Journal of Mining and Geology Vol. 57(1) 2021. pp.

99 - 111 0022-2763

Mining Geometrical Modelling Approach for the Estimation of Cut-Off Grade

of Open-Pit Mines, Through Maximization of the Net Present Value

Nwosu, J.I. and Williams, W.N.

Department of Geology, University of Port Harcourt, Port Harcourt, Nigeria.
Corresponding E-mail: joseph.nwosu@uniport.edu.ng

Abstract
The theory of cut-off grade estimation has taken a new dimension since Lane's proposal of maximum net present
value criterion for cut-off grade estimation. However, whereas this criterion is widely accepted by mine planners,
Lane's analytical method of its realisation has been subjected to several criticisms. In this paper a geometrical
modelling approach has been proposed for realisation of the maximum net present criterion which overcomes the
shortfalls of Lane's analytical approach. This geometrical modelling approach was applied to a hypothetical deposit
with five ore bodies of varying grades. The approach is applicable to situations of varying production rates, costs of
production and prices and can be utilised when multiple processing streams are available.
Keywords: Cut-Off Grade, Geometrical Modelling, Mining, Net Present Value, Open Pit Mines.

Introduction deposit, North central Nigeria and emphasized on the

need to adjust the cut-off grade of Itakpe deposit with
The Concept of Cut-Off Grade changing price-cost ratio.

The issue of discriminating between what should be
mined and what should not be mined is as old as mining
itself. In primitive mining, ancient miners always
discriminated between pure gems and impure gems.
Metallurgical slags found in Itakpe iron ore deposit
Nigeria, where ancient miners and metallurgists smelted
iron ore in-situ and forged primitive weapons are always
found in rich iron ore zones.
In modern mining, mine planners have always
attempted to establish what level of mineral content
should be found in an ore in order to justify its
exploitation and processing. The simplest but perhaps
most accurate definition of cut-off grade is the one by
Lane. Lane (1988) defined cut-off grade as the smallest
amount of concentration in the mineralised material that
determines what is considered as ore versus what is
considered as waste.
Nwosu and Nwankwoala (2015) considered the
influence of construction materials on the cut-off grade
of Itakpe iron ore deposits. Furthermore, Nwosu and
Bernard (2020) also considered the influence of
subgrade ores on the cut-off grade of Itakpe iron ore
deposit.
Another factor that requires very serious consideration
in cut-off grade estimation is the geology of the deposit
and mine design.
Consider the hypothetical deposit shown in fig. 1a & 1b
below.

Several factors affect cut-off grade of a mineral deposit

and these include: presence of other materials
(secondary ores) in the deposit; presence of processing
facility for low grade ores, price of mineral commodities Fig. 1a: Illustration of effect of geological factor and mine design on
cut-off grade of a deposit
in the market, cost of mining and processing etc.

Some Factors Affecting Cut-Off Grade of a Mineral

Deposit

The problem of establishing the effect of various factors

on cut-off grade has been treated by several researchers.
Nwosu and Nwankwoala (2012) studied the influence
of changes in cost of production and price of iron ore Fig. 1b: Illustration of effect of geological factor and mine design on
concentrates on the cut-off grade of Itakpe iron ore cut-off grade of a deposit

99
100
Design A considers mining the three ore bodies using a
single pit. Rationally, mine sequencing requires that pit
bottom be sited where ore bodies 1 & 2 are located. This
will involve removal of all the waste material between
ore bodies 2 and 3 in order to mine ore body 3. The cost
of removal of the waste material between ore bodies 2
and 3 will drastically increase the total production cost
and therefore increase the cut-off grade. However,
design B considers mining the deposit with two
concentric pits. The first pit being for ore bodies 1 and 2
while a second pit is for the 3rd ore body. A pillar of waste
material is left in-between the two pits. With this mine
design approach, the total production cost is lowered
and thus cut-off grade lowers. Consequently, the
disposition of ore bodies (geology) and the mine design
applied will affect the cut-off grade of the deposit.
The above mentioned situation can only be considered
in cut-off grade estimation through mine geometrical
modelling. Analytical method cannot be applied to
consider the influence of geology and mine design in the
above situation.
The effect of other factors such as multiple processing
steams on cut-off grade has been noted in the works of
Pettingel (2017), Asad and Dimitrakopoulos (2013).
Michelson and Buckley (1973) noted the effects of
minor metals on the cut-off grade of a mineral deposit.
Cut-Off Grade Policy
Cut-off grade policy refers to the principle on which the
estimation of cut-off grade must be based. In the history
of mine planning, two main principles can be
distinguished; (i) the break-even principle (ii) the
maximum net present value principle.
The method of realizing these principles may vary. One
approach to establishing the break-even cut-off grade is
to regard the cut-off grade as the grade in which the cost
of production and the value per ton of the ore are equal.
Consequently, any material above the cut-off grade is
mined. This approach is not a sound approach because it
is not all materials above such a cut-off grade can
provide a minimum acceptable rate of return on
investment. As noted by Nwosu and Okengwu (2009)
any material above the cut-off grade must provide at
least a minimum corporate acceptable rate of return on
investment in order to be mined.
The break-even policy of cut-off grade estimation
remained the traditional method of cut-off grade
estimation until 1964 when Kenneth Lane presented his
seminar in which he proposed maximum NPV from the
Journal of Mining and Geology Vol. 57(1) 2021.
project as the new policy for cut-off grade estimation.
One inadequacy of the break-even approach is its
inability to show how the cut-of grade affects the value
of the project as a whole. But with maximum net present
value approach, the impact of the chosen cut-off grade
on the overall value of the project can be known. As
laudable as this policy may be, the methods of realising
it have been many and varied and are fraught with
inadequacies. Even the models proposed by Kenneth
Lane himself, have been subjected to several criticisms.
Thus Pentigel (2017) noted that one inadequacy of
Lane's method is its assumption that there was one
source of material feeding one treatment plant. He
further noted that Lane's model also assumes that pit
limit and mine schedule were already known. From the
point of view of practical mine planning, such
assumptions are capable of invalidating any model since
pit limit and mine schedule are themselves dependent on
the cut-off grade being sought for. Gholamnegad (2009)
also noted that Lane's model does not consider the cost
of waste removal and dumping as well as pit
rehabilitation. He therefore amended Lane's model to
accommodate them. It can also be observed that Lane's
model is based on three constraints, the production rate
of the mine, the maximum processing capacity of the
processing plant and the existing market. In our own
opinion, the above parameters should not stand as
constraint since the production rate of the pit itself is
dependent on the cut-off grade. Breed and Heerden
(2015) stated that to ensure cut-off grade optimization is
done correctly, the capacity constraints must be
independent of cut-off grade. When the cut-off grade is
high, the reserve becomes low and the production rate is
therefore low. When the cut-off grade is low, the reserve
is high and production rate is therefore high (Nwosu and
Nwankwoala 2009). The capacity of the processing
plant is also variable and is usually chosen to match with
the production rate of the mine. Market can always be
expanded and therefore should not stand as constraint.
This fact is buttressed by Asad and Topal (2011).
Pettingel (2017) noted that variable cost estimate and
increasing prices of mineral products cannot be
incorporated in Lane's model for estimating cut-off
grade of the project through the net present value (NPV)
maximization. Because of the above inadequacies, it
becomes obvious that analytical approach alone does
not offer flexibility in the estimation of cut-off grade of a
deposit through maximization of net present value. The
above flexibility is offered by the Mining Geometrical
Modelling approach.
Methodology
In general, the mining geometrical modelling approach
Journal of Mining and Geology Vol. 57(1) 2021.
of establishing the cut-off grade of a mining project is an
iterative method and starts by choosing an arbitrary pit
limit and using annual deepening rates to form the
various bench heights of the pit. Hence, any ore or waste
produced from each pushback will represent annual
production of ore and annual waste removal. Mine
sequencing and locus of box-cut movement are drawn.
From the box-cuts push-backs are drawn to imitate the
mine extraction process. Pit limit is varied (raised or
lowered) as maximum NPV is being sought. The ore
bodies to be mined are included in each pit limit in
descending order of their grades until maximum NPV is
obtained. For example consider a pit with ore bodies A,
B, C, D, E with corresponding grades of XA%, XB%,
XC%, XD% and XE% respectively.
As a starting point, the first three ore bodies (with higher
grades) will be included in the first pit limit to be
Fig. 2: Algorithm for the realisation of the geometrical modelling approach
101
analysed. Then geometrical modelling is done based on
the three ore bodies to generate annual production of ore
and annual removal of waste at each bench (each push-
back). Consequently, cash flow analysis is done to
establish the NPV of the pit. At the second stage, the 4th
ore body is added to the 3 ore bodies in this pit limit and a
second NPV is obtained. If the NPV obtained with the
inclusion of the 4th ore body is greater than NPV
obtained from the first 3 ore bodies, then the process is
continued to include the 5 ore body. If less, then
th
analysis for the first pit limit is stopped and a new and
deeper pit limit is chosen. The entire process is repeated
from 3 ore bodies to the last ore body until the overall
maximum NPV of the pit is obtained in the new pit limit.
The lowest grade of the ore body in the pit when the
maximum NPV was obtained becomes the cut-off grade
of the mineral deposit under consideration. The
algorithm below simplifies the methodology.
102 Journal of Mining and Geology Vol. 57(1) 2021.

Results and Discussion

In order to establish the cut-off grade of the mineral

deposit based on the maximum net present value
criterion using geometrical modelling, use is made of a
cross-section of a hypothetical iron ore deposit
consisting of five ore bodies A, B, C, D, E with
respective grades as 45% Fe, 38% Fe, 32% Fe, 40% Fe
and 23% Fe (fig. 3). Table 2 shows the techno-economic
data for this deposit.

Fig. 4: First trial pit limit of 120m with 3 ore bodies A, B, D.

were used for the development of the cash flow. The

result of the economic analysis are also presented in
table 2 and for clarity are shown graphically in fig. 5 & 6.

NPV Estimation

NPV of any project can be estimated with the following

Fig. 3: Cross-section of the hypothetical iron ore deposit showing formula (Pandey 2006)
the five ore bodies A, B, C, D, E.
Table 2: Techno-economic data for the hypothetical deposit

Where;
NPV = net present value of the project

= sum of discounted annual net profits

n = Lifespan of the project (1, 2, 3……… n)

TC = capital outlay on the development of the pit limit
TC = 0.25T
Where ;
a) Selection of first trial limit and investment analysis T = the present value of both capital and operating
(Steps 1-3) expenditures on the project.

Following the methodology as stated above, the first T = (Nwosu and Onwualu 2019)
trial pit limit of 120m consisting of 3 ore bodies A, B, D Where;
was established (fig. 4). TO = present value of sum of annual cash outflow
throughout the life of the project.
In fig. 4, the geometrical modelling was done using
bench heights of 10m which is also equal to the annual Consequently,
deepening rate of the pit. A bench working room of 40m
was used for the imitation of the extraction process. The T = = US$101.68million
process of extraction was imitated in several push-backs
representing years of operation of the pit. The ore, waste TC = 0.25 x 101.68 = US$25.42million
and concentrate generated for each year of operation are
presented in column 2, 3 and 4 respectively (table 2). NPV = 26.18 – 25.42 = US$0.76million

Techno economic data of the pit as presented in table 1

Journal of Mining and Geology Vol. 57(1) 2021.
Table 2: Production scheduling and cash flow table of mining-geometrical analysis of 120m pit depth with 3 ore bodies.
Fig. 5: Tonnage of ore and waste for the entire life of the project
(120m pit depth with 3 ore bodies)
b) Addition of one more ore body to the 120m pit limit
(Step 4)
We now move to step 4 by adding one more ore body of
lower grade to the deposit (fig. 7).
Mine-geometrical modelling was carried out and cash
103
Fig. 6: Cash flow for the entire life of the project (120m pit depth
with 3 ore bodies)
flow table was developed as in the previous case. The
techno-economic parameters are presented in table 3
below and for clarity, graphical representation of the
production scheduling and major economic indicators
(cash outflow and annual net profit) have been
presented in fig. 8 & 9.
104 Journal of Mining and Geology Vol. 57(1) 2021.

Fig. 8: Tonnage of ore and waste for the entire life of the project
(120m pit depth with 4 ore bodies).
NPV Estimation
Fig. 7: Trial pit limit of 120m with 4 ore bodies A, B, C, D.
T = = US$127.28million

Table 3: Production scheduling and cash flow table of mining-geometrical analysis of 120m pit depth with 4 ore bodies.

TC = 0.25 x 127.28 = US$31.82million Since the NPV in step4 is greater than NPV in step3, we
NPV = 35.84 – 31.82 = US$4.02million now add the fifth ore body (fig. 10) to the 120m pit and
repeat geometrical analysis and cash flow development.
c) Addition of the 5th ore body to the pit limit (Step 5, The result of this is presented in table 4. Also the major
right side of the loop) techno-economic indicators are presented graphically
in fig. 11 & 12.
Journal of Mining and Geology Vol. 57(1) 2021. 105

Fig. 9: Cash flow for the entire life of the project (120m pit depth
with 4 ore bodies).

Fig. 10: Trial pit limit of 120m with 5 ore bodies A, B, C, D, E.

NPV Estimation

T = = US$130.76million The NPV with five ore bodies has decreased in

comparison with the NPV of the pit with 4 ore bodies.
TC = 0.25 x 130.76 = US$32.69million Consequently, analysis for the 120m pit depth is
NPV = 31.08 – 32.69 = US$-1.61million stopped.
Table 4: Production scheduling and cash flow table of mining-geometrical analysis of 120m pit depth with 5 ore bodies.
106
Fig. 11: Tonnage of ore and waste for the entire life of the project
(120m pit depth with 5 ore bodies).
d) Increment of pit limit to 160m and selection of
first 3 ore bodies (Step 6)
We now increase the pit depth to 160m and steps 2-3 in
the algorithm are repeated.
Fig. 13 below shows the 160m pit depth with 3 ore
bodies.
Fig. 13: First trial pit limit of 160m with 3 ore bodies A, B, D.
Journal of Mining and Geology Vol. 57(1) 2021.
Fig. 12: Cash flow for the entire life of the project (120m pit depth
with 5 ore bodies)
As in steps 2-3 the geometrical analysis has been done
for the 160m depth and techno-economic analysis
shown in table 5. They are subsequently represented
graphically in fig. 14 &15.
NPV Estimation
Capital outlay for the pit with 160m
Journal of Mining and Geology Vol. 57(1) 2021. 107

Table 5: Production scheduling and cash flow table of mining-geometrical analysis of 160m pit depth with 3 ore bodies.

Fig. 14: Tonnage of ore and waste for the entire life of the project Fig. 15: Cash flow for the entire life of the project (160m pit depth
(160m pit depth with 3 ore bodies). with 3 ore bodies).
Tc = 0.25T Tc = 0.25 x 115.05 = US$28.76million
NPV = 27.64 – 28.76 = US$-1.12million
T = = US$115.05million
108 Journal of Mining and Geology Vol. 57(1) 2021.

The negative NPV shows the non-viability of the pit

with 3 ore bodies at a depth of 160m.

e) Addition of one more ore body to the 160m pit limit

(Step 7)

We now add the fourth ore body to the 160m pit limit.
The geometrical modelling of this pit and techno-
economic indicators are shown below in fig. 16 and
table 6 respectively. The techno-economic indicators
are further displayed graphically in fig. 17 & 18.

Fig. 16: Trial pit limit of 160m with 4 ore bodies A, B, C, D.

Table 6: Production scheduling and cash flow table of mining-geometrical analysis of 160m pit depth with 4 ore bodies.
Journal of Mining and Geology Vol. 57(1) 2021. 109

Fig. 17: Tonnage of ore and waste for the entire life of the project Fig. 18: Cash flow for the entire life of the project (160m pit depth
(160m pit depth with 4 ore bodies). with 4 ore bodies).

NPV Estimation f) Addition of the 5th ore body to the 160m pit limit
(Step 8, right side of the loop)
T = = US$135.41million
The NPV estimated in step 7 is greater than the NPV
Tc = 0.25 x 135.41 = US$33.85million estimated in step 6 (160m with 3 ore bodies) so we add
NPV = 39.47 – 33.85 = US$5.62million the 5th ore body to the pit and repeat the geometrical
modelling (fig. 19). The techno-economic data are
presented in table 7 and further represented graphically
in fig. 20 & 21.

Fig. 19: Trial pit limit of 160m with 5 ore bodies A, B, C, D.E.
110 Journal of Mining and Geology Vol. 57(1) 2021.

Table 7: Production scheduling and cash flow table of mining-geometrical analysis of 160m pit depth with 5 ore bodies.

Fig. 20: Tonnage of ore and waste for the entire life of the project Fig. 21: Cash flow for the entire life of the project (160m pit depth
(160m pit depth with 5 ore bodies). with 5 ore bodies).

NPV Estimation The pit with the 5th ore body gives a negative NPV
showing that the deposit now becomes unprofitable to
T = = US$139.17million exploit. This can be explained due to high cost of mining
the 5th ore body when compared to cost of removal of the
TC = 0.25 x 139.17 = US$34.79million ore as waste. It can also be explained in terms of lower
NPV = 32.38 - 34.79 = US$-2.41million concentrate yield per ton of ore due to the low grade of
Journal of Mining and Geology Vol. 57(1) 2021.
the 5 ore body. Also capital cost is higher due to higher
th
production rate caused by the addition of the 5th ore
body.
Summary and Conclusion
The results of the above analysis have been summarised
in the table below.
Table 8: Summary of geometrical analysis for cut-off grade estimation
Table 8 above shows that the highest net present value
(NPV) was obtained from the 160m pit depth with 4 ore
References
Asad, M.W.A. and Topal, E. (2011). Net Present Value
Maximization Model for Optimum Cut-off
grade Policy of Open Pit Mining Operations.
South African Institute of Mining and
Metallurgy (2012).
Asad, M.W.A. and Dimitrakopoulos, R. (2013). A
heuristic approach to stochastic cutoff grade
optimization for open pit mining complexes
with multiple processing streams. Resour
Policy [Internet]. Elsevier; 38(4):591–7.
Available from: http://dx.doi.org/10.1016/
j.resourpol.2013.09.008.
Breed, M.F. and Heerden, D.V. (2015). Post-pit
optimization strategic 2016. (March
2015):11–2.
Gholamnejad, J. (2009). Incorporation of rehabilitation
cost into the optimum cut-off grade
determination. J South African Inst Min Metall.
109(2):89–94.
Lane, K.F. (1988). The Economic Definition of Ore:
Cut-Off Grades in Theory and Practice. 1st ed.
London: Mining Journal Books; 1988.
Lane, K.F. (1964). Choosing the Optimum Cut-Off
Grade, Colorado School of Mines Quarterly,
Vol. 59. Pp 811-829.
Nwosu, J.I. and Nwankwoala, H.O. (2015). Influence of
Construction Material on the Cut-Off Grade of
an Ore Using Itakpe Iron Ore Mine as a Case
Study. Nat. Journ. of Min. Sci. Vol.1(2). Pp. 6-
11.
Nwosu J.I. and Onwualu-John, J.N. (2019). Techno-
Economic Evaluation of Ajabanoko Deposit,
Kogi State, Nigeria. Journal of Mining and
Geology Vol. 55(2) 2019. pp. 253 – 259.
111
bodies. The 4th ore body in this pit is ore body C with a
grade of 32% Fe. The grade of 32% Fe therefore
becomes the cut-off grade of the deposit and the pit limit
of 160m becomes the optimum pit limit of the mine.
1. The above method proposed for the realization
of net present value criterion for cut-off grade
estimation is flexible and can be used when the
production rate, cost and prices vary. This is an
advantage over Lane's analytical method which
allows only a single value for production rate,
cost and price.
2. It also allows for a simultaneous estimation of
pit limit, production rate and cut-off grade
which is another major advantage over Lane's
method.
Nwosu, J.I. and Okengwu, K.O. (2009). Estimation of
Cut-Off Grade of Itakpe Iron Ore Deposit for
Open Pit Mining. Integrated Journal of
Sciences and Engineering, Vol. 8, No.1 (2009).
Pp. 1-5.
Nwosu J.I. and Nwankwoala, H.O. (2012). Influence of
some economic parameters on cut-off grade
and ore reserve determination at Itakpe iron ore
deposit, North central Nigeria. International
Research Journal of Geology and Mining
(IRJGM) (2276-6618) Vol. 2 (4) pp. 82-87,
June 2012.
Nwosu, J.I. and Benard, I.U. (2020). Influence of Sub-
Grade Ores on the Cut-Off Grade and Ore
Reserve of Itakpe Iron Ore Deposit, North-
Central, Nigeria. Journal of Mining and
Geology Vol. 56(1) 2020. pp. 105 – 111.
Michael, N.P. (2017). Cut-Off Grade Optimization Of
Open Pit Mines With Multiple Processing
Streams. M.Sc Thesis, University of British
Columbia.
Michelson, S.D. and Buckley, R.D. (1973). Influence of
Minor Metals or By-products on Pit Planning
and Ore Reserve Determination. Mining
Engineers Handbook, Edited by A.B. Cummins
and I.A. Given, Vol. 2 pp. 19 -21.
Pandey, I.M. (2006). Financial Management. Ninth
Edition Published by Vikas Publishing House
PVT Ltd New Delhi, 1250 Pages.
112 Journal of Mining and Geology Vol. 57(1) 2021.