Resources Policy 60 (2019) 178–184

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Resources Policy
journal homepage: www.elsevier.com/locate/resourpol

A method for optimal cut-off grade policy in open pit mining operations T
under uncertain supply
Asif Khana, Mohammad Waqar Ali Asadb,
⁎

a
Department of Mining Engineering, Karakorum International University, Pakistan
b
Mining Engineering, WA School of Mines: Minerals, Energy and Chemical Engineering, Curtin University, Australia

ABSTRACT

Cut-off grade controls the movement of materials among mining, processing and refining stages of an open pit mining operation. The cut-off grade policy constitutes a
schedule of cut-off grades and the associated quantities of materials that flow through various stages over the life of operation. This flow of materials in the system
relies on the grade-tonnage curve of the mineral resource and given that the variation in grade-tonnage curve is inevitable, it is crucial that the methods that define
the cut-off grade policy must consider this grade uncertainty. However, with few exceptions, a majority of these methods ignore this uncertainty in the supply of
materials. This paper shares a two-stage stochastic linear programming based cut-off grade optimisation model that accounts for the grade uncertainty and maximises
the net present value (NPV) subject to the production capacity constraints over the life of operation. An application of the proposed method at hypothetical and
realistic cases promises higher NPV as compared to the traditional heuristic approach.

1. Background closed prematurely due to this geological or grade uncertainty (Ajak

An open pit mining operation represents a supply chain system
where material moves from sources to destinations. The grade-tonnage
curve of the mineral reserves as well as economic and operational or
technical parameters contribute as an input to the determination of cut-
off grade, i.e. the economic criteria that guides the movement of ma-
terials from the mine (or pit) to the subsequent stages (waste dumps or
processing plant and refinery) within the system. Thus, the develop-
ment of a cut-off grade policy that spans over the life of an operation is
paramount to the regulated (ensuring quality) and consistent (ensuring
quantity) supply of ore to the processing streams and refinery that
convert ore to metal as a marketable product.
While economic (metal price, operating costs and fixed or period
costs) and operational (mine, process and refinery production capacities)
or technical (metallurgical recoveries) parameters are crucial to defining
the cut-off grade policy, the role of the geological input, i.e. the grade-
tonnage curve of the available mineral reserves inside the ultimate pit
limit (or the extent of extraction) or a production phase within the ul-
timate pit limit is unrelenting. Because, the economic and operational or
technical parameters if considered exclusively may result into a cut-off
grade policy that is irrelevant to the available reserves within the ulti-
mate pit limit or a production phase (Dagdelen, 1992, 1993). Similarly,
irrespective of the fact that variation in metal prices is common, the
variation in grade (or metal content) within the extent of mineral re-
serves is inherent and historically a significant number of mining projects
et al., 2018; Baker and Giacomo, 1998; Vallee, 2000). Because, this
translates into serious implications on meeting the qualitative (grade) as
well as quantitative (tonnes) requirements of the mineral supply chain.
Thus, the reliability of the flow of materials from the sources to desti-
nations rests on the basis that the method or procedure for the devel-
opment of the cut-off grade policy in fact accounts for the grade un-
certainty and addresses or manages the associated downside risk.
Therefore, as opposed to taking a single (constant or known or de-
terministic) estimate of the grade-tonnage curve as a geological input to
the calculation of cut-off grade policy, a procedure that incorporates
grade uncertainty and considers a set of sequential Gaussian simulation
derived equally probable multiple realisations (Goovaerts, 1997; Boucher
and Dimitrakopoulos, 2009; Horta and Amilcar, 2010) of the grade-
tonnage curve would be equipped to generate a valid, reliable and risk-
quantified cut-off grade policy (Dimitrakopoulos, 2011).
Asad et al. (2016) establishes that the traditional model proposed as
a general theory of cut-off grades in Lane (1964, 1988) and widely
practised in the industry (Geovia Whittle™) however ignore the un-
certainty in supply of ore and consider an estimated or average grade-
tonnage curve as the geological input. For application of the original
theory of cut-off grades in diverse open pit mining operations, a number
of studies modified the Lane models (Dagdelen, 1992, 1993; King,
2001, 2009; Ataei and Osanloo, 2003a, 2003b, 2004; Asad, 2005, 2007;
Bascetin and Nieto, 2007; Osanloo et al., 2008; Gholamnejad, 2008,
2009; Cetin and Dowd, 2013; Narri and Osanloo, 2015). In this respect,

⁎
Corresponding author.
E-mail address: waqar.asad@curtin.edu.au (M.W.A. Asad).

https://doi.org/10.1016/j.resourpol.2018.12.003
Received 10 June 2018; Received in revised form 4 December 2018; Accepted 4 December 2018
Available online 07 January 2019
0301-4207/ © 2018 Published by Elsevier Ltd.
A. Khan, M.W.A. Asad
Dagdelen (1992, 1993) and King (2009) decipher the intricacies in
Lane's model and share the steps of the algorithm along with applica-
tions at copper and gold mining operations. King (2001), Ataei and
Osanloo (2003a, 2003b, 2004), Asad (2005) and Cetin and Dowd
(2013) extend the Lane model for applications in operations handling
multiple-metal resources and share the techniques that help solve this
complex problem. Asad (2007) and Bascetin and Nieto (2007) modify
the Lane's model to incorporate variation in economic parameters.
Osanloo et al. (2008), Gholamnejad (2008, 2009) as well as Narri and
Osanloo (2015) include the environmental and rehabilitation costs into
the Lane's model and present applications at hypothetical copper and
gold as well as existing iron mining operations.
Few studies (Li and Yang, 2012; Asad and Dimitrakopoulos, 2013;
Azimi et al., 2013) incorporate grade uncertainty into the models for
the development of cut-off grade policy. Li and Yang (2012) apply
general reduced gradient method for improving NPV in each period or
year of the production horizon and proposes a multistage stochastic
programming based approach for the open pit mining operations with
multi-metal resources. Asad and Dimitrakopoulos (2013) propose an
extension in the original Lane's model such that it is applicable for a
stochastic framework that honours the grade uncertainty and generates
risk-quantified cut-off grade policy for open pit mining operations with
multiple processing streams. Azimi et al. (2013) present real option and
discounted cash flow analysis based ranking system for the selection of
the best among a set of feasible cut-off grade policies under price or
market and grade uncertainties. However, these studies implement a
heuristic method to solve the stochastic model for cut-off grade policy
and accordingly do not offer an optimal solution to the problem.
This paper shares a new two-stage stochastic linear programming
based mathematical model that offers an optimal cut-off grade policy for
open pit mining operations under grade uncertainty. More specifically, this
two-stage stochastic model with fixed recourse takes economic (metal
price, mining cost, processing cost, refining cost, fixed or period cost and
discount rate), operational (mining, processing and refining production
capacities) and geologic (multiple equally probable realisations of the
grade-tonnage curve derived from simulated equally probable realisations
of the mineralization or orebody) information as an input, maximises NPV
of the operation, minimises deviations from the production targets, sa-
tisfies production capacity constraints and generates a unique and the
optimal cut-off grade policy. In the context of geological input for the
proposed model, this study aligns with the extension of the Lane's model in
Asad and Dimitrakopoulos (2013). Consequently, it derives the equally
probable simulated realisations of the grade-tonnage curve from the
equally probable realisations of the three-dimensional orebody model that
typically maintains this geological information over thousands of mining
blocks. Finally, a valid comparison of the proposed and the modified La-
ne's model in Asad and Dimitrakopoulos (2013) demonstrates a better
performance of the proposed model.
2. Stochastic model
The two-stage stochastic linear programming approach with fixed re-
course models the cut-off grade policy problem under grade uncertainty.
Conceptually, in stochastic linear programming, two-stage recourse
models are applicable in situations where multiple equally probable fi-
nite realisations of an input parameter are available, and the models
utilise two stages to provide optimal solution to the problem (Sen and
Higle, 1999). Conceptually, the approach classifies the decision variables
as first and second-stage if implemented before or after the revelation of
an equally probable outcome of the input parameter, respectively. Thus,
the second-stage variables constitute recourse as they facilitate modelling
a response to the revealed equally probable outcome. For example, in
production planning formulations, the first-stage decision variable could
be the quantity of certain product produced, if supply of raw materials is
uncertain and modelled using second-stage decision variables, then the
quantity of material produced based on first-stage variables could relate
179
Resources Policy 60 (2019) 178–184
to a situation of over or under-supply given the demand. This situation
requires a recourse based on second-stage variables, and a possible re-
course for over-production is the stockpiling of extra material at some
storage cost, where stockpiled material becomes available in case of
shortage (under-production) at some rehandling cost. The generalized
form of two-stage recourse models follows a certain structure, where first
and second-stage decision variables form the objective function, and the
set of constraints constitutes stochastic (based on first-stage variables)
and non-stochastic (based on second-stage decision variables) con-
straints. If c is the cost of producing x (first-stage variable) quantity of a
product, s is the index for equally probable supply of raw material cor-
responding to the set of S equally probable occurrences of supply, ps is
the probability for outcome s , s is the penalty cost for over or under-
production corresponding to outcome s , A is the vector representing
available supply of raw materials with as as one of the row vectors, b is
the demand vector, ys+ , ys is the set of recourse variables in response to
an outcome s , then, the model (1)-(4) presents a general recourse model
(Sen and Higle, 1999):
+
Max cx ps s (ys + ys ) (1)
s S
(2)
Ax = b
as x + ys+ + ys = bs s S (3)
x , yk+ , yk 0 (4)
The optimisation process simultaneously determines first stage and
second stage decisions such that it optimizes the first-stage profit as
well as second-stage recourse cost. If recourse cost does not change with
the random outcome, then it is characterized as fixed recourse.
Specifically, the proposed model assumes that the multiple equally
probable simulated realisations of the grade-tonnage curve (Goovaerts,
1997) within the ultimate pit limit or a production phase as presented in
Fig. 1 are available as a geological input. Thus, a grade-tonnage curve
constitutes a set of grade bins with minimum (glb) and maximum (gub)
grades and the quantity of material (q) available between this minimum
and maximum grade. The variation in the available quantity of material in
each grade bin over the set of simulated realisations of the grade-tonnage
curve is evident in Fig. 1. The proposed model decides the flow of mate-
rials from the source to destinations under uncertainty during the first-
stage and then the recourse action in second-stage compensates for the
detrimental effects of the decisions in first-stage (Birge and Louveaux,
2011). Thus, the model relies on continuous (linear) variables exclusively
that establish the flow and deviations from production targets; however, a
binary integer variable applies the fixed or period cost. Following indices,
parameters (knowns) and decision variables (unknowns) are applicable:
Indices:
S= number of simulated realisations of the grade-tonnage curve of
the ore body;
B= number of grade bins within the grade-tonnage curve;
T = planning horizon or the life of operation or the number of per-
iods (years);
D= number of material destinations for the mined material;
s= simulated grade-tonnage curve index, where s = 1,2, …, S ;
b= grade bin index, where b = 1,2, …, B ;
t = period or year index, where t = 1,2, …, T ;
d= material destination index, where d = 1,2, …, D and d = 1 cor-
responds to waste dumps;
Parameters:
p= metal price in $ per tonne or troy ounce or gram of metal;
r = refining or marketing cost in $ per tonne or troy ounce or gram of
metal;
A. Khan, M.W.A. Asad Resources Policy 60 (2019) 178–184

Fig. 1. Variation in available quantity of material over a set of simulated and equally probable realisations of the grade-tonnage distribution.

Fig. 2. A set of simulated and equally probable realisations of the grade-tonnage distribution in Case A.

m= mining cost in $ per tonne of material; simulated grade-tonnage curve;

cd= processing cost in $ per tonne of ore processed at destination qb= minimum quantity of material in grade bin b over set (S ) of
d > 1; ¯simulated grade-tonnage curve;
ft = fixed or period cost in $ per year if material is mined during year Q= total quantity of available reserves in tonnes of material within
t; the ultimate pit limit or a production phase within the ultimate pit
yd = metallurgical recovery in % corresponding to destination d > 1; limit;
i= discount rate in %; t
vbd = discounted value in $ per tonne of material supplied from the
glb= minimum grade of the material in % or troy ounce or gram of grade bin b to destination d during year t , where
metal in grade bin b; (p r ) gy
¯ d m cd; if d > 1
0
vbd = ;
gub= maximum grade of the material in % or troy ounce or gram of m; if d = 1
metal in grade bin b; Mt = mining capacity in tonnes of material (ore and waste) during
ḡb= average grade of the material in % or troy ounce or gram of year t ;
g +g
metal in grade bin b, where ḡb = lb 2 ub ; Cdt= processing capacity in tonnes of ore at a processing destination
qbs= quantity of material in grade bin b of the simulated grade- d during year t ;
tonnage curve s ; Rt = refining capacity in tonnes or troy ounces or grams of metal
q̄b= maximum quantity of material in grade bin b over set (S ) of during year t ;

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A. Khan, M.W.A. Asad Resources Policy 60 (2019) 178–184

Fig. 3. A set of simulated and equally probable realisations of the grade-tonnage distribution in Case B.

Table 1 N = a reasonably large number that facilitates activation of the fixed

Economic, technical and operational parameters for copper mining operations. or period cost;
Parameters Case
Variables:
A B
t
qbd = quantity of material moved from the grade bin b to destination
Metal price ($ per tonne of Cu) 5000.00 5000.00
Refining cost ($ per tonne of Cu) 300.00 700.00 d during year t , where qbdt
is the stage-one decision variable and
Mining cost ($ per tonne of material) 2.00 1.50
t
0 qbd qb ;
Processing cost ($ per tonne of ore) 10.00 6.00 1, if material is mined in year t
Fixed or period cost ($ per year) 4,000,000 10,000,000 xt= ; i.e. the first-stage binary
Metallurgical recovery (%) 90 88 0, otherwise
Discount rate (%) 15 8 variable x t [0,1];
Mining capacity (tonnes of material per year) 4,000,000 150,000,000 qmt = quantity of material to be mined or mining rate during year t ,
Mill processing capacity (tonnes of ore per year) 2,000,000 75,000,000 where 0 qmt Mt ;
Refining capacity (tonne of Cu per year) 50,000 1,000,000
Penalties for surplus ore or metal ($ per tonne) 20.00 20.00
e¯store +, e¯stmetal += quantity of surplus ore and metal produced during
Penalties for surplus or deficient quantity of material 2.00 2.00 year t , where ēstore + and ēstmetal + are the second-stage simulated grade-
($ per tonne) tonnage curve dependent decision variables;
e stb+, e stb = surplus or deficient quantity of material moved from the
¯ ¯
grade bin b in simulated grade-tonnage curve s during year t , where
ore + metal +
h¯t , h¯ t = discounted cost (penalties) for producing surplus ore e b+
and e stb are second-stage decision variables and e stb+ 0 and
¯ stb ¯ ¯
e st 0 .
ore + metal +
ore + h¯t metal + h¯ t
and metal during year t , where h̄t = (1 + i)t
and h̄t = (1 + i)t
; ¯
htb+, htb = discounted cost (penalties) for producing surplus or de-
¯ ¯ Given these inputs and variables, the mathematical formulation in
ficient quantity of material from the grade bin b in simulated grade-
htb + htb
Eqs. (5)–(15) represents the stochastic model for the development of the
tonnage curve s during year t , where htb+ = ¯
(1 + i )t
and htb = ¯
(1 + i )t
;
¯ ¯

Table 2
Case A – the cut-off grade policy based on the modified Lane's model in Asad and Dimitrakopoulos (2013).
Year Qm (tonne) Gt (Cu %) Qc (tonnes) g (Cu %) Qr (tonnes) Cash Flow($)

Maximum Minimum Average Maximum Minimum Average Maximum Minimum Average

1 3,738,616 0.575 2,000,000 1.085 1.037 1.057 19,537 18,662 19,030 59,821,743 56,302,029 57,969,563
2 3,738,616 0.575 2,000,000 1.085 1.037 1.057 19,537 18,662 19,030 59,821,743 56,302,029 57,969,563
3 3,738,616 0.575 2,000,000 1.085 1.037 1.057 19,537 18,662 19,030 59,821,743 56,302,029 57,969,563
4 3,738,616 0.575 2,000,000 1.085 1.037 1.057 19,537 18,662 19,030 59,821,743 56,302,029 57,969,563
5 3,738,616 0.575 2,000,000 1.085 1.037 1.057 19,537 18,662 19,030 59,821,743 56,302,029 57,969,563
6 3,607,050 0.551 2,000,000 1.067 1.020 1.040 19,213 18,355 18,717 58,574,572 55,136,091 56,760,955
7 3,310,072 0.491 2,000,000 1.022 0.978 0.997 18,397 17,610 17,949 55,493,915 52,205,139 53,745,256
8 3,049,336 0.427 2,000,000 0.975 0.938 0.955 17,544 16,880 17,189 52,475,490 49,157,493 50,694,838
9 2,496,718 0.359 1,797,186 0.932 0.894 0.912 16,774 5675 14,746 49,295,888 13,803,792 42,297,146
10 877,952 0.303 642,727 0.898 0.867 0.881 8240 3437 5099 21,603,622 6685,898 11,859,288

Maximum NPV @15% = $281,265,300; Minimum NPV @ 15% = $250,470,212; Average NPV @ 15% = $269,337,952.

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A. Khan, M.W.A. Asad Resources Policy 60 (2019) 178–184

Table 3
Case B – the cut-off grade policy based on the modified Lane's model in Asad and Dimitrakopoulos (2013).
Year Qm (tonne) Gt (Cu %) Qc (tonnes) g (Cu %) Qr (tonnes) Cash Flow($ Million)

Maximum Minimum Average Maximum Minimum Average Maximum Minimum Average

1 140,453,964 0.441 75,000,000 0.918 0.885 0.900 605,898 584,069 594,123 1945.00 1836.34 1884.05
2 140,453,964 0.441 75,000,000 0.918 0.885 0.900 605,898 584,069 594,123 1945.00 1836.34 1884.05
3 140,453,964 0.441 75,000,000 0.918 0.885 0.900 605,898 584,069 594,123 1945.00 1836.34 1884.05
4 132,970,295 0.412 75,000,000 0.895 0.860 0.875 590,371 567,493 577,501 1887.82 1774.31 1823.80
5 125,635,439 0.381 75,000,000 0.870 0.833 0.849 573,993 549,483 560,124 1826.91 1709.00 1760.08
6 118,910,511 0.349 75,000,000 0.845 0.806 0.823 557,798 531,905 543,078 1766.09 1644.46 1696.87
7 112,719,630 0.317 75,000,000 0.821 0.780 0.797 541,721 514,652 526,274 1705.16 1580.37 1633.90
8 106,997,877 0.283 75,000,000 0.797 0.754 0.772 525,701 497,629 509,629 1643.92 1516.45 1570.91
9 101,691,491 0.248 75,000,000 0.772 0.728 0.747 509,685 480,754 493,074 1582.21 1452.44 1507.68
10 94,674,935 0.213 73,421,325 0.748 0.703 0.722 493,623 325,919 466,762 1519.86 972.07 1414.53
11 42,017,502 0.178 34,330,659 0.725 0.691 0.702 400,826 42,824 212,982 1218.96 119.16 636.81

Maximum NPV @8% = $12,657,733,942; Minimum NPV @8% = $11,298,344,333; Average NPV @8% = $11,893,110,797.

Table 4
Case A – the optimal cut-off grade policy based on the proposed model.
Year Qm (tonne) Gt (Cu %) Qc (tonnes) g (Cu %) Qr (tonnes) Cash Flow($)

Maximum Minimum Average Maximum Minimum Average Maximum Minimum Average

1 4,000,000 0.65 2,000,000 1.3582 1.3052 1.3236 24,169 23,160 23,631 83,595,240 78,851,530 81,065,297
2 4,000,000 0.64 2,000,000 1.2946 1.2412 1.2491 22,343 21,390 22,151 75,010,220 70,533,940 74,107,887
3 4,000,000 0.62 2,000,000 1.2938 1.2347 1.2525 22,224 20,792 21,795 74,454,680 67,722,870 72,435,929
4 3,814,500 0.58 2,000,000 1.2689 1.1949 1.2241 21,457 19,572 20,741 72,282,090 63,421,650 68,919,710
5 3,456,600 0.52 2,000,000 0.8207 0.7909 0.8088 14,453 13,536 14,082 39,753,260 35,439,600 38,005,834
6 3,354,300 0.48 2,000,000 0.7867 0.7417 0.7692 13,753 12,272 13,149 36,626,160 29,665,930 33,791,422
7 3,179,380 0.45 2,000,000 0.7457 0.6909 0.7227 12,971 11,114 12,083 33,193,790 24,464,010 29,017,538
8 2,980,270 0.40 2,000,000 0.7016 0.6338 0.6693 12,062 09,902 10,884 29,173,480 19,023,548 23,640,110
9 2,843,950 0.36 2,000,000 0.6624 0.5947 0.6274 11,193 09,065 09,948 25,319,710 15,321,118 19,467,915

Maximum NPV @ 15% = $284,505,000; Minimum NPV @ 15% = $252,907,000; Average NPV @ 15% = $271,236,000.

Table 5
Case B – the optimal cut-off grade policy based on the proposed model.
Year Qm (tonne) Gt (Cu %) Qc (tonnes) g (Cu %) Qr (tonnes) Cash Flow($ Million)

Maximum Minimum Average Maximum Minimum Average Maximum Minimum Average

1 148,255,000 0.498 75,000,000 1.1652 1.1088 1.1262 752,108 644,051 728,624 2551.68 2153.75 2450.70
2 136,972,000 0.456 75,000,000 1.1056 1.0558 1.0740 713,283 617,913 687,422 2401.66 2053.21 2290.46
3 127,285,000 0.414 75,000,000 1.0468 1.0058 1.0215 675,487 600,058 652,199 2253.67 1986.60 2153.53
4 119,252,000 0.374 75,000,000 0.9933 0.9533 0.9670 640,464 580,658 618,990 2115.12 1911.61 2022.78
5 114,282,000 0.336 75,000,000 0.7854 0.7776 0.7810 515,035 501,878 509,036 1583.23 1578.08 1557.43
6 110,304,000 0.309 75,000,000 0.7271 0.7234 0.7251 477,414 469,373 473,440 1427.42 1442.48 1410.34
7 105,516,000 0.282 75,000,000 0.7059 0.7038 0.7047 464,453 461,625 463,157 1378.87 1414.20 1373.30
8 101,481,000 0.253 75,000,000 0.6791 0.6674 0.6701 446,391 431,013 436,462 1307.26 1286.80 1264.56
9 97,987,000 0.225 75,000,000 0.6606 0.6347 0.6393 429,727 397,970 409,442 1240.85 1148.38 1153.62
10 95,516,300 0.196 75,000,000 0.6396 0.5877 0.6006 399,115 350,948 370,487 1112.92 0948.78 0989.82
11 91,726,800 0.167 75,000,000 0.6214 0.5688 0.5801 388,220 339,378 355,535 1071.76 0903.01 0931.21

Maximum NPV @ 8% = $12,849,166,947; Minimum NPV @ 8% = $11,641,275,988; Average NPV @ 8% = $12,297,387,241.

optimal cut-off grade policy, where Eq. (5) is the objective function and Eq. (6) ensures that the quantity of material supplied from the mine
Eqs. (6)–(15) are the mining capacity, fixed or period cost, processing to the waste dumps and processing destinations during year t remains
capacity, refining capacity, grade blending and production constraints. within the available mining capacity.
The objective function in Eq. (1) maximises the expected discounted
B D
value of future cash flows and minimises the deviations from the pro- t
qbd qmt ; t
duction targets. (6)
b=1 d=1
T B D
ft
Maximize z = t
E (vbd t
) q¯bd xt Eq. (7) activates the expense of fixed or period cost as it links the
(1 + i )t
t=1 b=1 d=1 continuous (qbd
t
) or linear and binary (x t ) variables.
1
1 S T ¯tore +e¯tsore + metal + metal + B D
( s=1 t=1
h + h¯ t e¯ts ) t
s qbd Nx t 0; t
2 b=1 d=1 (7)
1 B S T
( b=1 s=1 t=1 _htb +_etsb + + _htb _etsb )
Eqs. (8)–(9) maintain the processing and refining capacity con-
s
3 (5)
straints, respectively.

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A. Khan, M.W.A. Asad Resources Policy 60 (2019) 178–184

B
t
at destination d during year t , thus Gdt corresponds to the minimum glb
qbd e¯store + Cdt; d > 1, t, s within this set of grade bins, i.e. if the formulation schedules ore from
b=1 (8)
grade bins 4 ([(g4 , g5), q4]) to B ([(gB 1, gB ), qB 1]) at destination d then
B D Gdt = g4 .
t
gb yd qbd e¯stmetal + Rt ; t , s
(9)
b=1 d>1
3. Application of the stochastic model
Eqs. (10) and (11) enforce a balanced production i.e. the production
of proportionate quantity of material from the grade bins during each The application of the proposed stochastic model reflects its per-
year, as it facilitates the processing of a blend of low and high-grade ore formance against the modified Lane's model in Asad and
during the life of operation. Dimitrakopoulos (2013) in a hypothetical (Case A) and a realistic or
D actual (Case B) copper mining operation. Again, the simulated and
t qbs + [q¯b qbs] equally probable realisations of the grade-tonnage curve in the realistic
qbd + e stb+ × qmt ; t , b, s
d=1
¯ Q (10) case are coming from the case study in Asad and Dimitrakopoulos
(2013). Figs. 2 and 3 present these simulated and equally probable
D
qbs + [qbs q] realisations of the grade-tonnage curve in Cases A and B, respectively,
t
qbd + e stb ¯ b × qmt ; t , b, s
d=1
¯ Q (11) where variation in the available quantity of material within a grade bin
over a set of grade-tonnage curves is evident. Similarly, Table 1 illus-
Eq. (12) controls the supply of materials such that it may not exceed trates the relevant economic, technical and operational parameters.
the available reserves within each grade bin. Given these inputs, an implementation of the steps of the algorithm
T D for the modified Lane's model in Asad and Dimitrakopoulos (2013) in
t
qbd e b+ + e stb = qbs; b, s the Visual C++ programming environment develops the cut-off grade
¯ st ¯ (12)
t=1 d =1
policies in Tables 2, 3 for Cases A and B, respectively. Likewise, the
Eqs. (13) and (14) retain the supply of excess and deficient materials academic version of the “CPLEX” optimisation solver (CPLEX
from a bin b in simulated realisation of the grade-tonnage curve s Optimizer, IBM Analytics) solves the mathematical formulations for
within the difference between the maximum reserves over S and the Cases A and B, then a post-optimality analysis of the CPLEX solution
available reserves in s as well as the difference between the available files generates the optimal cut-off grade policies in Tables 4, 5, re-
reserves and minimum reserves over S , respectively. More specifically, spectively. The structure of the proposed model is such that it relies
the Eqs. (9) and (10) address the grade uncertainty associated to the mainly on the linear variables to define the flow of materials and ac-
available reserves in each grade bin as it varies between the maximum cordingly model requires relatively lower computational costs, i.e. it
and minimum values across all simulated realisations of the grade- generates solution in reasonable time. For example, the mathematical
tonnage curve as presented in Fig. 1. formulation in Case B constitutes 576,756 linear variables along with
T
607,930 constraints and CPLEX solver generates solution in about 2 h at
e b+ (q¯b qbs ); b, s a computer with Intel Core i7–2.3 GHz CPU and 8 GB RAM.
t=1
¯ st (13) The cut-off grade policies in Tables 2–3 (modified Lane's model) as
well as in Tables 4–5 (proposed stochastic model) define a schedule of
T
eb (qbs q ); b, s cut-off grade and the flow of materials with the copper mining opera-
t=1
¯ st ¯b (14) tions over the life of operation. However, given the uncertainty in
supply of ore, a significant feature of these policies is the risk profiles
Eq. (15) maintains that the supply of materials from the mine (or for maximum, average and minimum values in respect of the average
pit) to various destinations over life of operation remains within the grade of ore, copper (metal) production and expected cash flows over
total quantity of available reserves in the ultimate pit limit or a pro- the life of operation.
duction phase inside the ultimate pit limit. A comparison of the cut-off grade policies derived through the
B D T proposed and the modified Lane's model reveals that the proposed
t
ybd =Q model generated higher NPV in both Cases A and B. In this context, the
(15)
b=1 d=1 t=1
proposed model successfully handles the grade uncertainty in both
cases, as it proves to be reliable in maintaining a consistent supply of
2.1. Structure of the stochastic model ore to the processing stream at relatively higher cut-off grades leading
to the production of higher quantity of metal and expected cash flows
It is evident in the model (Eqs. (5)–(15)) that the stage-one decision throughout the life of operations.
variables (qbd t
) define the flow of materials from the mine to various More specifically, it is evident in Tables 2, 4 that the proposed
destinations within the open pit mining system and the stage-two or model supplies ore at a relatively higher cut-off grade (0.65% Cu in
recourse decision variables (e¯store +, e¯stmetal +, e stb+, e stb ) help avoid (mini- Year 1 to 0.36% Cu in Year 9) as compared to the Lane's model (0.575%
¯ ¯
mise) the deviations from processing and refining targets under the Cu in Year 1 to 0.303% Cu in Year 10) and this translates into higher
uncertainty defined through multiple simulated realisations of the NPV in the proposed model. The results also reflect that the proposed
grade-tonnage curve. More specifically, the component 1 in Eq. (5) as model derives a dynamic cut-off grade policy as the cut-off grade varies
well as Eqs. (6)–(7) facilitate the first-stage and components 2 and 3 in from one year to the next. On the contrary, Lane's model relies on
the Eq. (5) along with soft constraints in Eqs. (8)–(15) are dependent on constant cut-off grade (0.575% Cu) for first few years. Thus, as opposed
the variation in available reserves, thus help manage the deviations to the Lane's model, the proposed model will demonstrate an effective
from production targets. response to stockpiling of the potential ore if such an option is avail-
Moreover, if glb and gub are the lower and upper grade limits in the able. However, the proposed model would require additional stock-
grade bin b and q is the quantity of material or available reserves be- piling constraints as in its current form it does not handle stockpiling
tween these grade limits, then the mathematical presentation option and future studies may address this challenge. In addition,
{[(g1, g2 ), q1], [(g2, g3), q2], …, [(gB 1, gB ), qB 1]} of the grade-tonnage Tables 3, 5 demonstrate that the application of Lane and proposed
distribution helps describe the selection of the optimum cut-off grade models in realistic case leads to the outcomes that invite similar com-
(Gdt @ d > 1) during year t . In this context, given the structure of the ments as in hypothetical case. While, the availability of relatively less-
formulation (1)-(11), a set of grade bins contributes ore for processing variable, high-grade and higher quantity of mineralised material in the

183
A. Khan, M.W.A. Asad
realistic orebody (Fig. 3) leads to the choice of relatively low cut-off
grade values as compared to the hypothetical case, the results in Table 5
completely align with outcomes in Table 3, i.e., the modified Lane
model in Asad and Dimitrakopoulos (2013). Moreover, it is evident that
a pre-tax cash flow analysis is the basis for the cut-off grade policies
presented in Tables 2–5; thus, the procedure ignores royalties, capital
costs, mineral-rights acquisition costs, mine closure and environmental
costs, etc., and accordingly, an application of after-tax cash flow ana-
lysis given in Dagdelen and Mohammad (1997) will generate a rela-
tively lower NPV.
Moreover, the processing rates remain equal to the available pro-
cessing capacities in both cases, which makes the processing plant a
system bottleneck, with mining and refining stages running at surplus
capacities. Thus, the schedule of cut-off grades in these policies corre-
sponds to the process limiting cut-off grades, which confirms the sig-
nificance of processing plant in controlling or guiding the flow of ma-
terials within this mineral supply chain system. However, it is possible
that mining or refinery capacities (Eqs. (2) and (5)) may control the
mineral supply chain; accordingly, in such instances, the cut-off grades
derived through the proposed model would correspond to mining and
refining stages, respectively.
4. Conclusions
This paper shares a stochastic model for the development of optimal
cut-off grade policy that defines a schedule of cut-off grades along with
a flow of materials over life of an open pit mining operation considering
the inherent grade uncertainty. The application of the model at hy-
pothetical and realistic data confirms the robustness and performance
of the proposed methods as compared to the modified Lane's model.
Thus, the proposed model offers an optimal alternative to a heuristic
implementation of the traditional Lane's procedure largely practised in
the mining industry. The application of the proposed model reveals an
increasing trend in the difference in maximum and minimum NPV from
the high-grade and less variable grade-tonnage distributions in realistic
(9.40%) case to relatively low-grade and higher variability grade-ton-
nage distributions in hypothetical (11.11%) case. This confirms the
significance of incorporating grade uncertainty in the development of
cut-off grade policy for the open pit mining operations that exploit low-
grade and highly variable ore bodies. Moreover, the flexibility of the
method in minimising the deviations from production targets helps
generate a portfolio of flow of materials across the mineral supply chain
within the open pit mining system, thus quantifies the risk and facil-
itates the decision making process under uncertainty.
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