MinE424 - PROJECT MANAGEMENT IN MINING

CHAPTER 4

FORECASTING

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 CONTENT

4.1. Collective Opinion

4.2. Time Series Analysis
• Moving Average Method

4.3. Method of Least Squares

• Straight Line Equation
• Parabola Equation
• Exponential Equation
• Standard Error of Estimates for the Best-Fit Check

4.4. Confidence Interval of the Forecasting

4.5. Regression and Correlation in Forecasting

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 4.1. Collective Opinion

 In the design of a mining project we have to base our

decisions on certain assumptions. For instance, we
determine the capacity of the mine or plants related to
obtaining the final mining product, the cost of exploitation
and cost of the mining product to the consumers, forecast
our profits and sales at different phases of the mining
operation.

 Thus forecasting is an attempt to infer events on the basis of

what has occurred in the past. This forecast can be made by
using the experience of the recent past of people involved
without any quantitative technique.

 Opinion both in the country and outside the country might

bring up very valuable ideas and opinions for the markets.
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 4.2. Time Series Analysis

 When checking market trends, investigating project factors

that can change in time, evaluating the fluctuations in
commodity prices, and etc., the related data points taken
over time may need to be examined for whether there is a
time-dependent trend, seasonal variation, autocorrelation in
the data structure.
Commodity Price

July 18 Oct 18 Jan 19 Apr 19 July 19

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 4.2. Time Series Analysis

Moving Average Method

 Data taken over time show a random variation up and down. Moving average method provides more
understanding for trend and seasonal effect in the dataset by smoothing the arrangement of data
values.

Example 4.1:
Year Electricity Consump. (GWh)
1998 1569
1999 1586
2000 1545
2001 1645
2002 1590 Let’s assume that a global mining company is operating 9 different
2003 1712
2004 1717 mines simultaneously since 1998. The records show that there is a
2005 1841
2006 1896
tremendous increase in the total electricity consumption of the
2007 2000
mines due to the increase in production capacity year by year.
2008 2072
2009 2350
General manager of the company wants to see the general trend in
2010 1910
2011 2120 electricity consumption of 20 years with a better illustration.
2012 2147
2013 2117
2014 2287
2015 2351
2016 2425
2017 2436

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 4.2. Time Series Analysis

Moving Average Method

Solution:
Year Electricity Amount (GWh) 5MA
1998 1569 1569 + 1586 + 1545 + 1645 + 1590
1999 1586 5
2000 1545 1587
2001 1645 1616
2002 1590 1642
2003 1712 1701 Normal Curve Smoothed curve
2004 1717 1751
2,600
2005 1841 1833

Electricity Consumption (Gwh)

2006 1896 1905 2,400
2007 2000 2012
2,200
2008 2072 2044
2009 2250 2088 2,000
2010 2000 2122
1,800
2011 2120 2148
2012 2170 2160 1,600
2013 2200 2230
1,400
2014 2310 2291 1998 2003 2008 2013
2015 2351 2344 Year
2016 2425
2017 2436

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 4.3. Method of Least Squares

 Future forecasting for time-dependent values may be done by the method

of least squares with the following equations:

Straight Line Equation = +

Parabola Equation = + +
Exponential Equation =

 This method offers a different solution way of regression analysis

discussed in Chapter 2.3. Therefore, the solution technique in Chapter 2.3
for linear regression may also be used alternatively for the same problem.

 How a forecasting is performed for these equations will be illustrated using

a identical dataset for an example of blister copper.

 Then, the decision on which equation needs to be selected will be discussed

later in the subsection called Standard Error of Estimates for the Best-Fit
Check.
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 4.3. Method of Least Squares

Straight Line Equation

= +

The constants in the equation ( and ) can be found with side by side solution of
the following formulas:

= +

( )= +

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 4.3. Method of Least Squares

Straight Line Equation

Example 4.2: We have to forecast the sales of blister copper the mining company
produces for the coming years in order to establish a mining plan based on the
sales. Let us assume a straight- line model for our forecast by choosing the year
2001 as basis.
Solution:
Sales of blister copper (1000t)
Years Y X XY X2
1997 3.6 -4 -14.4 16
1998 5.6 -3 -16.8 9
1999 10.1 -2 -20.2 4
2000 16.5 -1 -16.5 1
2001 23.0 0 0 0
2002 31.1 +1 +31.1 1
2003 47.4 +2 +94.8 4
2004 64.6 +3 +193.8 9
2005 85.3 +4 +341.2 16
= . = = 593. =

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 4.3. Method of Least Squares

Straight Line Equation

Solution(cont’d):

= +

= + ⇒ 287.2 = 9 ⇒ = 31.91

( )= + ⇒ 593 = 60 ⇒ = 9.88

The straight line equation: Y = 31.91 + 9.88

Here, = 0 stands for 2001.

It means that if we want to make a forecasting for 2011: Y = 31.91 + 9.88 ∗ 10 = 130.71

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 4.3. Method of Least Squares

Parabola Equation (Second Order Polynomial)

= + +

The constants in the equation ( , , and ) can be found with side by side solution
of the following formulas:

= + +

= + +

= + +

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 4.3. Method of Least Squares

Parabola Equation
Example 4.3: We have to forecast the sales of blister copper the mining company
produces for the coming years in order to establish a mining plan based on the
sales. Let us assume a Parabola equation model for our forecast by choosing the
year 2001 as basis.
Solution:
Sales of blister copper (1000t)
Years Y X XY X2 X2Y X3 X4
1997 3.6 -4 -14.4 16 57.6 -64 256
1998 5.6 -3 -16.8 9 50.4 -27 81
1999 10.1 -2 -20.2 4 40.4 -8 16
2000 16.5 -1 -16.5 1 16.5 -1 1
2001 23.0 0 0 0 0 0 0
2002 31.1 +1 +31.1 1 31.1 +1 1
2003 47.4 +2 +94.8 4 189.6 +8 16
2004 64.6 +3 +193.8 9 581.4 +27 81
2005 85.3 +4 +341.2 16 1364.8 +64 256
= . = = 593. = = 2331.8 = =

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 4.3. Method of Least Squares

Parabola Equation
Solution(cont’d):

287.2 = 9 + 60
593 = 60
2331.8 = 60 + 708

= 22.9 + 9.9 + 1.35

Here, = 0 stands for 2001.

It means that if we want to make a forecasting for 2008:

= 22.9 + 9.9 7 + 1.35 7 = 158.35

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 4.3. Method of Least Squares

Exponential Equation
= ⟺ log = log + log

The constants in the equation ( and ) can be found with side by side solution of
the following formulas:

log = log + log

log = log + log

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 4.3. Method of Least Squares

Exponential Equation
Example 4.4: We have to forecast the sales of blister copper the mining company
produces for the coming years in order to establish a mining plan based on the
sales. Let us assume a Exponential equation model for our forecast by choosing the
year 2001 as basis.
Solution:
Sales of blister copper (1000t)
Years Y X logX XlogY X2
1997 3.6 -4 0.55630 -2.22520 16
1998 5.6 -3 0.74819 -2.24457 9
1999 10.1 -2 1.00432 -2.00864 4
2000 16.5 -1 1.21748 -1.21748 1
2001 23.0 0 1.36173 0 0
2002 31.1 +1 1.49276 +1.49276 1
2003 47.4 +2 1.67578 +3.35156 4
2004 64.6 +3 1.81023 +5.43069 9
2005 85.3 +4 1.93035 +7.72140 16
= . = = 11.80 = 10.30 = 60

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 4.3. Method of Least Squares

Exponential Equation
Solution(cont’d):

11.79 = 9 log
10.30 = 60 log

log = 1.31 + 0.17 ⟹ = 20.46 (1.485)

Here, = 0 stands for 2001.

It means that if we want to make a forecasting for 2012:

= 20.46 (1.485) = 1584.52

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 4.3. Method of Least Squares

Standard Error of Estimates for the Best-Fit Check

 Plotting of three different equations and the orientation of actual dataset
around the fitted lines are given in the below figure. To find the best fit, the
standard error of estimates for each alternative equitation needs to be checked.

120

100
Sales Tonnage (1000t)

80

Exponential Equation ∑( − )
60 =
Actual Data −1
Straight Line
40
Parabolic Equation : Standard error of estimates
20 : Actual data values
: Estimated values
0 : Number of values in the series
1996 1998 2000 2002 2004 2006
Years

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 4.3. Method of Least Squares

Standard Error of Estimates for Accuracy Check

Calculating the standard error of estimate for the straight line

Year Actual values, Theoretical values, ( − ) ( − )
1997 3.6 -7.7 +11.3 127.69
1998 5.6 2.2 +3.4 11.56
1999 10.1 12.1 -2.0 4.00
2000 16.5 22.0 -5.5 30.25
2001 23.0 31.9 -8.9 79.21
2002 31.1 41.8 -10.8 116.64
2003 47.4 51.7 -4.3 18.49
2004 64.6 61.6 +3.0 9.00
2005 85.3 71.5 +13.8 190.44
( − ) = .

Similarly, we calculate the standard error of estimate for the

∑( − ) 587.28 parabola and exponential equation and find S= ±1.59, and S=
= = = ±8.56 ±5.34 respectively. Thus the parabola equation gives the least
−1 8 standard error of estimate and is chosen as the best fit to our
problem.

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 4.4. Confidence Interval of the Forecasting

 The equations presented in Chapter 4.2 offers a single line

when fitting the line in the scattered data.

 Confidence interval of such a line can be found using the

following equations:

Estimated Value of Y from the equation

Average of X values
( )
 / = ∓ +
Sum of squares of errors for X values, = ∑( − )

Number of observation

Standard error, = where = ∑( − )

t-test result for the confidence interval of 1-α and degree of freedom of (n-2) (from the t-test table)

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 4.4. Confidence Interval of the Forecasting

Example 4.4: We have to forecast the sales of blister copper the mining company
produces for the coming years in order to establish a mining plan based on the
sales. Find the confidence interval of the straight line fitted into the data.

Solution: = 22.9 + 9.9 + 1.35

Sales of From the best-fit equation

blister copper
(1000t)
Years X Y ( − ) ( − ) ( − ) ( − )
1997 -4 3.6 4.9 -1.3 1.69 -4 16
1998 -3 5.6 5.4 0.3 0.06 -3 9
1999 -2 10.1 8.5 1.6 2.56 -2 4
2000 -1 16.5 14.4 2.2 4.62 -1 1
2001 0 23.0 22.9 0.1 0.01 0 0
2002 +1 31.1 34.2 -3.1 9.30 +1 1
2003 +2 47.4 48.1 -0.7 0.49 +2 4
2004 +3 64.6 64.8 -0.2 0.02 +3 9
2005 +4 85.3 84.1 1.2 1.44 +4 16
Mean=0 Sum=20.2 Sum=60

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 4.4. Confidence Interval of the Forecasting

Solution(cont’d):
t-test table

=9

Degree of freedom = n − 2 = 9 − 2 = 7

Significance Level=1 − 0.95 = 0.05 (for 95% conf. int.)

= 2.365

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 4.4. Confidence Interval of the Forecasting

Solution(cont’d):

SS = (Y − Y) = 20.2

20.2
= = = 1.70
−2 7

= ( − ) = 60

1 (X − X) 1 (X − 0)
Y / = Y ∓ t SE + Y / = Y ∓ 2.365 × 1.70 × +
n SS 9 60

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 4.4. Confidence Interval of the Forecasting

Solution(cont’d): Sample Solution

1 −4 − 0
Y = 4.9 − 2.365 × 1.70 × + ≈ 2.4
9 60

1 −4 − 0
Y = 4.9 + 2.365 × 1.70 × + ≈ 7.4
9 60

Sales of blister
Years X copper (1000t)
Y
1997 -4 3.6 4.9 2.4 7.4
1998 -3 5.6 5.4 3.3 7.4
1999 -2 10.1 8.5 6.8 10.2
2000 -1 16.5 14.4 12.9 15.8
2001 0 23.0 22.9 21.6 24.2
2002 +1 31.1 34.2 32.7 35.6
2003 +2 47.4 48.1 46.4 49.8
2004 +3 64.6 64.8 62.7 66.8
2005 +4 85.3 84.1 81.6 86.6

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 4.4. Confidence Interval of the Forecasting

Solution(cont’d):
Fitted line (dash line) equation:
100
y = 1.3543x2 + 9.8833x + 22.882
90

80
Upper bound with
max values
70
Lower bound
with min values
60

50

40

30

20

10

0
-5 -4 -3 -2 -1 0 1 2 3 4 5

95% percent of the data observation is expected to be in the area between

upper and lower bound. Especially for future forecasting, it gives an useful
information about the range of estimation.
24
MinE424 - Project Management in Mining
 4.5. Regression and Correlation in Forecasting

 Regression and correlation methods are widely applied as

forecasting techniques. If our basis of forecasting relates to
economical values like sales, revenues, profits, losses, prices, etc.
then it is evident that we shall use economic indicators for our
forecasting.

 These indicators describe economic conditions prevailing during

a given time period. For instance, in many cases companies find
that there is a direct relationship, or correlation, between sales of
some or all of its products and economic indicators.

 When this is true, the availability of appropriate indicators

provide the company with a means of estimating what it’s sales
will be. Some commonly used indicators are gross national
income, consumer prices, steel production, etc.

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