May 1999 By Jeff Whittle & David Whittle Mine Design Optimization poccecccccccccoeeSeocceccccccaha @Q22A22402a00Ran8 204BOSS PSU Seat Seeley poveveveuvrs’ -°~~erewee=”Qatimization in Mine Design ‘ Table of Contents ‘THE CORPORATE ENVIRONMENT WITHIN WHICH MINE DESIGN TAKES PLACE ‘STRATEGIC BUSINESS PLANNING penned Miuitary SteaTeov.. sonnnsnmnnne sessed BUSINESS STRATEGY ee os ‘CONTEMPORARY TEMPLATE FOR STRATEGIC PLANING on nnn von MARKET ANALYSIS. CCommoorries Magkers. SHARE MARKETS. ECONOMIC EVALUATION DECISION-MAKING BEHAVIOUR .. RISK NEUTRAL seen RISK AVERSE SATING THE MARKET'S THIRST. TAKING A COST POSITION INTHE MARKET as Oritek DECISION-MAKING BEHAVIOUR Bao Benaviout : : REPRESENTING DECISION-MAKING DEHA OUR ON A RASERVE“TONNAGED NPV CURVE sossssnsusssnea IT EXERCISES oso OPTIMIZATION TECHNIQUES wun ‘THE COMPUTING ENVIRONMENT. (OVERVIEW OF MINE DESIGN AND PLANNING. Discounrnc. SuoRt LiFe Mines. . Lon uiremvcs - WHAT IS MEANT BY OPEN PIT OUTLINE OPTIMIZATION? wns DEFINITION OF THe OPTIMAL OUTLINE [WHAT AFFECTS THE OPTIMAL OUTLINE FOR A GIVEN ORE BoDY 9. (ONCETHE ABOVE FACTORS ARE FIXED- SO ISTHE OPTIMAL PIT... A SIMPLE OPTIMIZATION EXAMPLE, \WIAT PIT OUTLINE OPTIMIZATION METHODS ARE AVAILABLE? TRIAL AND EaKoR. “LOATING CONE. “TWO-DIMENSIONAL LERCIS-GROSSMANN "TWO-AND-AcHAEE DIMENSIONAL LERCIIS-GROSSMANN ovens ERNEST KOENIGSBERG - 17TH APCOM sn ‘THREE-DIMENSIONAL LERCHS-GROSSMARN AND NETWORK FLOW. ‘THE EFFECTS OF SEQUENCING & SCHEDULING woveonsnsmnns “THe GFFECT OF TIME ON THE VALUE OF MONEY “THE EFFECT OF MINING SEQUENCE ON THE OPTIMAL PIT OUTLINE. ‘TME INTERACTION BETWEEN PRODUCTION RATES AND MINING SEQUENCE. “THE USE OF PIT SHELLS FOR SEQUENCING, GENERATION OF PIT SHELLS. Tue oavious Way. oo 33 THE LESS OBVIOUS WAY... a 35 18 May, 1999i Optimization in Mine Design ortiiction in Mine Design USING THE SHELLS FOR MINING SIMULATION “87 CALCULATING BLOCK VALUES FOR PIT OPTIMIZATION 59 CALCULATING BLOCK VALUES wu, ‘Tue Finst Rute, Tue Secovo Rute... ‘THE THIRD RULE... AFORMULA FOR A BLOCK VALUE... CALCULATING Costs Wulat Costs To INc.oe, EXAMPLES se SAMPLE COST CALCULATION. ACCOUNTING CONCEPTS V. OPTIMIZATION CONCEPTS, INTRODUCTION ‘THE PERVASIVENESS OF ACCOUNTING CONCEPTS... MISAPPLICATION OF ACCOUNTING CONCEPTS - AN EXAMPLE... PRINCIPALS AND ASSUMPTIONS FOR ACCOUNTING, PIT OPTIMIZATION AND DCF ANALYSIS . ‘TRE AUSTRALIAN ACCOUNTING STANDARD V. REQUIREMENTS FOR PIT OFTIMIZATION AND DCF ANALYSIS se EXPLORATION AND EVALUATION COSTS WHERE NO DISCOVERY 5 MADE... sessed EXILORATION AND EVALUATION COSTS, WHERE ITI§ UNCLEAR AT THE END OF ile ALPORTING Pbalod ne os WHETHEROR NOTA MINE WILL BE DEVELOPED. wunnneene oe EXPLORATION COSTS WHERE IT HAS BECOME APPARENT THAT MINING WiLL paOCELS (Cost OF ACQUIRE .G LEASES OR OTHER RIGITS OF TENURE, DEVELOPMENT COSTE en CONSTRUCTION CosTS IN THE NATURE OF DEPRECIABLE ASSETS. CONSTRUCTION COSTS - NOTIN THE NATURE OF DEPRECIABLE ASSETS... Coretivuino DeveLurMent (THE STANDARD OOES NOT DISCRIMINATE BETWEEN DEVELOMGNT Os New GeURCESIRESERVES OR THE UPGRADING THE CATEGORIES OF EXISTING RESOURCEIRESERVES) 78 OPERATION COSTS sn remnant sn 9 GENERAL AND AbMinUsTRATIVE Costs ven nnnann nnn 80 AMOUNTS RECEIVED AND SUUSIDES IN RELATION 10 EXPLORATION, EVALUATION, DeveLonweny Ox PRODUCTION rnnntnnnsnnnnnnnnitnnnncscnernes 80 RESTORATION Costs ACCOUNTING TERMS .. ACCOUNTS Bacance Suet, Cost Bases AcEOUNTS.. “ DePRictATiON AND AMORTISATION Doubts Enrry Accounting / BooKKEcine HISTORICAL ACCOUNTS ssn PROFIT AND LOSS STATEMENT EXERCISES.. EXERCISE... Exencise2., Exercise 3 Exercises, 18 May, 1999 002042024240 4422- 4% «| e @ e@ e e e @ @ @ @ e @ e @ @ @ e e e e @ e @ @ e @ @ e eHOOP OSSTOHS COS TOS ETC OOPS TOO CO RED Meee eee eeooaueere Optimization in Mine Design i PRODUCING A PIT DESIGN FROM AN OPTIMAL OUTLINE... GeTTING nip oF THe JAGGED OUTLINE. ENSURING THERE QUIRED MINIMUM MINING WIDTH TTHEOVERALL AIMIN CREATING TIC DETAILED DESIGN, ‘THE EFFECTS OF UNDERGROUND MINING. SUMMAR) WHICH ORE SHOULD BE MINED BY OPEN CUT? When THE Prt ConTRIOUTES TO Tie UNDERGROUND DiGLOPMENT. SENSITIVITY WORK AND BLOCK SIZES. SENSITIVITY WORK... [OPTIMEZATION IS IHFORTANT INSENSITIVITY WORK. sn ‘THE MAIN SENSITIVITY ISTO ECONOMIC UNCERTAINTY « CS nop BLOCK SIZES FOR DIFFERENT PURPOSES For ouruinins THEOREBODY FOR CALCULATING VALUES... FOR DESIONING 4 7 FORSENSITIVETY WORK nr RE-BLOCKING AND BIAS... ‘THE PROCESS OF DESIGN (CREATE 4 SeLective Mixing MODEL. (CHEaTE A Prt DESION MODEL, (CAEATE a Sensinvity Work wODEL EEsmiMATE THE GENERAL SIZ OF THE ULTIMATE PIT InRoDUCE PUSIL-BACKS. ‘PRODUCE SPIDER GIAGRANS... ‘OTHER SENSITIVITY WORK noms (Cie THe WoRK WITH THcPrT DESIGN MODEL. |ADWUST IE MINIMUM MING WIDTH DO THEFINAL DESIGN DEMONSTRATION OF MINING WLDTH ADJUSTMENT BAcKoROUND. ea . seve IDB ‘THE BASICS oF MINING WIDTH CONTROL. FURTIER TYING UP... “OTHER PIT OPTINUZERS COMDINATORICS - AUSTRALIA EARTIBVONRS - AUSTRALIA cor EENGINEESUNG ComPUTER SERVICES INTERNATIONAL AUSTRALIA. LL¥1a GEOSYSTEMS - CANADA, ' vo as MINEMAP- AUSTRAUA a : Ba MINTED: U.S.A, - 14 (primum PLANT” AUSTRALIA cur-orrs MARGINAL CUT-OFF: ‘Tre NowMaL Case wr ss soe scents BT [NON-LINEAR PROCESSING RECOVERY.» vv svnsssvnsennnrvonsnnns cr 8 ReiiaBitiTaTion Cost sone “ bs MULTIPLE PROCESSING METHODS a an) 18 May, 1999BALANCING MINING AND MILLING .. (CUT-OFFS WITH MULTIPLE PRODUCTS... (CHANGING THE CUT-OFFS WITH TIME CUT-OFF OPTIMIZATION. LANE THEORY OF CUT-OFF OPTIMIZATION WILITTLE METHOD OF CUT-OFF OPTIMIZATION wwe DEMONSTRATION OF CUT-OFF OPTIMIZATION . ‘TUTORIAL | ~ A SIMPLE RUN THROUGIE TIlE MAIN PROGRAMS. [EXERCISE I - AUTOMATING THEPROCESS.- - ‘TUTORIAL 2- FOUR-D INTERFACE AND SEQUENCE COMPACTION. EXERCISE 2 - DIFFERENT COMPACTIONS 7 ‘Turomat 3- STockrites. EXERCISE 3 - ADIUSTING THROUGHPUT. ‘Tutoniat 4 ~ MULT-CLEMENT DEPOSITS. EXERCISE 4 - MULTI-ELEMENT sTocKRiLe OTHER CUT-OFF OPTIMIZERS OTHER CUT-OFF OPTIMIZERS .. TZ TECHNICAL SERVICES -UK.. FUTURE DEVELOPMENTS wo CONCLUSIONS. REFERENCES... 18May, 1999 C0800 8OOA2BA2A440a42 POSPSSHSHSOHHASHOHOHOHHHHOHHOHGOCOOHGECOCCHCHSSOOCOSCSCE @ POCCCHOOOOOCOSOO SESE OCOD OC DOCS ALe Optimization in Mine Design 1 The Corporate Environment within which Mine Design Takes Place 18 May, 1998Optimization in Mine Design This page left blank intentionally 18 May, 1999Optimization ia Mine Design 3 Strategic Business Planning ‘Strategic Planning | Decision= Making oun Eis Evaluation’ Military Strategy Cieisthenes became the leader of Athens ~ 500 B.C., and introduced a democratic political system which included (en Strategi, each Strategus ig the military leader and representative of one of the tribes of ‘Athens. The manner in which Cleisthenes and his Strategi organised and d'rected the military forces is credited with the, Athenians « successfully defeatitg the Spartans. They achieves this victory despite / the fact thal the Spartans were greater in number, and were better warriors, Strateg! were leaders in the military sense, but also more Broadly they wore community lear. They drew on a whale range of different resources in order to achieve a military result. 797.1 Strategy is « Greek word meaning “Art of the Strategi”. Quotation fiom EneyclopediaBritanries onthe subject of contemporary (1700 onan) mirystalegy pepoe VVISOVGVVTIOVTGVVVVVIVVVVVVVVVUUY “The strategist eals)with many uncertainties and imponderables. Indeed the art of te strategist isthe art ofthe “alelate risk™” Business Strategy 1971 - Kenneth Andrews published “Business Strategy”: look at opportunities out in the world and match them with ou capabilities. + SWOT Analysis Strengths, Weakness:s, Opportunites, Threats 18 Nay, 19994 Optimization in Mine Design See ptiization in Mine Desig 1980 - Michee! Porter published “Competitive Strategy - Techniques for Analysing Industries and Competitors” understanding of economic and business environment is key 10 strategie management, ‘+ critical success factors forces driving change. Dr Jim Landau - July 1998; * “Look to your core competencies when tying to determine your strategic direction.” + "Tobe strategic, you need a window to the future." + “Optimize your resource usage to get a future advantage.” Contemporary Template for Strategic Planning eecccceovcees COCO HAR2AA0244a442a Situation Analysis © Size and structure ofthe miarket # Sweengths + Weaknesses + Opportunities + Threats + Forces driving change * Critical success factors + Competitor Analysis The Strategic Plan * Vision - a view of the future that is important to the organisation + Mission key statement af the purpose ofthe oganisation + Values - wider esponsibltes and guiding principles + Sustainable Competitive Advantage (the cars) + Strategic Thus (cost, differentiation, niche) + Value Proposition + Objectives - major milestones * Strategies - what things will be done in order achieve the objectives 18 May, 1999,piimization in Mine Design Market Analysis ‘Markel analysis is an important part of: n Analysis ‘There are two markets that are of interest (o mining companies, the 2alling commodities market for whatever the mine produces, an the share” "markets where capital is raised and share valuz is established. The iesr commodities market determines the inca of ie Blsness, The share markt étemines the scleral formance inthe fmt) Sasson aa peng Uae, Pongencest Commodities Markets In market theory, the price and volume tied on a market is detemninad by he intersection of the supply and demandirves. 1 the sarket price shoul, then suppliers will b'éncouraged to produce areater quantities, ven their marginal cost of production increases as ‘a result, In the long term additional suppliers will be encouraged to ens production. This potential additional supply is represented &y Te seution ofthe supply curve tothe right ofthe intersection. The r section ofthe supply curve tothe let ofthe intersection represent the contraction of supply that would occur should the price drop. ‘Supliers who ean no.longer make a profit will be forced out of the mae rdicng ie aoa of ie commodity valle freon he market. The quantity of the commodity demanded by the marcet is detemined by the demand for the uty imparted by the commodity and by the availability of substitutes. | NK —— ‘Supply Price C02 CCCDO OOO VECO DOGQOQGOIONN0" Quantity Figure 4: Determination of the long-term stable ‘Key concepts of a “perfect” market + Homogeneous product (product from supplier X is much the same as product from supplier Y). + Substitutes are available (establishes price elasticity of demand). ‘+ Large number of sellers (price takers). ‘+ Large number of buyers. y + Perfect information. 18 Moy, 1990 = TalxProao aR ~ CP) Cy ag andy te om Chopin we pee V8 x teFatrnent se) Seg a” 385 1k6 Optimization in Mine Design Se tiization in Mine Design (Other types of markets: ‘+ Monepoly - one dominant seller + Duopoly - two dominant setiers ‘+ Oligopoly - a few dominant suppliers ‘+ Monopsony - one dominant buyer ‘+ Oligopsony - a few dominant buyers Example - Copper Beare [Nal 7 7) Riana Yo eecrar rer a ‘axradiators pial bres in . teecormanications, plastica lambing Tenge wanbr oars | —| AOD parang nes, ba aR fewer companies. Some suppliers influence ont market? Tange amber of Bape= | 7 Perea efomtion —|-7 | Exes pic a Wo information avisble though commodities mist, iter Note that the price behaviour for copper is currently being affected by ‘some organisations amassing strategic stockpiles. 4 ots, = Clay CAF Char 5 CProenn + (Coffin tae Cot Bz) a agfite @ Crtiya? Chlesay AP 2 AAP pote ©8006 0000000 Reccnccesacanscsnn ' Source: Crowson, P, Minerals Handbook 1996.97, Siockion Press, New York, p.115 > tid, 18 May, 1989VOTUTSVESE CFT VUSTEVEESS TEST ETe vevvvvusvuuVVVVVVEUS Optimization in Mine Design Example - Gold ‘Share Markets Charade Seare | Neer Tlomagenco pradast | 7 Tabsraarare 7 | Bia params swileble Sivnim, chrom cease Bei Geico poole pollo p lobe, Tange mambo of alrs | 7 Tange namber of bape | 7 Taree formation | 7 | Saeed pice we intermation avaiable trou Commodities marke, teret Despite all ofthe above, the gold market does not work anything like @ perfect market. This is beeause gold is not only consumed inthe production of (603 iis also used asa store of wealth, both inthe form of jewellery and in bullion, This gold can and dees find its way back into tie market from these above ground stocks. This sxcondary market is larger than the primary market for gold, “Above ois 8 slocks of gold are very high, and the(willingness to ad to, or{rleise from, these stocks largely determines the sate of the What factors drive the price of shares? ‘The product is not gold, silver coal elc. The product iscompany shares, which need to satisfy one or more of the following buyer needs: ‘+ Potential cash flows (dividends) - Buy shares in the expectation (or hope) that the company will pay dividends in the futur. + Potential cash flows (realisation of capital gains) -Buy shares in the expectation (or hope) that the market value will increase and that the increase can be realised. + Potential unrealised capital gains - Buy shares in the expectation (or hope) thatthe market value will increase and use the additional value as security. 18May, 19998 Optimization in Mine Design + Exposure / Diversification - Buy shares in many different jes in many different Indosties so an pcfad risk of How ‘perfect’ is this market ‘Charawere Seare [ Noter Tiomagenecusproduat | x | Shetwrenvonaly erento ‘Sob ore 7 | Desai ver we wionsly valable siferentiaed, hares i one ‘company ae subsite for Shares in any ther Subsets ‘ls neta all forme of financial Tarpe mantra | 7 Tange ramen oben | 7 Fea fomaon (7 | Pra te wep “nsder information emt ‘The primary matket fr has pls to uewlyisued vail. A lage sveondary market exists for re-traded shares. > Source: Crowson, 18 May, 1999 + Minerals Handbook 1996-97, Stockton Press, New York, p.147 % occceccceccceccceEconomic evaluation rr cnn prs ies Beonomic Evaluation You can’t manage what you can't measure, ‘The optimization of a design cannot be achieved without having a method to determine the value of a particular design. If you cannot measure the value of a design, you cannot know whether or not a change init will improve it or make it worse. In a market economy, and in relation to economic matters, it is usual to represent all things in terms of their impact, or potential impact, on cash flows. Doing so gives a single-value measure ofa design or strategy, which allows easy comparison to all other designs and strategies. Tl TF UvesecsTeLeesereseseE Discounted Cash Flow Analysis DCF Analysis takes account of the fact that a dellar that we reecive ‘oday is more valuable to us than a dollar that we might receive in a year's time, and expected cash flows are discounted by an amount which increases with time, The rate of increase is usually expressed as a discount rate, such as ten per cent per year. ‘The discount rate can be defined or determined in various ways, including: @ + The riskadjusted discount rate consists of two compoxenis. The “opportunity cost’ isthe rate you could ear (risk free) with tie capital elsewhere. The ‘isk adjustment’ isan addtional amount to account for the geological, eotechnical, economic and political fisks associated with se project. + The cost of capital is the rate of return investors require to supply the funds for that project. Like the risk adjusted discount it includes an allowance for risk associated with the project. 18 May, 1999© tobesen baie oon The oul reeling te nt present valu (NPV) fra poet is Ditown a 1+h) hae ew fr xpi cisoun =n cpl egendie Internal rate of return (IRR) is calculated by solving the following caten ore Advantages of DCF Anaysisnlue «Very singe celta anders * Evaluation method independent of the method for generating conte * Takes eccount of tisk. «Allows compaizon often projets wth ere si profes «Independent of nation Dissivanags «Doe nina wet of jel nang iy pti fare hagas they orca Sane gee scadigy tt DOP Se ee oe Note: for details about how cost calculations for DCF Analysis differ from normal accounting practices, refer to the Appendix. seta 50 @ e @ e @ @ @ @ @ @ e @ @ @ e @ @ @ @ @ e @ e e @ « @ @ @Optimization in Mine Design 7 Projected Accrual Accounts Applying accrual accounting methods to calculate future profitability, For example, projected P & I. statement. ‘Advantages: + Well within the capabilites of an average accountant. + Beer at forecasting tax bilities. + Relates well o a CEO's need (i applicable) to show petiod profits. Disadvantages: + Deats very poorly with risk concepts + Subject to inflation Option Pricing Techniques Refer (o paper by Mogi et.al. in the Conference Proceedings. Advantages: ‘+ Can account for a project manager's ability to adapt to future changes / future information. Disadvantages: ‘© Requires more empirical data to implement. ‘Evaluation technique is closely tied to the method for generating scenarios. Monte-Carlo Analysis Uses probability distributions as inputs for major economic parameters and produces a probability distribution for value outcomes. Advantages: # Provides a probability distribution for value outcomes. Disadvantages: + Requires more data. ‘© Existing systems eannot incorporate pit optimization, schedule optimization and cut-off optimization. + Requires the generation of a large number of scenarios. 18 May, 1999)2 Optimization in Mine Design atin ine Dot Note: Refer to paper by MeRostie and Whittle in the Conference Proceedings of Optimizing with Whittle 1999. Counterpoint ‘The degree to which designs and strategies can be measured in dollar terms varies considerably, and there are some spectacular historic failures. For example, in the 1970s Ralph Nader drew the world’s attention to a leaked Ford Motor Company report which showed that the location of the fuel tank in the Ford Pinto made it prone to explode in common types of accidents. The report calculated the cost of relocating the tanks in future production (a few dollars per vehicle) and ‘compared it to the cost of legal action against the company as a result of the deaths of future Pinto owners. The report concluded that the net Cost to Ford would be lower ifit did not change the design, s0 condemning scores of future Pinto occupants to death, ‘One could argue that the economic model Ford employed was deficient, because it failed to take into account, in dollar terms, the loss of goodwill associated with the deaths, We are more inclined to belicve that there are some things that are just too difficult to value in ‘monetary terms and all economic designs need to be evaluated against a background of non-monetary considerations. q q q a a é @ e o e @ @ e e e @ @ @ e @ e e @ e @ @ @ @ e Many authors have contributed to a better understanding of economic analysis and decision making in relation to the mining indisty, and interested readers are referred to Walls (1996) and Appiah (1993): Walls (1996) examined the decision making behaviour of mining, ‘CEOs and found difference between the behaviour of Australian CEOs nd their US counterparts. He also offered a range of reasons why (CEOs depart from purely NPV objectives. Appiah (1993) presents Pareto Optimization as a methodology for dealing with multiple objectives, such as economic and social objectives. 18May, 1999OOO OHOSOHOS SOOO TSHPSOVOCOSCETVSETVHGVVVVTCVUVEVVTVVVUY e Decision-making behaviour Risk Neutral rete roe Ses nis Deciston~ Making Behaviour Decision-making behaviour affects performance in terms of the commodities markets and share markets, and is influenced very much by a desire to avoid or seek exposure to risk. Ttis a key factor in the etermination of strategies. In the piloting of a corporation, the CEO is charged with the responsibility of maximising shareholder value and itis generally accepted that the maximisation of Net Present Value (NPV) is consistent wih this objective. Where a decision is required as to whether oF not fo invest in a project, the NPV is calculated. Ifthe NPV is positive, then this indicates that the investment should be made. In choosing te exact configuration of a mining operation for a given resource, the designer is effectively choosing between a large number of mutually exclusive projects. Stermole (1993) stale that in deciding between mutually exclusive projects, you should choose the one with the highest NPV. In doing so, you would be exhibiting risk neutral behaviour. You can afford tobe risk neutral if the project under consideration is only 2 part of your risk exposure. You can, in fact, diversify-away the risk. Even if you ¢o not have a diversified portfolio, risk neutral behaviour can be appropriate. During discussion of the Eager (1997) paper at the “Optimizing with Whittle” Conference, it was suggested that U.S. mining companies seck exposure to certain types ofrisk and tothe potential upside associated with them. An example of this can be found in the Chairman's Statement of the Homestake Gold Annual Report 1994, which declares that: “Refer tothe section on Beonomie Beslution 18 May, 1999‘4 Optimization in Mine Design eee tization i tine Desig “The company's policy of not hedging the gold price continues in order to provide shareholders full exposure to its fluctuations " ‘The company is apparently making itself attractive t potential investors by exposing itself to the risk (and upside) associated with Aluctuations in the gold price. The advantages of this must outweigh any tendency of the company to avoid the risk. Risk Averse ‘Walls (1996) performed some research on the decision-making behaviour of mining CEOs and found that they do not generally make highest NPV decisions, their decisions being tempered by risk averse behaviour. He found that CEOs of smaller mining companies tend to b¢ more risk averse, and suggested that this is because the higher risk projects carried with them a greater risk of company feilure for small companies. Ixtrestingly, Walls also found that Australian small company CEOs were more risk averse than ther U.S, counterparts but could offer no explanation for this. ‘An alternative approach to the tempering of NPV objectives with risk averse behaviour is given by Sraith (1997), who suggests that rather than choose the maximum NPV production rate, tisrate should be Seen as the maximum rate and that the actual rate should be less than this. Par of the reasoning behind the attenuation is that a maximum NPY production rate tends to lead to a short mine life, leaving ‘minimum time to recover from early difficulties. Sating the Market's Thirst lis the underlying purpose of most companies to maximise shareholder wealth. For the shareholders ofa compary, itis advantageous fo have the share market determine a high value for the shares, The market determines the Value ofthe share using a number of subjective and stratogic criteria, but also uses a selection of \auitive measures. These measures are nol necessarily the best ‘way to measure a mining company’s value, but being based on readily ‘vailable information, they are practical. The methods include + Eamings per share (EPS) and Price Eamings Ratio (PER) * Cash Flow and Price to Cash Flow Ratios (PCFR) + Dividend Yield * Commodity and Reserve Exposure + Market Value 2 Refer to Rudenno (1998) fora more comprebensive discussion of how investors value mining company shares. 18 May, 1999 @ 0000006000080 00000000002 20an0004Catimization in Mine Design 1s these methods are being used to value the shares, then a strategic rine plan may be influenced by the need to sate the market's thirst for ‘measurable value. For instance, it may be better to structure a project 0 that i leads to early payment of dividends, even if this means a sacrifice of NPY. ‘A major non-financial measure used in the valuation of shares is the Reserve, Appleyard (1997) writes: “the reserve is probably the major input in a company's ability to raise debt or equity finance, and, if listed, in its rating on the sharemarket." Burmeister (1997) states that: “One of the simplest yardsticks for comparing gold companies is the ‘market capitalisation per ounce of reserve or resource. Since the adoption of The AUSIMM Code for reporting on Reserves and Resources by all listed Australian gold companies, the quality of > ’ D> > D> D D D> . D Figure 3 is an idealised example of an NPV / Ore-Tonnes-Processed ‘curve, Its possible to create such graphs for real data using one of a number of different software packages such as Whittle Four-D or Whittle Four-X. These packages design optimal pits and the total ore tonnes isa function of the size of the ultimate pit and other design parameters, The (otal oe tonnes is equivalent to the reserve. 18 May, 199918 Optimization in Mine Design A ntiization in tine Design NPV Total Ore Tonnes Figure 3: The typical shape of an Ore Tonnes (Reserve) / NPV graph. is useful to describe the nature of the curve in detail: ¢ C 4 4 q q «q q @ @ 6 e@ e @ @ @ e * The maximum of the curve represents the optimal design fom the point of view of the maximisation of NPV. + Every point on the curve represcits an optimal design given the corresponding ore tonnage on the horizontal axis, + There are infinite feasible designs which could be represented as points on the graph, but none of these points could occur above the curve, Those designs which are represented by points under the ‘curve are sub-optimal in one or more of the other design criteria not sraphed ‘+ The area under the curve but above the x-axis represents the feasible domain for pit designs which have a positive NPV and which are therefore economically viable, Figure 4 is similar to Figure 3, except that we have overlaid our ‘comments in relation to the decision-making behaviour discussed in the previous section, 18 May, 1999SUVGEVVTVUVVTOVUEVVV EVV VVEsVVVUVVVEY Optimization in Mine Design 19 Rk averse Rbk neutral es mine deson Maxum viable reserve NPV Al mine. deslans ‘wn NPV Figure 4: Representing decision making behaviour ‘onan ore tonnes / NPV graph. A risk neutral design will seek to maximise NPV. A risk averse design will nt succeed in maximising NPV because it will employ less capital than is required. This will lead to a smaller than optimal processing capacity, less efficiency and probably a less ambitious mine design. Al the far right ofthe graph is the mine design which maximises the reserve, while having a positive NPV. A company which is primarily motivated by the need to raise capital could present such a mine design as evidence thatthe reserve is economically viable. ‘An example of such a feasible domain using the Four-D package and a training data set called “Monte Bojo” is presented below. Several hhundred life of mine simulations were performed for a range of processing plant configuration and pit size alternatives. In total, 588 life-of-mine schedules were created and reported with a processing time of about 40 minutes on a PC. The results are shown in Figure 5, For this example, the processing plant and pit sizes were varied, but similar results could be achieved by varying any major mining parameter. One of the interesting features of this example is the fatness of the curve at its maximum. The maximum NPV (Net Present Value) design is 67 million tonnes, but the NPV curve is very flat over a range of between about 55 million and 75 million tonnes. 18May, 1999,20 Optimization in Mine Design {In the example, the optimal design and schedule involved a mine life of only 2.3 years with an optimum processing throughput rate of 29 nillion tonnes per annum. We would imagine that most miners would be reluctant to engage in such a schedule. The risks are extremely high, if for example, the mining were to commence in a cyclical low price period, or if there were difficulties getting the mill to perform to boiler-plats ecovery*. In this case the theoretical maximum NPV is uuncealistically high, and the achievable best NPV will be somewhat lower. The theoretical maximum NPV is, however, sll very useful as a reference point forthe economic evaluation of different practical altemaiives which the engineer devises All Production Ratos [sae] Figure 5: Example of a feasible domain, The dots represent a total of about 600 complete mine designs and schedules produced ‘by Whitto’s Four-x package. © Smith (1997) analyses this particular isue, and in relation to production rates, concludes that the ‘optimum’ production rate eel real Tower. 18 May, 1999 he regarded ng the maximum rate. The most sensible rate may be somewhat ®@ SOHOHOHOHOHCHOTDHOHSSOHSHOHHHOOOHHGAH2AA4244aevuvUeVUsVVVVVUVUS > > . D > D D » D »> D PeVvVTeveNVNUVCNVUEN ptimization iM Exercises 1, Define these Terms: Situation Analysis Business Plan Homogeneous Substitute Perfect Market Der NPV Risk Neutral 18May, 199922 Optimization in Mine Design Be ptimization in Mine Design 2. How perfect isthe market for diamonds? Characieriie Beare | Wate Tonogensoas poder ‘Sabatier are ‘vote Tage mambo alert Tage narber oT bapere Perec Iforiion SCOCOCBAAA2L2A00282222 ‘What strategic thrust has Argyle Diamond Mines (apparently) taken? 3. How perfect is the market forhigk ranked coal? Chavacterine Sears [Wave Vowanensout prodiat sore ville Tage nib ofacere e e e e e e e @ e e @ Tange mba fare Feafea formation ‘What effect do buyer cartels have on sellers" ability to exploit product differentiation? 18 May, 1999Optimization in Mine Design 2 4, What sort of risk position is being taken by a miner who seeks to maximise NPV? 5. Why would aminer seek to reduce exposure to commodity prices? 6 Why would any miner want to maximise their exposure to Aluctuations in commodity prices? ‘What isthe key benefit of Monte Carlo analysis? 10 May, 1999 yeewvevvevovsrwrrs24 Optimization ative Design BO ptimization in mine Design 8. Given the foltowing situations, nominate some objectives / decision-making behaviours relating to a potential small gold project that may be appropriate: ‘+ Small gold mining company - privately owned. ‘Smali gokt mining company - iste. Very large diversified mining company. [arge copper mining company. @ @ e e @ @ e @ @ e @ 10 May, 19 lev eeocenssesceeel:18 tay, 1999 in Mine Design Optimization Techniques Oviimizetion AMMAMAAAAABMAMAOBA442 2AM ARMA MAMAAMMABDABDABDAMMAABMABDADRAL‘This page lef blank intentionally 18 May, 1999Optimization in Mine Design 2 The Computing Environment When discussing optimization, we must first understand where we are in relation to the development of computers, On June 21" 1948, just over fifty years ago, the first run of a program. con “stored program” computer occurred. We have come a long way since then, LLetus look at the recent past, the present and the near future, where the speed of computers is increasing by a factor of about 100 every 10 yeats. Let us also consider the associated techniques and ideas, Coding eas ‘ower techniques: a " 1990-1995 | Third generation i 50} insets Fou-D/Fourx |" perseeond 15362000 | 00 Loe 300M and Third Lane generation Milawa @ Tolwine Halatchey Open pit optimization wih blending oa-2005 | OO and Fourth 7 500M feeneration?| Computer programs are “coded” by humans, That is the humans use various techniques to put together computer instructions, usually in some formal language. In 1990 third generation languages such as FORTRAN were almost universal in technical computing. We are ‘now seeing the introduction of “Object Oriented” (00) coding techniques, particularly in relation to graphic user interfaces. In the next five years OO will become much more prevalent, and we may also see higher level languages for dealing with the mathematical parts, although the third generation languages are often effectively raised a level by building up libraries of powerfu: subroutines VeUrVvVvVVUFTUVUVUUVUU UU VUEVUVEVVVUE The type of computing that we will be talking about depends on ideas, and these cannot be planned or manufactured to a timetable. There are ‘many things that we would like to optimize but do not know how to. Everyone in the field is on the lookout for ideas which might be useful, and some of us are supporting projects which try to foster the generation of these ideas. For decades now the available computing power has been doubling. approximately every 18 months (“Moore's Law") and, despite occzsional doomsayers, there seems no immediate probability of this slowing down. This makes programming progressively easier, so we are able to tackle more difficult tasks. ‘There ar interesting times ahead. 18 May, 1909 > > > > D> > > > > D> > > > > > > a28 ‘Optimization in Mine Design Overview of Mine Design and Planning 18 Mey, 1909 Open pit mine planning can be broken down into series of steps where each leads into the next. In one such breakdown we produce cach of the items shown in Figure 6 —Ore-body Modal] Ultimate Pit Design | Long-term Schedule Cut-off Schedule Short-term Schedule Figure 6: Open pit planning steps ‘While each item has a real effect on any following items, the reverse is not necessarily true, and they are grouped accordingly. For example, while the o-e body model is rarely affected by what follows, the pit design, long-term schedule and cut-off schedule can a‘fect each other @ great deal ‘The aims are also different for the three boxes. In creating the ore body model, the aim is to be as accurate as possible. In the second box, the aim is to maximize the value of the mine by deciding approximately what will be mined and processed in each year of the life ofthe mine. Here, the year in which a cash flow occurs can hhave a significant effect on the value of the pit. The emphasis is on {getting the over-all scale and mining sequence right. In short-term scheduling, we aim for the smooth and efficient use of the equipment on a day-to-day basis. This affects the value of the mine by its effect on the daily cash flow. Note that, in short-term scheduling, we often have more detailed information about the ore body than 's available when doing long-term scheduling. ‘This course concentrates on the items in the second box, but first we must discuss discounting. DOOHSHOHSHHHSHOHSHHSHHOHHSHHHOHHOHHHDOHHSHSHHHHDHDHOGOHAAABLa40Optimzation in Mine Design 29 Qovenationn Mine Design lw Discounting ‘There are different criteria for assessing the value ofa pt, but many companies use Net Present Value (NPV). This takes note ofthe fact that a dollar that we receive today is more valuable to us than a dollar {hat we might receive ina yeas time, and expected cash lows are discounted by an amount which inereases with time. The rate of increase is usually expressed as a discount rate, such as ten per cent per year. ‘Thus a five year project with an expected cash low of one million dollars per year and a discount rate of ten per cent would be assessed, in today's dollars, as shown below. vuvuvvesuVVVUVEWE Discount Today's Year| Cash faction Dollars 1_|_si000000 | iia $909,091 2 | s1.000000 | ian $526,486 »® 3 $51,000,000 1331 $751,315 > + | 81,000,000 | _iniaoat 5683.013 > 3 | sio00000 | in.eios1 | se2o921 ® This gives a total value today, the Net Present Value (NPV), of > $3,790,787 > the project had eash lows of SI 5M, S1.SM, $IM, $0.5M and , i S0.5M, which gives the same total undiscounted cach low of SSM, the D figures would be as shown below. > > Discount Today's > Year) Cash faction Dollars > 1__|_s1800000 | ata 51,363,636 6 2 ‘$1,500,000 wat $1,239,669 3 | 1,000,000 | 133i S751,315 4 $500,000 | 17.464 $341,507 5 $500,000 | 1n.610st_| _s310.401 ‘The NPV would then be $4,006,588. The increase of $215,801 (5.7%) is caused by $1M of the cash flow being brought forward from years 3 & 4 to years 182, Thus, in mine planning, we have to consider not just the magnitude of expected cash flows but when those cash flows will occur. 18 May, 1989 vevevuvvuvvvevuvvuvs30 Short life mines Long life mines 18 May, 1909, {the life of the mine is expected to be short, say less than three years, then the mining sequence has little effect on the ultimate pit design, and the cut-offs are generally constant. This considerably simplifies the problem of finding the best ultimate pit outline. Iis merely necessary o calculate the value of each block in the block model and then to find the three-dimensional shape which outlines the sub-set of blocks with the maximum toal block value for the required pit slopes, ‘Today, several computer algorithms which will solve this problem have been published, and computer programs are readily available which will find accurate optimal pit outlines. ‘With long life mines, we have to consider the interactions between the pit outline, the mining sequence and the cut-off schedule, where the latter two are affected by discounting. There are currently no programs available which will optimize the outline, the sequence and the cuto‘fs simultaneously, but we can ‘optimize some parts of the problem separately and tien iterate round the parts to obtain a result. SecvccccccccecmeccccccccanananaaOptimization in Mine Design a What is Meant by Open Pit Outline Optimization? Letus now look in more detail atthe kind of pit outline optimization which ignores discounting. Thétis, which is immediately applicable 10 shot life mines where discounting has little effect. Definition of the Optimal Outline Consider Figure 7, i} . 8 ® . ® ® . ® 9 8 ® ® 8 Figure 7: Typical Ore Body Any feasible outline has a Dollar Value, In this context “feasible” means that it obeys gafe slope require ments, (We will discuss haul roads later.) Dollar Value = Revenues - Costs Revenues can be calculated from ore tonnages, grades, recoveries and Product price. Price is oflen the main unknown factor but, in order to design at all, some price must i assumed. Costs are much more complicated, and we shall spend more t'me on. them later. For the moment, we will assume that the costs of mining and processing are known, ‘The dollar value of any feasible outline can, in theory, be calculated by totalling revenues less costs for every cubic meter, or every block, ‘within the outline. Note that, as well as the whole outline having a value, any portion of the pit has a value, ‘The optimal outline is defined as the one with the highest dollar value, Nothing can be added to an optimal outline which will increase the value without breaking the slope constraints. 18 May, 199932 Optimization in Mine Desiga Nothing can be removed from an optimal outline which will increase the value without breaking the slope constraints. In other words, we mine everything which is “worth mining”. What Affects the Optimal Outline for a Given Ore Body ? Prices and costs bigger. In general - if txe product price goes up, the optimal pit gz In general - if costs go up, the optimal pit gets smaller. Slopes In general - if we use steeper slopes, the optimal pit gets deeper Once The Above Factors Are Fixed - So is The Optimal Pit ‘We may not know the outline, but itis fixed, and, if we exclude pit extensions of exactly zero value, there is only one optimal outline, To prove this, let us postulate that there are two optimal outlines for the same ore body. That is, there are two different outlines which satisfy the slope constraints and Which both have the same total value, which is the maximum possible total value. If we can prove that this is aan impossibility, then we have proven that there is only one optimal outline. There are two possible cases. Figure 8: Disjoint pits Figure 8 represents the first case. Here the two pits are disjoint, that is, they do not intersect. This is clearly a nonsense because, if we mine both pits, we get twice the value of either one, so that neither one could have been of maximum value (i.e. optimal). 18 May, 1969ypevvevevvvvvvvversvvuwvoverueee wevVVVVVVVVVVVVVUS Optima zation in Mine Design 33 \/ Figure 9: Overlapping pits In the second case, where the two pits overlap as in Figure 9, we note that each of the three regions A, B and C have a value, and the value of the combined pit is A+B+C Ifthe two pits are of the same value, then A+B=B+C or =A+B+C=B+C+C But C must be positive, otherwise it would not be included in any optimal pit, so the combined pit has a value greater than B+C. Consequently, the supposition that two different optimal pits can have the same value is fale. 18 Nay, 1999au Optimization n ine Design Ati sation mine Det, A Simple Optimization Example Let us considera very simple ore body which is rectangular, of constant grade, and sits beneath @ horizontal topography. Let us further assume that itis of infinite length, so that we do not have to allow for end effects, and need only consider one section, Figure 10 shows such an ore body. surace bench tev 100 Tones wast Figure 10: Simple ore body Using the quantities indicated in the diagram, we can calculate the ‘onnages forthe eight pessible pit outlines, and the following table shows these, Tonnages for possible ou Pi Ee Ore 500 1,000 1500 2,000 2,500 3,000 3,500 4,000 Waste 100 400900 1,600 2,500 3,600 41900 6.400 Toial__600 14002400 3.600 5,000 Gann g.40ntms00 Note that, although the o-e tonnage inereases linearly with pit number, the waste tonnage increases as the square of the pit number. If we assume that ore is worth $2.00 per tonne and that waste costs $1.00 per tonne to mine end remove, then the following table shows the value of each pit 1 May, 1999 C0CCCCCCRO0CC® rocccccoccccccccesOptimization in Mi Design 35 Pit values for ore at $2.00/T and waste at -$1.00/T Pit toa 3 4 5 6 9 8 Value 9007 1.600 2,100 2.400 2,500 2400 2,100 1,600 Clearly, pit 5 has the highest value, but note also that the values of pits 4 and 6 differ only by a small amount from that of pit 5. This is very important to realise, and is shown graphically in Figure 11 vahe $3000 4 8 6 3 7 2000 2 8 so00 bg ° ! Loot ! 0” 2000 #000 6000600010000 tonnes Figure 11: Pit value against pit size Note thatthe graph goes through a smooth maximum. Although this is an artificial exarple, such a smooth maximum is normal for real ore bodies. In my experience a range often per eent in pit tonnage usually involves a range of less than two per cent in pit value. This has a profound effect en the process of designing pits. value singe verse attemwrs , pow wnt oo pusit bak et Tonnes Figure 12: The small effect of design changes near the maximum 18 May, 199918 May, 1999 Optimization in Mine Design ‘As you can see from Figure 12, small deviations from a design which is not optimal (A) can have significant effects on the pit value. Thus ‘generations of mining engineers have experimented with small changes to try to improve their designs. This is quite unnecessary if you start fom an optimel outline (B) where small deviations have only a second order effect on the value of the pit. ‘Whatever value you sim to maximize, if you work near the maximum, the value you achieve becomes insensitive to the pit outline, ‘This fact is one of the most important in the area of pit design. nnaaccccacecsccees,Opiimizaton in Mine Design ar What Pit Outline Optimization Methods Are Available? All currently available methods attempt to find the optimal outline in terms of a block model consisting of a regular matrix of blocks in three dimensions. The different methods (ry to find the list of blocks which has the maximum possible total value, while still obeying the slope constraints, ‘The enormity of this problem is seldom appreciated. Trial and Error Consider a trivial mode! with only one section and ten benches of ten blocks, as is shown in Figure 13. VBSESCVOOHSSSORVCOROE 10 100 Blocks Figure 13: & trivial model D D D> >» D D > d > > Awe take a very simple-minded approach, there are 100 blocks and ‘each can either be mined or not mined. This gives 2" or 10” '@ altematives! Even if computer could check out an alternative every ‘microsecond, t would still take three million times the age of the universe to check them all! 1*we startin any position at one end and then go up one, down one, or stay atthe same level, then there are about 10x3*, or 200,000, alternatives, Actualy itis 156,629 as the table below shows. This is because the number of altematives at the top and bottom is not 3 18 May, 1909 ~ yew eww wewewwewe38 Optimization n Mine Oesion Numero tren way of eachng 2 pariear dap i ach clue Desh ed et 8 3 Sy 3 822 tart tea nara aa. c1a7 oot 3 8% 45 aaa Yeo Sait assed 3] 1 3 8 ar ao ioe gee any 500 rato fot 3 8 at ez an 242 esag_ e700] re 23727 Heo G45 1915) fot 38 a2 7224263490760] yo+ 308 26 Gee 2008 S900 17500 jot 3 9 Be 216 623 1800 sari sit4 jo: 3 8 oe wi 483 1973 sez 128 os 1962677503823, boug 156,629 can be handled by a computer - but ifwe extend the model to 10 sections, asin Figure 14, then we have about 10x2" or 10" alternatives and thrce million times the ege of the universe again, and this is still a very small model of only onc thousand blocks. 10, 10 = 10 1000 Blocks Figure 14: A very small model Conclusion - Trial avd error is useless, Floating Cone Thi “heuri isa step up from pure trial and error - a heuristic, where best described a guided trial and error. Floating cone works by repeatedly searching for ore blocks and then ‘checking ifthe blocks in the inverted slope cone which sits on the ore block has a total value which is positive. If't is positive, the cone is “mined” and the search continues. When no mote positive cones can be found, the blocks “mined” constitute the optimal pit. Unfortunately, programs that use this approach can encounter problems. 18 May, 1999 @ SPHOHSHHSHHOKSSHSHOSHHSHHODHHHHOOHOHEOptimization in Mine Design 39 Ignoring co-operation - mining (00 litle. +00 00 Figure 1: Ore bodies and extraction cones With the ore and weste values shown in Figure 15, a loating cone program would examine the lef-hand ore and decide thatthe value of {he cone was 100-80-30=-10. It would decide not to mine the ore. It would then make a similar decision forthe right-hand ore body and ‘would conclude that there was nothing to mine. In fact, we can see that, if we mine both ore bodies, the mine has a total value of +10. Although all sorts of tricks ae resorted to, floating cone programs cannot really get around this problem without using trial and error, and ‘we know that that is useless Now, totaly disjoint ore bodies are not common. However, co- ‘operation of this sort between different protuberances of an ore body will frequently make a significant difference to the outline and value of apit Mining to0 much - pulling up the waste, D D ® D D D > D > Dd D Figure 16: Ore bodies and extraction cones With the ore bodies shown in Figure 16, a floating cone program will first examine the +40 ore body and decide that itis not worth mining. twill then examine the +200 ore body and will decide that itis very well worth mining (200-80-30=+50). It will remove it from the model, together with the waste which must be removed to expose it ‘The situation is then as shown in Figure 17, 18 May, 199940 Optimization in Mine Design YS Figure 17: Situation after frst ore body is removed Ifthe program goes back to the top of the model and starts searching, for ore again, then the final result will be that the +40 and +200 ore. bodies will be mined and the +60 ore body will not. This would be correct. However, in computational terms, it can be very expensive to go back to the top of the model each time any ore is removed and some floating ‘cone programs continue downwards in their search in order to save time, In this case the next ore body examined is the +60 one. The current contents ofits cone are 60-70+40-20=+10, so.the program mines out this cone, which is wrong. The +60 ore body should never be mined because -70 of waste has to be removed to uncover i ‘The main advantage of the floating cone method is that it is easy to understand. However, it can overlook co-operation and can use the value of ore to pay for the mining of waste below that ore. Two-dimensional Lerchs-Grossmann 18 May, 1999 Lerciis and Grossmann published two algorithms for open pit optimization. One was a very simple method for optimizing a single section. thas two main limitations, and they are fatal, ‘The first is that it can only handle slopes which can be produced by repeatedly moving one block up and one block across. Thus, to change the slopes, you have to change the block dimensions. In the original publication, the slopes had to be the same in both directions. Although variant has since been published which allows one up and two across ‘on one side, the slope modelling is still very poor, even if you have control over the block proportions. “The second restriction is thatthe optimization works on each section independently and adjacent sections usually do not join up. This leads SO0COCOOCOAALZA02442 @ @ e ° @ @ e@ e e@ @ e‘o considerable manual adjustment when doing a detailed design. In no sense does it arive at an over-all optimal outline Two-and-a-half Dimensional Lerchs-Grossmann Many people have extended the two-dimensional method by running it North-South and East-West and trying to join the sections up that way. ‘This has been only partially successful. It still does not arrive at an ‘optimal solution, and the slope modelling suffers frem the same restrictions as does the original two-dimensional method, In addition, slopes are always too steep in the NW-SE and NE-SW directions. As can be seen below, one block up and one across in the North, South, East and West directions from a single valuable block produces a diamond shaped pit rather than a circular pit. Ifthe slopes E-W and N-S are 45 degrees, then the slopes NW-SE and NE-SW are about 55 degrees. This illustrated in Figure 18, VESCVOVHOCBVGVVVVVUD 6 6{s|é 6[slais|6 e{s{4/3lalsl6 6|s{4/3/2/al4lslo 6is{4{3|2i/1l2iai4 6 6{s{a{sl2la]a|s 6{s{4ialalslo6 6[slais[6 6|si6 6 Figure 18: This diagram shows the outline of a pit generated by etepping one Lup and one across, starting from a single ore block and going up five benches. The numbers show the levels at which each step-out occurs, Ernest Koenigsberg - 17th APCOM ‘This method is similar tothe two-and-a-half dimensional Lerchs- Grossmann method, but it works on both axes aimultancously aud achieves better joins between the sections, It suffers from exactly the same slope constraints as the two-and-a-half, dimensional method, 18 May, 1999 > > ® . > > > > > > > > »® > > > > > > > > > > > > > > > d2 Optimization in Mine Design tization in mine Design Three-dimensional Lerchs-Grossmann and network flow 18 May, 1999 In the 1960s Lerchs and Grossmann published a graph theory method, and 7.B, Johnson published a network flow method for true three~ dimensional optimization, ‘Both methods guarantee to find the optimal pit in three dimensions. Both - naturally - give the same results. Both select a sub-set of blocks which gives the absolute maximum total value whilst obeying the slope requirements. Both are difficult to program for @ production ‘environment, where there are large numbers of block and variable slopes. ‘The Lerchs-Grossmann method is the one most used, and it has been programmed commercially by about four different groups. The programs they produced differ in their ability to handle slope variations and differ in the machines on which they will run, Despite bein, difficult to program, the Lerchs-Grossmann weihod is relatively easy to explain and demonstrate, atleast in general terms. ‘The method works with only two types of information. These are the block values and what Lerchs and Grossmann call “arcs” ‘An are isa relationship between two blocks. An arc from block A to block B indicates tha, if is to be mined, then B must be mined to expose, A. The reverse isnot true. IfB is to be mined, block A may or ‘may not be mined, See Figure 19, / ‘Ae tom Ato 8/ 7 i . Figure 19: An are 1m most optimization packages, all the slope requirements are translated into a (large) number of block telationships inthe form of arcs. It might appear that we requite an arc from each block to every block which is “above” tin a mining sense, but there is no need to have so ‘many, because arcs can “chain”. Thats, an arc from A to B and an are from B to C ensures that Cis mined if Ais mined, despite there being ‘no arc fom A to C, as is shown in Figure 20. @ e @ ° @ @ @ @ e @ @ rpoccccccccccccoesspevvevueuvvevevuvevers i ' A Figure 20; Chaining of ares In Figure 21, three arcs used repeatedly can ensure the mining of all, required blocks for the slope indicated when the bottom left-hand block is mined. tbe + Figure 21; Required arcs for a desired slope ‘When this idea is extended to both sides, and to three dimensions, we typically need of the order of $0 arcs for each block, to ensure a slope accuracy of about one degree. Exact slope accuracy can never be achieved, because optimization cannot “mine” part of a block. ‘The Lerchs-Grossmann three-dimensional optimization method achieves its aim by manipulating the block values and the ares. It uses ro other information. In other words, except forthe information given by the arcs, it “knows” nothing about the positions of the blocks - nor indeed about mining. Therefore, in order to demonstrate how the method works, iis merely necessary to work with «lst of Docks and alist of ares, Whether these are laid out in one, two or three dimensions, and how many ares per block are used, is immaterial 18 May, 199944 Optimization in Mine Design In order to demonstrate how the Lerchs-Grossmann three-dimensional ‘method works, we will choose to work in two dimensions, because that is much easier on paper. Also for simplicity, ws will use square blocks and slopes of 45 degrees, although this is not a eequirement for Lerchs-Grossmann, as was shown by the previous diagram. This allows us to work with only three arcs per block, as shown in Figure 22, Figure 22: The effect of chaining with three arcs per block The Lerchs-Grossmann method fags each block that we currently intend to mine. During the optimization preeess, these flags can be turned on and off many times. A block is flagged to be mined if it ‘currently belongs toa linked group of blocks that have a total value that is positive, These groups are called “branches” ‘The method repeatedly scans through the blocks looking for blocks that are flagged to be mined and that have an are pointing to a block that is not flagged to be mined. Clearly, this isnot a viable situation. ‘The way it resolves these situations forms tre core ofthe Lerchs- Grossmann method. ‘The following diagrams take you through such a search. We sta wit woinensional model, 17 leks lang ane 8 blocks high. Oriy twee back coninpoenta oe, and they have the values shown. ‘Al'sher loca are wate snghave fe value 1.9 Slep 1 The feet rom a "agg boc hat wen 1 1 ex wie gmat Rapped 18 May, 1999 peeecccccccccccceseccoceseceesBo Sten 2 To resale Wis, we Ink te ho oaks gene: "The lol vue ofthe wo-lock branch is 22, 28 Slap 3 We eat wth te oar oars fam his lok in the sae way “heel vate fe our block brane e208, 73 208 Step is consoue int sae way con ney tan alge nest ben, lng © 8 patee arch) 208 ‘Slop Thanet dagged back hasan ae 103 Mock wich also aap. ‘Wi dont crate a ink ris are re he vrteal ane fom ‘esame block, because noning haste resoved, 18 May, 1999oo Optimization a Mine Design 58 a 8 Slop & The nen kom » agg eater Rapped block between two branches. “The posed wncaryed me go tol nett ete 153 08 708 . ‘Sieg 7 We cntnue ag inks una we reach th one shown. Wha we ad hs tk he branch ill wi became. Seeause of ie ALL the hock Inne branch hve he fag ‘Slop: The nex scat neress em a fagged bok oa block which part branch 158 208 ‘Sp 9 Th Lerche Grossmann metodicudes a procedure fr combining theo inked tanchesno one branch wit ony one oat value (teat eres no requremen! 9 ‘ays bah spars fam te 0), 18May, 1999 @ @ DASMNSHSHSHSHSHSHOHSHHSSHSHHHDHHHHFIOHHHHGOHHHHHHHHHHHHHOHOHE> > > » > > > > > > > > ee > > > > > > > > » > » , , , , , 1 ah 33 168 Step 10. The nx ae of rarest stem a Napped Back oa was bck, ‘eres Gresamann detects habs ena wasie wl fenove ‘he aby ef cele branche co-operate mh be hightsand ‘branch paying lobe meg ol he ced ack Stap 11: Lerchs-Gresnann ncdes 2 proces fo breaking the singe tase ‘het reer BY REMOVING @ in oH ai rr ‘Step 12 We crtinue ang Sok an evertuay, Be ovale of he lettnand branch tetamesrojave. The ext re set "isis aga betwen postive anda nagatve branch oo oy ‘Stop 18: Tiss Goat win te someway as befor, ana een an Mahchand branches ate combined nia Gre wa ae a vs, 18 May, 199948 18 Nay, 1999 Optimization in Mine Design < 4 a4 oe ‘Step 14: We caniave acing acs ul we reach he san shown above. The progam “hauls do oraner ean aes rom ices wich ar gaed to locks we She nt naggea eco se al fe re, nd spect come Lerchs and Grossmann proved that, when no further ares can be found that are from a lagged block to a block thal is not flagged, then the flagged blocks constitute the optimal pit. In a real optimization, we ‘would start the scan again, but visual inspection shows us that this is unnecessary because itis clear that there can be no flagged blocks witt ares to blocks which are not flagged. ] L I I e i In this case we have a W shaped pit that contains two ore blocks with @ total value of 47.8 and 47 was blocks with a total cost of 47. The pit is thus worth 0.8, and we can sce thal this is indeed the pit with the ‘maximum possible value. Note that there are 7 extra blocks which would have to be removed to uncover the centre ore block which has a value of only 6.9. Its thus not worth mining. In real three-dimensional optimizations, there will usually be many ‘scans of the blocks checking for arcs that have to be resolved. These continue until a scan occurs in waich none have to be resolved, and we know that the optimization is complete, Since 1965, when the Lerchs and Grossmann paper was published, other algorithms have been published which achieve the same result, In general, they require a smaller number of steps to obtain the optimal outline, but the steps are more complicated. Using the Lerehs-Grossmann method with modern PCs and software, the time taken to do an optimization will frequently be as little as a ‘minute, and should never be more than an hour or :wo. eccccccavceds SCOCHHCHOHCHOCHOHHOCOe naoncccccscccesoesSVVGVTSFCVPVVCVVVVVVVTYH e pevvevrvevueeveveevveveevuevuwuTS Optimization in Mine Design 4 Lptmzaion in Mine Design The Effects of Sequencing & Scheduling 18 May, 1999SPECSCOOTOHSOOOSOCES ©2800 COCCO8 SPOKOCHCHHOHOHOOOCHOOO! Opuimizaton in wine Les 3 3 z i E 2 10 May, 1999Optimization in Mine Design st Dpterization in Mine Design The Effects of Sequencing and Scheduling As well as exploring different prices and costs, itis important to explore different mining sequences and schedules. Note that when we talk about a mining “sequence” we mean the order in which different parts of the pit are mined. A mining “schedule”, which tells us when things occur, can be cons:ructed by applying the Production constraints to the mining sequence, ® D . ® . 5 AAs wells determining when diferent pars ofthe pit are mined, Schedule determines when the cash lows asecated with mining are ® produced. Ths is important because all dollars ar nt equa. ® 2 ® S . DB The effect of time on the value of money We discussed this earlier, but now we will look at it in more detail [A dollar that we receive today is more valuable fo us than| a dollar that we might receive in a year’s time. ‘There are various reasons for this: + Inflation may reduce the value of next yea:'s dolar. + Ifwe have the money now, there is no risk of something going ‘wrong and our not getting it + If'we haven't got the money, we can't get interest on it, or we may have to borrow money to replace it. ‘The standard way to allow for this is to “discount” next year's dollar by a certain amount and to apply that idea cumulatively into the future. ‘Thus we discount future revenues and costs by a particular discount rate and reduce them all to a “Net Present Value” or NPV. The “Notional” discount rate is applied to actual revenues and costs which are likely to occur. That is, revenues and costs which follow the inflation rate. Thus the notional rate (typically 15-20%) includes an allowance for inflation, and itis correct to use this, provided that we inflate our revenues and costs for future years. However, we are then in the position of guessing at the future inflation rate and then guessing at a figure to correct for it! Itis easier, and more accurate, to work out revenues and costs in today’s dollars and then to use the “Real” discount rate (typically 10%), which does not allow for inflation 18 May, 1999) > > . > > > > > > > > > »® ‘There are wo disount cate. > > > > > > > > > > > > > > » >Optimization n Mine Design We work with NPV - see M.M. Hajdasinski (“An Analysis of the True Rate of Retum Project Evaluation Criterion”, Proc. 20" APCOM, Vol 1 pp. 133-151). The effect of mining sequence on the optimal pit outline Worst case mining Best case mining 18 May, 1989 Let us return (othe very simple example shown in Figure 23. "500 tonnes =~ Figure 23: A simple ore body ‘The simplest way'to mine a pitis to mine the whole of the top bench, then the whole of the next bench etc. We call this “worst case mining’ ‘because it produces the lowest NPV. However, it has the advantage of almost always being practical. If we consider the simple example again, waste at the top of the outer shells is mined early, and the cost is discounted less than the revenue from the corresponding ore, which is mined much later. ‘The optimal pit for worst case mining is thus generally smaller than is indicated by simple pit outline optimization using today’s costs and Each shell is mined in turn and thus the related ore and waste is mined in approximately the same time period. We call this "best case mining” because it produces the highest NPV. It is almost never practical, but sets an NPV target that we can airm for. é é ¢ @ @ @ @ e e e e@ @ @ @ @ @ @ e @ @ °e @ e@ e e e @ @Optimization in Mine Design 33 The interaction between production rates and mining sequence > ro? 3 4 8 6 7 8 Wasma . > B > > D D Dd D D D> D > Let us suppose that the user wants to generate pit shells where each is optimal for one ofa list of different prices. In Whittle software we optimize first for infinite price. This ean usually be done in one pass of the structure ares with specfal program code, and thereafter we can exclude all the blocks outside this pit from further consideration. Next we optimize for the lowest price specified, which gives us the smallest pit and allows us to exclude all the blocks within it from further consideration, ‘After these to initial optimizations, we repeatedly optimize for the Price which is in the middle of thelist of prices for te largest number of undivided blocks. We do this unt all prices have been dealt with. For each optimization we consider only those blocks which lie between the shells forthe nearest prices above and below the target price for ‘which shells exist. We adjust the values of these blocks to allow for the new price and then do scans through the ares which apply to these blocks until there is no further change. Figure 26 illustrates this sequence. 18 May, 139948 May, 1989 Optimization in Mine Desion Bo eatiniation in ine Desa Figure 26: Sequence of optimization of pit shells With this approach, each optimization is on successively fewer blocks and involves less and less adjustment to the Lerchs-Grossmann tree. Note also that, since no link in the tree crosses an existing pit shell, the links tend to become more and more parallel to the nearby shells ann thus easier and easier to optimize. ‘The combination of these effects make successive optimizations faster and faster. In practice 100 pit shells can be generated in about the time it would take to do about five simple optimizations. Note that, since we are dealing with blocks of finite size, itis entirely possible for one or more adjacent prices to produce exactly the same pit outline. In fact this frequently happens and the result i that fewer pit shells are generated than the list of prices supplied would suggest In Four-X we have to deal with more than one product and thus more than one price, so we work with what we call Revenue Factors. We ‘senerate pit shells for « range of Revenue Facto:s which all prices are ‘multiplied by. @ POOSSOSHSSSHSHSTHOLHHHOHVHHHOOHHHOHHODOZHQGQQH2A00046Optimization in Mine Design sr Using the Shells for Mining Simulation ‘The important thing to realise is that every pit shell obeys the required slope constraints, ‘The Figure 27 is a schematic of small set of pit shells and benches. In practice, itis usual to produce fifly to one hundred shells, so that they are much closer than indicated here. Nevertheless, the same principles apply. ‘The sequences in witich any of the eight pits cen be mined without breaking the slope constraints are clearly defined by the pit shells. For example, we must mine “a” before mining “C". We must mine “a”, 14'"g" before mining "k™ 2.84 1 tit? 678 pa 7b Je fafe7 7 / VET LIL IL vevvevVvVsVTVUSEVVEYU wuee Figure 27: A small set of pit shells and benches Since we know all the details ofthe actual blocks which are in each beneh/shell intersection, we can apply cut-o“ tonnes, grades and cash ows foreach such intersection. Therefore, if we specify a paricular sequence in which we are going to mine the intersections, the program can calculate a lfe-of-mine schedule with e@ fall tonnes, grades, eath flows, and discounted cash lows according to throughput limits specified by the user. We refer to ths as life-of mine ¥imulation, 18 May, 1999 . > > D > > > > dD >» » > d > > > > > > > > , > ,VSSCHOSTOHOOSOOSOOS &@OP090C8006 SSCOHCHHOCHHOOO BOO! Optimization a Mine Desien This page left blank intentionally “8 May, 1999 seeweyvervevovovcvvcvce @ vevvuvuuvueuvuvuevusuevueeueouL in Mine Design Calculating Block Values for Pit Optimization 18 May, 1999@000 2800008 SSOCCOCHCHOCHOHOHOO( s é : 5 4 £ g ‘This page left blank intentionally 18 May, 1999The First Rule The Second Rule > > D > > > > > ® D> Dd » . D > D D The Third Rule Optimization in Mine Design 6 Calculating Block Values Before we do a pit outline optimization we must first calculate the block values, and there are three basic rules to follow, ‘The block value must be calculated on the assumption that the block has already been uncovered. In other words, no allowance should be iade for the cost of the stripping required to gain access to the block, because that is precisely what the optimizer calculates. In particular, any cut-off used to define ore should reflect the cost of processing and any extra cost of mining the block as ore rather than waste, but nol the ccost of stripping. [fan allowance for stripping is included in the costs, the stripping will be paid for twice! ‘The block value must be calculated on the assumption that the block | be mined. So, ifthe block contains some ore that could profitably. be processed as well as some waste; the value of the ore should be added in, even if the resulting total value Of the block is still negative. The optimizer will not choose to mine such a block. but ifit has to ‘mine it to get at something more valuable, the ore will help to pay for the stripping, as it would in practice. Any expenditure that would stop if mining stopped must be included in the cost of mining, processing or selling. Conversely, any expenditure that would not stop if mining stopped must be excluded. This is discussed in more detail below. 18 May, 1999SB Sitiization in Mine 05190 A Formula for a Block Value ‘There are a number of ways of writing an expression for the value of a block. The one we use is as follows: VALUE « (METAL*RECOVERY*PRICE - ORE*COSTP) - ROCK*COSTM ‘where the part in parentheses is repeated for cach separately mineable ‘ore parcel in the block, and where: METAL — = Units of product in the ore parcel ie. ore tonnes times grade, RECOVERY = The proportion of product recovered by processing the ore PRICE = _The price obtainable per unit of product sold. ORE, = Tonnes of ore in the ore parcel. COSTP == The EXTRA cost per tonne of mining the material ‘as ore and processing it, rather than treating it as waste. ROCK ‘The total amount of rock (ore and waste) in the block.” COSTM — = The cost of mining a tonne of waste ‘An “ore parcel” isa region within the block of a defined rock-\ype, tonnage and metal content, which could be mined selectively. Its position within the block is not defined, Some generalised mining packages ireat a block as a homogeneous entity. In this case, there is ‘only one parcel per block. e @ @ ° @ e @ e @ @ @ ‘Note that air blocks must aiso be given a value so that the optimization rogram can differentiate them from waste. Air blocks have a value of zero. Blocks which are partially air have their block values reduced on a pro-ratabasis,eveuvvvvvvUEVTeVeVTS POCO SCSCCCHOCSCOVCHOTFUVEVV BVT VET VVUYU Calculating Costs When prepating for a pit outline optimization, you have to calculate the expected mining, processing, rehabilitation and selling costs. However, pit cutline optimization has very specific requirements with regard tothe calculation of thee costs, and itis important tha these be fully understood. All costs must be expressed as nining cost per tonne, as processing cost per tonne, as reliabilitalion cost per tonne, or as Selling cost per unit of product produced To reduce time costs to apr tone ra per unit basi, you have to make asumpt ons abou the production ete. Ihe sze of the it produced by the optimization makes These assumptions inapproprial, then the costs should bere ealaaed and the optimization done again Many people se up all heir eos calculations ina computer spreadsheet Ths makes re-caulation much ease, and a sample aivenlater What Costs to Include Incremental costs such as wages and fuel costs must obviously be included in the calculation of the cost ofthe activity with which they are associated. Expenditures that are related to time rather than (o tonnage or production require careful thought, but, as mentioned earlier, there is @ clear rule that allows you to decide which should be included: “Any expenditure that would stop if mining stopped must be included in the cost of mining, processing or selling Conversely, any cost that ‘would not stop if mining stopped must be excluded.” ‘The reasoning behind this is that, when the optimizer adds a block to the pit outline, it may effectively extend the life of the mine. If it does, the extra costs that would occur asa result ofthis extended life must be paid for. Otherwise the optimizer may add blocks to the pit that reduce, rather than increase, its real value. ¢Since the optimizer can only take note of costs expressed through the ‘block values, itis necessary to share these time-related costs between the blocks in some way. How they should be shared depends on whether production is limited by mining, by processing or by the market, Usually itis limited by processing, and, in his case, only the mining of an ore block extends the life ofthe mine. The ore block values should therefore include an allowance for tine costs. This is done by adding an appropriate amount to the processing cost per tonne. If production is limited by mining, as in some heap leach operations, every block that is mined extends the life of the mine, so that time costs should be added to the mining cost. A marke: limit means that 18 May, 199964 Optimization in Mine Design A timization in wine Desig time costs should be added tothe cellng cost. In each case, the amount added is the total ofall he time costs per year divided by the throughput limit per year, Examples Some examples ofthe handling of various costs may be helpful Processing mill Consider a processing mill that costs $10m to build and commission It the mine were tobe shut down, for whatever reason, on day 2 of operation, the mill vould have a certain salvage value, say Sm, In this ease S4m has gone forever. It isa “up-front” or “sunk” cost that ‘must be subtracted fom any optimized value of the pit itself. Its not 8 cost for pit oulline optimization purposes. We can deal with the remaining $6m in one of two ways. + {we assume that there will bean ongoing program of maintenasice and capital replacement tat will keep the salvage value of the mill lose to $6m in today’s dollar, then the Sém is theoretically ‘s recoverable when the mine is closed, and so is nota cost. However the ‘maintenance and periodic capital replacement expenses are costs for these purposes, because they would stop if mining stopped. They should be averaged and treated as atime cost COSCO CAAG2BARA2400244 Alternatively, we can assume that only essential maintenance will be done, and that the salvage value ofthe mill will become progressively tess, asis shown in Figure 28. In this ease, the expected rate of this reduction should be treated as atime cost. Note that the rate of reduction is not necessarily the same as the depreciation rate that is used by accountants. In most cases the depreciation rate is set by {axation considerations, and may reduce the book value to zero when the salvage value is clearly not zero. Note that the life ofthe mill (10 veers in this example) is not necessarily the satne as th life of the mine. 2 tvae 8 Figure 28: Calculation of rate of reduction af re-sale value 18 May, 1999wuevuvvvewvvevewee > > d D > > > d > D Dd > Optimization in Mine OF Trucks Administration costs ion 85 We discuss the interest on the salvage Value below. ‘Note that, ifthe mine is mining capacity limited, even time costs associated with the mill must be factored into the mining cost, IC the expected life ofthe mine is shorter than the operating life of a truck, then truck purchases can be treated in the same way as the cost of the mill Ifthe life of the mine is much longer than the life ofa truck, then trucks will have to be purchased progressively to maintain the flect, and such purchases will stop if mining is stopped. Consequently the cost of purchasing trucks should be averaged out over the life of the mine and treated as a time cost. Unless the life ofthe mine is expected to be very long, some compromise between the above two approaches is usually required, Contract mining companies must take these factors into account when quoting for a job, and itis sometimes useful to think as they do when ‘you are working out the costs for your own fleet. You should include everything that they do, except for their allowance for profit On-site administration costs will usually stop if mining is stopped. ‘They must therefore be treated as a time cost Head office administration costs may, or may aot, stop if mining stops at this particular mine, and thus may, or may not, be included. Bank loans for intial costs Repayment (principal and interest) ofa bank loan taken out to cover initial set-up costs will have to contique whether mining continues or nol. It should therefore not be included in the costs used when calculating block values. ‘Of course, these repayments will have to come from the cash flow of the mine. If the mine isnot going to produce enough cash flow to cover them, the project should not proceed. You should not introduce these repayments as costs in an attempt to “imarove” the optimization. ‘The result will be quite the opposite. You w tl get a smalier pit with a smaller total cash flow, and we will expand on this later. Although the bank loan repayments themselves are not included, some ofthe items that the loan was used to pay for may be included, as you will see below. 18Nay, 199966 Optimization m Mine Design Bo eprzaton n tine Desion. Bank loans for recoverable costs Ifyou borrow money from the bank for day-to-day working capital or for items, such as the Sém discussed in the mill example above, then you can reasonably expect to repay the loan if mining siops. Consequently the interest paid on such a loan is a cost that stops if ‘mining stops. Il should therefore be treated asa time cost. Note that ‘we work throughout in today’s currency, so the interest rate used should be the “real” interest rate and should not include an allowance {or inflation. Grade control costs Its offen necessary to do grade control work on some waste as well as ‘ore. In tis case, grade control costs apply to waste costs too. If only. some of the waste is grade controlled, then the correct way to handle it is to load the cost of those particular waste blocks. However many users make an estimate of the tonnes of such waste per tonne of ore, ‘ and load the cost of mining ore. COCCOORABAARAALa0242 Support cable bolts Ifthe permitted pit wall slope is to be increased by the use of cable bolts the cost per tonne is related to pit size, which has to be estimated ‘Then a cost per square meter of wall can be transformed into a cost per tonne of waste. This isan iterative estimate, but fortunately costs per tonne are usually low. ‘These examples do not cover all possible casts, but should indicate hhow to treat most costs.