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MinE 408: MCS, slides adapted from

Dr. Clayton Deutsch:


MIN E 310: Ore Reserve Estimation
Monte Carlo Simulation

Monte Carlo simulation: continuous and categorical


Resampling with the bootstrap
Examples

The Concept

Monte Carlo Simulation:


draw uniform random numbers p [0,1]
apply the transform xp = q(p) = F-1(p)
Bootstrap:
interested in uncertainty of a statistic
Sample n values (with replacement) and calculate statistic
Repeat many times to construct distribution of uncertainty

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Frequency

Cumulative Frequency

Monte Carlo Simulation


0.7807

28.83

Monte Carlo Simulation / Stochastic Simulation / Random Drawing


proceeds by reading quantiles from a cumulative distribution

The procedure:
generate a random number between 0 and 1 (calculator, table,
program, ...
read the quantile associated to that random number
For Example:
Random Number
0.7807
0.1562
0.6587
0.8934

Simulated Number

28.83

...

Comments on Monte Carlo


Simulation
Categorical variable cumulative distribution requires an ordering (that is
inconsequential since we are doing random drawing)
Foundation of all stochastic simulation techniques
Essential to have a representative distribution
Random number generation:
No such thing as a truly random number
Not an issue for petroleum or mining applications (particle physics requires
many more numbers)
Sophisticated algorithms exist

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Applying MCS: Specific Steps


1) generate distributions for your input parameters

Geostatistics
Expert knowledge
Past prices/costs
Incorporate uncertainty in the different parameters
Incorporate the probability of certain
unknowns/decisions/options/scenarios

2) Draw initial values for one realizations/simulation


Use in the calculation
Draw random number , p [0,1] , from a uniform distribution
Transform value using input distribution xp = q(p) = F-1(p)

3) Apply your transfer function

In geostatistics this is a reserve/resource calculation


In mine planning this is a mine plan
In economics this is a NPV calculation
In traffic design this is the wait time for a particular route home

4) Repeat steps 2-3 n times (where n is large)

The Bootstrap

The bootstrap is a name generically applied to statistical resampling schemes


that allow uncertainty in the data to be assessed from the data themselves, in
other words, pulling yourself up by your bootstraps.
Given n observations zi, i=1,,n and a calculated statistic S, e.g., the mean ,
what is the uncertainty in S?
The procedure:
Draw n values zi, i=1,,n from the
original data with replacement
Calculate the statistic S from the
bootstrapped sample
Repeat L times to build up a
distribution of uncertainty in S

Gonick, L., Cartoon Guide to Statistics, Collins Reference, 1993

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Comments on the Bootstrap


Useful technique to assess uncertainty in input statistics
Limitations:
Assumes data are independent
When multiple factors go into the calculation (e.g., PV
uncertainty) they are all assumed independent
Assumes representative data

Simple Examples

Bootstrap uncertainty in the mean:


0.3 Original Data

0.4

Number of Data 17

Bootstrap Distribution of Mean


Number of Data 1000

mean 1225.28
std. dev. 672.14
coef. of var 0.55

Frequency

0.2

mean 1223.46
std. dev. 156.98
coef. of var 0.13

3360.87
1305.14
1145.50
758.81
485.00

maximum
upper quartile
median
lower quartile
minimum

0.3

Frequency

maximum
upper quartile
median
lower quartile
minimum

1814.71
1320.91
1214.98
1111.62
836.53

0.2

0.1
0.1

0.0

0.0
0.

2000.

3000.

4000.

0.

1000.

2000.

3000.

Bootstrap uncertainty in the correlation coefficient:


13.0
0.10
11.0
0.08

Primary / Hard Data

1000.

9.0
0.06

= 0.54

7.0

0.04

5.0

0.02

3.0

0.00
0.

5000.

10000.

15000.

20000.

25000.

0.25

0.35

0.45

0.55

Secondary / Soft Data

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0.65

0.75

4000.

Review of Main Points


Monte Carlo Simulation is at the heart of stochastic modeling.
Draw randomly from U(0,1)
Obtain quantile associated to drawn number from cdf

Bootstrapping is useful in assessing uncertainty in a sample


statistic, e.g. the mean, variance, calculated properties,

NPV example
Consider uncertainty in:
Interest rate (normal distribution with m=10% std=1%
Mineral commodity price (flat real $) m=50$/unit std=5$/unit
Number of years of production (similar to uncertainty in the
reserves available) m=10yrs, std=2yrs
The following are known with 100% certainty:
100M capital costs
1M units/year
All operating costs are factored into the mineral
commodity price (not realistic, but the focus of this
example is on MCS not cost estimation).
Reclamation costs will be 20M/year for 2 years after mining
WHAT IS THE NPV (DISTRIBUTION) OF THIS MINE???
Lets do 1 (or 2) realizations by hand
Then 100 realizations with Excel (easy with computers)

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Tornado (fishbone) chart


Set one input variable to the LOWEST value (or maybe p10)
Set all other variables to the average or p50
Alternatively, could do n simulations with this one
variable set to the p10 and then average the results
Obtain the low value

Set one input variable to the HIGEST value (or maybe p90)
Set all other variables to the average or p50
Alternatively, could do n simulations with this one
variable set to the p90 and then average the results
Obtain the high value

Repeat for all input variables

MCS by Hand
Determine distributions
Draw values from the distributions
Apply transfer function
Draw random number, lets use 0.1313 for an example
Get a chart (make sure you know what kind of table it is
there are different ones)
Lookup the value 0.1313 in the body of the table and get 1.12
Convert this to a non-normal distribution by Multiplying the
std and adding mean: -1.12*1.0+10=8.88
check in Excel if you want: =NORMINV(0.1313,10,1)

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If you have a value >0.5, then switch the sign:


Draw random number, lets use 0.7313 for an example
Get a chart (make sure you know what kind of table it is
there are different ones)
Lookup the value 1-0.7313=0.2687 in the body of the table and
get -0.615,
Have to adjust for the sign for being >0.5, so we now have
0.615
Convert this to a non-normal distribution by multiplying the
std and adding mean: 0.615*1.0+10=10.615
check in Excel if you want: =NORMINV(0.7313,10,1). This
one is off a bit because -0.615 is not quite correct, you can
linearly interpolate between 0.61 and 0.62 on the chart if you
want more accuracy.

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