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Whittle Short Course Notes Eighth Edition
Whittle Short Course Notes Eighth Edition
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Jeff Whittle
Chris Wharton
Geoff Hall
Table Of Contents
Strategic Mine Planning........................................................................... 1
The Process of Design .......................................................................... 31
Sensitivity Analysis in Strategic Mine Planning ..................................... 41
Introduction to Optimization................................................................... 55
Open Pit Optimization............................................................................ 63
Economic Model for Pit Optimization..................................................... 83
Generation of Nested Pit Shells ............................................................ 89
Calculating Block Values ....................................................................... 95
Producing a Practical Pit Design from an Optimal Outline ................. 103
The Effects of Underground Mining..................................................... 117
Multiple Mines ..................................................................................... 125
The Effects of Sequencing & Scheduling ........................................... 137
Economic Model for Schedule Optimization........................................ 143
Schedule Optimization......................................................................... 147
Stockpiles ............................................................................................ 155
Blending .............................................................................................. 159
Cost Models for Different Purposes..................................................... 175
Cut-Offs ............................................................................................... 192
Cut-off Optimization............................................................................. 203
The DC Model for material classification and NPV maximization........ 211
References .......................................................................................... 223
Whittle Strategic Mine Planning 1
Introduction
Strategic Mine Planning is the art and science of the management of
businesses involved in resource exploitation. It is the convergence of
business strategy on the one hand and mining optimization on the other. It
therefore embraces the general nature of mining as a business, as well as
the special nature of mining as an application of economic geology and
engineering. The driving force behind this convergence has been
information technology, in particular full value chain modeling systems
such as those that have been developed around pit optimization cut-off
optimization and schedule optimization.
Military Strategy
Business Strategy
Situational Analysis
Situation Analysis
• Size and structure of the market – refer to the Market Analysis section
below.
• Strengths – Those qualities that the company possesses which can
contribute to its success.
• Weaknesses – Qualities that could contribute to the company’s
success, but which the company lacks.
• Opportunities – Factors, events or circumstances in the marketplace
that the company can use to its advantage.
• Threats – Factors, events or circumstances in the marketplace that
could hinder the company’s success.
• Forces driving change – Factors that will influence the market in the
future, including changes in competitive structures, the emergence or
disappearance of substitutes or competitors in the market place, and
any other factors that affect demand.
• Critical success factors – Those qualities, attributes and assets that a
company needs in order to succeed in its chosen market.
• Competitor Analysis – All of the above, analyzed from the perspective
of the company’s competitors, so that their actions in the market place
may be anticipated.
Market Analysis
Market analysis is an important part of Situation Analysis.
There are two markets that are of interest to mining companies, the
commodities market for whatever the mine produces, and the share
markets where capital is raised and share value is determined. The
commodities market determines the income of the business. The share
market determines the shareholder wealth. Performance in the former
market of course has a great impact on the performance in the latter.
Commodities Markets
• Perfect Information – All buyers and sellers know what other buyers
and sellers are trading, and the price at which they trade.
If these conditions are met, then it is believed that the market is operating
efficiently in the long term. Sellers cannot make excessive profits, and
they are forced to maintain the lowest possible cost of production. Excess
demand or excess supply is remedied by a movement in either the demand
curve or the supply curve, which leads to a return to equilibrium.
a Perfect Market. The seller has the power to adjust his or her price in
order to maximize their profits. 1
1
Refer to the section Introduction to Optimization. The example optimization problem in
that section is one in which the seller has considerable power in setting prices, and
utilizes an optimization approach to determine the price at which his or her profit is
maximized.
Whittle Strategic Mine Planning 9
Homogeneous product 9
Substitutes are 9 Aluminium for electrical uses and
available car radiators, optical fibres in
telecommunications, plastic in
plumbing. 2
2
Source: Crowson, P., Minerals Handbook 1996-97, Stockton Press, New York, p.115
3
Ibid.
10 Whittle Strategic Mine Planning
4
MiningNews.net 23 February 2005 “IRON ore majors BHP Billiton and Rio Tinto led
the charge on the Australian Stock Exchange this morning with iron ore explorers in their
wake as Brazilian giant CVRD announced a price hike of 71.5% overnight after
finalizing negotiations with long term partner, Japanese giant Nippon Steel Corporation.”
Whittle Strategic Mine Planning 11
Homogeneous product 9
Substitutes are 9 Platinum, palladium, silver,
available titanium, chromium based alloys.
Dollars and other currencies,
currency hedging instruments,
stock.
Despite all of the above, the gold market does not work anything like a
perfect market. This is because gold is not only consumed in the
production of goods, it is also used as a store of wealth, both in the form of
jewelry and in bullion. This gold can and does find its way back into the
market from these above ground stocks. This secondary market is larger
than the primary market for gold.
“Above ground stocks of gold are very high, and the willingness to add to,
or release from, these stocks largely determines the state of the market. 5
5
Source: Crowson, P., Minerals Handbook 1996-97, Stockton Press, New York, p.147
12 Whittle Strategic Mine Planning
Share Markets
The primary market for shares applies to newly issued capital. A large
secondary market exists for re-traded shares.
Whittle Strategic Mine Planning 13
Economic Evaluation
Strategic planning cannot proceed without having a method to determine
the value of the various strategic options that will be considered. If you
cannot measure the value of a plan/design, you cannot know whether or
not a change in it 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 of a plan/design, which allows easy comparison to
all others.
• In choosing between two or more plans, you should choose the one
with the highest net cashflows.
Despite its shortcomings, it has the advantage of being very simple, and it
is commonly used for planning functions such as pit optimization.
6
Real dollars are dollars with constant buying power.
7
Nominal dollars are dollars at their face value, with buying power which changes over
time subject to inflation or deflation.
14 Whittle Strategic Mine Planning
with time. The rate of increase is expressed as a discount rate, such as ten
per cent per year. It is the application of the discount rate which
differentiates DCF Analysis for simple cash flow analysis.
The discount rate can be defined or determined in various ways, including:
• Type 1 - risk adjusted discount rate consists of two components:
opportunity cost and risk adjustment. Assuming it is your own money
that you will invest, the opportunity cost is the rate you could earn
(risk free) with the capital elsewhere. The risk adjustment is an
additional amount to account for the geological, geotechnical,
economic and political risks associated with the project. The risk
adjustment must reflect all of the risk associated with the project.
• The cost of capital (in the context of this discussion) is the rate of
return investors require to supply the funds for the project where they
are assuming all the risk associated with the project. It is common for a
cost of capital approach to be taken when funding is provided
internally, for example, from a head office to a project office.
The formula for calculating the net present value (NPV) for a project is as
follows:
n
Rt
NPV = ∑ t −C
t = 1 (1 + k )
Where:
Rt = cash flow for period t
k = discount rate
C = initial capital expenditure
n
Rt
0= ∑ (1 + k )
t =1
t −C
To explain the application of DCF Analysis, it is useful to go through an
example. Consider a five year project with an expected cash flow of one
million dollars per year and a discount rate of ten per cent. The cash flow
calculations are shown below.
This gives a total value today, the Net Present Value (NPV), of
$3,790,787.
If the project had cash flows of $1.5M, $1.5M, $1M, $0.5M and $0.5M,
which gives the same total undiscounted cash flow of $5M, the figures
would be as shown below.
• Independent of inflation.
Disadvantages:
• Does not take account of a project manager’s ability to adapt to future
changes as they occur. Some argue accordingly that DCF analysis will
underestimate ‘true’ value.
Disadvantages:
• Deals very poorly with risk concepts.
• Subject to inflation.
Disadvantages:
• Requires more data.
Monte-Carlo Analysis
Monte-Carlo Analysis uses probability distributions as inputs for major
economic parameters and it produces a probability distribution for value
outcomes.
Advantages:
• Provides a probability distribution for value outcomes.
Disadvantages:
• Requires more data.
Advantages:
• Provides a probability distribution for value outcomes.
Disadvantages:
• Requires more data.
Common Practice
A survey of the evaluation practices of mineral projects in the mining
industry was conducted by the Canadian Institute of Mining Management
& Economics Society (CIM MES) in 2005. Refer to Figure 3 for the
results of the survey. This study indicates that Discounted Cash Flow
analysis is the preferred method for evaluation of feasibility studies, with
NPV and IRR topping the list of evaluation metrics 8. Accounting- and
market-based methods are seen to be of significantly less importance in
the evaluation process.
NPV
IRR
Cash cost $/oz or $/lb
Experience
Hurdle Rate
Payback
NAV = NPV + cash - debt
Break-Even Price
Real Options
Price/EBITDA
ROCE
EV = Market Cap + debt - cash
Profitability Index
Price/EBIT
Price/Earnings
NAV (SEC def)
Price/Cash Flow
Market Cap
Book Value
Price/Book Value
0 2 4 6 8 10
0 = no importance high importance = 10
8
Source: Smith, L.D., 2005 Survey of evaluation practices in the mineral industry, CIM
Management and Economics Society.
20 Whittle Strategic Mine Planning
Counterpoint
We started out this section by stating that strategic planning cannot
proceed without having a method to determine the value of the various
alternatives that will be considered. We looked at various systems for
measuring value, which cater variously for factors such as opportunity
cost, cost of capital, inflation, taxation and risk. However, none of these
systems are perfect, and none could be considered “complete”, where
“complete” means that all decision-influencing factors are considered.
Despite the apparent sophistication of some of the methods, they are only
as good as the data that is entered into them and they are poor when it
comes to taking into account more qualitative factors.
History has provided some spectacular failures for economic analysis
being applied to qualitative factors. 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, if the tank was not relocated. The
report concluded that the net cost to Ford would be lower if it did not
change the design, so condemning scores of future Pinto occupants to
death. People died as a result and when the news leaked, Ford’s good-will
was seriously eroded.
One could argue that the economic model Ford employed could have been
corrected by taking into account (in dollar terms) the potential loss of
good-will associated with the deaths, should the news have been leaked. It
might have led to the fuel tank being relocated, with consequent saving of
lives and of good-will. However there are perhaps some things that
should be left out of cold-hearted analytical processes, including human
lives.
Whittle Strategic Mine Planning 21
Decision-making behavior
Decision-making behavior 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. It is a key factor in the
determination of strategies.
Risk Neutral
Risk Averse
Walls also found that Australian small company CEOs were more risk
averse than their U.S. counterparts but could offer no explanation for this.
An alternative approach to the tempering of NPV objectives with risk
averse behavior is given by Smith (1997), who suggests that rather than
choose the maximum NPV production rate, this rate should be seen as the
maximum rate and that the actual rate should be less than this. Part of the
reasoning behind the attenuation is that a maximum NPV production rate
tends to lead to a short mine life, leaving minimum time to recover from
early difficulties.
If these methods are being used to value the shares, then a strategic mine
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 so
that it leads to early payment of dividends, even if this means a sacrifice of
NPV.
9
Refer to Rudenno (1998) for a more comprehensive discussion of how investors value
mining company shares.
Whittle Strategic Mine Planning 23
Example - Copper
Negatively sloping demand curve will ensure equilibrium of supply and
demand is achieved if supply reduces.
Contra-example - Gold
A drop in primary supply will be easily taken up by supply from the
secondary market.
Walls & Eggert (1996) suggested reasons why mining CEOs do not follow
classic highest NPV decision-making patterns. Risk aversion associated
24 Whittle Strategic Mine Planning
with potential company failure has already been discussed. Other reasons
included:
1. The desire to avoid making a short term loss. The CEOs’ continued
employment may be linked to their ability to consistently deliver a
profit (even if this is at the expense of NPV).
Bad Behavior!
parameter itself affects NPV, and, if you were to graph the NPV against
the parameter values, you would have a graph which illustrates the
relationship.
The major design variables that we have in mind include the size of the
ultimate pit, the cut-offs and the investment in processing plant (and
consequently its throughput rate). The curve will typically be convex,
with a single maximum. Figure 4 shows an example of such a curve for
the pit tonnage of a mine.
Such curves have been produced in countless papers. Hanson (1997) for
example, like most people who produce such graphs, shows only the
middle part of the curve. This is because it is the area around the
maximum which is generally considered to be most interesting. Smith
(1997) presents a number of similar looking graphs, but for NPV v.
Production-Rate.
26 Whittle Strategic Mine Planning
• 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.
Whittle Strategic Mine Planning 27
A risk neutral design will seek to maximize NPV. A risk averse design
will not succeed in maximizing 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. At
the far right of the graph is the mine design which maximizes 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
that the reserve is economically viable.
A company taking a cost position in the market may choose a design other
than that which provides the highest NPV. The same can be said for a
company that is seeking to effect market consolidation – that objective
may lead it to choose alternatives other than those that are indicated
through DCF Analysis to achieve the highest NPV.
An example of such a decision-making behavior feasible domain has been
creased using the Whittle package and a training data set called “Monte
Bojo”. It is presented below. Several hundred 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
analyzed. The results are shown in Figure 7. 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 flatness 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.
28 Whittle Strategic Mine Planning
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 million
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 processing plant to perform to
boiler-plate recovery 10. In this case the theoretical maximum NPV is
unrealistically high, and the achievable best NPV will be somewhat lower.
The theoretical maximum NPV is, however, still very useful as a reference
point for the economic evaluation of different practical alternatives which
the engineer devises.
800
600
400
200
0 opvalue/db ($m)
-200 0 20,000 40,000 60,000 80,000 100,000
-400
-600
-800
10
Smith (1997) analyses this particular issue, and in relation to production rates,
concludes that the ‘optimum’ production rate should really be regarded as the maximum
rate. The most sensible rate may be somewhat lower.
Whittle Strategic Mine Planning 29
Ore-body Model
Short-term Schedule
Figure 8: 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 ore body model is rarely affected by what follows, the pit design, long-
term schedule and cut-off schedule can affect each other a 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,
and to record data that will be important to the planning and subsequent
mining of the ore body.
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 of the mine. Here, the year in which a cash flow occurs can have 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 is available
when doing long-term scheduling.
From hereon we will focus on the first two activities in the second box:
Ultimate Pit Design and Long-Term Schedule. The cut-off schedule is
discussed in the section titled “Cut-Off Optimization”.
34 Whittle Strategic Mine Planning
We will assume that a block model has been prepared. Each block will
have a total tonnage and may have one or more “parcels”. Each parcel
will have a tonnage and a quantity of each element of interest.
The main steps:
1. Create a selective mining model
4. Introduce pushbacks
11
Sub-Block Model - A model in which some blocks are split up into smaller blocks,
often to provide greater precision at contacts.
12
Regular Model - A model in which all blocks are exactly the same shape and size, with
no sub-blocks.
36 Whittle Strategic Mine Planning
If the selective mining model is very large, it can lead to long processing
times and slow analysis. If this is the case, then for the purposes of
performing high-level analysis and sensitivity analysis, a smaller model
should be produced, which will process much more quickly. This can be
achieved in Whittle by “re-blocking” the selective mining model,
combining blocks by a factor of 2 in each direction.
Most of the analysis work can be done using this model, which makes it
very quick. During this work you will home in on a design that best meets
your corporate aims. You can then do a final check on the design by
repeating the final simulations on the design model. It is unlikely that you
will find that there is any significant change.
will peak at different pit sizes. Although you will not be able to mine like
the Best case simulation, you can expect to get fairly close to its NPV with
suitable scheduling.
Choose a pit outline which lies between the two peaks, but is closer to the
Best case peak. Let us call this pit shell the “working shell”.
If this shell is significantly different from the pit size you assumed when
setting up the base case economics, adjust the base case economics and
repeat the above work.
Slope sensitivity
At an early stage of analysis, you may only have a rough idea of how steep
the slopes can be. It is useful to know in advance just how sensitive the
economics of the operation are to the pit slopes. You can check the
approximate effect on NPV of changes in the pit slopes, by rerunning the
pit optimization several times, each time with different pit slope settings.
By rerunning the graphs for the Best and Worst case simulations and
comparing the results to those for the original slope settings, you will be
able to determine the sensitivity of NPV to the pit slopes.
You may also have alternatives available as to pit slope angles. For
example, it is sometimes possible, by using techniques such as cable
bolting, to increase the pit slopes safely.
You can check the approximate effect on NPV of increasing the pit slopes
by, say, five degrees, increasing the mining cost by an amount
commensurate with the rock-bolting costs, and re-running the above
graphs. This will allow you to decide whether it is economic to use cable
bolting.
Introduce pushbacks
If the expected mine life is going to be more than two or three years, and
the pit is physically big enough, the use of pushbacks will probably
increase the pit value and allow a more constant stripping ratio.
Examine the layout of the working shell and the shells within it. Choose
one, two or three shells which could make reasonable intermediate
pushbacks. Here the concern is mining width. Providing the separation of
shells is sufficient round, say eighty per cent of their circumference, don’t
worry at this point if it is too narrow elsewhere, this can be fixed later.
38 Whittle Strategic Mine Planning
Through simulations plot a graph showing NPVs for Best, Specified (with
the pushbacks you have chosen) and Worst cases for several pit shells
either side of the current working shell.
Do this both with schedule optimization for improved NPV and for
improved balance. How close are the NPV values to the Best case NPV
values?
Does the working shell still look the best?
If it doesn’t, re-design the pushbacks for a new working shell, and produce
the graph again.
Experiment with different numbers of pushbacks. If increasing the
number of pushbacks increases the NPV only a little, it may be wise to use
the smaller number of pushbacks. This is because:
• Wider pushbacks require less adjustment later, and adjustment always
reduces the apparent value of the pit.
• Are there a few periods in which the processing capacity is not fully
utilized? If so, you may be able to overcome this by increasing the
mining rate temporarily (contract mining for example) or by choosing
different pushbacks or by introducing buffer stockpiles.
• Do the mining rates vary wildly from one period to the next? This is
rarely desirable, as it means that a large mining fleet is often
underutilized, and the cost of underutilization may not be adequately
modeled in the simulation. The problem may be overcome by
choosing different pushbacks, or by making appropriate adjustments
to the cost model so that the schedule optimizer produced a more
appropriate schedule.
Re-run your final version of the above work using the pit design model
rather than the sensitivity work model. There will usually be very little
change (1% to 2%) to any of the key figures.
Whittle Strategic Mine Planning 39
Using the selective mining model and the pushbacks you have established,
run the Whittle Mining Width module to adjust the mining widths before
re-running again. There will be a loss in value, but it should not be
anything like as big as the gain made by using pushbacks in the first place.
You now have a final pit and one or more pushbacks which you can use as
guides in using the final design. This will usually be done in your GMP.
The size and shape of an ultimate pit outline is affected more by the
economic conditions when mining ends than the economic conditions
when mining starts. If the mine life is to be only a year or two, then we
can probably predict the economic conditions reasonably well. Otherwise
we have a problem.
What-if Analysis
If the change looks promising, you should check if it would have an effect
on the best pit size.
13
Refer to the section “Calculating Block Values for Pit Optimization” for an explanation
of the equation and terms.
Whittle Strategic Mine Planning 41
Abstract
There are many inputs to the process of designing an open cut mine and
uncertainty in the value of any of these inputs leads to uncertainty in the
economic outcomes. For example, a change in one input, such as the
commodity price, can have a direct influence on the economics of resource
exploitation.
Spider diagrams.
Spider Diagrams
Figure 10: Sensitivity analysis for the recovery of sulphide rock in the
processing plant. The recovery was varied in steps from 70% to 96%. For
each of the 14 scenarios, Whittle produced a life of mine schedule,
complete with recalculation of the cut-offs, and recalculation of discounted
cashflows. The graph, which has been produced by Whittle, shows the
result in terms of the total ore tonnes and NPV for the mine.
To study the concept, we will use a simple example that is derived from
the Whittle tutorial data set. The simple example presented here uses only
46 Whittle Strategic Mine Planning
27 tests, and so provides very rough results. Tests of 125 or more are
recommended if a reasonable estimate of the final distribution is to be
made.
The first step in determining the risk associated with the operation is to
determine the subjective probability distribution of each major risk factor,
including the geological, geotechnical and operational
limitations/environment.
Model
Name Probability Notes
Model A 20% Simulated by removing last 12 benches
of the model.
Model B 60% Simulated by removing last 6 benches
of the model.
Model C 20% Complete model
Sum: 100%
14 The current gold price indicates the price at the time the Whittle tutorial data set was created, not the current gold price at the time of
writing.
Whittle Strategic Mine Planning 47
Figure 11: Probabilistic Risk Analysis Using Whittle. This screen dump
shows some expanded and some collapsed branches of the analysis tree.
In total there are 27 analyses (not all visible here), representing all possible
combinations of the three uncertain inputs.
The probability of each result, and the NPV result itself were entered into
a spreadsheet from which the weighted mean and standard deviation can
be calculated.
The weighted mean was calculated by summing the product of each NPV
result and its associated calculated probability. The standard deviation
was calculated using Equation 1.
σ = ∑(X 2
p( X )) − X 2
the small number of NPV results and because of the discrete form of the
input variables.
Cumulative Probability
3x3x3 data set
1.00
0.90
0.80
0.70
0.60
Probability
0.50
0.40
0.30
0.20
0.10
0.00
- 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000
NPV
Figure 12: Cumulative Probability for Simple 3x3x3 Data Set (27 Data
Points)
Cumulative Prob
5x5x5 Data set
1.00
95.875%
81.850%
0.80
0.60
Probability
53.200%
0.40
0.20
18.600%
3.950%
0.00
- 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000
NPV
Figure 13: Cumulative Probability for More Complicated 5x5x5 Data Set
(125 Data Points)
0.9
0.8185
0.8
0.7
0.6
Probability
0.532
0.5
0.4
0.3
0.2 0.186
0.1
0.0395
0 0
0 5000000 10000000 15000000 20000000 25000000
NPV
Once a curve like the one presented in Figure 12 has been plotted, rough
estimates as to the risk involved in the project may be made. Our sample
shows a mode of approximately $9m, with NPV values 25% either side of
the mode of $6m and $13m.
Such a range is much more useful than a spot estimate when evaluating
projects.
50 Whittle Strategic Mine Planning
Once you have determined the impact of uncertain inputs on the project
value, you can determine a strategy to deal with it. The alternatives are:
Four categories of uncertain inputs have been chosen for the model:
• Geological
• Geotechnical
• Operational, and
• Product Price.
Apart from being generally useful categories, they also happen to map
well to the design process inherent in the Whittle package. This
relationship is represented in Figure 16 and Figure 17.
52 Whittle Strategic Mine Planning
Figure 16: Mapping of the uncertain inputs of the design process to the
artefacts of the planning process
Figure 17: The planning process artefacts as they are represented in the
Whittle
With the exception of product price, the uncertainty of all of the inputs can
be influenced by the degree of research into the field. Taken to its logical
extreme, it is possible to virtually eliminate the uncertainly of all inputs,
except price, by investing more money in the appropriate research. Price
is the exception, because it is something that does not yet exist. No matter
how much money is invested into research of future prices, a great deal of
its uncertainty will remain with you.
With this model in mind, it is possible to test cases in Whittle whereby the
impact of an uncertainty-reducing strategy can be tested.
Having measured the project risk using sensitivity analysis, and having
determined the costs of reducing that risk, it may well be that the best
strategy is to tolerate the risk.
15
Alternatively, this can be thought of as the consideration of strategic issues when
choosing pushbacks.
54 Whittle Strategic Mine Planning
Whittle Strategic Mine Planning 55
Introduction to Optimization
56 Whittle Strategic Mine Planning
Whittle Strategic Mine Planning 57
16
You can calculate this using simultaneous equations and the linear expression form
Y=aX+c, where Y is the number of units sold and X is the Price.
Whittle Strategic Mine Planning 59
Profit
2500
2000
1500
1000
500 Profit
0
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70
-500
-1000
-1500
There can be more than one way to finds an optimal solution. In this
simple case, we can apply some algebra to solve it, by finding the value of
P at which the derivative of the objective function is equal to zero. That
yields a precise answer of 0.32617.
0 = -2*30000P+19300
→ P = 0.32617
The Profit (Pr) for P = 0.32617 is:
Pr = -30000*(0.32617)2+19300*0.32617-1190
→ Pr = 1913.47
We could also apply a step and stride routine, to try different values of P,
in order to find the peak of the graph, which corresponds to the highest
value of Pr.
Some further observations based in part on this optimization example:
1. We made some assumptions about the behavior of sales volume
(Units) with respect to price. In reality, we could probably not expect
such highly predictable market behavior. The expression [U = 19000-
60 Whittle Strategic Mine Planning
Would you really expect to sell exactly 19000 units if you set the price
to zero?
It can be said for all models – that they are simplified representations
of reality. We can’t expect reality to behave exactly like a model
especially when you get to extreme values. We can use models like
this to our benefit, but should be ever mindful of their limitations.
For other types of optimization problems there may be more than one
optimal solution. That is, two or more settings of decision variables,
that yield exactly the same optimal objective function. In the strategic
mine planning domain, blend optimization is an example of an
optimization problem for which it is possible for two or more settings
of decision variables to yield exactly the same optimal objective
function.
Conclusions
We worked through a very simple optimization problem. We will consider
much more complex cases in the following sections, but they will share in
common the following:
1. An objective function, which calculates the variable which is to be
optimized (minimized or maximized).
In this case, the problem is simple and we can apply some simple
techniques to find the optimal solution:
1. Enumeration
For any orebody model there are many feasible pit outlines. In fact the
number of technically feasible outlines is usually very large.
Any feasible outline has a Dollar Value.
In this context “feasible” means that it obeys safe slope requirements.
(We will discuss haul roads later.)
Dollar Value = Revenues - Costs
Revenues can be calculated from ore tonnages, grades, recoveries and
product price. Price is often the main unknown factor but, in order to
design at all, some price must be assumed.
Costs are much more complicated, and we shall spend more time on them
later. For the moment, we will assume that the costs of mining and
processing are known.
66 Whittle Strategic Mine Planning
Slopes
In general - if we use steeper slopes, the optimal pit gets deeper.
We may not know the outline, but it is 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 an
impossibility, then we have proven that there is only one optimal outline.
There are two possible cases.
Figure 20 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).
Whittle Strategic Mine Planning 67
In the second case, where the two pits overlap as in Figure 21, 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
If the 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
false.
surface
1
2
3
4
5
bench level
100 tonnes waste 6
7
8
500 tonnes ore
Note that, although the ore tonnage increases 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 and remove, then the following table shows the value of
each pit.
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 23.
Note that the graph goes through a smooth maximum. Although this is an
artificial example, such a smooth maximum is normal for real ore bodies.
In my experience, a range of ten per cent in pit tonnage usually involves a
range of less than two per cent in pit value. This has a profound effect on
the process of designing pits.
value
B
A
tonnes
Figure 24: The small effect of design changes near the maximum
As you can see from Figure 24, 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 from an
70 Whittle Strategic Mine Planning
optimal outline (B) where small deviations have only a second order effect
on the value of the pit.
Whatever value you aim 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.
Enumeration
Consider a trivial model with only one section and ten benches of ten
blocks, as is shown in Figure 25.
10
10
100 Blocks
Figure 25: A trivial model
If we take a very simple-minded approach, there are 100 blocks and each
can either be mined or not mined. This gives 2100 or 1030 alternatives!
Even if a computer could check out an alternative every microsecond, it
would still take three million times the age of the universe to check them
all! If we start in any position at one end and then go up one, down one,
or stay at the same level, then there are about 10x39, or 200,000,
alternatives. Actually it is 156,629 as the table below shows. This is
because the number of alternatives at the top and bottom is not 3.
Whittle Strategic Mine Planning 71
10
10
10
1000 Blocks
Figure 26: A very small model
Floating Cone
With the ore and waste values shown in Figure 27, a floating cone
program would examine the left-hand ore and decide that the value of the
cone was 100-80-30=-10. It would decide not to mine the ore. It would
then make a similar decision for the 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 are resorted to, floating cone programs cannot really get around
this problem without using enumeration, and we know that that is useless.
Now, totally 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 a pit.
With the ore bodies shown in Figure 28, a floating cone program will first
examine the +40 ore body and decide that it is not worth mining. It will
then examine the +200 ore body and will decide that it is very well worth
mining (200-80-30=+90). 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 29.
Whittle Strategic Mine Planning 73
If the 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 of its 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 it.
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
Figure 30: This diagram shows the outline of a pit generated by stepping one up
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.
In the 1960s Lerchs and Grossmann published a graph theory method, and
T.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 a production environment,
where there are large numbers of blocks 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 being difficult to program, the Lerchs-Grossmann method is
relatively easy to explain and demonstrate, at least 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 arc is a relationship between two blocks. An arc from block A to
block B indicates that, if A is to be mined, then B must be mined to expose
A. The reverse is not true. If B is to be mined, block A may or may not
be mined. See Figure 31.
B
Arc from A to B
A
Figure 31: An arc
A
Figure 32: Chaining of arcs
In Figure 33, three arcs used repeatedly can ensure the mining of all
required blocks for the slope indicated when the bottom left-hand block is
mined.
are laid out in one, two or three dimensions, and how many arcs per block
are used, is immaterial.
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, we will use square blocks and
slopes of 45 degrees, although this is not a requirement 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 34.
Figure 34: The effect of chaining with three arcs per block
The method repeatedly scans through the blocks looking for blocks that
are flagged to be mined and that have an arc pointing to a block that is not
flagged to be mined. Clearly, this is not a viable situation. The way it
resolves these situations forms the core of the Lerchs-Grossmann method.
Step 1: The first arc from a “flagged” block that we find is to a block which is not flagged.
22.9
Step 2: To resolve this, we link the two blocks together.
The total value of the two-block branch is 22.9.
Step 3: We deal with the other two arcs from this block in the same way.
The total value of the four-block branch is 20.9.
Step 4: We continue in the same way along the bottom bench,and then along the next bench.
(Note that even waste blocks are flagged if they belong to a positive branch.)
Whittle Strategic Mine Planning 79
Step 5: The next flagged block has an arc to a block which is also flagged.
We don’t create a link for this arc or for the vertical one from
the same block, because nothing has to be resolved.
Step 6: The next arc from a flagged to another flagged block is between two branches.
The procedure is unchanged - we do not insert a link.
Step 7: We continue adding links until we reach the one shown. When we add this link, the branch
total will become -0.1. Because of this ALL the blocks in the branch have their flags turned off.
Step 8: The next arc of interest is from a flagged block to a block which is part of a branch
which is not flagged. Effectively the centre and the right-hand branches
can co-operate in paying for the mining of the common
waste block, which is circled.
15.9 20.8
Step 9: The Lerchs-Grossmann method includes a procedure for combining
the two linked branches into one branch with only one
total value.(Note that there is no requirement to
always branch upwards from the root.)
80 Whittle Strategic Mine Planning
Step 10: The next arc of interest is from a flagged block to a waste block.
Lerchs-Grossmann detects that this extra waste will remove
the ability of the centre branch to co-operate with the right-hand
branch in paying for the mining of the circled block.
Step 11: Lerchs-Grossmann includes a procedure for breaking the single branch
into two branches by REMOVING a link.
Step 13: This is dealt with in the same way as before, and the left and right-hand
branches are combined into one, with one total value.
Whittle Strategic Mine Planning 81
Step 14: We continue adding arcs until we reach the situation shown above. The program
would then do another scan for arcs from blocks which are flagged to blocks which
are not flagged. We can see that it will find none, and the optimization is complete.
Lerchs and Grossmann proved that, when no further arcs can be found that
are from a flagged block to a block that 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 it is clear that there can be no flagged blocks with arcs to blocks
which are not flagged.
In this case we have a W shaped pit that contains two ore blocks with a
total value of 47.8 and 47 waste blocks with a total cost of 47. The pit is
thus worth 0.8, and we can see that 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. It is 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 which 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 Lerchs-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 two.
82 Whittle Strategic Mine Planning
Whittle Strategic Mine Planning 83
Cash Objective
If your objective is to maximize undiscounted cash-flows over the life of
the mine, then the application of Lerchs-Grossmann pit optimization is
perfect – it achieves the maximization of undiscounted cash-flows.
Maximization if undiscounted cash-flows is relatively simple, since the
exercise is completely independent of the mining schedule and mine life.
Cash Pit
This is the pit outline which will yield the highest undiscounted cash
value. The outcome is independent of the mining schedule.
NPV Pit
The pit outline which, combined with a specific schedule, will yield the
maximum NPV.
2. In order to know the NPV’s of the individual blocks, you need to know
which ones are included in the pit outline and when they will be mined
and processed (i.e. you need a mining schedule). You cannot produce
a mining schedule without first having the pit outline. See step 1.
DBD Technique
NPVS Technique
This technique will produce a set of nested pits, equal in number to the
number of blocks in the ultimate pit.
Whittle Strategic Mine Planning 87
2. It does not in any way guarantee that the NPV values used to evaluate
the blocks in the generation of the sequence (and consequently in the
generation of the shape of the ultimate pit) bear relation to the actual
NPV values that the blocks have once practical scheduling constraints
have been applied. As a consequence, it could be that the pit produced
by this method is OK if your final schedule tends towards Best Case in
nature, but is inappropriate should your final schedule tend towards
Worst Case in nature.
DPS Technique
The Discounted Pit Shells technique has been developed by Whittle. The
process involves:
1. Apply the Conventional Whittle Technique (see below), thus
producing a realistic mining schedule.
2. Use the mining schedule to determine mining periods for each block in
the model.
3. Based in the mining period, modify the original block model so that it
contains estimates of block NPV.
Note that the block NPV values calculated in step 3 are only used in the
pit optimization stage. Normal discounting procedures are applies during
the simulation and scheduling stage of the Whittle Technique.
The DPS technique should lead to the generation of block NPV estimates
that are far more accurate than those generated by the DBD technique, or
the NPVS technique, as it takes into account the actual style of scheduling
that is applicable to the mine (as applied by the software operator) rather
than a hypothetical one.
The DPS technique is available in the Whittle software.
This technique effectively deals with the issue of an NPV Pit being a
different size to a Cash Pit. It does so, by providing NPV evaluations of a
range of Cash Pits, each one optimal for a different cost-price ratio and
each with a different tonnage. The user is able to choose the pit which
yields the highest NPV, for the scheduling method of choice.
The technique does not deal with the issue of any difference in shape
between the NPV Pit and the Cash Pit.
Whittle Strategic Mine Planning 89
outline. In fact this frequently happens and the result is that fewer pit
shells are generated than the list of prices supplied would suggest.
In Whittle 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 generate
pit shells for a range of Revenue Factors which all prices are multiplied
by.
Mining Phases
The mining phases technique applies vertical bounding to provide a set of
nested pits. The technique is available in the Whittle Pit Shells node and is
described fully in the help files.
Mining Direction
The mining direction technique has been developed by Whittle and
generates a nested set of pit shells while imposing a horizontal mining
direction. In many circumstances the nested pit shells produced by the
technique are far more practical that those produced by other techniques.
This technique is based on the use of user-defined expressions, to drive Pit
Parameterization in a different way. Rather than generating pits on the
basis of a changing price/cost ratio (the normal Revenue Factor approach),
this technique includes increasingly more ore blocks in the optimization
for each increment of a factor that relates to the distance from the block to
an origin position. Figure 36 shows the effect of applying this technique.
Figure 36: Effect of applying the mining direction technique. The mining
direction was set to emanate radially from the South East.
Whittle Strategic Mine Planning 93
Copy and paste this Pit Shells node back onto the
parent Pit Slopes node. This new node will be the
one in which you create the Mining Direction
technique. Make sure you are in Cash Flow Mode.
The technique won't work if you are in Cut-off
Mode.
2. Define a User In the Expressions Tab, create an expression called
defined "DST":
Expression
D(X,0,0,0,0,0)/MX
5. Compare the You should compare the results from this technique
results with the standard pit shells technique:
(a) Is the new set of pit shells more practical to
mine?
(b) How much does this change the NPV?
(c) Do different mining directions yield different
practicality/NPV results?
94 Whittle Strategic Mine Planning
The block value must be calculated on the assumption that the block has
already been uncovered. In other words, no allowance should be made 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 not the cost of stripping. If
an 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 will
be mined. So, if the 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 if it 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.
where the part in parentheses is repeated for each separately minable ore
parcel in the block, and where:
METAL = Units of product in the ore parcel i.e. ore tonnes times
grade.
RECOVERY = The proportion of product recovered by processing
the ore.
98 Whittle Strategic Mine Planning
Calculating Costs
When preparing for a pit outline optimization, you have to calculate the
expected mining, processing, rehabilitation and selling costs. However,
pit outline optimization has very specific requirements with regard to the
calculation of these costs, and it is important that these be fully
understood.
All costs must be expressed as mining cost per tonne, as processing cost
per tonne, as rehabilitation cost per tonne, or as selling cost per unit of
product produced.
To reduce time costs to a per tonne or a per unit basis, you have to make
assumptions about the production rate. If the size of the pit produced by
the optimization makes these assumptions inappropriate, then the costs
should be re-calculated and the optimization done again. Many people set
up all their cost calculations in a computer spreadsheet. This makes re-
calculation much easier, and a sample is given later.
Incremental costs such as wages and fuel costs must obviously be included
in the calculation of the cost of the activity with which they are associated.
Expenditures that are related to time rather than to tonnage or production
require careful thought, but, as mentioned earlier, there is a 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 as a result of this extended life must be paid
Whittle Strategic Mine Planning 99
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, it is 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
it is limited by processing, and, in this case, only the mining of an ore
block extends the life of the mine. The ore block values should therefore
include an allowance for time 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 market limit means that time costs should be added to the
selling cost. In each case, the amount added is the total of all the time
costs per year divided by the throughput limit per year.
Examples
Processing mill
Consider a processing mill that costs $6m to build and commission.
3
$0.4M/Y
2
0
0 2 4 Year 6 8 10
Trucks
If the expected life of the 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.
If the life of the mine is much longer than the life of a truck, then trucks
will have to be purchased progressively to maintain the fleet, 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 of the 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 it is 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.
Administration costs
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 not, stop if mining stops at
this particular mine, and thus may, or may not, be included.
result will be quite the opposite. You will get a smaller pit with a smaller
total cash flow, and we will expand on this later.
Although the bank loan repayments themselves are not included, some of
the items that the loan was used to pay for may be included, as you will
see below.
Introduction
In this section we will consider the following issues:
1. Block model artifacts – Since an optimizer uses a block model and
mines each block completely or not at all, the optimal outline is
presented initially as a jagged line defined by block edges. However,
it is important to remember that the blocks themselves are artifacts.
The ore body itself does not consist of neat rectangular blocks. It is
therefore not relevant to try to follow the jagged outline in detail, or to
mine the individual blocks as though they were significant entities.
6. Haul Roads and Safety Berms – Haul roads and Safety Berms have
the effect of flattening the overall slope angle.
In section, the simplest method is to join the centre points of the bottom of
each column of blocks that is to be mined, as is shown in Figure 40.
If you experience these problems with a design that has a great many
pushbacks, it could be that the NPV calculated for that particular scenario
is unachievable. On the other hand, if you were to eliminate all pushbacks,
you could be assured practicality, but may sacrifice NPV.
The question arises as to how to reach a compromise between practicality
and NPV Maximization. The answer to the question depends very much
on the details of the case. A significant factor is the degree of
dissemination of the ore body. Disseminated ore bodies with little
stripping required, will not benefit from a very large number of pushbacks.
In extreme cases, the introduction of pushbacks will make no difference to
the NPV. Deposits in which target minerals are concentrated in smaller
areas such as seams, will benefit more from the addition of pushbacks.
The recommended method for determining the number of pushbacks is to
try different options and compare the practicality and the NPV of those
different options. The most efficient way to try different options is to
utilize the Whittle Pushback chooser, which, given a number of pushbacks
required, can choose shells to use as those pushbacks, which maximize
NPV.
Mining Direction
Introduction
Example
Figure 42: Standard pit optimization showing "onion skin" type shells
(reduced number of pushbacks)
Figure 43: Same final pit, but with a Mining Direction applied (From South
East Radial)
110 Whittle Strategic Mine Planning
From examination of Figure 42 to Figure 44, you will see that there is
quite a difference in the manner in which pits are generated, though the
final pit is exactly the same in each case. The original pit shells (onion
skins) should always yield the highest NPV, but with poor practicality.
Introducing a mining direction increases the practicality, but sacrifices
NPV.
Many people complain about the onion skin pits as being “un-mine-able”.
“Un-mine-able” means that the reported NPV is unachievable.
Table 1 includes a comparison of NPVs for a range of different mining
directions, as compared to the standard shells.
Whittle Strategic Mine Planning 111
DST Expression
In the Expressions tab, you must define an expression called DST. The
formulation of the expression depends on the mining direction you wish to
take. The twelve examples used in the example project are shown in Table
6.
17
Note that the number of pit shells is an artifact of the process. More pit shells will
generally lead to a higher Best Case NPV. In order to attempt to negate that effect, the
revenue factors for the standard pit shells were changed so as to produce roughly the
same number of shells as the mining direction cases.
112 Whittle Strategic Mine Planning
Price Expressions
price by 1. If the REVFAC is less than the DST value, then we multiply
the price by 0.
The actual price function is as follows:
[price]*IF(REVFAC>=DST,1,0)/REVFAC
Note that these expressions are only ever applied to the Pit Shells node,
never to a Scenario node.
Revenue Factors
1. You should look to the original set of shells to see if there is any
apparent “natural” direction that you can exploit. For example, if
smaller pits tend to be in the west, then a mining direction working
from the West will likely achieve pleasing results.
3. You must run in Cash Flow mode in the Pit Shells Node. The
technique will not work if you have the Cut-Off mode selected in the
pit shells node.
5. These expressions are generalised. They should work with any model.
6. The technique provides a final pit as being the revenue factor 1.00 pit
for the specified economic conditions. If you wish to use a pit other
than the revenue factor 1.0 pit, then you should do the following:
b. Change the End Factor for the Revenue Factor to the desired
value. 18
2. Converting the final pit shape into a new model bounded by the new
pit shape.
Figure 45: An ore body, with the final pit shown. The shape of the final pit
outline is determined with the application of ultimate pit slope constraints.
Figure 46: The final pit shape converted into a new model bounded by the
new pit shape. All ore and waste has been stripped out of the model
beneath the pit.
18
Note that I have not tested this aspect of the technique.
Whittle Strategic Mine Planning 115
Figure 47: Re-optimizing the new model with working slope constraints
by applying one of the pit parameterization techniques. The working
slopes are shallower that the ultimate pit slopes.
Figure 48: Allowing for haul roads and safety berms in the average slope y°
We want to work out angle y°, which is the average slope angle for use in
pit optimization.
Input Variables
x° is the inter-ramp slope angle.
D is the width of the haul road. In this example, the one haul road
intersects the wall. If two or more haul roads intersect the wall, then D is
the combined width of the haul roads.
C is the depth of the pit (this is an approximation – the actual value is
dependent in part on the pit slopes, which of course will change as we
adjust for the haul road).
116 Whittle Strategic Mine Planning
Derived Variables
y° = Arctan(C/(B+D))
B=(C/Tan(x))
Substitute B
y° = Arctan(C/((C/Tan(x))+D))
Whittle Strategic Mine Planning 117
Overview
If it is economically viable to mine ore by either underground or open cut
method, then pit optimization software can be used to determine which is
the better alternative.
For the purpose of pit optimization, the value attributed to blocks should
be the value to the company of mining by the open pit method. If a block
is worth, say, $1000 if mined by open pit method, and $800 if mined by
underground method, then the value used for the purposes of pit
optimization should be $200.
When implementing this using Whittle, the user must specify an
underground processing method, including all the costs associated with
mining and processing by the underground method. The software
calculates the value of the block if mined by underground method and
subtracts this from its normal open pit value.
The result of implementing this method is very often a smaller pit, with a
lower value, but the combined value of the open pit and the underground
mine will be maximized.
Additional ore bodies have been identified in the East as shown in Figure
51.
It would be feasible to mine the A ore body by underground method, but
not the B ore body. This possible underground development is shown as
dotted lines.
Assume that all the ore above Drive-1 is included in Stope-1; that all the
ore between Drive-2 and Drive-1 is included in Stope-2, etc. To mine
each stope, the only development necessary is the digging of its associated
drive. Provided that the revenue generated from mining and processing
the ore in each stope is greater than the cost of the associated drive, then it
is economic to mine it.
If only the open pit method is considered, then, in this example, the pit
optimizer may yield the results shown in Figure 52.
Whittle Strategic Mine Planning 121
Figure 52: This pit is optimal if only open cut methods are possible.
Let’s say in this case the net value for the block is $1000.
If it is not mined by open pit method:
Net Value = (block revenue) - (cost to mine & process by
underground method)
Let’s say in this case the net revenue for the block is $800.
If the block is included in the pit outline, it will be worth $1000, and if it is
not included in the pit outline it will be worth $800. Therefore, the value
to the company of including it in the pit is $200.
Pit optimizers such as Whittle can calculate the value to the company, by
deducting the underground value from the open pit value. Using this
system of block valuation in this example, a pit optimization is run and
produces the pit shown in Figure 53.
Figure 53: The pit is smaller if the underground value of blocks is deducted
from their open cut value.
122 Whittle Strategic Mine Planning
Note that the pit in Figure 53 takes in part of Stope-1. Stope-1 is only
economically viable by the underground method if all of Stope-1 is mined.
If the pit takes part of Stope-1, it will not be economic to mine the
remainder by underground method.
A new optimization should be run, which excludes the ore available to
Stope-1 from consideration for underground mining. The results are
shown in Figure 54.
The pit now takes in more of Stope-1 as expected. Stope-2 and Stope-3
remain undisturbed and should be mined by the underground method.
Whittle Strategic Mine Planning 123
19
If you are using a package such as Whittle (multi-element) you can define a new
element called “DOLL” for “dollars”. The price of a DOLL is always $1. This
simplifies many of the calculations.
124 Whittle Strategic Mine Planning
For example:
Assume that block 15 ,7, 23 originally contained one parcel. To add
another parcel, you must increment the number-of-parcels value in the
header line, and append the new parcel line.
Column numbers:
0 1 2 3 4
123456789012345678901234567890123456789012345678
Step 4 - Optimization
Re-optimize with the new Model file and additional Processing Method.
You should find that for the same Revenue factors, that the new pits are
greater than or equal to the pits generated from the original model.
Whittle Strategic Mine Planning 125
Multiple Mines
126 Whittle Strategic Mine Planning
Whittle Strategic Mine Planning 127
Abstract
It is not uncommon for a number of open cut mines to share infrastructure
in the mining value chain. This sharing offers economies of scale, and
presents additional scheduling options, but also increases the complexity
of design and scheduling. How do you best investigate and optimize this
type of scenario in order to yield maximum economic benefit?
As a senior developer in the Whittle team, the author has been involved in
the creation of a modelling and optimization system which caters for
multiple integrated mines. The objectives of the system design were:
This paper describes the benefit the Whittle Multi-mine option can bring
to such a complex operation and the features that enable that benefit.
Introduction
It is not uncommon for a number of open cut mines to share infrastructure
in the mining value chain. This sharing presents scale economies, and
presents additional scheduling options, but also increases the complexity
of design and scheduling. How do you best investigate and optimize this
type of scenario in order to yield maximum economic benefit?
Multiple mines could be treated in Whittle, to a certain extent, before the
Whittle Multi-mine option was introduced. The simplest approach was to
model each mine in isolation and then produce a schedule manually.
Several people, Tom Tulp (Tulp, 1997), David Whittle (Whittle, 2001)
and Chris Desoe from AMDAD developed techniques that removed some
of the restrictions associated with treating multiple mines as a single
model within the Whittle environment. None of these processes could
entirely remove the restrictions and they all required complex setup
procedures. Within their limits, however, they worked and they all
enjoyed success in a restricted number of situations.
128 Whittle Strategic Mine Planning
The Multi-mine option allows the flexibility of choice of optimal pit and
pushbacks for each mine independent of the other mines in the model,
while still producing a schedule automatically across all mines.
The key benefits of the Multi-mine option are that it gives you
independence between mines:
Whittle Strategic Mine Planning 129
Example data
The data comes from the “BlueSky” project which was originally
developed as a multi-mine example by Chris Wharton and is based on the
“Marvin” data developed by Norm Hanson for his students at RMIT
University and used in the “Whittle Challenge”, a one day add-on to the
“Optimizing With Whittle” conference in 1999. It has two mines, called
NorthPark (mine 1) and SouthBorder (mine 2). SouthBorder is the
standard Marvin mine with three rock-types: OX (a surface oxide), MX (a
mixed ore) and PM (the primary ore). NorthPark has been modified from
the original Marvin with the OX and PM rock-type tonnages being
summed together (called SL) and MX being renamed to RF. The
SouthBorder rock-types have their rock-type Cost Adjustment Factor
(CAF) greater than one to indicate a harder rock than in the original
Marvin. The slopes of both mines have been modified from the original
Marvin and also made different from each other. All rock-types have gold
and copper elements.
Optimal Pit
The creation of the optimal pit for each mine proceeds as in the single
mine case because the LG algorithm (in a single model file) will treat the
mines as independent entities (provided the resultant pits do not touch).
130 Whittle Strategic Mine Planning
With the above limits and reasonable estimates of the costs required to
support the above rates, the Pit by Pit Graph node indicates that the
maximum best case NPV that can be achieved is $272m. This is the pit
containing 693m tonnes total with a mine life of 24 years (Table 1, line 1).
We have arbitrarily chosen to develop four pushbacks. This is a decision
that can be explored further when there are definite costs of starting a new
pushback. The more pushbacks you have, the closer you can get to the
Whittle “Best case” scenario. When the costs of a pushback are included
in the analysis, you can very quickly see when the cost of adding a
pushback outweighs the return. When we add four pushbacks (letting the
Pushback Chooser (Whittle 2004a) decide them for us), the optimal pit is
488mt with a value of $186m over a nearly 19 year mine life (Table 1, line
2).
Three asides
1. The use of geometric values 20 in defining the revenue factor range
generates a good range of pits, giving good starting pits and still keeps the
overall number of pits to consider to a minimum.
Treat as multi-mine
Without the Multi-mine option above, the chosen pushbacks are the same
for every mine. The optimal pit is chosen by its pit number and that is also
the same for every mine.
Each mine is different, therefore one would expect the ideal pushbacks for
each mine to be different. Using the Multi-mine model we can run the
Pushback Chooser separately for each mine. This approach can be used
because the Pushback Chooser only uses the relative differences between
NPVs in deciding where to put the pushback boundaries.
Once we have the pushbacks for each mine, we can explore schedules
using input from both mines (each with its own pushbacks) and costings
and limits that can be a combination of global and per mine attributes.
Note that individual mine constraints are only available with the Multi-
mine option.
The user can now explore the opportunities available to vary the schedule
based on the order in which the mines are considered as well as the
previous variables associated with pushbacks in a single mine.
At this point it useful to note which mines are the biggest contributors.
This will help drive the decision as to the order in which we should mine
the mines. In this example, the significantly bigger contribution comes
from the NorthPark mine, so we will consider it first in the order (Fig 1).
Using the Milawa algorithm will improve the NPV if an inappropriate
ordering of mines is chosen, but it cannot necessarily find the best NPV.
20
“Geometric values” is a technique for defining revenue factors that produces a greater number of pits at the
smaller pit end of the range than at the larger pit end (Whittle 2004b). It is useful for defining the starter pit and
early pushbacks.
132 Whittle Strategic Mine Planning
With each mine having its own (four independent) pushbacks and
considering NorthPark first, we end up with a schedule (Fig 2) developing
an NPV of $197m from a combined tonnage of 569 mt (Table 1, line 3).
This is an increase of $11m with addition of 81 mt over the previous result
which is a direct result of being able to start with individually optimized
mines.
The following steps are not specific to the Multi-mine option when only
global limits are applied, but significant gains in NPV may be available by
exploring variations in the processing and mining limits.
Modifying constraints
Processing capacity
We have started with a generous mining limit, so the impact of extending
the processing capacity can be considered without a tight mining limit
confusing the results.
Whittle Strategic Mine Planning 133
Mining capacity
From Fig 2 we can see that there are some periods that have mined
considerably more material than is required in that period. The pattern is
similar after the processing capacity is increased.
21
In a real study, several scenarios would be considered to explore the benefits of increasing production. Some
questions that would need answers are, “Should we increase production?” “If we do, by how much?” “What are the
risks involved?” This example is chosen to illustrate one such scenario.
22
As with the processing capacity, this is an example of a single variation, which in practice would be one of several
variations studied.
134 Whittle Strategic Mine Planning
Milawa algorithm
The study up until now has only used fixed lead. This has been for a
couple of reasons. The fixed lead approach gives results very quickly
which allows us to explore many possible “what if” scenarios and gives a
good feel for the performance of the mine under differing conditions. As
we get closer to what we think might be a final solution, we use the
Milawa algorithm 23 to see what extra benefits we can realise out of this
mining operation.
The result using Milawa NPV raises the value another $30m to $336m
(Table 1, Line 6). Now the mill is kept full (until the end of the mine).
Milawa is now changing the order of processing in the mines to achieve a
greater NPV. This becomes more obvious when the mining limit is
reduced even further to 50 mt pa (Fig 4).
23
The Milawa algorithm is a proprietary algorithm that modifies the selection of material available from every open
pushback to produce a schedule that improves the NPV. “Milawa NPV” focuses on improving NPV, “Milawa
Balanced” focuses on keeping the mining rate balanced.
Whittle Strategic Mine Planning 135
The next result, from a Milawa Balanced run, shows that we can balance
our mining (and keep the mill filled) at a cost of dropping the value of the
operation to $246m (Table 1, Line 7; Fig 5).
From Figs 4 and 5, by inspection, it looks like the increased mining in the
early years of the Milawa Balanced solution is contributing to some early
costs of mining which do not occur in the Milawa NPV solution.
We can now consider “tuning” the mining capacity to improve the Milawa
Balanced result. In this example we can achieve a Milawa Balanced
136 Whittle Strategic Mine Planning
Conclusions
The optimal pits for individual mines can be determined without the
Multi-mine option in Whittle. The LG algorithm will develop each mine
independently.
The basic approach to a multi-mine study is similar to a single mine study
with all the single mine features being available in the multi-mine
situation.
The differences arise when the key benefits of the Multi-mine option are
used:
• • pushbacks can be determined that are ideal for an individual mine,
The Effects of
Sequencing & Scheduling
138 Whittle Strategic Mine Planning
Whittle Strategic Mine Planning 139
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.
1
2
3
4
5
bench level
100 tonnes waste 6
7
8
500 tonnes ore
140 Whittle Strategic Mine Planning
Table 8: Pit values for different mining sequences and production rates
Pit 1 2 3 4 5 6 7 8
Worst Mill <500 900 1,530 1,917 2,085 2,057 1,851 1,486 978
Best Mill <500 900 1,530 1,935 2,154 2,220 2,161 2,002 1,763
Worst Mine 900 1,520 1,868 2,011 1,956 1,552 1,049 449
<1,000
Best Mine 900 1,520 1,898 2,068 2,105 1,993 1,790 1,540
<1,000
This table, which was derived by sequencing the mining of this very
simple model by worst and best case mining, has been scheduled with a
mill limit and with a mining limit. In both cases, a discount rate of 10%
has been applied.
Figure 62 and Figure 63 show the above data in graphical form.
Whittle Strategic Mine Planning 141
Mill<500
2500
2000
1500
NPV
1000
500
0
1 2 3 4 5 6 7 8
Ultimate Pit
Mine<1000
2500
2000
1500
NPV
1000
500
0
1 2 3 4 5 6 7 8
Ultim ate Pit
In both cases it can be seen that not only is the maximum NPV smaller for
the worst case, but the pit with the highest value is smaller for worst case
mining.
In this very simple case, the pit shells are easy to construct by hand.
However, in real cases where both the ore body shape and the grade
distribution are irregular, we can still construct nested pits by doing a
series of optimizations through the use of a pit parameterization technique.
In the simple case above, the inner pit shells indicate mining with the
lowest stripping ratio, because the grade is constant. In real cases, the
inner shells indicate the region with a good combination of grade and
stripping ratio.
Real pit shells, together with the benches, can therefore be used in the
design of mining phases or pushbacks which will yield the highest early
cash flow and thus the best NPV for the pit.
142 Whittle Strategic Mine Planning
Since we know all the details of the actual blocks which are in each
bench/shell intersection, we can apply cut-offs and can calculate tonnes,
grades and cash flows for each such intersection. Therefore, if we specify
a particular sequence in which we are going to mine the intersections, the
program can calculate a life-of-mine schedule with full tonnes, grades,
cash flows, and discounted cash flows according to throughput limits
specified by the user. We refer to this as life-of-mine simulation.
Whittle Strategic Mine Planning 143
Introduction
Schedule optimization and simulation, operate in a DCF analysis
environment, which is richer, more complex and more flexible that the
economic modeling environment for pit optimization. The latter is never
the less the foundation for the former. Accordingly, the Economic Model
for Schedule Optimization is described by explaining the difference
between it at the Economic Model for Pit Optimization. The main
differences are:
In the pit optimization economic model there was no place for an initial
capital expenditure. In the DCF modeling environment for scheduling,
initial capital expenditure can be provided and should be provided in order
to calculate NPV and IRR correctly.
Time-Based Expenditure
In the section “Economic Model for Pit Optimization” the method for
including time-costs as a cost per tonne of waste, or per tonne of ore, or
per unit of product was described. This treatment of time-costs is referred
to as “implicit time costs” to contrast it to the explicit manner in which
time costs are handled in the DCF modeling environment. The details as
to how to deal with implicit and explicit time costs in Whittle is described
in the Whittle Help Files.
Refer to the section Cost Models for Different Purposes for detailed
discussion as to the rules for cost allocation in DCF Analysis.
146 Whittle Strategic Mine Planning
Whittle Strategic Mine Planning 147
Schedule Optimization
148 Whittle Strategic Mine Planning
Whittle Strategic Mine Planning 149
pushbacks, and
The second routine is an evaluation routine which calculates the NPV for
an individual schedule.
The third routine searches the domain of feasible schedules for the one
which has the highest NPV. The routine also has logic built in to decide
when to stop searching. This third routine is a form of step and stride
routine.
The Milawa algorithm does not generate and evaluate all feasible
schedules (i.e. it does not enumerate the problem), as the number of
feasible schedules in any analysis is extremely large. Rather it
strategically samples the feasible domain and gradually focuses the search
(without necessarily narrowing it) until it converges on its solution.
The number of evaluations required to converge on a solution varies, but
5,000 is typical, and this usually takes less than a minute.
The feasible domain can be viewed as a multi-dimensional volume, where
each point in the volume has a corresponding NPV. The optimum
solution is the point which has the highest NPV, but it is possible for there
to be more than one point with the maximum NPV. It is also possible for
there to be a range of other solutions which have NPVs that are very close
to the maximum. Milawa cannot guarantee to find a schedule with the
absolute maximum NPV, particularly if the highest happens to occur on a
very sharp peak. However, experience has shown that it will find a
solution with a very high NPV.
2. There are periods in which the processing capacity is not fully used.
The most frustrating case is the one in which condition 1 occurs, followed
five years later by condition 2.
Here is what many people think:
1. The spare mining capacity could be used to do some pre-stripping,
thus avoiding the later ore shortfall, but Milawa NPV doesn't do it.
Whittle Strategic Mine Planning 151
That leads to a total period mining cost of $5.5m, if the mining rate is
indeed 5mT.
Now, lets say you only mine 3mT in a year, 60% of the maximum. Whittle
would calculate the total mining cost for the period as being 60% of
$5.5m.
Is that realistic? Probably not.
Dropping the mining rate to 3mT for 12 months probably saves fuel oil
costs and some maintenance costs, but that's about all. You will probably
not want to lay off drivers and rehire in 12 months, so you will likely not
save very much in wages. You probably won't save much money in
management, security or dust suppression either. It might be, for example,
that to mine 3mT, costs you $4.5m per year - a saving of only $1m.
But, that is not the information you have provided Milawa. Milawa thinks
that the mining cost is $1.10 per tonne, no matter what the rate of mining.
This provides bias, which contributes to the Problem detailed above.
a and c are factor and constant to define the mining cost function. The
units are as follows:
a ($)
c ($m)
If you work out the values of a and c using simultaneous equations, you
get:
a = 0.5
c = 3.0
The full calculation using simultaneous equations is set out below in the
section Simultaneous Equations.
The way to use these two parameters is as follows:
Use $0.50 as the mining cost per tonne.
Add $3m to the Time Cost Per Period. Refer to the help files for
information on how to correctly deal with time costs.
That looks a lot different to a mining cost of $1.10, but will be modeled
correctly at 5mT and at 3mT.
Solution 1 really worked back from some empirical data to what is, in
effect, a standing cost for the mining fleet, and a marginal cost of mining:
Standing cost: $3m per period (Add $3m to the Time Cost Per Period.).
Refer to the help files for information on how to correctly deal with time
costs, or consult with your Whittle Service Provider.
Marginal cost of mining an extra tonne: $0.50 (Use $0.50 as the mining
cost per tonne.)
Same solution, different way of thinking about it.
Notes
Since the per tonne mining rate is now lower, Milawa will have a lower
propensity to avoid pre-stripping.
Since the time cost is increased, Milawa will have a higher propensity to
pre-strip, if this avoids later ore shortfalls (ore short falls extend the mine
life, thus increasing total time costs).
The NPV reported by Milawa will most likely be lower than that reported
pre-solution, but the pre-solution NPV was not realistic.
Simultaneous Equations
substitute for c
> -1 = - 2*a
> a = 0.5
> c = 3.0
154 Whittle Strategic Mine Planning
Whittle Strategic Mine Planning 155
Stockpiles
156 Whittle Strategic Mine Planning
Whittle Strategic Mine Planning 157
The following definitions rnelate to the purpose of the stockpile and are
represented as three different types. Whilst any given stockpile is usually
of a single type, it is certainly possible for a single stockpile to serve more
than one purpose.
Grade Stockpile
Blending Stockpile
Buffer Stockpiles
Stockpile Planning
Stockpile Design
Stockpile Operation
Blending
160 Whittle Strategic Mine Planning
Whittle Strategic Mine Planning 161
Introduction
We define four types of blending here. Only two of these four defined
blending types are directly relevant to the field of Strategic Mine Planning,
but the full set of definitions is provided in the interests of completeness.
Examples of the application of Type-1 and Type-2 Blending are given for
a talc mining operation in Noble & Sier (1996).
The objective function is to determine the pit shape and optimal blend
which maximizes the economic performance of the operation over its
entire life.
Whittle Strategic Mine Planning 163
Srinivasan, S., Whittle, D., 1996, Combined Pit and Blend Optimization,
in SME Annual Meeting Phoenix, AZ., Society for Mining Metallurgy and
Exploration, Inc. Reprint No. 96-69.
Abstract
Introduction
Pit optimization techniques are often applied to gold, copper, diamond and
other mines, but rarely to iron ore, coal, limestone and some other
industrial minerals. One of the reasons is that, to miners of the latter
group of minerals, the problem of sequencing a mine in order to achieve a
desired blend of ores, is more pressing than optimizing the shape and size
of the mine itself.
Pit optimization techniques could perhaps be used if a nest of pits were
used to guide long term mine planning, and where each phase so defined
contained a mix of ore types that can be blended efficiently. However, pit
optimization techniques have no way of dealing with the blending issues
explicitly and the solution of this problem is the focus of this paper.
Mol and Gillies (1984) suggested using the grade tonnage curves and
curves for cutoff iron versus average iron, alumina and silica, to determine
the cutoff iron grade which leaves the average iron content, alumina
content and silica content in the deposit in accordance with the blend
requirement. Iron ore mines still employ a similar approach for
determining ore and waste. The disadvantage of this approach is that it
doesn’t allow for the optimization of the pit design (an optimized pit
would define a subset of the original deposit, therefor upsetting the
164 Whittle Strategic Mine Planning
average grades). The technique also leads to the abandoning of some low
grade blocks, which might otherwise be included in the blend, because of,
say, their low impurity content.
The solution to the problem of how to generate an optimal pit which
contains an optimal mix of ores, seems to lie in the combined operation of
pit and blend optimizers.
Assumptions
General
We are dealing with a finite resource consisting of various ore-types
which must be blended to produce a marketable product. Ore-types are
assigned on the basis of primary grade and radicals or contaminants. All
examples of a particular ore-type will have the same primary grade and
radicals characteristics. There is no limit to the number of ore-types that
might be defined in order to effectively describe an ore-body.
The price obtained for blended ore is constant. It is not the purpose of this
paper to look at the demand side of the blended ore market.
For the discussion of techniques for combining pit and blend optimization,
no account is made of time, sequencing or stockpiling. The aim is to
produce a pit (or pits) which will yield the different ore-types in such
quantities so as to maximise the sum of the profits of the mining and
blending operation.
Pit Optimization
A pit optimizer designs a pit which has the following characteristics:
• Pit slope constraints are obeyed.
• A model which describes the position of the ore and waste in three
dimensional space.
Whittle Strategic Mine Planning 165
If there are different ore-types, the value of the ore may be different for
each ore-types.
Blend Optimization
There are a number of different ways of defining the objective function of
blend optimization. Some examples are as follows:
• Maximise the tonnage of blended ore by determining which stockpiled
ores to blend, while satisfying grade constraints.
In each case discussed below, the objective function of the blend optimizer
will be specified.
Heuristic Method
The basic heuristic method in four variants was developed and tested on
an iron ore model. The model was from an iron ore deposit in eastern
India, with reserves of about 290 million tonnes of Haematite with an
average analysis of 63.5% iron, 4.0% Alumina and 2.405% Silica. Blocks
of 25m x 25m x 12m were estimated with variogram modelling and
krigging using Surpac mine planning software. The model contains
blocks each of which are defined as air, waste or potential ore and the
grade characteristics of the potential ore is included in the model.
Surpac was also used to manipulate the model and to interface with
Whittle Three-D, which is an implementation of the Lerchs-Grossmann pit
optimization algorithm. The blend optimizer was created using the linear
programming package ORSYS of ESP inc. with an objective function to
maximise the tonnage of the blend under the constraints that the blend
must not violate the grade targets set out for the blend. Some block model
manipulation and interface between the linear programming package and
Surpac was done using software written by Srinivasan in Pascal.
166 Whittle Strategic Mine Planning
Flow Chart
Heuristic Type 1
The numbers in brackets in the discussion below refer to the flow chart
above.
The blend-optimization-targets are initially set (1) as being equal to the
real grade constraints. A blend optimization (2) is performed on the
original block model in order to find the maximum subset of potential ore
blocks which can be included in a blend that will satisfy the grade
constraints. The potential ore in the optimal-blend-subset is flagged as
ore. A pit optimization (3) is then performed, which defines an optimal-
pit-subset of the original model (consists of everything which is within the
ultimate pit outline). The same values are attributed to the different ore
types, being equal to the value of ore that just meets the real grade criteria.
The pit value is re-calculated (4) as if all the potential ore in the optimal-
pit-subset were in fact ore. A comparison is done (5) to see, if all the
potential ore in the optimal-pit-sub-set is blended, whether it will meet the
real grade constraint. If not, the blend optimization targets are adjusted,
and the process repeated until an iteration is performed in which the
comparison test (5) is passed.
Whittle Strategic Mine Planning 167
Heuristic Type 2
In most respects this is the same as Heuristic Type 1, except for the
following:
When the pit value is recalculated (4), only flagged ore (potential ore in
the optimal-blend-subset) is included in the calculation.
The comparison (5) is performed to determine, if all the flagged ore in the
optimal-pit-subset is blended, whether the resulting grade will meet the
real grade constraint.
Heuristic Type 3
In most respects this is the same as Heuristic Type 2, except for the
following:
A second blend optimization (6) is performed in each iteration on all
potential ore blocks on the optimal-pit-subset and then the pit value is
recalculated (7).
Heuristic Type 4
In most respects this is the same as Heuristic Type 3, except for the
following:
For the purposes of pit optimization (3), different prices are applied to the
flagged ores, depending on the grade characteristics of the ore. In general,
low grade ore has a lower price, high grade ore a higher price. The effect
of this is to cause the pit optimizer to favour mining of high grade ore.
168 Whittle Strategic Mine Planning
250
200
mill. tons
150
100
50
0
Type 1 Type 2 Type 3 Type 4
Waste
40
35
30
mill. tons
25
20
15
10
5
0
Type 1 Type 2 Type 3 Type 4
Pit Value
9500
9000
mill. rupees
8500
8000
7500
7000
6500
Type 1 Type 2 Type 3 Type 4
All heuristic methods were able to produce a pit with the desired grade
characteristics, with only a few iterations, although the tonnages and pit
values varied considerably. The best value pit was achieved with the
heuristic type 4, where the values assigned to the blocks is related to its
grade. The problem with using constant value regardless of grade as is the
case for heuristic types 1-3, is that, the pit optimizer treats each block with
equal priority. But when a subset of the total blocks need to be selected,
based on the slope constraints, to maximise the value, we would rather
have richer blocks included in the pit than the poorer ones. This
distinction could be achieved only by linking the value of the block to its
grade content.
The heuristic type 1 result is of interest, even though the value of the pit
was low. It produced a small pit with a very low stripping ratio. This
could provide a suitable starting point for opening a deposit when
minimising waste excavation is one of the priorities.
Whittle Strategic Mine Planning 169
silica ore is not merchantable, you decide to set it’s value to zero for the
purpose of pit optimization. The software does it’s work and in doing so,
yields 1,000 units of low-silica ore, 1,000 units of high-silica ore and some
waste. If you were to sell the 1,000 units of low-silica ore, you would
generate revenue of $10,000. This corresponds exactly with the revenue
calculated by the pit optimization software. The high-silica ore would be
sent to the waste dump.
It is brought to your attention that it would be possible to mix high-silica
and low-silica ore in a ratio of 1:2 and the blended ore would just meet
your buyers requirement. In doing so, you are able to sell 1,500 units of
blended ore at $10 per unit, so increasing your revenue to $15,000. You
have earned $5,000 more from the ore yielded than your pit optimizer
calculated. The problem is that by giving the optimizer a high-silica price
of $0, you have indicated that the ore has no value, yet clearly it does have
some value because it can be sold for $10, provided it is blended with
some low-silica ore. It is extremely likely that the pit optimizer will have
achieved a sub-optimal result, because you have not given it appropriate
values for the ore.
You perform a number of trials to try to get the design revenue and real
revenue the same. Firstly you set the price for high-silica ore to $10. The
pit optimizer does it’s work and now yields 1,200 units of low-silica ore
and 2,000 units of high-silica ore. The optimizer calculates the revenue to
be 1,200 * $10 + 2,000 * $10 = $32,000. However, you can still only
blend high and low-silica ore in a ratio of 1:2, so the amount of ore you
can sell is limited to (600+1,200)=1,800. Your real revenue is only
$18,000, well short of the figure calculated by your pit optimizer. The
optimizer has counted $20,000 revenue for the high-silica ore, whereas
you only realised $6,000 through the use of some of the ore. Again the
result is sub-optimal, but this time the pit is optimistic rather than
pessimistic. The pit optimizer has treated some ore as being valuable
when in fact it is worthless.
You consider applying the $10 price to only some of the high-silica ore,
but realise that by doing so, you would be steering the optimizer towards
the high-silica ore that you favour, rather than allowing the software to
make a proper economic decision.
Numerous subsequent trials are performed and it becomes apparent that
you cannot make the design revenue equal to the real revenue by
modifying the high-silica price alone, you must change both prices. In
fact the rules that you must follow are:
1. The sum of the ore-type unit prices (transfer prices) multiplied by
their yield ratios, must equal the unit price for the final blended ore.
2. The ore-type ratios yielded by the pit must equal the ratios
demanded in the blend, in this case (high-silica : low-silica)=(1:2). There
is one exception to this rule. It is possible for an ore-type to have a
Whittle Strategic Mine Planning 171
transfer price of $0, in which case, it is acceptable for the pit optimizer to
yield a greater quantity of the ore than can be used in the blend.
The rules stated above hold for any number of ore-types. Simple
arithmetic can be used to determine a set of transfer prices that complies
with the first condition, but only by running the pit optimizer with that set
of transfer prices, can it be determined whether or not the second
condition is met. It is therefore necessary to perform multiple pit
optimizations, diligently altering the set of transfer prices (this is the
transfer pricing mechanism in action) between each run, in order to find a
set which satisfies both conditions.
Mathematical Model
Below is the mathematical definition of the problem. The Pit function and
Blend function shown below, represent the operations of a pit optimizer
and a blend optimizer, however in this model, they serve the purpose of
providing constraints for the pricing optimization. The objective function
is to make the supply ratios equal the demand ratios, by manipulating the
transfer prices (the decision variables), subject to various constraints.
m = f ⎛⎜ p ,..., p ⎞⎟
i mi ⎝ 1 n⎠
bi = f bi ⎛⎜ p 1 ,..., p n ⎞⎟
⎝ ⎠
172 Whittle Strategic Mine Planning
Minimise:
⎛ ⎞
x = f ⎜⎜ p ,..., p ⎟⎟
0 p⎝ 1 n⎠
Where:
⎛ ⎞ n
f ⎜⎜ p ,..., p ⎟⎟ = ∑ ⎛⎜ m i − b i ⎞⎟
p⎝ 1 n⎠ i =1 ⎝ ⎠
(the function returns the sum of the absolute differences between the
supply and demand of all ore-types)
Subject to:
n n
∑ m i = 1 and ∑ b i = 1
i =1 i =1
p ≥ 0, m ≥ 0, b ≥ 0, i = 1,..., n
i i i
Method
Do until x0 = 0
m = f ⎛⎜ p ,..., p ⎞⎟ , i = 1,..., n
i mi ⎝ 1 n⎠
b = f bi ⎛⎜ p 1 ,..., p n ⎞⎟ , i = 1,..., n
i ⎝ ⎠
Scheduling
Conclusion
Introduction
In the section Economic Analysis, Projected Accrual Accounts was
presented as an alternative economic analysis technique for strategic mine
planning, with the advantage of being good for projected future tax
liabilities, but with little else in the way of advantages. It is never the less,
the dominant financial modeling system in all businesses but for reporting
of past financial performance and current financial position. Never the less
as a dominant model, the rules associated with it are better known to many
that the rules that apply to simple cash flow analysis and DCF analysis,
and there are times at which the rules of the former, get mixed up with the
rules of the latter. It is for this reason, that some space is dedicated here to
compare and contrast the rules, so that the Strategic Mine Planner can
more fully appreciate the issues and successfully avoid confusing the
rules.
Accrual accounting is universally used as the basic business financial
reporting system. The idea behind the system is to match costs with
revenues for particular activities, so that a true picture of the profitability
of the activities can be obtained. The results of accrual accounting
manifest themselves as the Balance Sheet, the Profit/Loss Statement and a
variety of other historical business reports. The cost and revenue
information required to perform pit optimization is different to that
required for accrual accounting and the requirement for DCF Analysis is
different again. Here, we seek to illuminate the difference, with particular
reference to an Australian Accounting Standard for the extractives
industry.
24
Refer to the Glossary of Accrual Accounting Terms section for explanation of these
terms.
178 Whittle Strategic Mine Planning
The underlying assumption is that the plant is still operating, whilst all of
its original cost has been brought to account as an expense. This changes
the cost of mining under accrual accounting rules and it then appears to
become profitable to mine C, when previously it appeared not to be
profitable. However, the real contribution C makes to the value of the pit
depends only on the cash costs and revenues that it generates. The issue
of whether or not the cost of the plant has been fully depreciated is
irrelevant.
The correct approach to this particular problem is to determine which pit
yields the highest value, not counting in any way the capital cost of the
processing plant. Once you have determined the highest value pit,
subtract the capital cost of the processing plant to get the correct project
value.
This sort of confusion is common according to Whittle's software support
records, even seasoned consultants with international reputations get it
wrong. We believe that most or all of the confusion can be cleared by
examining the basic principles of accrual accounting, DCF Analysis and
pit optimization.
AAS 7 Accounting
Write off.
Pit Optimization
Not Applicable - It does not vary in accordance
with the amount of waste or ore that is removed or
processed.
DCF Analysis
Not Applicable - It is committed and irreversible.
Whittle Strategic Mine Planning 181
Exploration and evaluation costs, where it is unclear at the end of the reporting
period as to whether or not a mine will be developed.
AAS 7 Accounting
Carry forward.
Pit Optimization
Same treatment as for exploration and evaluation
costs where no discovery is made.
DCF Analysis
Same treatment as for exploration and evaluation
costs where no discovery is made.
Exploration costs where it has become apparent that mining will proceed.
AAS 7 Accounting
Carry forward / amortize 25.
Pit Optimization
Same treatment as for exploration and evaluation
costs where no discovery is made.
DCF Analysis
Same treatment as for exploration and evaluation
costs where no discovery is made.
25
Under AAS 7 amortization should be done on a production output basis (e.g. $/gram of
gold produced), unless, under the circumstances, a time basis is more appropriate.
Amortization charges form part of the cost of production.
182 Whittle Strategic Mine Planning
AAS 7 Accounting
Classify as exploration, evaluation or development
costs depending on the circumstances
Pit Optimization
Not Applicable - It does not vary in accordance
with the amount of waste or ore that is removed or
processed.
DCF Analysis
If the cost is contingent on project start up, then it should be included. If
the cost has already been committed, then the extent to which the cost
should be included will depend on the likely resale value of the lease,
should you decide not to proceed with the mining project. The likely
resale value represents an opportunity cost; if the project proceeds, you
will forego the resale value.
Inclusion of the contingent lease acquisition costs
in the DCF model is important if you are using the
analysis to decide whether or not to proceed with
the project. However, if you are using DCF
Analysis to compare alternative designs and long
term schedules, then the inclusion of the cost in the
model is not important, because it will not affect
the ranking of the alternatives.
Development Costs
AAS 7 Accounting
Carry forward / amortize
Pit Optimization
Not Applicable - It does not vary in accordance
with the amount of waste or ore that is removed or
processed
DCF Analysis
If the cost is committed and irreversible, it should
not be included
Whittle Strategic Mine Planning 183
AAS 7 Accounting
Depreciate in accordance with AAS 4.
Pit Optimization
If one of the following conditions prevails, then it can be said that the
cost varies in accordance with the amount of waste or ore which is
removed or processed:
1. The asset will need to be replaced during the life of the mine.
If the cost has not been included in the pit optimization model, its
inclusion in the DCF Analysis model will depend on the manner in which
the resale value of the asset changes over time.
If the resale value is zero at any time (as would be the case for the
concrete foundations for a processing plant), then the cost should be
included as a single negative cash flow, but only if the expenditure has
not yet been committed.
AAS 7 Accounting
Treat in the same way as development costs. That
is, carry forward / amortize
Pit Optimization
Same treatment as for Construction Costs - in the
nature of depreciable assets
DCF Analysis
Same treatment as for Construction Costs - in the
nature of depreciable assets
AAS 7 Accounting
Amortize
Pit Optimization
If the continuing development relates to potential new resources in the
area of interest, then the cost should be excluded.
If the continuing development relates to upgrading
the categories of existing resources, the cost
should also be excluded, although this issue is far
less clear cut. It could be argued, for example,
that if the pit produced by pit optimization
includes, some Indicated Resources, then extra
costs will be incurred in relation to that ore to
improve the estimate category to Measures
Resource. However, we do not believe that this
would be an appropriate treatment of the
uncertainty associated with Resource and Reserve
estimates and it is beyond the scope of this
document to discuss the issue in detail. Interested
readers should refer to Hanson, N., (1995)
DCF Analysis
As for Pit Optimization
Whittle Strategic Mine Planning 185
Operation Costs
AAS 7 Accounting
Write off
Pit Optimization
Costs should be categorized as mining, processing or selling costs.
Within those categories, the costs should be categorized as either
throughput based costs or time based costs. Throughput based costs can
be applied directly. Time based costs must be converted to throughput
based costs by dividing the cost by the period throughput which limits the
mine life.
If the limiting factor in the mines production is the
processing throughput, then all time based costs
should be divided by the period processing
throughput limit and assigned as a processing
cost. Similarly, if the limiting factor is the mining
capacity, then all time based costs should be
converted to mining costs. If the limiting factor is
the amount of product that can be sold in each
period, then the time costs should be converted to
selling costs.
DCF Analysis
If the cost has been explicitly handled in pit
optimization, the cost will be automatically carried
over into the DCF Analysis model, so do not enter
the cost again. The only exception to this rule is
that, if you have had to model time based costs in
pit optimization as throughput costs, then for DCF
Analysis you should apply time based costs
explicitly and reverse out the costs built into the pit
optimization model.
186 Whittle Strategic Mine Planning
AAS 7 Accounting
Allocate only to the extent that the costs can be
related to operational activities in the area.
Pit Optimization
If the costs are not dependent on the project commencement or cessation,
then they should not be included.
General and Administrative costs that stop if
mining, processing or selling stop, should be
converted to throughput based mining, processing
or selling costs. If the costs are not dependent on
the project commencement or cessation, then they
should not be included.
DCF Analysis
If the costs are not dependent on the project commencement or cessation,
then they should not be included.
General and Administrative costs are generally
time based rather than throughput based. If you
have had to model time based costs in pit
optimization as throughput costs, then for DCF
Analysis you should re-enter the time based costs
explicitly and reverse out the costs built into the pit
optimization model.
AAS 7 Accounting
Offset against the expense to which the payments
or subsidies apply.
Pit Optimization
Offset against the expense to which the payments
or subsidies apply.
DCF Analysis
Offset against the expense to which the payments
or subsidies apply.
Whittle Strategic Mine Planning 187
Restoration Costs
AAS 7 Accounting
Shall be provided for at the time of the activities to
which the restoration is related and shall form
part of the cost of the respective phase of
operation.
Pit Optimization
As with AAS 7, restoration costs should be
attributed to exploration, evaluation, development,
construction or operation. If attributed to
exploration, evaluation, construction or
development (outside the pit) they should be
treated as shown above for these categories. If the
costs relate to operation, and the cost is related to
the throughput of waste or ore, then the cost
should be included on a throughput basis.
DCF Analysis
If the cost has been explicitly handled in pit
optimization, the cost will be automatically carried
over into the DCF Analysis model, so do not enter
the cost again. The only exception to this rule is
that, if you have had to model time based costs in
pit optimization as throughput costs, then for DCF
Analysis you should apply time based costs
explicitly and reverse out the costs built into the pit
optimization model.
188 Whittle Strategic Mine Planning
Accounts
Balance Sheet
Cost-Based Accounts
The value of items is based on the cost of the items. For example, a shop
may buy stock worth $100 that it expects to eventually sell for $150. The
stock is recorded in the accounts as having a value of $100, being the cost,
rather than the expected sales value of $150. Not until the item is actually
sold is the value of $150 taken up in the accounts, being attributable as
$100 for the cost of goods sold, and $50 profit.
2. The net worth of the business equals the assets of the company, less
the liabilities of the company, and the net worth is equal to the capital
of the owners. The basic equation is Assets = Liabilities + Capital.
26
Please note that when a business receives an account statement from the Bank, the
Bank is presenting the state of the account from the Bank’s point of view, so if the
account is in Credit, from the Banks point of view, this indicates that he trusts (he being
the Business) the Bank with the money. If the accounts are in Debit, this indicates that he
owes the money to the Bank. When the money is viewed from the point of view of the
Business, the Debits and Credits are reversed.
Whittle Strategic Mine Planning 191
Historical Accounts
The Profit and Loss Statement lists and totals all Revenue and Expense
Accounts. The difference between Revenue and Expenses is the Profit (or
Loss) which is allocated to the Capital account.
192 Whittle Strategic Mine Planning
Cut-Offs
Whittle Strategic Mine Planning 193
194 Whittle Strategic Mine Planning
Marginal Cut-offs
Cut-offs are grades above which we do one thing and below which we do
another.
Material may be sent to the mill or the waste dump depending on whether
its is at or above a particular grade or not.
Similarly, a cut-off may be used to decide whether material is sent to the
mill or sent for heap leaching.
There is a long tradition in the mining industry of setting cut-offs at the
grade where the cash flow produced per tonne is the same, whichever
decision you take. We call these marginal cut-offs. They should not be
confused with “break even” cut-offs, which include an allowance for the
cost of stripping.
0 Grade
Cut-off
Cost of
“processing”
We assume that the decision to process or not to process is made while the
material is still in the ground. Thus material that is not processed incurs
only the cost of mining it as waste. Material that is to be processed will
often be handled with different equipment at a greater cost, and this extra
cost should be added to the cost of processing.
Revenue
per tonne
ice
x Pr
y
er
cov
Re
t=
dien
a
Gr
0 Grade
Cut-off
Cost of
"processing"
Threshold
0 grade
Rehabilitation Cost
Revenue
per tonne
ice
x Pr
ry
o ve
c
Re
t =
ien
rad
G
0 Grade
Rehabilitation cost
Cost of
"processing"
Cut-off
0
Whittle Strategic Mine Planning 197
If the cut-off is “C”, we can calculate the cash flows for mining the whole
increment as follows:
Revenue: 1M*(1-C)*((1+C)/2)*0.9*100
Mining cost: 1M*1.0
Milling cost: 1M*(1-C)*18
Mining limited total time costs: (1M/1M)*15M
Milling limited total time costs: ((1M*(1-C))/0.5M)*15M
Note that, when we are mining limited, the total time costs do not depend
on cut-off. Conversely, the time costs per year have no influence on the
cut-off we choose.
If we plot curves of total cash flow for the two cases, we get Figure 73.
Total cash flow (Millions)
14
12
10
8
6
4
2
0
0.00 0.20 0.40 0.60 0.80 1.00
Cut-off
Consider the left-hand curve in Figure 73, which shows the total cash flow
from mining and processing the 1MT if the mine is entirely mining
limited. It has its maximum at a cut-off of 0.20, which is precisely the
marginal cut-off we would calculate by equating the revenue and
processing cost (18.00/(100.00*0.90) = 0.20). The time costs have no
effect on the best cut-off in this case because, with our previous approach,
the time costs would be factored into the mining cost (1.00 + 15M/1M)
rather than the processing cost.
Whittle Strategic Mine Planning 199
The curve which shows the cash flow per year if the mine is entirely
processor limited peaks at 0.53, which is what the marginal cut-off would
be if the time costs were factored into the processing cost.
(18.00+15M/0.5M)/(100.0*0.90) = 0.53
Since both the mining and milling throughput limits must be honoured, we
can only operate on or below both curves, so that we are limited by the
“maximum feasible” curve. In this case the cut-off which gives the
highest point on this curve (0.50) is also the point at which mining and
milling rates are both at their limits. However, with different economic
values this is not always the case.
If we halve the time costs to $7.5M per year, we get Figure 74. Now the
best cut-off is 0.37.
20
15
10
0
0.00 0.20 0.40 0.60 0.80 1.00
Cut-off
Figure 74: Processor and mining limited cash flows with lower time costs
The difference between the two total cash flow graphs clearly
demonstrates that time costs can affect the optimal cut-off.
Note that, if there are no time costs, the two curves in a total cash flow
graph will coincide.
An important aspect of the interaction between the cut-off and the
operation of the mine is that the time taken to mine the million tonnes also
changes when we change the cut-off, as is shown in Figure 75. Below
0.50, the mine is limited by processing capacity. Since the cut-off controls
the proportion of the material which is put through the mill, the time varies
with the cut-off. Above 0.50, the mine is limited by the mining capacity,
and, since everything is mined, the time taken does not change with the
cut-off.
200 Whittle Strategic Mine Planning
2.5
1.5
1.0
0.5
0.0
0.00 0.20 0.40 0.60 0.80 1.00
Cut-off
Alternatively, we can work out the factor to apply by first working out the
cut-offs which would apply to each product in isolation and then dividing
CUTOFF1 by CUTOFF2.
Therefore, the formula for an equivalent PR1 metal is:
GRADE1 + GRADE2x(CUTOFF1/CUTOFF2)
Another way of looking at it is to divide each grade by the corresponding
cut-off and add the resultant values together. You then apply a cut-off of
1.0 to the sum. This is shown graphically in Figure 76. Material to the
right of the sloping line is processed, material to the left is not.
If the processing cost is not linear with grade, or the recovery fraction is
not independent of grade, then, strictly, you should not use an equivalent
metal. You should calculate the revenue and processing cost of each
sample, and only process if the revenue is higher than the cost.
Nevertheless, equivalent grades are often used in these circumstances for
operational convenience.
The effect can be seen in Figure 77. Why is the best cut-off for the first
increment now more than 0.5, whereas we know that 0.2 gives the highest
cash flow?
134
132
130
NPV (Millions)
128
126
124
122
120
0.00 0.20 0.40 0.60 0.80 1.00
Cut-off for Increment 1
Figure 77: The effect of varying the cut-off used for the first increment
Whittle Strategic Mine Planning 203
Cut-off Optimization
204 Whittle Strategic Mine Planning
Whittle Strategic Mine Planning 205
As the cut-off is increased, the cash flow for the first million tonnes
decreases, as we would expect, since we know that the marginal cut-off of
0.20 maximizes the cash flow. The NPV of the first million tonnes also
decreases, but not quite so rapidly because the discounting is reduced due
to the reduced elapsed time.
However, the NPV of the remaining nine million tonnes increases because
its exploitation is started sooner and all its cash flows arrive earlier.
Cut-off Time NPV Total NPV
for first 1mT for first 1mT of last 9mT of project
0.20 1.6Y $102.9M $128.3M
0.45 1.1Y $108.9M $132.4M
0.70 0.6Y $115.2M $131.2M
The NPV of the last 9mT changes by about 6 per cent with each step in
cut-off, which is what you would expect with a twelve per cent discount
rate, if the start time changes by half a year.
Clearly, of the three cut-offs we have tried, 0.45 gives the best total NPV,
and this ties in with the graph we saw earlier. Can we calculate the cut-off
which maximizes the total NPV?
Since the NPV of the last 9mT varies with the time taken to exploit the
first 1mT, we can treat it as a time cost, here called the delay cost. The
difference between starting after 0.6Y and after 1.6Y is $12.3M. If we
divide this by the processing capacity, we get a delay cost of $24.6/T. It is
then easy to work out the best cut-off.
206 Whittle Strategic Mine Planning
(18.00+24.6)/(100.00*0.90) = 0.47
This does not quite tie in with the graph, where the maximum is obviously
greater than 0.5. The reason for this is that this simple formula makes no
allowance for the discounting of the cash flow from the first 1mT.
It is worth making the point here that the discounting schemes normally
used in accounting, where all the cash flows for a particular calendar year
are discounted by the same amount, do not reflect the real value of the
cash flows, since they do not distinguish between an amount received on
January 1st and one received on December 31st.
Discount percentage/Y: P
We have discussed the delay cost at length, but we mentioned earlier that
there are two pseudo costs.
Everyone knows that cash flows are higher if we exploit our resource
when the price of the product is high, and vice versa. Using the previous
example, if we delay the exploitation of the last nine million tonnes to a
period of lower prices, we reduce the cash flows for the nine million
tonnes, and hence the NPV of this nine million tonnes. Since this effect
will generally get bigger with increasing delay, we again treat it as a type
of time cost, and we call it the “change cost”. It is different from all other
time costs because, if the price of the product increases with time, or the
costs decrease with time, it can be negative.
Whittle Strategic Mine Planning 207
If the project is mill limited, both the delay and the change costs should be
divided by the mill throughput limit and added to the processing cost when
calculating the cut-off. Consequently, the delay cost, which is always
positive, increases the cut-off. The change cost can increase or decrease
the cut-off, depending on whether the economic circumstances are
deteriorating or improving, respectively. However, its general magnitude
is still related to the remaining NPV.
So far we have only discussed the possibility of varying the cut-off for the
first increment. Why should we not vary the cut-offs also for the second
and subsequent increments? We can, of course, but when we do, we
change the NPV of the last 9mT, which, through the delay and change
costs, changes the optimal cut-off for the first 1mT. This leads to a
circular arrangement where we repeatedly go back and re-optimize earlier
cut-offs until the cut-off schedule for the complete exploitation of the
10mT settles down.
As the resource is used up, the NPV of the remainder of the resource tends
to fall, and is zero when no further resource remains. Since both the delay
and the change costs are dependent on the remaining NPV, they too tend
to fall. In general, therefore, optimized cut-offs start high and
progressively decrease throughout the life of the project.
For the case where the economic conditions do not change, and for which,
therefore, the change cost is zero, Lane proposed an approach to
optimization in which you start with an estimate of the total NPV,
optimize each increment using a delay cost derived from the remaining
NPV and then update the remaining NPV. When all of the resource is
exploited in this way, you usually find that the final remaining NPV is not
zero as it should be. You then adjust the estimate for the starting NPV and
try again. This process is repeated until the final remaining NPV is zero.
208 Whittle Strategic Mine Planning
If we follow this approach with the case we were looking at before, we get
cut-offs as shown in Figure 78, and a total NPV of $144.3M, which is an
improvement of 12.5% on the $128.3M obtained with marginal cut-offs.
0.70
0.60
0.50
Cut-off
0.40
0.30
0.20
0.10
0.00
1 2 3 4 5 6 7 8 9 10
Increment
Figure 78: Cut-off curve for simple increments using Lane method
This can be expressed as is shown below when there are no change costs.
It is much more complicated when there are.
However, “mostly” was not good enough for a commercial package, and
we changed to the following scheme:
0.60
0.50
0.40
Cut-off
0.30
0.20
0.10
0.00
1 2 3 4 5 6 7 8 9 10
Increment
Figure 79: Cut-off curve for simple increments using Whittle method
Note that the cut-off curve is convex upwards rather than downwards, as is
inherent in the Lane method.
Why does the Lane approach produce a result which is not as good?
There are two reasons.
First, Lane uses the NPV at the start of mining the increment to calculate
the delay cost, whereas it is the NPV of the material after the current
increment which is delayed.
Second, Lane maximizes the cash flow for the increment rather than the
discounted cash flow. That is, he doesn’t allow for the fact that lower cut-
offs delay the exploitation of some of the current increment.
Overview
The DC Method is an approach to ore waste discrimination which utilizes
a new cash-flow approach. It differs from Lane, which proceeds on the
basis of grade cut-offs, and it differs for existing cash flow methods in that
it can be used in Cut-Off optimization for multiple processes.
Compared to Lane-based approaches:
I have done a review of subsequent papers, and did not find evidence
that he has published any advances on the above-mentioned topic. The
DC model deals with any number of unranked processes, each with
throughput limits.
Definitions
• Material – rock coming from the mine which may be waste or ore.
Whittle Strategic Mine Planning 215
Marginal Cut-Offs
The marginal cut-off is the cut-off which maximizes the net undiscounted
cashflows. Refer to Figure 80.
The general rules are:
7. If the value is positive it will be processed.
Parcels in areas A and B are assigned to the Mill because there are no
alternatives which will yield higher profits. C and D are assigned to the
Heap because there are no alternatives which yield higher profits.
The marginal cut-off is the cut-off which maximizes the net undiscounted
cashflows (as for Whittle ore selection by cashflow. Refer to Figure 80.
The general rules are:
9. If the value is positive it will be processed.
10. Given 1, then the parcel will be assigned to the process which
provides the highest revenue.
The -ve X and -ve Y axes and a diagonal line running between the +ve X
and +ve Y axes provide the delineators for process assignment in the
normal case. The normal case is equivalent to a Whittle ore selection by
cash-flow case, where material is assigned to the process which makes the
most profit, or if no process makes a profit, the material is assigned as
waste.
Parcels in areas A and B are assigned to the Mill because there are no
alternatives which will yield higher profits. C and D are assigned to the
Heap because there are no alternatives which yield higher profits.
216 Whittle Strategic Mine Planning
• For a given increment, if you reduce the time taken to process the
increment, then you will increase the NPV of the sum of all
subsequent increments.
In the event that one process has a throughput limit on it, then a decrease
in the tonnage of material sent to that process will reduce the length time
required to process the increment. The reduction in time taken to process
this increment, decreases the NPV of the increment, but increases the NPV
of subsequent increments.
Given that it might be desirable to decrease in the tonnage put through the
limiting process, the question is: what type of material should the decrease
be applied to?
The answer: it should be applied to the material which, if reclassified, will
have the lowest impact on the NPV of the increment.
Figure 82: The material that should be reallocated from Mill is that which, if
reclassified, will have the lowest impact on the value of the increment.
It follows that material that should be reallocated is that which has the
lowest profit per tonne, or the lowest difference in profit. Refer to Figure
82.
In Figure 83, a set of red lines has been added. The position of the new red
lines is defined by the original vertical axis, and the variable DCm (Shown
as Dm in the figure) - Discrimination control for Mill.
Whittle Strategic Mine Planning 219
Figure 83: Process re-allocation that will reduce the time take for the
increment to be processed (presuming a Mill throughput limit).
• H is reassigned to Mill. This is the least cost reallocation (in fact, this
reallocation actually wins back some value).
Figure 84: Process re-allocations that will reduce the time take for the
increment to be processed (presuming a Mill throughput limit and a Heap
throughput limit both apply).
Figure 85: If further process allocation from Heap… The two decision
variables DCm and DCh and their implementations (material classification
for DCh1 and DCh2 shown).
The processes used above are “Mill” and Heap” – familiar to miners, but
unnecessary for the model to work. There is no need for the two processes
to have any ranking of precedence or value. The model is entirely
symmetrical. For the generalized rule we need to only refer to process 1
and process 2.
=If(And((P1-DC1)>0, (P1-DC1)>=(P2-DC2)), "Pa1", If( And((P2-
DC2)>0, (P2-DC2)>=(P1-DC1)), "Pa2", "W"))
Where:
Pa1 = Process 1 assignment
Pa2 = Process 2 assignment
W = Waste assignment
P1 = Profit through Process 1
P2 = Process through Process 2
DC1 = Discrimination control for Process 1
DC2 = Discrimination control for Process 2
222 Whittle Strategic Mine Planning
Note that the approach described below has not been tested.
It should be possible to define waste destinations as processes, each with
constraints and economic models set as for regular processes. By this
method, it should be possible to provide an optimal assignment of waste to
one of a range of possible waste dumps. There would be a need for a
default waste process to be defined, with extremely high costs associated
with it to make the mathematics work. With that one qualification in mind
the mathematics actually become a bit simpler.
For Process n of m processes:
=If((P1-DC1)>=max((P1-DC1), (P2-DC2), (P3-DC3), … (Pm-DCm)),
"Pan", [next test] )
The above test is conducted on each parcel for each of m processes.
Material that is not selected for any process, is classified as waste.
Where:
Pan = Process n assignment
Pn = Profit through Process n
DCn = Discrimination control for Process n
Whittle Strategic Mine Planning 223
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224 Whittle Strategic Mine Planning
Whittle Strategic Mine Planning 225
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