on a block by block basis;
2. Draw the grade-tonnage curves for the orebody. Identify the primary metal in
case of a polymetallic deposit;
3. Spatially locate the position of each resource block within the mine;
4. Estimate the lateral and vertical infrastructure required to put each fraction of
the resources as a function of the level of production and calculate the capital
cost;
201
APPENDIX A. MODELING PROCEDURES 202
5. Determine the mining method required to mine each resource block, the regular
development required, and the production expected to come from ore develop-
ment and from stoping activities. Estimate the corresponding operating costs;
6. Estimate the development and mining operating costs as a function of the level
of production.
7. Estimate the capital and operating costs of mine services, milling, and on-site
costs as a function of production rates and levels.
8. Determine the mill recoveries and smelter contracts.
A.2 Simulation procedures
Once the functions are established, the procedures to run the simulation are:
1. Establish the parameters of the metal price model: long-term average price,
degree of reversion, and variance of the short-term price variations.
2. Determine the number of simulations to run in order to get signicant results.
3. For each simulation, generate a series of annual metal prices, and determine
which combination of rate and level of production yields the highest net present
value.
4. Plot the relative frequencies of all answers obtained in the simulations in a
bubble graph format.
5. Identify the highest-frequency combination and analyze the graph to establish
the nal solution.
Appendix B
Capital Development
At continuation, the longitudinal projections of each mine show the position of the
resource blocks relative to the existing mine infrastructure. This appendix is divided
into three sections, one for each mine. In each section, a general outline of the
lateral infrastructure shows the elevation and lateral extent of the main levels and
the position of the ramp along which ore and waste are hauled either to surface or
to ore and waste passes. Afterwards, sixteen gures show the position of resource
blocks according to the level of production, starting with the best one million tonnes
and increasing in increments on one million tonnes until all resources are shown. The
blocks of all veins in a given mine are projected on the longitudinals since they all
are dependent on the transport drifts to be put in production.
Each resource block is represented by a single point corresponding to the bottom
elevation of the centre of the block. This point could be considered as the initial
entry point for production purposes, and therefore, it represents the extent to which
a transport drift would have to be developed in order to put that block in production.
The capital development necessary to put the blocks associated with a given level
203
APPENDIX B. CAPITAL DEVELOPMENT 204
of production is equal to the metres of ramp to reach that level, the lateral drifting
required to reach the blocks and the raises necessary to supply ventilation to them.
B.1 Mine A
Mine A has lateral development extending from section -250 to section 850 metres
at various elevations between 150 and 560 metres, accessed either through adits or
from the main ramp centered on section 0. Accessing resource blocks located above
elevation 270 would entail extending the existing drifts laterally, and blocks located
below that elevation would require driving the ramp downwards and establishing new
transport drifts. These blocks would be mined by longhole and the transport drifts
would be located every 30 metres.
When all resource blocks are considered, the mine extends between sections -230
and 825 metres and between elevations 30 and 550.
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Figure B.1: Mine A, General outline of lateral infrastructure
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Figure B.2: Mine A, Level of production = 1 million tonnes
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B.2 Mine B
Mine B is located close to Mine A, and shares the same main ramp. The existing
infrastructure extends from section -380 to 180 metres and from elevation 140 to 560.
When all resource blocks are considered, the mine extends from section -450 to section
180 and from elevation -100 to 560 metres. In that mine, the ground in some sectors
is classied as fair and for that reason, only 20 metres separate the levels in those
areas.
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Figure B.18: Mine B, General outline of lateral infrastructure
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Figure B.19: Mine B, Level of production = 1 million tonnes
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B.3 Mine C
Mine C is located at a certain distance from the other two mines. It has its own
independent ramp extending between elevations 290 and 560 metres. The existing
transport drifts extend from section -230 to 775 metres. The resource blocks limits are
sections -338 to 930 and elevations 80 to 580. Lower resources are mined by longhole,
with 15-metre level intervals adjacent to the current infrastructure and increasing to
30 metres at lower elevations.
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Figure B.35: Mine C, General outline of lateral infrastructure
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Figure B.36: Mine C, Level of production = 1 million tonnes
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Appendix C
Production & Development
Indicators
Three main indicators are required to determine the relationships between regular
development, production, and costs as a function of the level of production. They
are metres of regular development (ore and waste) required to put a tonne of ore
resource in production, the percentage of this development located in ore, and the
tonnes of ore generated per metre of ore development. These indicators are constants
for each mining method and for each vein. In this appendix, the concepts of ore and
waste regular development are dened for each mining method, then the constants
are calculated and are combined with the resource block database to generate the
production, development and costs functions.
In longhole mining, the typical development of a stope consists of developing two
levels, one at the top elevation and another at the bottom. On both elevations,
development typically includes the access from the main infrastructure to a point
approximately located 10 metres away from the stope. A drift that extends for the
231
APPENDIX C. PRODUCTION & DEVELOPMENT INDICATORS 232
length of the stope is set up parallel to the ore. From this drift, cross-cuts are driven
into the ore at every ten metres, and a drift is driven on the vein for the whole length
of the stope. A slot raise is sunk in the ore at an extremity of the stope as a last step
before the start of production. The vertical separation between the two elevations
can vary between 16 and 20 metres at the mine, according to the quality of the rock
mass and the variation of the method that is used.
Ramp-in-vein cut and ll is commonly used at the mine, with some minor use
of conventional mechanized cut and ll. Ramp-in-vein are usually 20 metres high,
and requires waste access drifts at the bottom and at the top of the stope. The
bottom drift accesses the ore where the whole length of the stope is developed; this
cut is considered as development. All other cuts above this one are considered as
production.
In pillar recovery, there are no hard rules as this is more of a scavenging operation
than a strict mining method. In general, a drift is driven from the infrastructure to
the ore on the bottom elevation. A drift in ore is driven along the length of the stope.
Often, no more development is required, however, sometimes a ramp might be driven
in the waste to gain access of the upper elevation of the stope.
From the descriptions of the mining methods and required development, one can
understand that the metres of development per tonne of ore indicator is a function
of the size of the stopes and the distance separating the individual veins and the
infrastructure. In relative terms, cut and ll stopes are generally the biggest stopes,
followed in size by longhole and then by pillar recovery. The second indicator, per-
centage of development done in ore, would tend to be higher for longhole mining
given the fact that and overcut and undercut are required, compared to the other two
methods where only one ore drift is driven. As for the third indicator, tonnes of ore
per metre of ore development, this would be independent of the mining method, and
directly related to the type of mineralization and the width of the vein.
C.1 Metres of development per tonne of ore
The best way to calculate this indicator would be to take the block plan of each
individual stope or mine sector and average the numbers out over all the projects,
but this information was not available. However, long-term mine plans incorporate
all the information contained in these block plans, and thus became the source of
information. Plans from 1997 to 2001 were used. The compiled data is in table C.1.
It is worth noting that these numbers are compiled for a resource of 2.9 million tonnes,
a small subset of the total resource, but the overall average indicator (expressed as
metres per 1,000 tonnes of ore for sake of simplicity) seem reasonable at ten meters, an
average that the author encounters in many operations. However, closer examination
of the numbers is warranted.
Starting with cut and ll, vein A5 seems high, but one must consider that that
vein is fairly remote and that a lot of waste development is required to reach it.
Meanwhile, vein B1 seems high and veins B4 and B5 seem low. One must consider in
this case that all three veins are closely related and that they share development. It
would be logical to consider all three together. Overall, it seems right that vein A5
averages more than twice the average of the other veins. Therefore, for calculation
purposes, vein A5 is set at 14.8 metres per 1,000 tonnes and all the other veins are set
at 6.3 (see table C.2). These numbers make sense given the nature of ramp-in-vein
cut and ll with short crosscuts to the ore and the stope undercut.
Table C.1: Calculations of development per tonne indicators
Metres development Tonnes mined metres per 1,000 tonnes of ore
method vein ore waste Total Total ore waste Total
Cut & Fill A2 205 65 270 29,215 7.0 2.2 9.2
A3 202 89 291 50,611 4.0 1.8 5.7
A4 859 403 1,262 139,058 6.2 2.9 9.1
A5 275 275 18,600 0.0 14.8 14.8
A6 100 190 290 58,462 1.7 3.2 5.0
B1 50 133 183 13,525 3.7 9.8 13.5
B2 101 101 13,151 0.0 7.7 7.7
B4 110 110 48,205 0.0 2.3 2.3
B5 35 295 330 95,260 0.4 3.1 3.5
Cut & Fill Total 1,451 1,661 3,112 466,087 3.1 3.6 6.7
Longhole A1 237 134 371 27,151 8.7 4.9 13.7
A2 1,992 1,449 3,441 373,899 5.3 3.9 9.2
A3 41 41 11,184 3.7 0.0 3.7
A4 20 20 9,600 2.1 0.0 2.1
A6 1,935 2,303 4,238 259,619 7.5 8.9 16.3
B4 1,185 634 1,819 301,287 3.9 2.1 6.0
B6 1,536 768 2,304 253,365 6.1 3.0 9.1
C1 1,300 1,616 2,916 178,120 7.3 9.1 16.4
C2 1,659 2,343 4,002 193,094 8.6 12.1 20.7
C3 2,822 2,453 5,275 753,514 3.7 3.3 7.0
Longhole Total 12,727 11,700 24,427 2,360,833 5.4 5.0 10.3
A2 150 858 1,008 31,796 4.7 27.0 31.7
A3 83 101 184 3,600 23.1 28.1 51.1
A4 6,450 0.0 0.0 0.0
B1 55 184 239 3,240 17.0 56.8 73.8
B2 89 30 119 12,310 7.2 2.4 9.7
pillar Total 377 1,173 1,550 57,396 6.6 20.4 27.0
Grand Total 14,555 14,534 29,089 2,884,316 5.0 5.0 10.1
Pillar
Recovery
Table C.2: Development per tonne indicators
Vein Cut & fill Longhole Pillar
recovery
A1 6.3 13.7 27.0
A2 6.3 9.2 27.0
A3 6.3 2.9 27.0
A4 6.3 2.9 27.0
A5 14.8 2.9 27.0
A6 6.3 16.3 27.0
B1 6.3 2.9 27.0
B2 6.3 2.9 27.0
B4 6.3 7.4 27.0
B5 6.3 2.9 27.0
B6 6.3 7.4 27.0
C1 6.3 18.6 27.0
C2 6.3 18.6 27.0
C3 6.3 7.0 27.0
For longhole stoping, veins A1, A6, C1, and C2 seem high, but they are all reason-
able numbers since the longhole sectors of veins A1 and A6 are located far from the
infrastructure, and veins C1 and C3 are very narrow and have fewer tonnes on which
to average out the development. Veins A3 and A4 are very small, but the longhole
sectors are remnants of cut and ll stopes requiring very little development to put in
production.
Pillar recovery information is very sparse and it was decided that the average of
27 metres per 1,000 tonnes was reasonable and should be applied to all veins.
Table C.2 list the indicators used for further calculations.
C.2 Percentage of ore coming coming from devel-
opment
Production sent to the mill comes from two sources, the development done in ore and
the stoping activities. In general, the ore produced by development costs more that
by stoping, and development needs to be minimized in order to generate more prots.
However, this proportion can vary given the size of the stopes and the spacing between
sublevels. Using the same source of information as previously, the initial estimation
of the proportions is presented in table C.3, and the nal indicators are listed in
table C.4.
The numbers show a lot of spread, it would be better to compile the data for
similar circumstances. In a cut and ll stope, only the rst cut of a stope is considered
development. For a level spacing of 20 meters, one cut of 4 metres followed by 16
metres stope corresponds to a 4 20 or 20% ratio. However, many stopes are not
bounded by levels and can go much higher. Therefore, the average of 17% seems
reasonable. Pillar stopes need very little ore development given the type of operation
they represent. The 7% average seems reasonable. Longhole stopes can be broken
down in sectors. Mines A and B copper veins, Mine C gold veins C1 and C2, and vein
C3. Mines A and B copper veins have 20 metres sublevels, vein C3 has 25 metres,
and veins C1 and C2 are narrow with a lot of internal dilution in development. In
all cases, development consists of an undercut and an overcut, but since the overcut
counts as the next stopes undercut, and that in general four sublevels are needed per
three stopes, one must assume one and one third development per stope. Using these
numbers, the theoretical numbers are quite similar to the calculated ones.
Table C.3: Calculations of percentage production coming from ore development
Source
method vein Development Production Total % dev/total
Cut & Fill A2 9,350 19,865 29,215 32%
A3 8,521 42,090 50,611 17%
A4 31,405 107,653 139,058 23%
A5 0 18,600 18,600 0%
A6 10,262 48,200 58,462 18%
B1 0 13,525 13,525 0%
B2 0 13,151 13,151 0%
B4 4,490 43,715 48,205 9%
B5 0 95,260 95,260 0%
Cut & Fill Total 64,028 402,059 466,087 14%
Longhole A1 14,376 12,775 27,151 53%
A2 92,471 281,428 373,899 25%
A3 1,394 9,790 11,184 12%
A4 0 9,600 9,600 0%
A6 87,039 172,580 259,619 34%
B4 65,597 235,690 301,287 22%
B6 65,750 187,615 253,365 26%
C1 55,820 122,300 178,120 31%
C2 44,149 148,945 193,094 23%
C3 120,348 633,166 753,514 16%
longhole Total 546,944 1,813,889 2,360,833 23%
A2 5,201 26,595 31,796 16%
A3 0 3,600 3,600 0%
A4 0 6,450 6,450 0%
B1 0 3,240 3,240 0%
B2 0 12,310 12,310 0%
pillar Total 5,201 52,195 57,396 9%
Grand Total 616,173 2,268,143 2,884,316 21%
Pillar
Recovery
(Tonnes)
Table C.4: Calculations of percentage production coming from ore development
Vein Cut & Fill Longhole Pillar Recovery
A1 14% 26% 9%
A2 14% 26% 9%
A3 14% 26% 9%
A4 14% 26% 9%
A5 14% 26% 9%
A6 14% 26% 9%
B1 14% 26% 9%
B2 14% 26% 9%
B4 14% 26% 9%
B5 14% 26% 9%
B6 14% 26% 9%
C1 14% 27% 9%
C2 14% 27% 9%
C3 14% 16% 9%
C.3 Tonnes of ore per metre of ore development
Since veins have various horizontal width and mineralogy, it is important to know how
many tonnes of ore are generated in one metre of ore development. The horizontal
width of each stope varies, meaning that the proportion of ore to waste also varies for
a constant development cross-section; and the specic density of the mineralization
also changes wether the ore is in quartz or in sulde. By combining them, the number
of tonnes of ore per metre advance in a stope changes based on the mining method
and the vein.
The procedures to calculate this indicator are as follows. Based on the monthly
data collected from 1997 to 2001, match the number of metres developed and the
tonnes of ore reported per heading. Sum up each heading over its life, and add up
all the headings as a function of the vein and mining method. The tonnes of ore per
metre of ore development is calculated by dividing the tonnes by the metres. The
Table C.5: Tonnes of ore per metre development data
Cross sectional area of ore development Specific density Tonnes per meter advance in ore
(square metres) (tonnes per cubic metre)
vein cutfill longhole pillar cutfill longhole pillar cutfill longhole pillar
A1 10 3.57 36 X X
A2 12 14 10 2.77 3.26 2.77 33 46 29
A3 11 12 15 2.91 2.84 2.38 33 34 35
A4 12 3.00 35
A5 X
A6 13 14 3.41 3.41 44 47 X
B1 X X
B2 X X
B3 X
B4 14 3.86 X 53 X
B5 X X X
B6 16 3.26 X 52 X
C1 15 2.60 40
C2 13 2.71 35
C3 15 3.62 54 X
data is summarized in table C.5. Unfortunately, not all the combinations of vein and
mining methods are evaluated by this approach, as indicated by the letter X in the
last table.
The only way to x this is by applying factors based on the experience of the mine
engineers and geologists of the mine.
Vein A1 is a massive sulphide and its thickness increases with depth. In the
case of longhole, the cross-sectional area of development would be in the order
of 14 square metres giving a factor of 48 tonnes per metre. Pillar recovery would
occur near the top of the vein in narrower ore and a lot of internal dilution would
be taken in development, thus reducing the specic density. It is estimated that
31 t/m would be produced.
Vein A5 is a narrow quartz vein and the indicator in cut and ll would probably
be very similar to other cut and ll in similar veins. Use 37 t/m.
Vein A6 is a massive sulde with narrow width near the top where pillar recovery
would be conducted. Use 31 t/m as in the case of A1.
Vein B1 is a narrow quartz vein. For cut and ll, use the same factor as for vein
A5, and for pillar recovery, use 31 t/m.
Veins B2 and B3 are similar to vein B1, use the same factors.
Veins B4, B5, and B6 are similar to vein A6 but narrower near the top where
selective mining is conducted. Use 37 t/m for cut and ll and 31 t/m for
pillar recovery. In the case of longhole mining in vein B5, the vein is somewhat
narrower than veins B4 and B6, and the factor is reduced marginally to 48 t/m.
Vein C3, pillar recovery is conducted in the narrower upper portion of the vein
and is assigned the same as the other veins, 31 t/m.
Table C.6 shows the factors that are used for the rest of calculations. The author
judges that, though many numbers seems to be judged arbitrarily, the error is not
more than 15% and does not have a signicant impact.
C.4 Compilation of data
With these three indicators in place, it now becomes possible to apply these factors
to each resource block in the database to calculate the following:
Breakdown of resource tonnes into development and stoping tonnes;
Metres of regular development associated with each block;
The variable stoping cost; and
Table C.6: Final table of tonne of ore per metre development
(tonnes per meter advance)
vein cutfill longhole pillar
A1 36 48 31
A2 33 47 35
A3 33 34 42
A4 35
A5 37
A6 43 45 31
B1 37 31
B2 37 31
B3 37
B4 37 55 31
B5 37 48 31
B6 37 52 31
C1 41
C2 35
C3 55 31
The variable regular development cost.
The database can now be queried to determine these four factors as a function of
the level of production.
Appendix D
Metal Price Model Validation
Shannon [58] suggested that a model is valid if it has face validity, does not generate
absurd answers, and generally looks right. The argument presented here is that the
model ts well with the observed prices of the last thirty years. Obviously, the future
cannot be predicted from the past, but a solid base is at least set.
The gold model is compared to actual prices starting in 1980 in gure D.1 and
1994 in gureau1994,
1
and copper is shown starting in 1975 in gure D.3 and in 1994
in gure D.4.
In general, the models seem to t well with past behaviour, and it could be
conceived that they will represent adequately future price uctuations.
1
1994 is chosen a a reference year because it is the start of price modeling for the project; the
rst year of the plan is 1996, and the model should be constructed 6 months earlier in June 1995,
so the latest annual average price available is 1994.
242
APPENDIX D. METAL PRICE MODEL VALIDATION 243
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$
/
o
z
)
minimum price = $250
Expected price
Actual price
Figure D.1: Gold price model starting in 1980
0
100
200
300
400
500
600
700
800
900
1000
1980 1985 1990 1995 2000 2005
Year
A
v
e
r
a
g
e

a
n
n
u
a
l

g
o
l
d

p
r
i
c
e

(
$
/
o
z
)
minimum price = 250
Expected price
Actual price
Figure D.2: Gold price model starting in 1994
APPENDIX D. METAL PRICE MODEL VALIDATION 244
0
20
40
60
80
100
120
140
160
180
1975 1980 1985 1990 1995 2000 2005
Year
A
v
e
r
a
g
e

a
n
n
u
a
l

c
o
p
p
e
r

p
r
i
c
e

(
c
e
n
t
s

/

l
b
)
minimum price = 50
Expected price
Actual price
Figure D.3: Copper price model starting in 1975
0
20
40
60
80
100
120
140
160
180
1975 1980 1985 1990 1995 2000 2005
Year
A
v
e
r
a
g
e

a
n
n
u
a
l

c
o
p
p
e
r

p
r
i
c
e

(
c
e
n
t
s

/

p
o
u
n
d
)
minimum price = 50
Expected price
Actual price
Figure D.4: Copper price model starting in 1994
Appendix E
Development Constraint
The objective in this part is to establish the relationship existing between the quantity
of ore to extract in a mine plan and the capacity to develop it such that a given
mining rate can be sustainable over the life of the project. As the level of production
decreases, so does the number of headings available for development, thus limiting
the potential daily production rate. Any attempt to increase the development rate
beyond the sustainable rate only leads to ineciencies and higher unit costs, without
any benets to production.
The data available to establish the relationship consists of a series of life-of mine
plans and annual budgets, listed in table E.1.
Figure E.1 shows a correlation between production rate and production level for
production levels up to 6,000,000 tonnes. Above that level, production rates stay
constant at 3,300 tonnes per day as that is the installed capacity of the mine. The
equation of the regression curve is similar to that developed by Taylor [67], with the
power of this equation established at 0.56 versus a power of 0.75 for Taylor. Figure E.2
shows the correlation between annual development capacity and production rates
245
APPENDIX E. DEVELOPMENT CONSTRAINT 246
Table E.1: Annual development
Year Plan Reserves Production Rate Development
(tonnes per day) (metres per year)
1999 Annual Budget 750 2,000
2000 Life-of-mine 700,000 1,000 4,000
2000 Annual Budget 1,000 5,800
2001 Life-of-mine 1,000,000 1,200 8,000
1998 Annual Budget 1,680 5,700
1998 Life-of-mine 2,400,000 2,200 11,000
1995 Annual Budget 3,050 14,000
1994 Life-of-mine 5,300,000 3,100 12,000
1996 Life-of-mine 6,000,000 3,300 19,000
1997 Life-of-mine 12,000,000 3,300 16,000
1997 Annual Budget 3,300 22,000
based on the data from budgets and life-of-mine plans. The regression shows a factor
of approximately 5 metres of development per daily tonnes of ore.
A relationship between the upper limit of annual development and the production
level is deduced from these two functions, as shown in gure E.3. This function
is valid for production levels less than 6,000,000 tonnes, and for higher levels, the
development rate is equal to 17,300 metres.
Using these development rate limits, the minimum mine life and the maximum
production rate as a function of production levels can be calculated. To simplify
calculations, the production rates are increased to the next higher increment of 500
tonnes per day. These constraints will be used in the simulations. The numbers are
summarized in table E.2.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
0 2 4 6 8 10 12
Production level (million tonnes)
P
r
o
d
u
c
t
i
o
n

r
a
t
e

(
t
o
n
n
e
s

p
e
r

d
a
y
)
rate = 0.5185 x level
0.5628
R
2
= 0.9923
Figure E.1: Production rates vs. reserves
0
5
10
15
20
25
0 500 1,000 1,500 2,000 2,500 3,000 3,500
D
e
v
e
l
o
p
m
e
n
t

(
'
0
0
0

m
e
t
r
e
s

p
e
r

y
e
a
r
)
Dev = 5.1 * rate
R
2
= 0.84
Figure E.2: Development rates vs. production rates
0
2
4
6
8
10
12
14
16
18
0 1 2 3 4 5 6 7
D
e
v
e
l
o
p
m
e
n
t

r
a
t
e

(
'
0
0
0

m
e
t
r
e
s

p
e
r

y
e
a
r
)
Dev = 2.64 * level
0.5628
Figure E.3: Development rates vs. production levels
Table E.2: Maximum production rate
Production Total Maximum Minimum Maximum
level development development mine production
rate life rate
(tonnes) (metres) (metres per year) (years) (tonnes per day)
1,000,000 17,600 6,300 3.0 1,000
2,000,000 33,400 9,300 3.8 1,500
3,000,000 47,600 11,700 4.3 2,000
4,000,000 60,600 13,700 4.7 2,500
5,000,000 72,600 15,600 4.9 3,000
6,000,000 83,900 17,300 5.1 3,500
7,000,000 94,700 17,300 5.7 3,500
8,000,000 105,200 17,300 6.3 3,500
9,000,000 115,500 17,300 6.9 3,500
10,000,000 125,800 17,300 7.5 3,500
11,000,000 136,100 17,300 8.1 3,500
12,000,000 146,600 17,300 8.7 3,500
13,000,000 157,300 17,300 9.3 3,500
14,000,000 168,100 17,300 10.0 3,500
15,000,000 179,000 17,300 10.6 3,500

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Strategic Design of an Underground Mine

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Figure 2.23: Example of mean reversion

t where is a normally distributed

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