Project Evaluation by Sensitivity, Scenario and Risk Analysis
E J M Bloem1 and J D van Wees2
ABSTRACT
Preliminary project evaluation is relevant to the evaluation process of the
decision makers (or executives) prior to making the critical business
choices. Important to the assessment is an integrated sensitivity, scenario
and risk analysis at every stage of a mining project. This should include
the evaluation of different options taking into account uncertainties.
Construction of interactive financial computer models where each
element is functionally integrated into a fully integrated life-cycle allows
rapid and automatic study of the sensitivity of each element through
changes in the value of an input. The scenario analysis is the effect of
changing more than one input at a time, organised through scenarios in a
decision tree. Risk analysis is an integrated analysis of the effect of all
uncertainties of the parameters, using Monte Carlo simulation.
Key to the asset decisions process is that the decision maker is
provided with the essential integrated decision information. We have
clustered this information into several scenario groups. Within each
group, two levels of uncertain information are distinguished:
1. discrete scenarios critical for the decisions; and
2. remaining uncertainty within the scenario (risk analysis) which can
be modelled by continuous probability density functions (pdf’s).
For an asset, the relevant scenarios in each group and the associated
continuous pdf’s need to be defined. When the scenario groups and
associated pdf’s have been defined for the asset, the decision process can
be started by structuring the different scenario groups in a Scenario Tree.
1. Project Developer, Geo Information Systems, NITG-TNO, PO Box
80015, 3508 TA Utrecht, The Netherlands.
E-mail: e.bloem@nitg.tno.nl
2. NITG-TNO, PO Box 80015, 3508 TA Utrecht, The Netherlands.
FIG 1 - The exploration investment (after Levy, 1983).
Mine Planning and Equipment Selection Kalgoorlie, WA, 23 - 25 April 2003
A Scenario Tree contains decision and end nodes. Each end node
corresponds to a completely defined mine project or asset model. The
calculations for each end node result in a set of stochastic realisations for
the reserves, production forecast, cash flow, and profitability indicators
(NPV, IRR, DPR). Thus, a deterministic and fully probabilistic
multi-commodity analysis tool is provided to investigate the sensitivity
and robustness of decisions.
INTRODUCTION
Many studies suggest that companies using uncertainty and risk
analyses are performing better than the ones that don’t (Jonkman
et al, 2000). The main goal of such analyses is to improve capital
investment and financial and portfolio decisions. A preliminary
evaluation is sufficient for a rough assessment of viability, to
compare and rank projects, to allocate exploration budgets, to
analyse sensitivity, to make decisions of proceeding, to monitor
cost effectiveness, to determine the economic life of assets, for
negotiations of project acquisitions/sales, and to analyse
risks/opportunities. The exploration investment is shown in
Figure 1.
Before the decision maker can start with the decision analysis
activities he/she needs to get an overview of all available
information relevant to the nature of the decisions which have to
be made. This information is collected during any phase of the
project process workflow or mine life cycle and through several
disciplines. Company-wide communication is often complicated
through cross-discipline transfer of data. Integration of cross
discipline information is therefore essential for project
evaluation.
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E J M BLOEM and J D van WEES
Once the information is established, the decision maker(s)
optimise(s) the evaluation in terms of geological, technical,
economic (eg net present value (NPV), internal rate of return
(IRR)) and timing criteria, while working with safety and
environmental standards, and meeting both internal and external
constraints. Two major phases have been identified in the field
life-cycle decisions: value generating or decision phase and value
protection or monitoring phase. The value-generating phase
concludes with the final investment decision (FID).
Decisions can be made by assumed certainty, probabilistic
conditions to handle uncertainty or risk, decisions with Monte
Carlo Realisations, or by integrated asset management mode.
Studies show that scalar uncertainty calculation lead to an
under-estimation of the uncertainty compared to a spatial
approach (Floris and Peersmann, 1998). To support decision
makers computer models have been developed. In this paper the
methodology of those models, such as sensitivity, scenario and
risk analysis is explained.
METHODOLOGY
Construction of interactive financial computer models where
each element is functionally integrated into a fully integrated
life-cycle allows rapid and automatic study of the sensitivity of
each element through changes in the value of an input. The
sensitivity of a project is the degree of change in its returns as a
function of variations in an individual element. Projects are
sensitive in order of significance:
1. revenue factors, such as price, recovery and grade;
2. capital investment; and
3. operating costs (Guj, 1989).
Scenario analysis is the effect of changing more than one input
at a time in desired combinations or scenarios and has been
modelled also. Risk analysis is an integrated analysis of the
effect of uncertainties of the input parameters, which is modelled
using Monte Carlo simulation: resulting in pdf of input
parameters and key performance indicators (kpi’s).
Key to the asset decision process is that the decision maker is
provided with the essential integrated decision information. We
have clustered this information in the following scenario groups:
1. static earth model,
2. dynamic earth,
FIG 2 - Decision making and uncertainty.
92 Kalgoorlie, WA, 23 - 25 April 2003
3. mining development policy,
4. surface facilities,
5. activity planning,
6. commercial model,
7. human factors controllable,
8. human factors uncontrollable, and
9. health, safety and environment.
Within each group, two levels of uncertain information are
distinguished:
1. discrete scenarios critical for the options and events; and
2. remaining uncertainty within the scenario (risk analysis)
which can be modelled by continuous probability density
functions (pdf’s, see Figure 2).
For an asset, the relevant scenarios in each group and the
associated continuous pdf’s of input parameters need to be
defined. The above scenario groups can either be a chance
(event) or a decision (option) scenario group. A chance group
represents events beyond human control, eg presence or absence
of a fault in the static earth model. A decision group represents
activities within human control, eg a mine development policy.
When the scenario groups and associated pdf’s have been
defined for the asset, the Decisions process can be started by
structuring the different scenario groups in a Scenario Tree
(Figure 3).
A Scenario Tree contains chance nodes representing chance
groups, decision nodes representing decision groups and end
nodes on the bottom of the tree representing full mine
development or asset scenarios. Thus, each end node corresponds
to a completely defined mine project or asset model for which
model calculations can be done. For each complete asset scenario
there still is uncertainty represented by the continuous pdfs of the
scenario group. The calculations for each end node result in a set
of pdf’s of kpi’s, such as stochastic realisations for the reserves,
production forecast, cash flow, and profitability indicators (NPV,
IRR, DPR) calculated from the pdf’s of the underlying input
scenario parameters. Having defined the pdf’s for each of the end
nodes, this data needs to be propagated up through the scenario
tree, passing both chance nodes and decision nodes. Then the
scenarios are mutually compared using a utility function. The
utility function expresses a decision maker’s attitude towards risk
and opportunity.
Mine Planning and Equipment Selection
 PROJECT EVALUATION BY SENSITIVITY, SCENARIO AND RISK ANALYSIS
FIG 3 - Scenario Trees.
CRITICAL BUSINESS DECISIONS
The system includes information about assets and methodologies
and/or analysis tools relevant to the evaluation process of the
decision makers (or executives) prior to making the critical
business choices. It provides a comprehensive overview of the
existing and possible mine scenarios and associated geological,
technical and commercial uncertainties during the integrated
life-cycle. The system enables decision makers to perform
sensitivity analysis and test the robustness of the individual
project scenarios in terms of commercial opportunities and risks.
It allows a thorough technical and commercial analysis of
opportunities when reviewing a number of different exploration
and/or development scenarios. It enables to roughly assess
projects of their viability, to compare and rank between projects
and to allocate exploration budgets during the decision phase.
Executives can capture the opportunities to be top quality by
evaluating and realising each opportunity value in order to make
more balanced, less subjective, more effective and ‘smarter’
business choices within a shorter period of time. The system
enables to capture the decision analysis process from the
initiation phase until the abandonment phase, providing an audit
trail of the critical business choices and the associated decision
analysis process during the monitoring phase. It also facilitates
cross-discipline and company-wide communication. This will
enable peer decision makers to follow the decision process and
understand the technical and commercial reasoning that has led
to the final decision.
CONCLUSIONS
New concepts and methodologies are developed for the
propagation and aggregation of uncertainties and scenarios
Mine Planning and Equipment Selection Kalgoorlie, WA, 23 - 25 April 2003
during the whole-of-life mining process. The methodology has
been implemented in a Scenario Analysis tool supporting fully
integrated life-cycles and scenario trees, in order to enable
studying of the method on realistic data sets. The Scenario
Analysis tool is regarded as the central component, or kernel of
the Mining DSS: It can make fast models for quick calculations
regarding the asset, as well as an economic spreadsheet to
calculate cash flows and NPV’s. The fast models can rapidly be
adjusted and extended with new parameters to explicitly include
company specific calculation wishes. New data can directly be
added and/or adjusted during the mine lifecycle, thus providing
better monitoring throughout the process. Moreover, analysis
tools are provided to investigate the sensitivity and robustness of
decisions. It is both a deterministic and fully probabilistic
application, is multi-commodity based, makes use of standards to
comply with, and allows easy custom-tailoring of company-own
calculation methods.
REFERENCES
Floris, F J T and Peersmann, M R H E, 1998. Uncertainty estimation in
volumetrics for supporting hydrocarbon E&P decision making,
Petroleum Geoscience, 4:33-40.
Guj, P, 1989. Elementary Project Evaluation (University of Western
Australia Textbook: Perth, Australia).
Jonkman, R M, Bos, C F M, Breunese, J N, Morgan, D T K, Spencer, J A
and Sondena, E, 2000. Best Practices and Methods in Hydrocarbon
Resource Estimation, Production and Emissions Forecasting,
Uncertainty Evaluation and Decision Making, in Proceedings SPE
European Petroleum Conference, Paris, No 65144, pp 1-9 (Society of
Petroleum Engineers: USA).
Levy, I W, 1983. Exploration Costs, Risks, Decisions and Returns: The
Exloration Business, Lecture presented at the ADAB. Mineral
Resources Course, Perth, Australia.
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