Mine Planning - Operations April 14, 2016

Contents
Introduction to Mine Planning - Operations................................................................................................... 2
Overview ....................................................................................................................................................... 2
Assumptions .................................................................................................................................................. 2
Course Scope ............................................................................................................................................... 3
Part 1: Sequence and Scheduling ................................................................................................................ 4
Present Value and Opportunity Cost ........................................................................................................ 4
The Strategic Mine Planning Model .......................................................................................................... 5
Introduction to Mine Planning - Operations - Figure 1 ......................................................................... 5
Planning and the Life Cycle of an Orebody .......................................................................................... 6
The Continuous Nature of Mine Planning ............................................................................................ 6
References ........................................................................................................................................... 7
Transition Point Investigation: Open Pit vs Underground ............................................................................. 8
Introduction ............................................................................................................................................... 8
Activity: Transition Point Investigation (Open Pit vs Underground) .......................................................... 9
Changes in Market Conditions................................................................................................................ 15
Activity: Change in Market Variable Investigation .............................................................................. 15
Underground Mining ............................................................................................................................... 22
Overview of Mining Methods .............................................................................................................. 22
Block Caving ....................................................................................................................................... 22
Sublevel Caving.................................................................................................................................. 24
Sublevel Stoping................................................................................................................................. 25
Room and Pillar .................................................................................................................................. 26
Longwall Mining .................................................................................................................................. 26
Sublevel Stopping............................................................................................................................... 27
Overview ............................................................................................................................................ 27

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Mine Planning - Operations April 14, 2016

Introduction to Mine Planning - Operations

You will cover the following points in Part 1: Sequence and Scheduling.
 introduction to mine planning—operations
 transition point investigation: open pit vs underground
 changes in market conditions
 underground mining
 sublevel stoping

Overview
Mine Planning 2 – Operations deals with the fundamental processes and levers required to generate
optimal mine plans. This course carries on from Mine Planning 1 – Strategy by addressing the remaining
two key levers for value creation as part of the mine planning process.
As such, the two principle aims of the course are to:
 develop an understanding of the basic principles and practical methodologies of mine planning and
mine evaluation; and
 develop the ability to recognize and use key levers for creating value in the mining business.
After successfully completing this course, participants should be able to:
 understand how the technical aspects of mining are incorporated into the development of optimal
mine plans;
 identify the key levers for creating value as part of the strategic mine planning process;
 effectively use these key levers to evaluate avenues for creating additional value by generating
alternative mine plans; and
 appreciate the key differences between the mining business and other traditional industries in terms
of value creation and how these relate to the mine planning process.
The theoretical principles within are demonstrated by way of examples throughout.

Assumptions
For the purpose of focusing on the mine planning and evaluation process, this course addresses very few
of the technical aspects of mining (including: geotechnical, environmental, metallurgical, geological, and
social aspects). As is commonly the case, before beginning the financial evaluation, all technical aspects
of the mining process must first be confirmed as feasible. This is because the financial evaluation should
be based on technically feasible parameters to provide the framework to then be able to carry out a proper
financial evaluation. The financial evaluation itself does not confirm technical feasibility. Technical feasibility
must be confirmed beforehand.
This course assumes that participants have a sound understanding of key financial concepts. This is
particularly the case for the purpose of determining net present values (NPV)—the sum of all future
discounted cash flows. NPV calculations essentially form the basis for comparing multiple alternatives of
any given scenario. An in depth knowledge of the time value of money and opportunity cost concepts is
vital for mine planners. It is thus recommended that participants also complete the Introductory Mining
Project Evaluation course if their knowledge in this area needs to be improved or refreshed.

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Course Scope
The mining process in reality is highly complex. In most cases, it is simply not possible to effectively evaluate
each known scenario manually, even after narrowing down the potential list of scenarios that experienced
judgement has determined to be worthwhile to pursuing. As a result of this, mathematical modelling of mine
planning scenarios to speed up the process of evaluating a mine plan to aid the decision-making process
needs to be considered.
Numerous mine planning software packages already use mathematical modelling techniques and
algorithms to help evaluate a mine plan. Many of these software packages produce results that may be
competitive; however, they are rarely optimal. The results that are generated from mine planning and design
packages should be heavily scrutinized. As such, it is important that mine planners have a basic
understanding of the most fundamental mine planning principles and mathematical modelling to know what
the software is doing and how it generates its outputs. Since each mining operation is different, many
companies also develop in-house software to cater to the specific requirements of their unique operations.
While this course carries on from Mine Planning 1 – Strategy by addressing the remaining two key levers
for value creation as part of the mine planning process, it also sets the scene for the Mine Planning 3 –
Optimization course which introduces basic mathematical programming techniques including linear, integer
as well as mixed integer programming concepts through examples specific to the mine planning context. In
looking forward to the next stages of project development and construction, after the completion of feasibility
studies and numerous iterations of generating mine plans, the Mine Planning 3 – Optimization course also
introduces project management and network flow techniques. These are extremely useful in determining
the critical path to complete the development of a project and in evaluating any potential avenues for
reducing completion time through the allocation of additional resources.

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Part 1: Sequence and Scheduling

Present Value and Opportunity Cost
The notion that money is worth more in the hand today than it is tomorrow requires that expected future
project revenues and expenditures be discounted at a constant rate to permit valid comparisons with current
net cash flows. The present value of an expected cash flow is calculated using the following equation:

where:
 PV = the present value of expected net cash flows ($)
 FVt = the future value of expected net cash flow at time t ($)
 i = the average discount rate from time 0 to time n (%)
 t = the time into the future (usually years)
As an example, the present value of a $2.3M cash flow in 7 years' time at a discount rate of 8% would be $1.34M.
This is calculated as follows:

The NPV is simply the summation of all expected future net cash flows and is calculated using the following
equation:

where:
 NPV = the net present value of expected net cash flows ($)
 FVt = the future value of expected net cash flow at time t ($)
 i = the average discount rate from time 0 to time n (%)
 t = the time into the future (usually years)
The net present value of a series of cash flows (-$1.6M in year 1, -$0.5 in year 2, $0.8M in year 3, $2.3M
in year 4 and $2.7M in year 5) at a discount rate of 9% would be $2.11M. This is calculated as follows:

From the above equations, it can be seen that the longer the time (t), the lower the net present value of
future cash flows. This fundamental insight forms the basis for generating mine plans that seek to bring
forward positive cash flows while delaying cost as much as possible. It is thus generally beneficial from an
economic perspective to exploit the higher grade stopes/blocks at the commencement of a resources
project in order to reduce the effect that discounting has on their values.

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NPV is considered one of the main financial metrics used to determine the value of a mine plan. The
optimum mine plan will thus be the one that maximizes NPV. An NPV that is greater than zero means that
the project obtains income that is greater than the interest/discount rate. An NPV that is less than 0 means
that the project obtains income that is less than the interest/discount rate. Circumstances under which the
NPV is exactly equal to zero indicate that the project obtains income for exactly the interest/discount rate.
This situation has been given its own term, most often referred to as the internal rate of return (IRR).

The IRR is another important financial metric used to determine the value of a mine plan. The advantage
of IRR is that it provides a better indication of the return on each dollar invested into a project. The IRR
cannot be calculated without the presence of at least one negative cash flow in a series of cash flows.

It is also important to note that as the discount rate is increased, the NPV is reduced. When comparing two
projects and taking capital requirements (cash flows and project life) into account, one might have a large
NPV but a low IRR, while the other might have a smaller NPV but a higher IRR. It then becomes a case of
management having to decide which option is best.

The Net Present Value (NPV) referred to throughout this course is exclusive of tax and any taxation related
offsets and claims.

The Strategic Mine Planning Model

Introduction to Mine Planning - Operations - Figure 1

Figure 1: Strategic mine planning model (source: recreated from Camus (2002))
The strategic mine planning model illustrated in Figure 1 (right) highlights the five key controllable strategic
mine planning variables (mining method selection, process route selection, scale of operation, sequence
and scheduling, and cut-off grade policy) that can be used to create as much value as possible from the
exploitation of an orebody. All these variables are interrelated in the sense that they cannot be determined
in isolation from each other. These five key variables together with an additional five uncontrollable input
models (geotechnical, geological, market, metallurgical and health, safety, environmental, and community
(HSEC)) contribute to the development of mine plans.

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Mining method selection, for the purpose of removing valuable ore from the ground, is one of the first and
most elementary processes in planning a mine. In terms of its impact on value, it is arguably the most
significant of all five key levers for creating value as part of the strategic mine planning process. Mining
method selection together with process route selection and scale of operation were addressed in the Mine
Planning 1 – Strategy course (see Part 2: Mining Method Selection, Part 2: Selection of Process Route,
and Part 2: Scale of Operation). This course seeks to address the two remaining key levers for value
creation as part of the strategic mine planning process: sequence and scheduling and cut-off grade policy.
Sequence and scheduling will be discussed in terms of how the time value of money can significantly impact
the value of a mine plan. This will be followed by cut-off grade policy. Like all five levers, the evaluation of
each in practice should not be carried out in isolation but rather as part of a fully integrated process whereby
all levers are considered simultaneously.

Planning and the Life Cycle of an Orebody

Strategic mine planning deals with those activities that account for the majority of value that can be
attributed to most mining operations. Tactical or operational mine planning and decision-making, however,
deals with the tasks required to actually achieve that value. As such, the majority of strategic decisions are
made fairly early on in the life cycle of an orebody. This is illustrated in Figure 2, below.

Introduction to Mine Planning - Operations - Figure 2

Figure 2: Planning in the life cycle of an orebody (source: recreated from Camus (2002))
As the life cycle of the orebody matures, less strategic decisions are made. As development is completed
and operations move to full production, strategic decision-making tends to be replaced by an increase in
tactical decision-making. This makes sense since tactical planning revolves around the shorter term
decisions and tasks that need to be completed in order to achieve the value created as part of the strategic
planning process.

The Continuous Nature of Mine Planning

It is important to understand that the mine plan should always be viewed as a working document, even in
the production phase of an operation, so as to continuously map out the optimal path for exploitation of the
deposit with the most up to date information that is available at the time. The mine plan may identify areas
in the input models that are lacking and require further study for later update and input back into the planning
model. Even though enhancements to a mine plan may be possible once it has been implemented, the
opportunity to develop a mineral deposit will only ever occur once. Mine planners, therefore, owe it to society
to make the most out of every mineral deposit by generating mine plans that generate maximum value for
all stakeholders.

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References
This course has been created for educational purposes. The authors have drawn information, concepts,
examples and illustrations contained within the course from a wide variety of sources including their own
knowledge, experiences and expertise as well as from material readily available on the public domain. Concepts
have also been drawn from the list below. Course participants are thus encouraged to refer to these as
additional resources.
Camus, J. P. (2002) Management of Mineral Resources: Creating Value in the Mining Business. Society for Mining,
Metallurgy, and Exploration, Inc (SME), Littleton, CO, USA.
Hustrulid, W. A. and Kuchta, M. (2006) Open Pit Mine Planning & Design, Volume 1—Fundamentals, 2nd Edition.
Balkema: Rotterdam/Taylor and Francis: London.
Lane, K. F. (1988) The Economic Definition of Ore—Cut-Off Grades in Theory and Practice. Mining Journal Books
Limited: London.
Rudenno, V. (2004) The Mining Valuation Handbook—Australian Mining and Energy Valuation for Investors and
Management. WrightBooks: Victoria.
Runge, Ian C. (1998) Mining Economics and Strategy. Society for Mining, Metallurgy, and Exploration, Inc.
Littleton, CO, USA.

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Transition Point Investigation: Open Pit vs Underground

Introduction
Sequencing and scheduling is the fourth key lever for maximizing value as part of the strategic mine
planning process. Like all other levers, it should not be evaluated in isolation from the other levers—it should
be evaluated simultaneously to give rise to the best possible mine plan. It is firstly important to establish
the key difference between a sequence and a schedule.

A sequence is a particular order in which related events follow each other. A schedule provides the intended
dates and times for these events to occur. A particular sequence may be an input for the scheduling
process. Scheduling is vitally important to the mine planning process because it adds a time dimension.
For this reason, the time value of money and opportunity cost concepts now play a significant part in
evaluating a mine plan.

The scope, time horizon, and level of detail for scheduling will vary depending on its intended purpose. In
mining, a strategic schedule will generally span the life of the operation. This may be at yearly, two-yearly,
five-yearly, or even ten-yearly intervals, or a combination of these. The objective of the strategic mine plan
is to provide a path to exploit the resource with the aim of maximizing net present value (NPV). The level
of detail contained within a strategic schedule is usually not very high, however, it must still be detailed
enough to estimate future production and cash flows to a level of confidence that appeases financiers and
investors.

The strategic schedule will generally provide the input required to undertake medium term scheduling. While
each operation will be different, a medium term schedule may span the next two to five years at quarterly
or even monthly intervals. Medium term scheduling is completed to a much greater level of detail than the
strategic schedule, and may detail the resources required (e.g. allocation of equipment) in order to meet
targeted production rates. The medium term schedule provides the input required to undertake short term
scheduling. The short term scheduling horizon may span for several weeks at daily or even shift intervals.
The objective of short term scheduling is to execute the medium and long term plans and to achieve the
value that these plans envisage. In order to do so, however, the short term objective may be more customer
oriented, with the immediate goal of minimizing a deviation to a targeted tonnage, metal grade, or level of
impurity. Depending on the operation, the short term schedule in many cases will be very detailed and
allocate specific equipment and personnel to various working faces in order to achieve short term
production targets.

In summary, each scheduling activity uses the results of the previous higher level schedule as input. The
focus for this course is on strategic production scheduling for the purpose of maximizing NPV.

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Activity: Transition Point Investigation (Open Pit vs Underground)

Transition Point Investigation: Open Pit vs Underground - Figure 1

Figure 1: Pushback sequence for the exploitation of a vertical deposit (source: Nehring and Shafiee (2016))
Transitioning between open pit and underground operations presents a significant challenge in terms of
identifying the optimal transition point that maximizes value. This challenge becomes more pronounced
with the addition of the scheduling process into the evaluation as shown by the following example. Consider
the vertical deposit to be exploited in the pushback sequence indicated in Figure 1 (right).

The associated ore and waste for each pushback/phase is shown in Table 1 (below), together with the
cumulative tonnages associated with each. Phase 1 contains 1,000t of ore and 500t (2 × 250t) of waste
material. Like all other phases, phase 2 also contains 1,000t of ore, however, the amount of waste required
to be removed to uncover the ore block significantly increases with depth. Phase 2 thus contains 1,500t (6
× 250t) of waste material. This increases to 2,500t (10 × 250t), 3,500t (14 × 250t), 4,500t (18 × 250t), 5,500t
(22 × 250t) and 6,500t (26 × 250t) for phases 3, 4, 5, 6 and 7 respectively.

Table 1: Ore and waste tonnages associated with the exploitation of the vertical deposit

Phase Tonnage (t) Cumulative Tonnage (t)

Phase
Ore Waste Ore Waste

1 1,000 500 1,000 500

2 1,000 1,500 2,000 2,000

3 1,000 2,500 3,000 4,500

4 1,000 3,500 4,000 8,000

5 1,000 4,500 5,000 12,500

6 1,000 5,500 6,000 18,000

7 1,000 6,500 7,000 24,500

Table 1: Ore and waste tonnages associated with the exploitation of the vertical deposit (Nehring and Shafiee (2016))

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Table 2: Phase evaluation and breakeven pit limit calculation

Phase Revenue ($) Cost ($) Phase Value ($) Cumulative Value ($)

1 6,000 -500 5,500 5,500

2 6,000 -1,500 4,500 10,000

3 6,000 -2,500 3,500 13,500

4 6,000 -3,500 2,500 16,000

5 6,000 -4,500 1,500 17,500

6 6,000 -5,500 500 18,000

7 6,000 -6,500 -500 17,500

Table 2: Phase evaluation and breakeven pit limit calculation Source: Nehring and Shafiee (2016)
Using revenue of $6.0/t for ore and a cost of -$1.0/t for waste as indicated in Figure 1, the ultimate pit limit
(breakeven pit) can be determined. Since each phase contains 1,000t of ore and the revenue received from
each tonne of ore is $6.0/t, the revenue associated with each phase is $6,000 ($6.0/t × 1,000t). Multiplying
the cost to remove each tonne of waste by the amount of waste contained within each phase generates the
figures contained in the cost column of Table 2 (right). For phase 1, this is calculated as being -$500 (-
$1.0/t × 500t).

The value of each phase is thus obtained by adding the cost to remove the waste from the revenue obtained
by mining the ore. For phase 1, this is calculated as being $5,500 ($6,000 + -$500). As has been the case
thus far, when neither the time value of money nor other operational factors such as mine and plant
capacities are considered, the optimal final limit is reached at phase 6 as is shown in Table 2. This is
because phase 6 is the final phase to generate a positive value ($500) for a total cumulative value of
$18,000. Expanding the pit to phase 7 would destroy value since phase 7 generates a negative value of -
$500.

The implicit assumption currently is that ore is exposed simultaneously with waste and that ore revenue
occurs at the same time as waste cost. When accepting that ore and waste extraction have to consider
certain physical restrictions (phase/pushback size and available equipment), then the time value of money
becomes a very relevant consideration.
Transition Point Investigation: Open Pit vs Underground - Figure 2

Figure 2: Saw graph for scheduled open pit ore and waste extraction (source: Nehring and Shafiee (2016))

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Assuming now that the plant capacity is limited to 1,000t/y, the mine capacity is limited to 4,000t/y and that
ore must be uncovered in the year prior to its extraction, ore and waste extraction can be appropriately
scheduled according to the saw graph illustrated in Figure 2 (right).

A saw graph is one way to illustrate the timing of when ore and waste/overburden production take place. It
provides a means of being able to directly see how much waste needs to be removed to access each
pushback/phase and when waste needs to be removed to uncover ore in order to maintain a consistent mill
feed. Being able to visually see the effect of removing the final (final few) pushback/s on rescheduling waste
for the purpose of delaying the cost associated with waste removal as much as possible can significantly
aid the mine planning process. The saw graph is characterized by a central horizontal axis containing a
time scale (usually in years for strategic planning purposes). Ore production from each pushback together
with its respective timing is presented above the central horizontal axis, with all waste production from each
pushback together with its respective timing presented below the central horizontal axis.

As shown, production in year 5 consists of mining and processing the 1,000t ore block associated with
phase 4, as well as 500t and 2,500t of waste removal from phases 5 and 6 respectively. As such, mine and
plant capacities of 4,000t and 1,000t respectively are maintained.
Scheduling the open pit exploitation of this deposit to the 6th phase as determined by the breakeven pit
evaluation produces the cash flow stream for the 6th phase as shown in Figure 3 (below) using a discount
rate of 15%pa.

Transition Point Investigation: Open Pit vs Underground - Figure 3

Figure 3: Cash flow stream for 6th phase according to the Figure 2 production schedule (Nehring and Shafiee (2016))
The schedule contained in Figure 2 results in a net present value for phase 6 of -$284.3M. As a result, an
ultimate pit to the 6th phase should be abandoned in favour of a potentially smaller pit. As such, an open
pit operation to phase 5 will be investigated. The current cash flow stream for the 5th phase is shown below
in Figure 4.

Transition Point Investigation: Open Pit vs Underground - Figure 4

Figure 4: Cash flow stream for 5th phase according to the Figure 2 production schedule (source: Nehring and Shafiee (2016))

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The current production schedule contained in Figure 4 results in a net present value for phase 5 of -$27.5M.
This is still a poor cash flow, however, considering a plant and mine capacity of 1,000t/y and 4,000t/y
respectively, the removal of phase 6 from the operation may be able improve the net value of phase 5 due
to a rescheduling of waste removal to produce the new production schedule as depicted by the saw graph
shown in Figure 5, below (left). The cash flow stream for the 5th phase of this newly rescheduled operation
is shown in Figure 6, below (right).

Transition Point Investigation: Open Pit vs Underground - Figure 5

Figure 5: Saw graph for rescheduled open pit ore and waste extraction (source: Nehring and Shafiee (2016))
Transition Point Investigation: Open Pit vs Underground - Figure 6

Figure 6: Cash flow stream for 5th phase according to the Figure 5 production schedule (source: Nehring and Shafiee (2016))
Transition Point Investigation: Open Pit vs Underground - Figure 7

Figure 7: Comparison between breakeven and discounted/scheduled final pit limits (source: Nehring and Shafiee (2016))

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The new production schedule contained in Figure 5 results in a net present value for phase 5 of +$244.9M.
This represents an increase of $272.4M over the NPV of phase 5 under the previous production schedule
contained in Figure 2. While the exact same amount of material is being extracted, this additional value has
been created simply by delaying the cost associated with waste removal. The production schedule
represented in Figure 5, therefore, becomes the optimal schedule for this deposit at the given plant and
mine capacities and discount rate. Figure 7 (right) summarizes these findings.

As demonstrated, discounting and scheduling production can have a profound impact on final pit limits and
design. In this case, the original breakeven pit limit at phase 6 was substituted in favour of a smaller pit limit
at phase 5 after considering the full effects of capacity restrictions to generate a production schedule whose
cash flows can then be discounted to produce a positive net present value. It should be noted that the
discounted/scheduled final pit limit will always be smaller than or equal to the breakeven final pit limit. The
discounted/scheduled final pit limit will never be larger in size than the breakeven final pit limit.

Transition Point Investigation: Open Pit vs Underground - Figure 8

Figure 8: Considering an underground alternative for phases 4, 5, 6 and 7 (source: Nehring and Shafiee (2016))
The scheduling process is further challenged when considering an underground alternative as depicted in
Figure 8, where phases 4, 5, 6 and 7 have the option of being exploited via an underground operation.

The net present values (NPVs) associated with each underground phase commencing with phase 4 in year
5 (which is the year that open pit extraction of the phase 4 ore block is currently scheduled to take place),
to allow a direct like for like comparison with the previously determined open pit NPVs, are provided in
Table 3 below. These values have been conceptually generated for the purpose of enabling a direct
comparison between open pit and underground operations and are not based on any particular
underground mining cost.

Table 3: NPVs associated with each potential underground phase

Phase NPV ($M)
1 n/a

2 n/a
3 n/a

4 430.0
5 270.0

6 120.0
7 -300.0
Table 3: NPVs associated with each potential underground phase Source: Nehring and Shafiee (2016)

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Since the net present value of phase 6 as an underground operation is positive as opposed to the negative
net present value achieved as an open pit, this phase should be exploited via an underground operation.
However, the evaluation between open pit and underground alternatives must also extend to other phases.
Phase 7, which generates a negative NPV in year 8, is thus rejected. A full evaluation is presented in Table
4 below.

Table 4: Open pit versus underground NPV comparison of each phase

Final Configuration
Phase Open Pit NPV ($) Underground NPV ($)
Mining Method NPV ($M)
1 4,102.1 n/a Open pit 4,102.1

2 2,810.9 n/a Open pit 2,810.9

3 1,638.8 n/a Open pit 1,638.8

4 810.4 430.0 Open pit 810.4

5 244.9 270.0 Underground 270.0

6 n/a 120.0 Underground 120.0

7 n/a -300.0 n/a 0.0

Total 9,752.2

Table 4: Open pit versus underground NPV comparison of each phase Source: Nehring and Shafiee (2016)

Transition Point Investigation: Open Pit vs Underground - Figure 9

Figure 9: Optimum configuration (source: Nehring and Shafiee (2016))

As shown, phase 5 as an underground operation has a net present value of $270.0M, while phase 5 as an
open pit has a net present value of $244.9M. As such, phase 5 should also be exploited via the underground
alternative. An investigation of earlier phases finds that these should be exploited via the open pit
alternative. The optimum scheduled open pit/underground configuration is summarized in Figure 9 (right)
generating an NPV of $9,752.2M.

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Changes in Market Conditions

Activity: Change in Market Variable Investigation
Despite the mining sequence not generally being a flexible variable, it is useful to think about the
implications of changes in market conditions. As commodity prices increase or decrease, the sequence
may need to be adjusted accordingly. An increase in commodity price should privilege higher-grade ores
earlier on in the mine life to thus produce more metal and ultimately more value. The opposite may be
observed in a lower commodity price environment. It is not always obvious what happens if the discount
rate changes, but it is useful to be aware that the sequence may also change as the discount rate changes.

Changes in Market Conditions - Figure 1

Figure 1: The impact of commodity price on sequence (source: Nehring and Shafiee (2016))
As an example of how commodity price may affect the sequence, consider the sequencing illustration
contained in Figure 1 (right). Since the sequence should favour the higher valued margin first (followed by
the lower valued margin second) at a certain commodity price, the sequence in this case will target the right
pit followed by the left pit. An increase in commodity price however, results in the situation where the margin
from the left pit is now substantially more than the margin from the right pit. This, therefore, warrants an
evaluation of a new sequence which now targets the left pit followed by the right pit. It may well be the case
that after capacities have been determined and a schedule has been generated, it is optimal to maintain
the original sequence whereby the right pit is exploited first and then the left pit. This may be the case
particularly where a greater waste removal is required over a longer period of time which, thus, delays
gaining access to revenue generating ore.

As an example of this, consider a five-block (U, V, W, X and Y) gold deposit with two potential open pit
exploitation sequences (A & B) as illustrated in Figures 2 and 3 together with the relevant data relating to
each sequence below.

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Changes in Market Conditions - Figure 2

Figure 2: Sequence A (blocks U, V, W, X and Y) with data (source: Nehring and Shafiee (2016) not to scale)
Changes in Market Conditions - Figure 3

Figure 3: Sequence B (blocks Y, X, W, V and U) with data (source: Nehring and Shafiee (2016) not to scale)
Note that both sequences mine the same total amount of ore and waste of 5Mt and 20Mt respectively. The
difference between the two sequences is contained in the first and final pushback. Pushback 1 (to access
block U) requires the removal of 1Mt of waste and pushback 5 (to access block Y) requires the removal of
7Mt of waste in sequence A. Sequence B differs in that pushback 1 (to access the deeper block Y) requires
the removal of 7.5Mt of overburden (an additional 0.5Mt of waste). This reflects the additional waste needing
to be removed since waste removal from previous pushbacks no longer benefits this pushback. The 0.5Mt
increase in waste in pushback 1 is offset by the 0.5Mt reduction in waste removal required in pushback 5
(to access Block U) in sequence B.

A schedule and mine plan can be developed and valued using the two relevant pre-determined sequences
using the data contained in Table 1 (below) which is applicable to both sequences.

Table 1: Data relevant to both sequences

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Mine capacity (ore and waste): 5Mt per year

Process Plant Capacity: 1Mt per year (no ore production in the first year)
Discount Rate: 20% pa

Gold price: $25/g

Recovery: 85%

Mining cost: $3.60/t

Processing cost: $7.20/t

Each ore block must be uncovered in the year prior to extraction

No lower restriction on yearly material mined

Table 1: Data relevant to both sequences Source: Nehring and Shafiee (2016)
The undiscounted values attributed to each pushback within each sequence are contained in Tables 2 and
3 for sequence A and sequence B respectively (below).

Table 2: Sequence A pushback values (undiscounted)

Ore Ore Ore Overburden

Grade Overburden Revenue Cumulative
Block Tonnes Mining Processing Mining Cost Value ($)
(g/t Au) Tonnes (t) ($) Value ($)
(t) Cost ($) Cost ($) ($)

U (PB 1) 1.3 1,000,000 1,000,000 27,625,000 3,600,000 7,200,000 3,600,000 13,225,000 13,225,000

V (PB 2) 1.5 1,000,000 2,500,000 31,875,000 3,600,000 7,200,000 9,000,000 12,075,000 25,300,000

W (PB 3) 1.7 1,000,000 4,000,000 36,125,000 3,600,000 7,200,000 14,400,000 10,925,000 36,225,000

X (PB 4) 1.9 1,000,000 5,500,000 40,375,000 3,600,000 7,200,000 19,800,000 9,775,000 46,000,000

Y (PB 5) 2.1 1,000,000 7,000,000 44,625,000 3,600,000 7,200,000 25,200,000 8,625,000 54,625,000

Table 2: Sequence A pushback values (undiscounted) Source: Nehring and Shafiee (2016)
Table 3: Sequence B pushback values (undiscounted)

Ore Ore Ore Overburden

Grade Overburden Revenue Cumulative
Block Tonnes Mining Processing Mining Cost Value ($)
(g/t Au) Tonnes (t) ($) Value ($)
(t) Cost ($) Cost ($) ($)

Y (PB 1) 2.1 1,000,000 7,500,000 44,625,000 3,600,000 7,200,000 27,000,000 6,825,000 6,825,000

X (PB 2) 1.9 1,000,000 5,500,000 40,375,000 3,600,000 7,200,000 19,800,000 9,775,000 16,600,000
W (PB 3) 1.7 1,000,000 4,000,000 36,125,000 3,600,000 7,200,000 14,400,000 10,925,000 27,525,000

V (PB 4) 1.5 1,000,000 2,500,000 31,875,000 3,600,000 7,200,000 9,000,000 12,075,000 39,600,000
U (PB 5) 1.3 1,000,000 500,000 27,625,000 3,600,000 7,200,000 1,800,000 15,025,000 54,625,000

Table 3: Sequence B pushback values (undiscounted) Source: Nehring and Shafiee (2016)

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Changes in Market Conditions - Figure 4

Figure 4: Sequence A production schedule (tonnes) and saw graph representing the production schedule (source: Nehring and
Shafiee (2016))
As expected, the undiscounted cumulative value for the gold deposit at full depletion is the same for both
sequences at $54,625,000. However, since the values achieved by sequence A are significantly higher in
the earlier pushbacks, sequence A will be favoured over sequence B as the most likely sequence to
generate the best discounted present value. Production scheduling is therefore based on sequence A with
a focus on delaying waste removal where ever possible. This production schedule and saw graph
representations are shown in Figure 4 (right). As shown, an initial year of pre-stripping (in year 1) removing
4Mt of waste across pushbacks 1, 2 and 3 is required in order to maintain a constant flow of ore to the
process plant from year 2 while adhering to mining and processing capacity constraints.

The undiscounted and discounted cash flows associated with this production schedule are contained in
Figures 5 and 6 respectively (below).

Changes in Market Conditions - Figure 5

Figure 5: Undiscounted cash flows ($) associated with sequence A (source: Nehring and Shafiee (2016))

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Changes in Market Conditions - Figure 6

Figure 6: Discounted (using 20%pa discount rate) cash flows ($) associated with sequence A ( Nehring and Shafiee (2016))
The summation of the discounted cash flows over the operation's six-year mine life results in an NPV of
$16,241,907 (-$12,000,000 + $1,684,028 + $3,862,000 + $5,268,615 + $6,098,492 + $11,327,924).

For the same gold deposit, consider now an increase in the gold price from $25/g to $40/g and the effect
of this on the mine plan. The value of each pushback is recalculated in order to determine the appropriate
sequence as shown in Tables 4 and 5 below.

Table 4: Sequence A pushback values at $40/g Au (undiscounted)

Ore Ore Ore Overburden

Grade Overburden Revenue Cumulative
Block Tonnes Mining Processing Mining Cost Value ($)
(g/t Au) Tonnes (t) ($) Value ($)
(t) Cost ($) Cost ($) ($)
U (PB 1) 1.3 1,000,000 1,000,000 44,200,000 3,600,000 7,200,000 3,600,000 29,800,000 29,800,000

V (PB 2) 1.5 1,000,000 2,500,000 51,000,000 3,600,000 7,200,000 9,000,000 31,200,000 61,000,000

W (PB 3) 1.7 1,000,000 4,000,000 57,800,000 3,600,000 7,200,000 14,400,000 32,600,000 93,600,000

X (PB 4) 1.9 1,000,000 5,500,000 64,600,000 3,600,000 7,200,000 19,800,000 34,000,000 127,600,000

Y (PB 5) 2.1 1,000,000 7,000,000 71,400,000 3,600,000 7,200,000 25,200,000 35,400,000 163,000,000

Table 4: Sequence A pushback values at $40/g Au (undiscounted) Source: Nehring and Shafiee (2016)
Table 5: Sequence B pushback values at $40/g Au (undiscounted)

Ore Ore Ore Overburden

Grade Overburden Revenue Cumulative
Block Tonnes Mining Processing Mining Cost Value ($)
(g/t Au) Tonnes (t) ($) Value ($)
(t) Cost ($) Cost ($) ($)

Y (PB 1) 2.1 1,000,000 7,500,000 71,400,000 3,600,000 7,200,000 27,000,000 33,600,000 33,600,000

X (PB 2) 1.9 1,000,000 5,500,000 64,600,000 3,600,000 7,200,000 19,800,000 34,000,000 67,600,000

W (PB 3) 1.7 1,000,000 4,000,000 57,800,000 3,600,000 7,200,000 14,400,000 32,600,000 100,200,000

V (PB 4) 1.5 1,000,000 2,500,000 51,000,000 3,600,000 7,200,000 9,000,000 31,200,000 131,400,000

U (PB 5) 1.3 1,000,000 500,000 44,200,000 3,600,000 7,200,000 1,800,000 31,600,000 163,000,000

Table 5: Sequence B pushback values at $40/g Au (undiscounted) Source: Nehring and Shafiee (2016)
Once again, the undiscounted cumulative value for the gold deposit at full depletion is the same for both
sequences at $163,000,000. Unlike the higher values for the earlier pushbacks that were achieved by

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sequence A, this time it is sequence B that witnesses higher values in in initial pushbacks. For this reason,
sequence B must now be taken more seriously and should thus undergo a full evaluation. Production
scheduling again takes place with a focus on delaying waste removal where ever possible. This production
schedule and saw graph representations are shown in Figure 7 (below). Note that this time, an initial 2
years of pre-stripping (in years 1 and 2) removing 9Mt of waste across pushbacks 1 and 2 is required in
order to maintain a constant flow of ore to the process plant from year 3 while adhering to mining and
processing capacity constraints. It is also worth noting that mining capacity is not fully utilized at the 5Mtpa
rate in years 5 and 6.

Changes in Market Conditions - Figure 7

Figure 7: Sequence B production schedule (tonnes) at $40/g Au and saw graph representing the production schedule (source:
Nehring and Shafiee (2016))
The undiscounted and discounted cash flows associated with this production schedule are contained in
Figures 8 and 9 respectively (below).
Changes in Market Conditions - Figure 8

Figure 8: Undiscounted cash flows ($) associated with sequence B at $40/g Au (source: Nehring and Shafiee (2016))

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Changes in Market Conditions - Figure 9

Figure 9: Discounted (using 20%pa discount rate) cash flows ($) associated with sequence B at $40/g Au (source: Nehring and
Shafiee (2016))
The summation of the discounted cash flows over the operation's seven-year mine life results in an NPV of
$58,689,641. The large amount of up-front overburden that needs to be removed and the resulting delay
to accessing ore (in the third year as opposed to the second year—which also extends mine life out to
seven years as opposed to six years) should prompt an evaluation of the alternative sequence (sequence
A). Using the original sequence A production schedule and saw graph shown in Figure 4, the undiscounted
and discounted cash flows associated at the new gold price of $40/g Au are contained in Figures 10 and
11 respectively (below).

Changes in Market Conditions - Figure 10

Figure 10: Undiscounted cash flows ($) associated with sequence A at $40/g Au (source: Nehring and Shafiee (2016))
Changes in Market Conditions - Figure 11

Figure 11: Discounted (using 20%pa discount rate) cash flows ($) associated with sequence A at $40/g Au (source: Nehring and
Shafiee (2016))

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The summation of the discounted cash flows over the operation's six-year mine life results in an NPV of
$67,975,243. This represents a $9,285,602 improvement over the sequence B value of $58,689,641. It is
apparent that the higher initial cash flows generated by sequence B are more than offset by sequence A's
lower cash flows that commence a whole year earlier due to not having to remove as much waste at the
commencement of the operation. At a higher gold price however, it may well be that sequence B does
generate the higher NPV. The important point to note is that sequence can have a significant impact on
value. It is important, therefore, to generate a schedule and mine plan for a number of sequences in order
to determine their discounted value and thus be able to select to the most appropriate.

Underground Mining
Overview of Mining Methods
Sequencing and scheduling in underground mining is significantly different from the open pit scenario. In
underground mining, the sequence is generally very closely tied to technical parameters required for safe
and efficient extraction and thus, requires an in-depth knowledge of the method. The orebody is generally
accessed via a series of drives which link to a shaft or decline that connects with the surface. Underground
mining tends to be technically more challenging than open pit mining due to the constrained working
environment, the need for ventilation and a greater reliance on rock mass behaviour. Material may be
caved, cut or blasted before being loaded and hauled to the surface which may involve the use of load haul
dump (LHD) units, trucks and shaft/conveyor systems. The five main bulk underground mining methods in
their basic form include:
 block caving;
 sublevel caving;
 sublevel stoping;
 room and pillar mining; and
 longwall mining.

Various forms of these methods have evolved to adapt to the specific characteristics of an orebody.
Different terminology may also be used for each of these methods and their adaptations depending on the
country. Each method is unique and uses different processes and equipment, which drives the mining
sequence and ultimately the scheduling process. A brief discussion of each underground mining method
and the sequencing and scheduling aspects of each now follows.

Block Caving

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Underground Mining - Figure 1

Figure 1: The block caving method (source: Public Domain)

The block caving method as illustrated in Figure 1 (right), relies on the caving process of unsupported rock
under natural gravity. It thus requires an orebody and host rock that is amenable to caving and is mostly
suited to large orebodies such as is commonly the case with porphyry copper deposits. The orebody should
ideally be moderately well-defined and have a continuous horizontal cross-sectional shape spanning the
depth of the deposit.

The block caving method is considered as a low development intensive mining method. Block caving
commences with the development of a singular production level comprising of numerous drawpoints.
Production commences with the development of an undercut across the production horizon of the orebody.
As material is drawn out of the drawpoints, the resulting void initiates further caving to ultimately become a
self-sustaining process. As the cave propagates across and higher into the orebody, the cave zone
increases to eventually breakthrough to the surface resulting in an area affected by subsidence. Material
continues to be drawn from the mine until only waste rock reports to the drawpoints.

While block caving is a low development intensive method, most of the development is carried out before
commencement of production. This generally results in a high initial capital expenditure, which is offset by
a lower operating cost. The method does not tend to allow a great amount of operating flexibility. There are
also often issues with dilution, and uncertainties about cave propagation and the flow of material within the
cave. For scheduling purposes the orebody is divided up into a series of columns which correspond to a
drawpoint directly beneath the column. Each column spans the full height of the orebody. Cave shape and
propagation in part relies on a sequence of drawing specific tonnages from specific drawpoints to allow an
even drawdown of material from each column across the cave footprint. An even drawdown of material
across the cave footprint helps to maintain an appropriate cave profile that is sound from a geotechnical
perspective and allows a greater resource recovery. As such, the method is quite restrictive and inflexible.
It is not very amenable to being able to draw the desired tonnes at a desired grade from whatever drawpoint
may be able to accommodate this at a particular point in time.

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Sublevel Caving
Underground Mining - Figure 2

Figure 2: The sublevel caving method (source: Public Domain)

The sublevel caving method as illustrated in Figure 2 (right) also relies on the caving of unsupported rock
under natural gravity. It can tolerate orebodies that are quite competent but relies on a host rock that is
amenable to caving. It is particularly suited to wide steeply dipping orebodies where the dip of the footwall
exceeds the angle of repose of the broken ore to allow it to freely gravitate to the base of the sublevel for
collection. The orebody should ideally be well-defined.

The sublevel caving method is considered as a moderate development intensive mining method. Drives
into the orebody from the footwall side (known as cross-cuts) at regular vertical intervals (known as
sublevels) are required for the development of each production level along the orebody. Orepasses and a
main production level that channel ore to the crusher are also required. Production is initiated with the
development of a raise slot or winze on the hanging wall end of a cross-cut in the upper most sublevel of
the orebody. This creates an initial void to cater for the subsequent rock expansion that takes place when
initial blasting is carried out. As this material is drawn out, it is replaced by caved waste rock. Further blasting
of fan patterned drill-hole rings in the sublevel continues in stages with material being mucked and tipped
into a nearby orepass. Production continues from each blasted ring on each sublevel until only waste rock
reports to the drawpoint. Only once production on a sublevel has reached a certain distance from the
hanging wall is it safe to commence production on the sublevel below.

Similar to the block caving method, sublevel caving also results in an area affected by subsidence on the
surface. While sublevel caving requires development of the main production level at the crushing and/or
loading horizon to be virtually completed at the commencement of production, much of the actual sublevel
development can be carried out as production moves deeper throughout the mine life. This results in a
mining method requiring a moderate initial capital expenditure with moderate ongoing operating costs. The

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method tends to allow more operating flexibility than block caving but not as much as sublevel stoping.
From a sequence and scheduling point of view, vertical sequencing constraints between sublevels result in
moderate restrictions in being able to draw the desired tonnes at the desired grade.

Sublevel Stoping
Underground Mining - Figure 3

Figure 3: The sublevel stoping method (source: Public Domain)

One of the main differences between sublevel stoping as illustrated in Figure 3 (right) and the other caving
methods is that no caving should be taking place. For this reason, voids that are created as a result of
extraction are required to be backfilled. Once consolidated, these fill masses provide the support and
confinement to mine surrounding stopes. The method generally requires a competent ore and stable host
rock requiring minimal support, and is mostly suited to steeply dipping orebodies where the dip of the
footwall exceeds the angle of repose of the broken ore to allow it to freely gravitate to the base of a stope
for collection at the drawpoints. The orebody itself should ideally be well-defined and regular in shape.

The sublevel stoping method is considered as a high development intensive underground mining method.
Sublevel drives into the orebody at regular vertical intervals are required to develop stopes that occur over
set vertical distances along the orebody. Orepasses and production levels that channel ore to a crusher or
loading area are also commonly required. Production commences with the development of a raise slot or
winze between sublevels to create an initial void to cater for the subsequent rock expansion that takes
place when blasting the stope. The rest of the stope is blasted in stages from fan patterned drill-holes
created on each sublevel. The empty stope is then backfilled with slurry that commonly consists of mill
tailings blended with cement via a pipe network from the surface.

Sublevel stoping requires the least amount of initial development of all the bulk underground mining
methods, with most being carried out as production advances. This therefore results in a lower initial capital
expenditure, which is offset by a higher operating cost. The sublevel stoping method is the most flexible of
the underground methods as it is very amenable to being able to change development path in order to
access other stoping areas to achieve the targeted tonnage at the required grade. However, as will be
illustrated in Part 1: Sublevel Stoping, the need to backfill creates additional scheduling considerations
which add significant complexity to the scheduling process.

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Room and Pillar

Underground Mining - Figure 4

Figure 4: The room and pillar method (source: Public Domain)

The room and pillar mining method as illustrated in Figure 4 (right) is typically used in gently dipping flat
seam deposits as is commonly the case with coal deposits, although some metalliferous operations also
employ the method. As the name suggests, the method involves the development of a series of "rooms"
and "pillars". In the initial phase, pillars serve to hold up the roof. In thicker seams, multiple phases of
extracting the floor may be required to remove the full height of the seam.

In general terms, the method operates through the development of a checkerboard pattern of pillars within
the orebody or seam after a series of main access drives into the seam have been developed. Longer and
wider barrier pillars on both sides of the main access drives protect them from failure potentially propagating
through from the production areas. Upon retreat, pillars may be recovered in a process known as pillar
splitting. As pillars are recovered, the roof collapses to fill the void. This leaves a zone of subsidence on the
surface. Unless a pillar recovery process is used, the disadvantage of room and pillar mining is that lower
resource recovery rates are generally achieved. In coal mining operations, the room and pillar mining
process is carried out by a machine known as a continuous miner. The continuous miner is equipped with
a rotating drum that cuts the coal. Coal is then transported via shuttle car to a breaker feeder before being
conveyed to the surface.

The room and pillar mining method requires far less initial development work than the longwall mining
method in order for production to commence. Development of the mine in this case is essential to how
production is achieved. This results in a lower initial capital expenditure, which is offset by a higher operating
cost compared with longwall mining. The room and pillar mining method however, offers a high degree of
flexibility from a sequence and scheduling point of view.

Longwall Mining

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Underground Mining - Figure 5

Figure 5: The longwall mining method (source: Public Domain)

The longwall mining method as illustrated in Figure 5 (right) is also typically used in gently dipping flat
seams and is mainly limited to coal deposits. The method requires the use of a longwall unit which cuts the
coal from a series of longwall panels or blocks. These panels are developed from a set of drives known as
main drives (or mains). Access to the longwall unit at the production face is via a set of gate roads known
as the main gate (which carries fresh intake air), and the tailgate (which carries the exhaust air after the air
has passed through the longwall production face).

The longwall unit itself consists of a number of main components including a series of chokes that span the
width of the panel. These chokes hold up the roof in order to accommodate the mining process and move
forward as mining advances, leaving the area behind it to cave. This cave also propagates through to the
surface to create an area affected by subsidence. The coal is mined by cutting it from the coal face by a
rotating drum known as the shearer. As the shearer cuts the coal, it falls onto the armoured face conveyor
(AFC) which takes the coal to a breaker feeder before it is conveyed to the surface. Development of mains
and gate roads is generally carried out in the coal itself by a continuous miner.

Between mining out each panel, the entire longwall unit is relocated to the next panel in what is known as
a "longwall move" before production can resume. The longwall mining method requires a far greater amount
of initial development work than the room and pillar method in order for production to commence. The
remaining gate road development and extension of mains can all be carried out as required during the
operating phase of the mine.

The method requires a high initial capital expenditure due to the purchase of the longwall unit and initial
development requirements, which are offset by a lower operating cost compared with room and pillar
mining. From a sequence and scheduling point of view, the longwall mining method does not allow a great
amount of operating flexibility (and thus, scheduling flexibility) as the sequence of panels to be mined is
virtually set from the outset. Panel orientation is usually dictated by principle stress direction and ground
conditions.

Sublevel Stopping
Overview
As mentioned in Part 1: Underground Mining, the sublevel stoping method is arguably one of the most
complex from a sequencing and scheduling perspective. This is mainly brought about by the need to

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backfill. With this in mind, consider the 16 stope (A–P) sublevel stoping operation as shown in Figure 1
below.

Sublevel Stoping - Figure 1

Figure 1: 16 stope sublevel stoping operation (source: Nehring and Shafiee (2016))
As shown, all major infrastructure (such as decline) are placed in the footwall side of the orebody. The
reason for this is to prevent any potential failure in the production area propagating through to surrounding
infrastructure. If placed in the hanging wall side of the orebody, infrastructure would be at risk if a failure
occurred in the stoping area. The dip of the orebody exceeds the angle of repose of the broken ore to allow
it to freely gravitate to the base of the stope for collection at the drawpoints. A closer and more detailed
examination of the extensive development required to bring each stope into production (as described
earlier) is provided in Figure 2 below.

Sublevel Stoping - Figure 2

Figure 2: Stope development (source: Nehring and Shafiee (2016))

Sequencing constraints
The first of the three main sequencing constraints associated with the sublevel stoping method is known as
the continuous production constraint. This constraint demands that once production commences on a
stope, it should be rapidly drawn down and backfilled. This is to reduce the risk of stope failure, which if

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severe enough, could potentially propagate through to surrounding stopes and infrastructure. Rapid stope
drawdown also recoups the financial outlay that went into bringing the stope into production as quickly as
possible. An example of this constraint in practice—if stope B from Figure 1 was in production, then ore
drawdown would continue until all ore has been fully exhausted. There would be no possibility of ceasing
production on stope B half-way through the drawdown phase to then start drawing ore from another stope
simply because it may contain a better quality ore, if it means stope B is left sitting idle.

The second main sequencing constraint is known as the non-concurrent adjacent stope production
constraint. This constraint ensures that all simultaneous adjacent stope production is avoided for the
purpose of preventing excessively large unsupported voids from forming. Once again, this increases the
risk of failure. As an example, if stope F in Figure 1 is selected for production then stopes A, B, C, E, G, J,
K and L cannot enter production until stope F is backfilled and fully consolidated. Depending on the
operation and the stope layout, stope corner contacts—which in this case include stopes A, C, J and L—
may be exempt from the non-concurrent adjacent stope production constraint if stope F is selected for
production.

The third sequencing constraint is referred to as the single fill mass exposure and double stope
exposure constraint. This ensures that prior to production commencing on a stope (while it is still a solid
rock mass), adjacent stope production must not expose more than two sides of the rock mass. Once a
stope ceases production and becomes a fill mass however, adjacent stope production must not expose
more than a single side of the fill mass. This is also to prevent excessive risk of failure. While the fill mass
is good at providing confinement of a rock mass, it is generally weak and does not transfer stresses very
well. For this reason, it must be protected by not overly exposing it. As an example, production may only
take place from one of E, F, G, J, L, N, O or P at any one time after stope K becomes a fill mass. While
stope K is still a solid rock mass, production may take place from any two adjacent stopes while still
maintaining compliance with all other sequencing constraints.

Stress shadowing sequence

Sublevel Stoping - Figure 3

Figure 3: The stress shadowing sequence (source: Nehring and Shafiee (2016))
In some cases, the presence of severe stresses calls for the implementation of very specific sequencing
regimes. The stress shadowing sequence illustrated in Figure 3 (right) is one such sequence.

The stress shadowing sequence involves the extraction of an initial slot perpendicular to the main principle
stress as a common approach to mitigating the effects of stresses in surrounding stopes, especially in larger
orebodies. All preceding stopes are sequenced around this slot with retreat toward the outer limits of the
orebody. After extraction of the slot, remaining stopes on either side of the central slot are partly shadowed
from the main principle stress. For the example illustrated in Figure 3, principle stresses run horizontally
(left-right or right-left direction) through the 12 stopes. The 4 stopes through the middle of this orebody are
mined to form a central slot (which runs perpendicular to the principle stress direction). Once the central

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slot has been completed, stresses are forced to redistribute around it leaving the remaining stopes in a
reduced stress environment. Production can then take place in the remaining stopes without the
geotechnical issues that would otherwise be prevalent.

It is apparent that the numerous sequencing constraints inherent to the sublevel stoping method make it
one of the most complex to schedule in underground mining. The ongoing interactions that a fill mass
continues to have on adjacent stopes means that it does not simply leave the data set and become obsolete
once the backfill has consolidated. This is now demonstrated in the following section.

Case Study
Assume that the parameters contained in Table 1 (below) apply to the same 16 stope sublevel stoping
copper (Cu) operation shown previously in Figure 1 (above). Stope extraction in this case is modelled
according to Figure 4 (below, right), whereby it takes six months to extract all 150,000t of ore at a rate of
25,000t of ore per month at the grade shown in Table 1. This is then followed by a three-month backfilling
and consolidation period, whereby backfill is placed into the stope during the first month with the remaining
two months available for the stope to dry and consolidate.
Table 1: Parameters for 16 stope sublevel stoping operation

Stope Ore (t) Grade (% Cu) Extraction Cost ($/t) Backfill Cost ($)

A 150,000 2.1 12 3,600,000

B 150,000 1.9 14 3,200,000

C 150,000 2.0 14 3,500,000

D 150,000 1.9 15 3,600,000

E 150,000 2.4 10 3,500,000

F 150,000 1.8 11 3,600,000

G 150,000 2.2 9 3,100,000

H 150,000 1.5 15 3,800,000

I 150,000 2.1 13 3,700,000

J 150,000 2.1 9 3,300,000

K 150,000 2.5 8 4,000,000

L 150,000 1.8 13 3,600,000

M 150,000 2.2 16 4,100,000

N 150,000 1.9 12 3,700,000

O 150,000 1.6 10 3,900,000

P 150,000 2.0 11 3,400,000

Table 1: Parameters for 16 stope sublevel stoping operation Source: Nehring and Shafiee (2016)

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Sublevel Stoping - Figure 4

Figure 4: Stope production (source: Nehring and Shafiee (2016))

All preproduction activities have been completed to thus enable each stope to enter production from the
first period. A shaft haulage capacity of 50,000t per month allows a maximum of two stopes to be in the ore
extraction phase of production per month. A recovery of 90% Cu is achieved and a discount rate of 10%pa
(discounted monthly) applies. This evaluation is to be based on a copper price of $5,000/t Cu. The task in
this case is to develop a monthly production schedule over a two-year (24-month) horizon with the objective
of maximizing NPV while complying with the three main sequencing constraints inherent to the sublevel
stoping method discussed earlier.

If production scheduling was to be carried out manually (without the aid of software), this process would be
conducted by selecting the next available highest cash flow stope. With this in mind, the undiscounted cash
flows associated with each stope are presented in Table 2 (below).

Table 2: Stope cash flows (undiscounted)

Cash Flow
Stope Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Rank
($)

A 2,062,500 2,062,500 2,062,500 2,062,500 2,062,500 2,062,500 -3,600,000 0 0 8,775,000 5

B 1,787,500 1,787,500 1,787,500 1,787,500 1,787,500 1,787,500 -3,200,000 0 0 7,525,000 10

C 1,900,000 1,900,000 1,900,000 1,900,000 1,900,000 1,900,000 -3,500,000 0 0 7,900,000 9

D 1,762,500 1,762,500 1,762,500 1,762,500 1,762,500 1,762,500 -3,600,000 0 0 6,975,000 12

E 2,450,000 2,450,000 2,450,000 2,450,000 2,450,000 2,450,000 -3,500,000 0 0 11,200,000 2

F 1,750,000 1,750,000 1,750,000 1,750,000 1,750,000 1,750,000 -3,600,000 0 0 6,900,000 13

G 2,137,500 2,137,500 2,137,500 2,137,500 2,137,500 2,137,500 -3,100,000 0 0 9,725,000 3

H 1,425,000 1,425,000 1,425,000 1,425,000 1,425,000 1,425,000 -3,800,000 0 0 4,750,000 16

I 2,037,500 2,037,500 2,037,500 2,037,500 2,037,500 2,037,500 -3,700,000 0 0 8,525,000 6

J 2,137,500 2,137,500 2,137,500 2,137,500 2,137,500 2,137,500 -3,300,000 0 0 9,525,000 4

K 2,612,500 2,612,500 2,612,500 2,612,500 2,612,500 2,612,500 -4,000,000 0 0 11,675,000 1

L 1,700,000 1,700,000 1,700,000 1,700,000 1,700,000 1,700,000 -3,600,000 0 0 6,600,000 14

M 2,075,000 2,075,000 2,075,000 2,075,000 2,075,000 2,075,000 -4,100,000 0 0 8,350,000 8

N 1,837,500 1,837,500 1,837,500 1,837,500 1,837,500 1,837,500 -3,700,000 0 0 7,325,000 11

O 1,550,000 1,550,000 1,550,000 1,550,000 1,550,000 1,550,000 -3,900,000 0 0 5,400,000 15

P 1,975,000 1,975,000 1,975,000 1,975,000 1,975,000 1,975,000 -3,400,000 0 0 8,450,000 7

Table 2: Stope cash flows (undiscounted) Source: Nehring and Shafiee (2016)

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Sublevel Stoping - Figure 5

Figure 5: Cash flow rank of each stope with respect to location (source: Nehring and Shafiee (2016))
As shown, stope K has the highest undiscounted cash flow with $11,675,000. This is followed by stopes E,
G, J and so on, until the stope (stope I) with the lowest cash flow is reached with $4,750,000. Figure 5
(right) clearly summarizes the cash flow rank of each stope together with its plan view location within the
16 stope operation. Since stope K is the highest cash flow stope, it will be selected to commence production
in month one. The shaft haulage capacity of the operations allows one additional stope to also be in
production at the same time. Even though stope E is the next highest cash flow, due to its proximity to stope
K, it is unavailable for production for the next nine months while stope K is in production. The only stopes
that are available for selection at this point in order to maintain compliance to the sequencing conditions
are stopes A, B, C, D and I. The highest cash flow from these is stope A. As such, stope A will join stope K
to enter production in month one. When stopes K and A cease extraction at the end of month six, other
stopes may be selected for production to continue ore supply. However, the backfilling and consolidation
of stopes K and A still require the appropriate sequencing conditions to be met. As such, stopes C, H, I and
M are the only stopes available to commence production in month seven. Since stopes I and M have the
highest cash flow, they are selected. This process continues to ultimately generate the production schedule
displayed in Figure 6 below.
Sublevel Stoping - Figure 6

Figure 6: Production schedule based on selecting the next available highest cash flow stope (source: Nehring and Shafiee (2016))
Summing the discounted cash flows generated by this production schedule produces an NPV of
$61,911,930. Unfortunately due to the sequencing constraints associated with sublevel stoping, the
approach of simply selecting the next highest available cash flow stope will not always provide the optimal
production schedule. The optimal production schedule is actually displayed in Figure 7 (below) which
generates an NPV of $65,287,081.

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Sublevel Stoping - Figure 7

Figure 7: Production schedule generated using mixed integer programming approach (source: Nehring and Shafiee (2016))
This production schedule was generated by modelling the sequencing constraints in mathematical form
and solving this with a commercially available solver. A $3,375,151 improvement in NPV is obtained from
the optimized schedule over the first pass manual schedule representing a 5.45% improvement in NPV.
While stope K is the highest cash flow stope, it does not enter the optimal schedule until month ten. The
mathematical model recognizes that stope K's position in amongst other stopes would result in these stopes
not being available due to sequencing constraints. While this is only a small example and the optimal
schedule may well have been found manually by investigating all possible scenarios, any further increase
in the size of the problem (stopes, time periods, constraints) exponentially increases its complexity. There
is little guarantee that a manual approach would yield the optimal result. Mathematical programming is
recognized as being able to model and solve complex problems and thus, aid the underground production
scheduling decision-making process. Mathematical programming will be addressed in greater detail in the
Mine Planning 3 – Optimization course.

You have covered the following points in Part 1: Sequence and Scheduling.

 introduction to mine planning—operations

 transition point investigation: open pit vs underground
 changes in market conditions
 underground mining
 sublevel stoping

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Part 2: Cut-Off Grade Policy

Breakeven Cut-Off Grade

You will cover the following points in Part 2: Cut-Off Grade Policy.

 breakeven cut-off grade

 Lane's cut-off grade model

 economic balancing and cut-off grades

 cut-off grade investigation

Introduction

Cut-off grade policy is the fifth key lever for creating value as part of the strategic mine planning process. Like
all other levers, it should be evaluated simultaneously together with mining method selection, process route
selection, scale of operation, and sequence and scheduling. Cut-off grade essentially defines the point between
ore and waste. The decision whether to send material to the waste dump, to treat it in the process plant, or
perhaps even place it on a stockpile for later processing is one which is very important in planning a mining
operation. Unfortunately, an incorrect understanding of cut-off grade often results in the wrong cut-off grade
policy being applied, resulting in a significant reduction in the value of an operation.

Grade-Tonnage Distributions

Table 1: Tabulated grade-tonnage distribution for a pushback of a typical copper operation

Cut-Off Grade (% Cu) Average Grade (% Cu) Tonnes (t) Above Cut-Off Metal Tonnes (Cu)

0.00 0.32 30,800,000 98,560.0

0.10 0.65 12,780,000 83,070.0

0.20 0.78 10,080,000 78,624.0

0.30 0.86 8,780,000 75,508.0

0.40 0.94 7,630,000 71,722.0

0.50 1.04 6,430,000 66,872.0

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0.60 1.11 5,600,000 62,160.0

0.70 1.21 4,620,000 55,902.0

0.80 1.32 3,670,000 48,444.0

0.90 1.38 3,250,000 44,850.0

1.00 1.47 2,700,000 39,690.0

1.10 1.56 2,240,000 34,944.0

1.20 1.70 1,670,000 28,390.0

1.30 1.81 1,350,000 24,435.0

1.40 1.92 1,080,000 20,736.0

1.50 1.99 950,000 18,905.0

1.60 2.11 745,000 15,719.5

1.70 2.24 575,000 12,880.0

1.80 2.41 425,000 10,242.5

1.90 2.51 365,000 9,161.5

2.00 2.65 290,000 7,685.0

2.10 2.78 240,000 6,672.0

2.20 2.87 210,000 6,027.0

2.30 2.97 180,000 5,346.0

2.40 3.07 155,000 4,758.5

2.50 3.13 140,000 4,382.0

Source: Nehring and Shafiee (2016)

Table 1: Tabulated grade-tonnage distribution for a pushback of a typical copper operation

It is important to firstly understand the relationship between the tonnage contained within a deposit or
pushback, the cut-off grade, and the average grade. Table 1 (right) and Figure 1 (below) contain the tabulated
and graphical version of a grade-tonnage distribution for a pushback of a typical copper operation.

Breakeven Cut-Off Grade - Figure 1

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Figure 1: Graphical grade-tonnage distribution for a pushback of a typical copper operation (source: Nehring
and Shafiee (2016))

As shown, this pushback contains a total of 30,800,000t of material that is to be extracted. At a cut-off grade of
0.00% Cu (meaning that everything is viewed as ore and is thus sent to the plant for processing), this material
contains an average grade of 0.32% Cu for a total of 98,560.0 tonnes of copper metal. If the cut-off grade is
raised from 0.00% Cu to 0.10% Cu, the tonnage of material at or above cut-off significantly reduces from
30,800,000t to 12,780,000t, resulting in 18,020,000 tonnes of waste (30,800,000t – 12,780,000t). The average
copper grade increases from 0.32% Cu to 0.65% Cu and the total contained copper metal reduces from
98,560.0t to 83,070.0t. As the cut-off grade is incrementally raised, the tonnage of material above cut-off
reduces while the average copper grade continues to increase. While each and every deposit is different and
will contain different grade-tonnage profiles, the overall tonnage of material above cut-off as cut-off is raised
will always trend lower.

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Breakeven Cut-Off Grade

Breakeven Cut-Off Grade - Figure 2

Figure 2: Final 3 pushbacks of a gold operation with related data (source: Nehring and Shafiee (2016))

By way of example, consider the conceptual gold operation illustrated in Figure 2 (right) with accompanying
data related to the red-coloured block. The final 3 pushbacks to be extracted before the ultimate pit limit is
reached are clearly shown.

Considering the red-coloured block, the question that the operation needs to address is: should this block be
sent to the waste dump as waste, or, should this block be sent to the processing plant as ore?

Some may answer this question by calculating whether the revenue obtained from selling the gold contained
within it is greater than or equal to the cost of mining and processing it. If the answer is yes, then they would
claim that it should be viewed as ore and sent to the processing plant. If the answer is no, then it should be
viewed as waste and sent to the waste dump. This may seem reasonable at first.

In carrying out these calculations, the value of gold contained within the block is $12,880 as follows:

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1,000t × 0.4g/t Au × 92% × $35/g = $12,880

The cost to mine and process the block in order to obtain the gold is -$16,500 as follows:

(1,000t × -$5.0/t) + (1,000t × -$11.5/t) = -$16,500

The result is a difference of -$3,620, which therefore indicates that the block should be viewed as waste and
sent to the waste dump.

The problem with this calculation however, is that it includes the mining cost. Since the block is contained
within the ultimate pit limit, it has to be mined regardless of whether it is waste or ore. Since whether or not
the block will be mined is a foregone conclusion, the issue now becomes whether the cost of processing the
block in order to obtain the gold within it outweighs the revenue obtained from selling this gold. The cost to
process the block in order to obtain the gold is -$11,500 as follows:

(1,000t × -$11.5/t) = -$11,500

The result now is a difference of +$1,380, which therefore indicates that the block should in fact be viewed as
ore and sent to the processing plant.

While the mining cost is not included in the calculation to determine if the block should be viewed as ore or
waste, the actual process of determining the ultimate pit limit fully takes into consideration the mining cost.
The process of determining the ultimate pit limit has been extensively addressed in Part 1: Transition Point
Investigation: Open Pit vs Underground. To include the mining cost in the above calculation would be mean it
is being accounted for twice.

Since it has now been determined that any block with a grade of 0.4g/t Au, regardless of its location within the
ultimate pit, will be considered ore, the next question becomes: what is the cut-off grade for ore to the process
plant for this operation? In other words, what is the gold grade whereby the revenue obtained from selling the
gold is greater than or equal to the cost of processing it? This is often referred to as the breakeven cut-off grade
and may be calculated using the following equation:

Applying the formula to the gold operation results in a breakeven cut-off grade of 0.357g/t Au as follows:

This indicates that any block with a gold grade greater than 0.357g/t Au within the ultimate pit should be
viewed as ore and sent to the process plant.

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It is apparent that an operation that varies its throughput rate, and thus varies the recoveries that are achieved
for each rate, will have a different cut-off grade for each throughput/recovery scenario. Consider the example
of a typical porphyry copper operation which may contain oxide, transition, and sulphide ore types. The
recoveries for each ore type will typically vary between process routes (a floatation circuit versus a leach
circuit). In addition to this, the throughput rate (low, intermediate, rapid) that is used for a given plant size will
also significantly impact recovery rates. The recoveries that may be achieved for a floatation circuit for each
ore type across a number of throughput rates are displayed in Table 2 below. The reason for the variation in
recoveries at each throughput rate is due to the time spent grinding and liberating the mineral from its host
rock. A higher throughput rate at the process plant will mean less time is spent crushing and grinding, which
will result in a reduced liberation of the valuable mineral before separation occurs. Because a large component
of plant costs are fixed, increasing the throughput will generally lower the processing cost per unit of material
($/t). A lower throughput rate on the other hand will mean more time is spent crushing and grinding, which
will result in an increased liberation of the valuable mineral before separation occurs. Reducing process plant
throughput will generally increase the processing cost per unit of material ($/t).

Table 2: Floatation circuit recoveries for each ore type for each throughput rate

Ore Types
Throughput Rates
Oxide Transition Sulphide

Low 37% 72% 96%

Intermediate 27% 47% 68%

Rapid 13% 28% 40%

Source: Nehring and Shafiee (2016)

Table 2: Floatation circuit recoveries for each ore type for each throughput rate

Assuming a copper price of $5,000/t and processing costs of $11.50/t, $8.90/t and $6.30/t for low,
intermediate and rapid throughputs respectively, the breakeven cut-off grade to the process plant for each
scenario can be calculated. The results of this are contained in Table 3 below.

Table 3: Floatation circuit breakeven cut-offs for each ore type for each throughput rate

Ore Types
Throughput Rates
Oxide Transition Sulphide

Low 0.622% Cu 0.319% Cu 0.240% Cu

Intermediate 0.659% Cu 0.379% Cu 0.262% Cu

Rapid 0.969% Cu 0.450% Cu 0.315% Cu

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Source: Nehring and Shafiee (2016)

Table 3: Floatation circuit breakeven cut-offs for each ore type for each throughput rate

The key point to keep in mind is that mining cost should never be included in open pit cut-off grade calculations.
While the breakeven cut-off grade formula may provide a good starting point for distinguishing between ore
and waste, it does not take into consideration the installed capacity of mining, processing, or refining
facilities—nor does it consider any opportunity cost. Lane's comprehensive cut-off grade model which does
consider capacities and opportunity cost, as well as the specific grade-tonnage characteristics of an orebody
will be introduced in Part 2: Lane's Cut-Off Grade Model.

Lane's Cut-Off Grade Model

Introduction to Lane's Cut-Off Grade Model

This model was developed in the early 1960s by Ken Lane, a mathematician who made his professional career
in the Rio Tinto Group. At the time, the model was initially used in various mines owned by Rio Tinto including:
Rio Algom's mines in Elliot Lake (Canada), Palabora Mine (South Africa) and Bougainville Mine (Papua New
Guinea).

Lane's Cut-Off Grade Model - Figure 1

Figure 1: Stages of extraction and processing considered as part of Lane’s model (source: recreated from
Camus (2002))

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The model considers costs, quantities and capacities of the three main phases of extraction and processing as
illustrated in Figure 1 (right). This includes the mining phase, concentrating phase and finally the refining
phase. The costs, quantities and capacities of each of these are ultimately used to determine the appropriate
cut-off in separating waste from ore during the mining phase. It should be noted that two additional separations
may also occur as part of the overall extraction process. The first of these is the separation at the concentrating
phase between concentrates and tailings. The second separation occurs at the refining phase to produce a final
product or a slag. While these separation processes are also important, the cut-offs (e.g. passing size) associated
with these are not integrated into this model. The purpose of this session is to introduce the notation used as
part of this model - please don’t be overwhelmed by the mathematics presented. The fundamental purpose of
this session is to introduce the cut-off grade formulations and how they are used rather than the process of
deriving them. Those that would like to delve further into Lane’s model and how each cut-off grade has been
derived should consult the References for this course.

The model contains numerous input costs, capacities and quantities as follows.

 M: Mine capacity per period (t of material)

 C: Plant capacity per period (t of ore)

 R: Refinery capacity per period (t of product)

 Qm: Quantity of run-of-mine material (t of material)

 Qc: Quantity of ore (t of ore)

 Qr: Quantity of final product (t of product) = Qc × g × y

 T: Time to mine, process or refine Qm

 P: Profit

 d: Annual discount rate

 m: Mining costs ($/t of material)

 c: Concentrating costs ($/t of ore)

 r: Refining and marketing costs ($/t of product)

 f: Fixed costs, per period ($/period)

 s: Selling price ($/t of final product)

 g: Average grade of ore

 y: Overall metallurgical recovery

The profit for Qm in general can be calculated using the following equation:

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Since Qr = Qc × g × y, the equation above can be restructured to:

Profit from Qm is related to the present value of the segment/pushback (v) as illustrated in Figure 2 below.

Lane's Cut-Off Grade Model - Figure 2

Figure 2: Profit from Qm and present value, V (source: Nehring and Shafiee (2016))

As shown, V is the present value of the whole resource before Qm has been extracted. W is then the remaining
present value after mining segment Qm. The tonnage Qc is the amount of Qm that is above a certain cut-off grade
(viewed as ore) and is thus sent to the processing plant.

The present value (V) is calculated by discounting each cash flow as illustrated in Figure 3 below.

Lane's Cut-Off Grade Model - Figure 3

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Figure 3: Present value calculation (source: Nehring and Shafiee (2016))

The present value (V) is thus shown in the following equation:

Similar to Part 1: Mining Economics Principles, as addressed in the Mine Planning 1 – Strategy course, the
relationship between v (value of segment Qm), V (present value), W (remaining present value) and P (profit) is
required in deriving appropriate cut-off grade equations.

If time (T) is small, say ~1 year, then the following equation will apply:

Placing this into the previous equation will result in:

This can be re-arranged resulting in:

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Further re-arranging will result in:

v is the contribution that the segment Qm makes to the present value of the business. As such, v is the variable
to maximize when choosing the optimum cut-off grade.

Placing the first equation (present value) into the previous equation will form:

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Lane's Economic and Balancing Cut-Off Grades

Economic Cut-Off Grades

The optimum present value (V) on the right hand side of the equation below is unknown until the cut-off grade
policy is optimized. This "chicken and egg problem" is solved by iterations, using an arbitrary value of V in the
first iteration and continuing until V converges. In the equation below (subsequently referred to in this session
as the first equation), time (T) depends on the stage (mining, processing, refining) that limits the pace at which
ore is mined; that is, the quantities Qm, Qc and Qr and their respective capacities M, C or R. This leads to three
economic cut-off grades as follows.

Cut-off grade 1: When the mine imposes a limit (M)

In this case:

Replacing this expression into the first equation results in:

The maximum value for vm will occur at:

As Qm is given, g only affects Qc and Qr. Then g must be chosen to make (s − r) × Qc − c × Qc as large as possible.

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Therefore, the cut-off grade when the mine imposes a limit is given by the following equation:

Cut-off grade 2: When the plant imposes a limit (C)

In this case:

Replacing this expression into the first equation results in:

The maximum value for vc will occur at:

In the same way as Qm, g must be chosen to maximize:

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Therefore, the cut-off grade when the plant imposes a limit is given by the following equation:

Cut-off grade 3: When the refinery imposes a limit (R)

In this case,

Replacing this expression into the first equation results in:

The maximum value for vr will occur at:

In the same way as Qm, g must be chosen to maximize:

Therefore, the cut-off grade when the plant imposes a limit is given by the following equation:

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Balancing Cut-Off Grades

In some cases the operation may be limited by two or even three stages simultaneously. If this is the case, three
balancing cut-off grades may be introduced into the analysis. These are:

 gmc: mine concentrator;

 gmr: mine refinery; and

 gcr: refinery concentrator.

Example: Mine concentrator balancing cut-off grade

Consider the example of an operation consisting of a mine and plant/concentrator with the following
parameters:

 mine capacity: 650,000t/d;

 plant capacity: 150,000t/d;

 gm: 0.25% Cu; and

 gc: 0.65% Cu.

Table 1: Possible throughputs

Cut-Off Mine Mill Grade

(% Cu) (t/d) (t/d) (% Cu)

0.25 450,000 150,000 0.9

0.50 650,000 150,000 1.2

0.65 650,000 120,000 1.3

Source: Nehring and Shafiee (2016)

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Table 1: Possible throughputs

Table 1 (right) lists possible throughputs for this operation. As shown, at the lowest cut-off grade of 0.25% Cu,
the mine only needs to achieve a production rate of 450,000t/d in order to feed the process plant at its capacity
of 150,000t/d. While the process plant is operating at full utilization, the mining operation is producing
200,000t/d less than its capacity. The average grade of material being processed under this scenario is 0.9%
Cu; while the mill achieves full utilization, the mine does not.

At the highest cut-off grade of 0.65% Cu, the mine is operating at its full capacity of 650,000t/d. However, the
feed to the process plant under this scenario falls short of the plant's capacity of 150,000t/d by 30,000t/d. The
average grade of material being processed under this scenario is 1.3% Cu; while the mine achieves full
utilization, the mill does not.

It is only at the cut-off grade of 0.5% Cu that both the mining and processing operations utilize full capacities
of 650,000t/d and 150,000t/d respectively. The average grade of material being processed under this scenario
is 1.2% Cu gmc and fully utilizes mine and plant capacities; that is, maximum stripping ratio at the mine and
throughput at the plant. Plotting the value v for each grade will typically result in the graph shown in Figure 1
below.

Lane's Economic and Balancing Cut-Off Grades - Figure 1

Figure 1: Plot of v against grade (source: Nehring and Shafiee (2016))

As shown in Figure 1 (above), the maximum value is achieved at the 0.5% Cu balancing cut-off grade.

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Optimum cut-off grade

In summary, Lane's model considers six cut-off grades.

 three economic cut-off grades

 gm

 gc

 gr

 three balancing cut-off grades

 gmc

 gmr

 gcr

The economic cut-off grades depend on economic factors and capacities, whereas the balancing cut-off grades
are determined by the grade distribution that can vary widely throughout irregular ore bodies. It is important
to note that none of these consider mining costs. The overall optimum cut-off grade is one of the six cut-off
grades listed above. To assess which one of these cut-off grades is the optimum, it is best to consider each pair
of stages. This will be carried out by analyzing the plots of the value functions v of each pair.

Mine concentrator

The value v for the mine and the concentrator are calculated using the following equations:

Plotting these functions will produce the graphs shown in Figures 2, 3 and 4 respectively (below).

Lane's Economic and Balancing Cut-Off Grades - Figure 2

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Figure 2: Mine concentrator balancing cut-off grade (gmc) where gmc = gmc (source: Nehring and Shafiee
(2016))

Lane's Economic and Balancing Cut-Off Grades - Figure 3

Figure 3: Mine concentrator balancing cut-off grade (gmc) where gmc = gm (source: Nehring and Shafiee
(2016))

Lane's Economic and Balancing Cut-Off Grades - Figure 4

Figure 4: Mine concentrator balancing cut-off grade (gmc) where gmc = gc (source: Nehring and Shafiee
(2016))

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As shown in Figures 2, 3 and 4, the balancing cut-off grade gmc will always be the middle value of gm, gc and gmc
within the graph formed by the overlapping value functions v. In Figure 2, gmc happens to be the middle value
anyway, while in Figures 3 and 4, gmc will assume the middle values which occur at gm and gc respectively.
Considering the other pairs of stages in a similar way, it is possible to obtain gmr and gcr. The overall optimum
cut-off grade is therefore the middle value of gmc, gmr and gcr as shown in the equation below and Figure 5
(below).

Lane's Economic and Balancing Cut-Off Grades - Figure 5

Figure 5: Optimal cut-off grade (source: Nehring and Shafiee (2016))

The optimal cut-off grade as shown in Figure 5 thus occurs at gmc.

Cut-Off Grade Investigation

Activity: Cut-Off Grade Investigation

Table 1: Gold deposit grade-tonnage distribution

Grade Interval Tonnes

(g/t Au) (t)

0.0–0.1 100

0.1–0.2 100

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0.2–0.3 100

0.3–0.4 100

0.4–0.5 100

0.5–0.6 100

0.6–0.7 100

0.7–0.8 100

0.8–0.9 100

0.9–1.0 100

1,000

Source: Nehring and Shafiee (2016)

Table 1: Gold deposit grade-tonnage distribution

The purpose of this section is to use the formulas introduced previously in a practical application. Consider a
gold deposit with the following parameters and whose grade-tonnage distribution is shown in Table 1 (right)
and Figure 1 (below).

 mine capacity (M): 100tpa

 concentrator/mill capacity (C): 50tpa

 refinery capacity (R): 40g Au pa

 mining cost (m): $1/t

 concentrating cost (c): $2/t

 refining cost (r): $5/g

 fixed cost (f): $300pa

 selling price (s): $25/g

 overall recovery (y): 100%

 annual discount rate (d): 15%

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Cut-Off Grade Investigation - Figure 1

Figure 1: Gold deposit grade-tonnage distribution (source: Nehring and Shafiee (2016))

For the purposes of this exercise and to maintain simplicity, the gold deposit has an even gold distribution. The
objective in this case is to determine the optimal cut-off grade (g/t Au) that provides a suitable starting point
from which to commence iterations toward determining the optimal life of mine cut-off grade policy.

The first step in this process is to turn the grade-tonnage data provided in Table 1 into a useful set of numbers.
Some extrapolation of this data is thus required in order to obtain the information contained in Table 2, below.

Table 2: Grade-tonnage distribution with average grades and metal

Grade Interval Average Grade Tonnes Metal

(g/t Au) (g/t Au) (t) (g)

0.0–0.1 0.05 100 5

0.1–0.2 0.15 100 15

0.2–0.3 0.25 100 25

0.3–0.4 0.35 100 35

0.4–0.5 0.45 100 45

0.5–0.6 0.55 100 55

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0.6–0.7 0.65 100 65

0.7–0.8 0.75 100 75

0.8–0.9 0.85 100 85

0.9–1.0 0.95 100 95

500

Source: Nehring and Shafiee (2016)

Table 2: Grade-tonnage distribution with average grades and metal

As shown in Table 2 above, this deposit contains a total of 500 grams of gold metal which is calculated by
summing the metal contained at each grade interval. This grade interval data is further re-worked to determine
the mine, mill, and refining quantities at each separate cut-off grade (g/t Au), as shown in Table 3, below.

Table 3: Mine, mill and refining quantities at each cut-off grade (g/t Au)

Cut-Off Grade Mine Mill Refine Average Grade

(g/t Au) (t) (t) (g) (g/t Au)

0.0 1,000 1,000 500 0.50

0.1 1,000 900 495 0.55

0.2 1,000 800 480 0.60

0.3 1,000 700 455 0.65

0.4 1,000 600 420 0.70

0.5 1,000 500 375 0.75

0.6 1,000 400 320 0.80

0.7 1,000 300 255 0.85

0.8 1,000 200 180 0.90

0.9 1,000 100 95 0.95

Source: Nehring and Shafiee (2016)

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Table 3: Mine, mill and refining quantities at each cut-off grade (g/t Au)

At each grade interval, a total of 1,000t of material needs to be mined as shown in column 2 of Table 3. This is
determined by summing the quantity of material contained within each grade interval. At a cut-off grade of
0.0g/t Au, all mined material is sent to the mill for processing. Column 3 of Table 3 lists the amount of material
to be processed at each cut-off grade. As expected, the amount of material sent for processing reduces by 100t
at each incremental increase in cut-off grade. This is due to the uniform grade distribution of the deposit. The
fourth column of Table 3 lists the total metal content at each cut-off grade. At a cut-off grade of 0.0g/t Au, all
500g of gold will be recovered. As cut-off grade is increased to 0.1g/t Au, the 5 grams of gold that is contained
between 0.0g/t Au and 0.1g/t Au as shown in the fourth column of Table 2 is no longer recovered and is thus
subtracted from the 500 grams of gold. This process is repeated in determining the amount of gold at each
subsequent incremental increase in cut-off grade as shown in column 4 of Table 3.

One of the first steps in this process is to determine the balancing cut-off grades. To aid this process, the ratios
associated with each scenario (M/C, M/R and C/R) may be determined as shown in Table 4, below. The M/C
ratio (column 6 of Table 4) is calculated by simply dividing the amount of material to be mined (at 0.0g/t Au:
1,000t) by the amount of material sent to the mill/concentrator for processing (at 0.0g/t Au: 1,000t) at each
cut-off grade (at cut-off grade of 0.0g/t Au: 1,000t/1,000t = 1.0). Likewise the M/R ratio (column 7 of Table 4)
is calculated by dividing the amount of material to be mined (at 0.0g/t Au: 1,000t) by the amount of gold
produced after refining (at 0.0g/t Au: 500g) at each cut-off grade (at cut-off grade of 0.0g/t Au: 1,000t/500g =
2.0). Finally, the C/R ratio (column 8 of Table 4) is calculated by dividing the amount of material sent to the
mill/concentrator for processing (at 0.0g/t Au: 1,000t) by the amount of gold produced after refining (at 0.0g/t
Au: 500g) at each cut-off grade (at cut-off grade of 0.0g/t Au: 1,000t/500g = 2.0).

Table 4: Ratios (M/C, M/R and C/R)

Cut-Off Mine Mill Grade Refine Ratios

(g/t Au) (t) (t) (g/t Au) (g) M/C M/R C/R

0.0 1,000 1,000 0.50 500 1.00 2.00 2.00

0.1 1,000 900 0.55 495 1.11 2.02 1.82

0.2 1,000 800 0.60 480 1.25 2.08 1.67

0.3 1,000 700 0.65 455 1.43 2.20 1.54

0.4 1,000 600 0.70 420 1.67 2.38 1.43

0.5 1,000 500 0.75 375 2.00 2.67 1.33

0.6 1,000 400 0.80 320 2.50 3.13 1.25

0.7 1,000 300 0.85 255 3.33 3.92 1.18

0.8 1,000 200 0.90 180 5.00 5.56 1.11

0.9 1,000 100 0.95 95 10.00 10.53 1.05

Source: Nehring and Shafiee (2016)

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Table 4: Ratios (M/C, M/R and C/R)

An evaluation of the mine and plant capacities of 100t and 50t respectively finds that the operation has an M/C
ratio of 100/50 = 2.00. The cut-off grade that corresponds to an M/C ratio of 2 provides a balancing cut-off
grade of gmc = 0.50g/t Au. This process is repeated to find the balancing cut-offs for each pair of stages as follows:

As mentioned previously, calculation of the economic cut-off grades requires an overall value V for the deposit.
Since no value has been determined yet, we will initially use a value of V = 0. The initial economic cut-off grades
are thus calculated as follows:

The balancing cut-off grades can therefore be summarized as follows:

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This gives rise to the optimal cut-off grade:

With the newly determined cut-off grade of 0.40g/t Au, an intermediate mine plan may be developed for the
purpose of calculating its value V. This firstly requires annual mining, concentrating and refining rates to be
calculated. The life of an operation according to each capacity restriction may be calculated as follows:

The limiting process is therefore the concentrator/mill since it requires the longest life of 12 years to process
all material. The mill will thus be fully utilized at 50tpa over the 12-year mine life. The annual mining and
refining rates are thus determined as follows:

With these rates, an intermediate mine plan can be developed as contained in Table 5, below.

Table 5: Intermediate mine plan for gold deposit

Cut-Off Mine Mill Refine Profit Dis. Profit

Year
(g/t Au) (t) (t) (g) ($M) ($M)

1 0.4 83.33 50 35 216.67 188.41

2 0.4 83.33 50 35 216.67 163.83

3 0.4 83.33 50 35 216.67 142.46

4 0.4 83.33 50 35 216.67 123.88

5 0.4 83.33 50 35 216.67 107.72

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6 0.4 83.33 50 35 216.67 93.67

7 0.4 83.33 50 35 216.67 81.45

8 0.4 83.33 50 35 216.67 70.83

9 0.4 83.33 50 35 216.67 61.59

10 0.4 83.33 50 35 216.67 53.56

11 0.4 83.33 50 35 216.67 46.57

12 0.4 83.33 50 35 216.67 40.50

1,174.49

Source: Nehring and Shafiee (2016)

Table 5: Intermediate mine plan for gold deposit

The annual profit for this operation is calculated using the following profit equation:

Discounting annual cash flows of $216.7M over 12 years at a discount rate of 15% yields a value V of $1,174M.
This value V of $1,174M is now used in the next iteration to replace the original starting value for the operation
of V = 0. The economic cut-off grades for the second iteration are thus calculated as follows:

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The balanced cut-off grades for the second iteration can therefore be summarized as follows:

This gives rise to the optimal cut-off grade:

With the newly determined cut-off grade of 0.50g/t Au, another mine plan may be developed for the purpose
of calculating its value, V. This again first requires annual mining, concentrating and refining rates to be
calculated. The life of an operation according to each capacity restriction is thus calculated as follows:

The limiting process is therefore the mine and the concentrator/mill since both require the longer life of 10
years to mine and process all material. The mine and mill will thus be fully utilized at 100tpa and 50tpa over
the 10-year mine life respectively. The annual refining rate is thus determined as follows:

With these rates, an intermediate mine plan can be developed as contained in Table 6, below.

Table 6: Revised intermediate mine plan for gold deposit

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Cut-Off Mine Mill Refine Profit Dis. Profit

Year
(g/t Au) (t) (t) (g) ($M) ($M)

1 0.5 100 50 37.5 250 217.39

2 0.5 100 50 37.5 250 189.04

3 0.5 100 50 37.5 250 164.38

4 0.5 100 50 37.5 250 142.94

5 0.5 100 50 37.5 250 124.29

6 0.5 100 50 37.5 250 108.08

7 0.5 100 50 37.5 250 93.98

8 0.5 100 50 37.5 250 81.73

9 0.5 100 50 37.5 250 71.07

10 0.5 100 50 37.5 250 61.80

1,254.69

Source: Nehring and Shafiee (2016)

Table 6: Revised intermediate mine plan for gold deposit

The annual profit for this operation is calculated using the following profit equation:

Discounting annual cash flows of $250.0M over 10 years at a discount rate of 15% yields a value V of $1,255M.
This process can again be repeated. However, after completing another iteration, the cut-off grades don’t
change and the difference between the initial and final value of V is negligible. As such, it can be concluded that
the optimal single cut-off grade over the life of the operation is 0.5g/t Au.

So far, the cut-off grades that have been determined have been kept constant at each year over the life of the
operation. The decreasing opportunity cost as the life of an operation matures, however, may also impact upon
the cut-off grade policy. A new mine plan can be developed by now changing the cut-off grade from year to year
to thus change the present value from year to year to give another, hopefully higher, value for V. This process
may be continued until the initial and final value of V converge, or, at least doesn't exceed a defined tolerance

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threshold. The decreasing opportunity cost should ultimately be reflected in a cut-off grade policy that
decreases with mine life to thus generate the optimal cut-off grade policy over the life of the operation.

While it is beyond the scope of this course to carry out an evaluation in which the cut-off grade is allowed to
change from year to year, if this was to be completed on this case study, a slight improvement in value to
$1,256M could be achieved as a result of the new mine plan shown in Table 7 below.

Table 7: Optimal life of mine plan for gold deposit with declining cut-off grade

Cut-Off Mine Mill Refine Profit Dis. Profit

Year
(g/t Au) (t) (t) (g) ($M) ($M)

1 0.50 100 50 37.5 250 217.39

2 0.50 100 50 37.5 250 189.04

3 0.50 100 50 37.5 250 164.38

4 0.50 100 50 37.5 250 142.94

5 0.50 100 50 37.5 250 124.29

6 0.50 100 50 37.5 250 108.08

7 0.50 100 50 37.5 250 93.98

8 0.49 97 50 37.1 245 80.01

9 0.46 93 50 36.5 238 67.65

10 0.41 89 50 35.9 229 56.61

11 0.41 21 13 8.8 55 11.82

Total 1,000 513 380.8 2,517 1,256.19

Source: Nehring and Shafiee (2016)

Table 7: Optimal life of mine plan for gold deposit with declining cut-off grade

As shown, the optimal cut-off grade policy over the life of the operation is one which does ultimately decline.

You have covered the following points in Part 2: Cut-Off Grade Policy.

 breakeven cut-off grade

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 Lane's cut-off grade model

 economic balancing and cut-off grades

 cut-off grade investigation

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Part 3: Advanced Mining Economics and Closure Planning

Optimum Rate of Exploitation

You will cover the following points in Part 3: Advanced Mining Economics and
Closure Planning.

 optimum rate of exploitation

 change in commodity price

 mine closure considerations

Introduction

Due to the unique nature of the mining industry—which involves the exploitation of a finite, non-renewable,
and complex resource—a non-traditional approach is required when determining an optimum rate of
depletion. Part 1: Mining Economics Principles of the Mine Planning 1 – Strategy course introduces some
general economic concepts relating to the theory of the firm before specifically addressing the theory of the
mining firm. It was established that the production rate at which marginal cost equals marginal revenue (price)
is suitable for any firm whose production inputs are considered unlimited or renewable. Since mining is based
on the exploitation of a limited or non-renewable resource, a unique approach is required. Part 1: Mining
Economics Principles of the Mine Planning 1 – Strategy course thus introduces the Hotelling r-percent rule,
which may be used to define the optimum rate at which an orebody should be exploited over its entire mine
life in order to maximize its value.

Optimum Rate of Exploitation

Optimum Rate of Exploitation - Figure 1

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Figure 1: Illustrating Hotelling's r percent rule (source: recreated from Camus (2002))

Since the time horizon of a finite, non-renewable resource is crucial to its planning, the rate at which a resource
should be consumed in order to achieve an optimum economic result must be established. The Hotelling r-
percent rule provides an overall life of mine modelling methodology, whereby the resource is depleted such
that the yearly rate of growth of value of the extracted resource is equal to the discount rate. To illustrate this,
the variables associated with the Hotelling r-percent rule are displayed in Figure 1 (right).

Since mine life is directly related to the rate of extraction, which is a decision variable in itself, the whole mineral
resource must be considered in the development of an optimum depletion strategy. This makes it possible to
account for the different lifespans associated with each strategy. The value of each strategy may be assessed by
using their respective net present value of cash flows, which have been derived from the exploitation of the
entire resource. The strategy in this case refers to the values attributed to all the variables that affect mine life.
The example presented in Figure 2 (below) is the cost structure of an iron ore operation with a total resource
of 180Mt.

Optimum Rate of Exploitation - Figure 2

Figure 2: Cost structure for an iron ore mine (source: Nehring and Shafiee (2016))

In mining, the optimum rate of exploiting a resource will occur somewhere between the point where average
cost is lowest and where marginal cost equals marginal revenue (price). Tables 1 and 2 below assess the
extraction rate at these two extreme points for the cost structure of a mining firm looking to exploit the 180Mt
iron ore shown in Figure 2 (above). The first production rate being assessed is the production rate at the lowest
average cost (green line), which occurs at a rate of 20Mtpa at a cost of $10/t. The second production rate being
assessed is the production rate where marginal cost equals marginal revenue, or price, (intersection between
blue and red lines), which occurs at an extraction rate of 30Mtpa at a marginal cost of $20/t and an average
cost of $12/t.

Table 1: Annual profit for the iron ore mine with 30 and 20Mtpa extraction rates

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Yearly Extraction Rate Yearly Revenue Yearly Costs Yearly Profit

(Mtpa) ($M) ($M) ($M)

Marginal Cost = Marginal 30 600 360 240

Revenue

Minimum Average Cost 20 400 200 200

Source: Nehring and Shafiee (2016)

Table 1: Annual profit for the iron ore mine with 30 and 20Mtpa extraction rates

Table 2: Total profit for the finite, non-renewable iron ore resource (180 million tonnes)

Yearly Extraction Rate (Mtpa) Mine Life (Years) Yearly Profit ($M) Total Profit ($M)

30 6 240 1,440

20 9 200 1,800

Source: Nehring and Shafiee (2016)

Table 2: Total profit for the finite, non-renewable iron ore resource (180 million tonnes)

As shown, the extraction rate where average cost is at its lowest (20Mtpa) does not maximize the cash flow C,
although it does maximize the undiscounted cash flow for the whole resource. The time to extract the fraction
r, however, will tend to be longer, which will thus delay receiving all remaining cash flows and thus reduce the
net present value that these cash flows generate. On the other hand, if the extraction rate is set at the point
where marginal cost equals marginal revenue (30Mtpa), then the cash flow C relating to the fractional
component r will be maximized. A combination of a reduced mine life and an increased average cost, however,
results in a reduced total undiscounted cash flow stream for the whole resource. For this reason, setting
optimum production rates at the point where marginal cost is equal to marginal revenue or price is not valid
for industries that exploit a finite, non-renewable resource. Rather, it is a case of having to take into account
time-adjusted cash flows generated from the exploitation of the whole resource. In summary, the 30Mtpa and
20Mtpa rates of production represent two extremes. The optimal rate is the one that maximizes the net present
value for the whole resource. In mining, this occurs somewhere between these two extremes.

Using the cost structure presented in Figure 2 (above), discount rates of 20%, 15%, 10%, 5% and 0% are
applied to each rate of extraction between the two extremes of 20Mtpa and 30Mtpa, as shown in Table 3
(below). For the purposes of this example, a linear marginal cost has been adopted between the two points of
interest, from 20Mtpa to 30Mtpa.

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Table 3: Net present values and rates of extraction for iron ore mine at various discount rates

Yearly Yearly PV Using PV Using

Margin Mine Life PV Using PV Using PV Using
Extraction Cash Flow 20% 15%
($/t) (years) 10% ($M) 5% ($M) 0% ($M)
Rate (Mtpa) ($M) ($M) ($M)

20 10.00 200.0 9.00 806.2 954.3 1,151.8 1,421.6 1,800.0

21 9.80 205.8 8.57 812.4 956.8 1,147.7 1,405.7 1,763.7

22 9.60 211.2 8.18 817.8 958.5 1,142.9 1,389.5 1,727.6

23 9.40 216.2 7.83 821.0 958.1 1,136.2 1,372.4 1,692.8

24 9.20 220.8 7.50 821.6 954.7 1,126.4 1,352.4 1,656.0

25 9.00 225.0 7.20 821.5 950.8 1,116.4 1,332.4 1,620.0

26 8.80 228.8 6.92 819.6 948.4 1,104.5 1,317.4 1,583.3

27 8.60 232.2 6.67 815.6 937.3 1,091.1 1,289.2 1,548.8

28 8.40 235.2 6.43 810.4 928.1 1,076.2 1,265.7 1,512.3

29 8.20 237.8 6.21 804.7 918.7 1,061.3 1,242.5 1,476.7

30 8.00 240.0 6.00 798.1 908.3 1,045.3 1,218.2 1,440.0

Source: Nehring and Shafiee (2016)

Table 3: Net present values and rates of extraction for iron ore mine at various discount rates

As shown, at a 20% discount rate the optimal rate of extraction is found at 24Mtpa with a net present value of
$821.6 million. This reduces to 22Mtpa when using a 15% discount rate with a corresponding net present value
of $958.5 million. The optimal rate of extraction when using discount rates of 10%, 5% and 0% is 20Mtpa,
which generate net present values of $1,151.8, $1,421.6 and $1,800.0 million respectively.

The problem that needs to be addressed is not just determining the optimum net present value V from
exploiting resource R, but to also determine the optimum value v that is generated from each fraction r. The
sum of all the values v generated from each fractional part r essentially provides the trajectory to reaching the
overall optimum.

In calculating the value of each segment r, it is essential to relate cash flow C to net present value V. The net
present value for the whole operation can be expressed as shown in the following equation:

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Where:

 V = net present value

 C = cash flow

 W = remaining net present value

 k = weighted average cost of capital (equity plus debt)

 t = required time to exploit fraction r

Assuming that t in this case is about one year, it is possible to express (1 + k)t ≈ 1 + k × t. Replacing this into the
equation above yields the following equation:

Furthermore, by rearranging the equation above, the net present value v resulting for the exploitation of
fraction r is able to be obtained as shown in the following equation:

If instead of a fixed extraction rate for the whole mine life (such as the 24Mtpa at the 20% discount rate as
shown in Table 3) it could vary as the deposit is mined, it would be possible to create a better mine plan with
an even higher net present value. These equations now allow the iterative process of optimizing the net present
value v for each fraction r and thus the respective rate of extraction associated with it. The optimum value of
$821.6M obtained when using the 20% discount rate may be used as an initial starting point.

Table 4: Calculation of the fraction r (30Mt) value added for iron ore resource as part of first iteration

Cash Fracti Fracti Fracti Fracti Fracti Fracti Fracti Fracti

Flow on 1 on 2 on 3 on 4 on 5 on 6 on 7 on 8
Yearly Segme
Margi ($M) (30Mt (30Mt (30Mt (30Mt (30Mt (30Mt (30Mt (14Mt
Extracti nt Life
n for ) Value ) Value ) Value ) Value ) Value ) Value ) Value ) Value
on Rate (years
($/t) 30Mt Added Added Added Added Added Added Added Added
(Mtpa) )
Fracti (v) (v) (v) (v) (v) (v) (v) (v)
on ($M) ($M) ($M) ($M) ($M) ($M) ($M) ($M)

20 10.00 1.50 300.0 53.52 75.56 99.32 127.8 158.2 193.2 231.9 129.8
0 2 4 5 0 7

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21 9.80 1.43 294.0 59.02 80.04 102.6 129.8 158.8 192.2 229.0 127.5
0 8 6 6 3 8 5

22 9.60 1.36 288.0 64.52 84.51 106.0 131.8 159.4 191.2 226.2 125.1
0 5 9 7 2 6 9

23 9.40 1.30 282.0 68.38 87.49 108.0 132.7 159.1 189.4 222.9 122.7
0 7 8 4 9 8 9

24 9.20 1.25 276.0 70.60 88.97 108.7 132.5 157.8 187.0 219.2 120.3
0 6 2 7 4 5 6

25 9.00 1.20 270.0 72.82 90.45 109.4 132.2 156.6 184.6 215.5 117.8
0 5 6 0 0 2 9

26 8.80 1.15 264.0 75.03 91.93 110.1 132.0 155.3 182.1 211.7 115.4
0 4 0 2 6 9 0

27 8.60 1.11 258.0 75.60 91.92 109.4 130.5 153.1 179.0 207.6 112.8
0 9 9 0 1 1 9

28 8.40 1.07 252.0 76.18 91.90 108.8 129.1 150.8 175.8 203.4 110.3
0 5 8 8 5 2 6

29 8.20 1.03 246.0 76.75 91.89 108.2 127.7 148.6 172.7 199.2 107.8
0 0 7 6 0 4 1

30 8.00 1.00 240.0 75.68 90.38 106.2 125.2 145.5 168.8 194.6 105.2
0 1 1 0 4 0 4

f first fraction r (30Mt) for 29Mtpa extraction rate:

($/t): At 20Mtpa & 30Mtpa margin is $10/t and $8/t respectively. $10/t - $8/t = $2/t. $2/t/(30Mtpa - 20Mpta) = $0.2/t for each 1Mtpa increment
Mtpa increments) = $0.2/t. $8.0/t + $0.2/t = $8.2/t.
nt life: 30Mt/29Mtpa = 1.03 years.
ash flow (C): 30Mtpa × $8.20/t = $246.00M.
dded (v): $246.00M - (0.20 × $821.6M × 1.03) = $76.75M.
f eighth fraction r (14Mt) for 20Mtpa extraction rate:
($/t): At 20Mtpa & 30Mtpa margin is $10/t and $8/t respectively. $10/t - $8/t = $2/t. $2/t/(30Mtpa - 20Mpta) = $0.2/t for each 1Mtpa increment
Mtpa increments) = $2.0/t. $8.0/t + $2.0/t = $10.0/t.
nt life: 14Mt/20Mtpa = 0.70 years.
ash flow (C): 14Mt × $10.00/t = $140.00M.
dded (v): $140.00M - (0.20 × $72.38M × 0.7) = $129.87M.

Source: Nehring and Shafiee (2016)

Table 4: Calculation of the fraction r (30Mt) value added for iron ore resource as part of first iteration

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Table 4 (right) provides the value at each extraction rate for each fraction r as part of the first iteration. The
size of each fraction is set at 30Mt, with an adjustment made to accommodate the final (eighth) fraction of 14Mt.
It is important to note that any reasonable net present value as a starting point can be used to commence this
iterative process. This starting point is then refined with each full iteration. The further the starting point is
from the optimal value, the more iterations may be required to reach convergence between the starting point
and the sum of all final yearly value added values. The value added for each extraction rate contained in Table
4 has been calculated using the equation above.

Now that an explicit opportunity cost is considered, Table 4 shows that the highest value for the first 30Mt
fraction for r across each extraction rate occurs at 29Mtpa. This is thus set at the rate of extraction for the first
year of exploitation, producing a profit of $237.8M (29Mt × $8.20/t) which reduces the size of the reserve from
180Mt to 151Mt.

The next (second) fraction, which has also been set at a size of 30Mt, is also assessed for each extraction rate
using the equation above after firstly calculating the remaining net present value using a rearranged version of
the previous equation as shown below:

Table 5: Production plan obtained after one full iteration using a starting seed value of $821.6M

Yearly Reserve Yearly Extraction Rate Yearly Profit Remaining Value W Final Value Added v
Year
(Mt) (Mtpa) ($M) ($M) ($M)

1 180 29 237.8 748.12 73.48

2 151 26 228.8 668.94 79.18

3 125 26 228.8 573.93 95.01

4 99 23 216.2 472.52 101.41

5 76 22 211.2 355.82 116.70

6 54 20 200.0 226.99 128.84

7 34 20 200.0 72.39 154.60

8* 14 20 140.0 0 129.87

∑ $879.08

*only part of the year

Source: Nehring and Shafiee (2016)

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Table 5: Production plan obtained after one full iteration using a starting seed value of $821.6M

This produces a new net present value V (or remaining value W) of $748.12M ($821.6M × (1 + 0.2) – $237.8M)
which is used in the next (second) fraction to replace the original (fraction 1) starting value of $821.6M. As the
resource is depleted, each fraction will have a new net present value V and thus a remaining value W. This
process is repeated to determine the optimal extraction rate in each year until the resource is fully exploited.
Table 5 (right) summarizes the result of one fully completed iteration. The final value added v component of
each yearly segment is calculated and summed. For the first year's production of 29Mt, this equals $73.48M
($237.8M – 0.2 × $821.6M × 1). Since year 8 is only in production for part of the year, its final value added v
component is $129.87M ($140.0M – 0.2 × $72.39M × (14Mt/20Mtpa)).

Table 6: Calculation of the fraction r (30Mt) value added for iron ore resource as part final iteration to
determine optimal exploitation strategy

Cash
Fracti Fracti Fracti Fracti Fracti Fracti Fracti Fracti
Flow
Yearly Segme on 1 on 2 on 3 on 4 on 5 on 6 on 7 on 8
Margi ($M)
Extracti nt Life (30Mt (30Mt (30Mt (30Mt (30Mt (30Mt (30Mt (11Mt
n for
on Rate (years ) Value ) Value ) Value ) Value ) Value ) Value ) Value ) Value
($/t) 30Mt
(Mtpa) ) (v) (v) (v) (v) (v) (v) (v) (v)
Fracti
($M) ($M) ($M) ($M) ($M) ($M) ($M) ($M)
on

20 10.00 1.50 300.0 49.41 70.63 96.10 123.9 153.6 187.6 225.2 99.10
0 6 1 9 3

21 9.80 1.43 294.0 55.10 75.34 99.61 126.1 154.4 186.9 222.7 97.42
0 7 4 3 2

22 9.60 1.36 288.0 60.80 80.04 103.1 128.3 155.2 186.1 220.2 95.69
0 3 9 7 7 1

23 9.40 1.30 282.0 64.82 83.21 105.2 129.4 155.1 184.6 217.2 93.92
0 9 3 3 7 0

24 9.20 1.25 276.0 67.18 84.86 106.0 129.3 154.0 182.4 213.6 92.12
0 8 0 1 1 9

25 9.00 1.20 270.0 69.53 86.51 106.8 129.1 152.8 180.1 210.1 90.28
0 8 7 9 5 8

26 8.80 1.15 264.0 71.88 88.15 107.6 129.0 151.7 177.9 206.6 88.42
0 8 3 7 0 8

27 8.60 1.11 258.0 72.56 88.27 107.1 127.7 149.6 174.8 202.6 86.53
0 1 3 7 9 7

28 8.40 1.07 252.0 73.25 88.38 106.5 126.4 147.5 171.8 198.6 84.62
0 5 2 7 9 6

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29 8.20 1.03 246.0 73.93 88.50 105.9 125.1 145.4 168.8 194.6 82.68
0 9 2 8 8 6

30 8.00 1.00 240.0 72.94 87.09 104.0 122.6 142.4 165.1 190.1 80.73
0 7 4 1 3 5

f first fraction r (30Mt) for 29Mtpa extraction rate:

($/t): At 20Mtpa & 30Mtpa margin is $10/t and $8/t respectively. $10/t - $8/t = $2/t. $2/t/(30Mtpa - 20Mpta) = $0.2/t for each 1Mtpa increment
Mtpa increments) = $0.2/t. $8.0/t + $0.2/t = $8.2/t.
nt life: 30Mt/29Mtpa = 1.03 years.
ash flow (C): 30Mtpa × $8.20/t = $246.00M.
dded (v): $246.00M - (0.20 × $835.3M × 1.03) = $73.93M.
f eighth fraction r (11Mt) for 20Mtpa extraction rate:
($/t): At 20Mtpa & 30Mtpa margin is $10/t and $8/t respectively. $10/t - $8/t = $2/t. $2/t/(30Mtpa - 20Mpta) = $0.2/t for each 1Mtpa increment
Mtpa increments) = $2.0/t. $8.0/t + $2.0/t = $10.0/t.
nt life: 11Mt/20Mtpa = 0.55 years.
ash flow (C): 11Mt × $10.00/t = $110.00M.
dded (v): $110.00M - (0.20 × $99.08M × 0.55) = $99.10M.

Source: Nehring and Shafiee (2016)

Table 6: Calculation of the fraction r (30Mt) value added for iron ore resource as part final iteration to
determine optimal exploitation strategy

The net present value of this exploitation strategy is $879.08M, which is greater than the initial starting value
of $821.6M. Another iteration, starting with a value between $821.6M and $879.08M as the initial seed value,
should iterate closer to the optimal result. This process should continue until convergence is obtained whereby
the starting value equals the final net present value. To demonstrate this, the whole process is now repeated
using a starting value of $835.3M. Once again, the size of each fraction is set at 30Mt, with an adjustment made
to accommodate the final (eighth) fraction of 11Mt. The value added for each extraction rate at the $835.3M
starting seed value is contained in Table 6 (right). Table 6 shows that the highest value for the first 30Mt
fraction for r across each extraction rate occurs at 29Mtpa. This is thus set at the rate of extraction for the first
year of exploitation, producing a profit of $237.8M (29Mt × $8.20/t) which reduces the size of the reserve from
180Mt to 151Mt.

Table 7: Optimal production plan using a starting seed value of $835.3M

Yearly Reserve Yearly Extraction Rate Yearly Profit Remaining Value W Final Value Added v
Year
(Mt) (Mtpa) ($M) ($M) ($M)

1 180 29 237.8 764.56 70.74

2 151 29 237.8 679.67 84.89

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Mine Planning - Operations April 14, 2016

3 122 26 228.8 586.81 92.87

4 96 23 216.2 487.97 98.84

5 73 22 211.2 374.36 113.61

6 51 20 200.0 249.23 125.13

7 31 20 200.0 99.08 150.15

8* 11 20 110.0 0 99.10

∑ $835.32

*only part of the year

Source: Nehring and Shafiee (2016)

Table 7: Optimal production plan using a starting seed value of $835.3M

The next (second) fraction, which has also been set at a size of 30Mt, is also assessed for each extraction rate
using the equation W = V(1 + k) - C after firstly calculating the net present value V (or remaining value W) of
$764.56M ($835.3M × (1 +0.2) – $237.8M), which is used in the next (second) fraction. This process is again
repeated to determine the optimal extraction rate in each year until the resource is fully exploited. Table 7
(right) summarizes the result of the fully completed iteration. The final value added v component of each yearly
segment is again calculated and summed. For the first year's production of 29Mt, this equals $70.74M ($237.8M
– 0.2 × $835.3M × 1). Since year 8 is only in production for part of the year, its final value added v component
is $99.10M ($110.0M – 0.2 × $99.08M × (11Mt/20Mtpa)).

The net present value of this exploitation strategy is $835.32M, which is virtually the same as the starting value.
Since convergence between the starting value and the final net present value has been achieved, the iteration
process can stop as this represents the optimal exploitation strategy. The value of $835.32M achieved when
allowing yearly extract rates to change is $13.72M higher than the initial starting value of $821.6M, which was
achieved when maintaining a constant rate of extraction of 24Mtpa. Notice that the only difference between
the optimal exploitation strategy and the exploitation strategy achieved after the initial iteration is that the
extraction rate in year 2 is 29Mtpa as opposed to 26Mtpa. Notice also that the yearly rate of resource
consumption will decline to ultimately reach the extraction rate that matches the lowest average cost. In
complying with Hotelling's r percent rule, the yearly growth in the value of the extracted resource more or less
equals the discount rate.

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Change in Commodity Price

Optimum Rate of Exploitation with Change in Commodity Price

Table 1: Calculation of the fraction r (30Mt) value added for iron ore resource at price of $24/t in year 1

Cash
Mar Cash Mar
Flow Fract Fract Fract Fract Fract Fract Fract Fract
gin Flow gin
Yearly ($M) Segm ion 1 ion 2 ion 3 ion 4 ion 5 ion 6 ion 7 ion 8
($/t ($M) ($/t
Extrac for ent (30M (30M (30M (30M (30M (30M (30M (10M
) at for ) at
tion 30Mt Life t) t) t) t) t) t) t) t)
Pric 30Mt Pric
Rate Fract (year Value Value Value Value Value Value Value Value
e of Fract e of
(Mtpa) ion at s) (v) (v) (v) (v) (v) (v) (v) (v)
$20 ion at $24
$24/ ($M) ($M) ($M) ($M) ($M) ($M) ($M) ($M)
/t $20/t /t
t

20 10.0 300.0 14.0 380.0 1.50 - 72.48 98.32 126.6 156.8 191.5 229.8 91.93
0 0 0 0 44.65 2 0 2 3

21 9.80 294.0 13.8 378.0 1.43 - 77.10 101.7 128.7 157.4 190.5 227.1 90.32
0 0 0 26.83 3 1 9 9 0

22 9.60 288.0 13.6 376.0 1.36 -9.02 81.72 105.1 130.8 158.1 189.6 224.3 88.66
0 0 0 4 0 7 5 8

23 9.40 282.0 13.4 374.0 1.30 5.97 84.82 107.2 131.7 157.9 187.9 221.1 86.98
0 0 0 1 4 0 9 8

24 9.20 276.0 13.2 372.0 1.25 18.12 86.40 107.9 131.5 156.6 185.6 217.5 85.28
0 0 0 3 2 7 0 2

25 9.00 270.0 13.0 370.0 1.20 30.28 87.98 108.6 131.3 155.4 183.2 213.8 83.55
0 0 0 5 0 4 2 6

26 8.80 264.0 12.8 368.0 1.15 42.44 89.57 109.3 131.0 154.2 180.8 210.2 81.79
0 0 0 8 7 2 3 0

27 8.60 258.0 12.6 366.0 1.11 51.76 89.64 108.7 129.7 152.0 177.7 206.0 80.02
0 0 0 5 0 3 3 7

28 8.40 252.0 12.4 364.0 1.07 61.08 89.70 108.1 128.3 149.8 174.6 201.9 78.24
0 0 0 3 2 5 2 4

29 8.20 246.0 12.2 362.0 1.03 70.41 89.77 107.5 126.9 147.6 171.5 197.8 76.44
0 0 0 1 5 7 1 2

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30 8.00 240.0 12.0 360.0 1.00 76.90 88.32 105.5 124.4 144.5 167.6 193.2 74.62
0 0 0 4 1 4 8 2

30Mt) for 30Mtpa extraction rate:

margin is $12/t.
tpa = 1.00 year.
tpa × $12.00/t = $360.00M.
M - ((0.20 × $932.0M) + ($932.0M - $835.3M) × 1.00) = $76.90M.
(10Mt) for 20Mtpa extraction rate:
margin is $10/t.
tpa = 0.50 years.
t × $10.00/t = $100.00M.
M - (0.20 × $80.69M × 0.50) = $91.93M.

Source: Nehring and Shafiee (2016)

Table 1: Calculation of the fraction r (30Mt) value added for iron ore resource at price of $24/t in year 1

Following on from the example in the previous session, one situation likely to occur could be a sudden short
term increase in the iron ore price (for example, an increase of $4/t from $20/t to 24/t). If the increased price
is expected to last only one year (in year 1) and then return to the price of $20/t, it is important to assess the
implications of this on the mine plan. If the mine plan is not changed, the effect of the price increase would add
a nominal amount of $116.0M (29Mt × $4/t) to the business. This is $4 extra for each of the 29Mt mined in the
first year. The price effect would, therefore, increase the net present value of the mine plan by $96.67M
($116.0M/1.21) from $835.3M to $932.0M. A change in price, however, should affect the optimum exploitation
strategy. This is because it affects the net present value, which in turn leads to a new economic equilibrium. A
higher price means the market is demanding more production. This is exactly what happens when re-
optimizing the value added of the first fraction of the deposit as displayed in Table 1 (right). Once again, the
size of each fraction is set at 30Mt, with an adjustment made to accommodate the final (eighth) fraction of 11Mt.

An additional column has been added to Table 1 showing the margin at the increased price of $24/t for each
extraction rate, which is only applicable for the first 30Mt fraction. The cash flow associated with the 20Mt rate
of extraction is $380M (20Mt × $14/t + 10Mt × $10/t). The value added v for the first fraction, thus, needs to
take into account the price increase for the part mined in the first year and the remaining amount mined at the
original price. At the 20Mtpa rate of extraction the value added v is calculated to be -$44.65M (380 – ((0.2 ×
$932.0M) + ($932.0M – $835.3M)) × 1.5). From the second fraction onward, calculation of the value added v
component reverts back the usual process as carried out in prior iterations. The value added for each extraction
rate at the $932.0M starting seed value (for fraction 1) is contained in Table 1.

Table 1 shows that the highest value for the first 30Mt fraction for r across each extraction rate occurs at
30Mtpa. This is thus set at the rate of extraction for the first year of exploitation, producing a cash flow profit
of $360.0M (30Mt × $12.00/t), using the increased margin of $12.00/t, which reduces the size of the reserve
from 180Mt to 150Mt.

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Mine Planning - Operations April 14, 2016

Table 2: Production plan obtained after one full iteration at price of $24/t in year 1 using a starting seed value
of $932.0M

Yearly Reserve Yearly Extraction Rate Yearly Profit Remaining Value W Final Value Added v
Year
(Mt) (Mtpa) ($M) ($M) ($M)

1 180 30 360.0 758.40 173.60

2 150 29 237.8 672.28 86.12

3 121 26 228.8 577.94 94.34

4 95 23 216.2 477.32 100.61

5 72 22 211.2 361.59 115.74

6 50 20 200.0 233.91 127.68

7 30 20 200.0 80.69 153.22

8* 10 20 100.0 0 91.93

∑ $943.24

*only part of the year

Source: Nehring and Shafiee (2016)

Table 2: Production plan obtained after one full iteration at price of $24/t in year 1 using a starting seed value
of $932.0M

The next (second) fraction, which has also been set at a size of 30Mt is also assessed for each extraction rate
after firstly calculating the net present value V (or remaining value W) of $758.40M ($932.0M × (1 + 0.2) –
$360.0M), which is used in the next (second) fraction. This process is again repeated to determine the optimal
extraction rate in each year until the resource is fully exploited, remembering to revert back to the original
margin generated at the original iron ore price of $20/t. Table 2 (right) summarizes the result of the fully
completed iteration. The final value added v component of each yearly segment is again calculated and summed.
For the first year's production of 30Mt, this equals $173.60M ($360.0M – 0.2 × $932.0M × 1). Since year 8 is
only in production for part of the year, its final value added v component is $91.93M ($100.0M – 0.2 × $80.69M
× (10Mt/20Mtpa)).

Table 3: Calculation of the fraction r (30Mt) value added for iron ore resource as part final iteration to
determine optimal exploitation strategy at price of $24/t in year 1

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Cash
Mar Cash Mar
Flow Fract Fract Fract Fract Fract Fract Fract Fract
gin Flow gin
Yearly ($M) Segm ion 1 ion 2 ion 3 ion 4 ion 5 ion 6 ion 7 ion 8
($/t ($M) ($/t
Extrac for ent (30M (30M (30M (30M (30M (30M (30M (10M
) at for ) at
tion 30Mt Life t) t) t) t) t) t) t) t)
Pric 30Mt Pric
Rate Fract (year Value Value Value Value Value Value Value Value
e of Fract e of
(Mtpa) ion at s) (v) (v) (v) (v) (v) (v) (v) (v)
$20 ion at $24
$24/ ($M) ($M) ($M) ($M) ($M) ($M) ($M) ($M)
/t $20/t /t
t

20 10.0 300.0 14.0 380.0 1.50 - 71.47 97.11 125.1 155.0 189.4 227.3 90.93
0 0 0 0 49.69 7 6 3 2

21 9.80 294.0 13.8 378.0 1.43 - 76.14 100.5 127.3 155.8 188.5 224.7 89.36
0 0 0 31.64 7 3 3 9 1

22 9.60 288.0 13.6 376.0 1.36 - 80.80 104.0 129.4 156.5 187.7 222.1 87.75
0 0 0 13.59 4 9 9 5 0

23 9.40 282.0 13.4 374.0 1.30 1.60 83.94 106.1 130.4 156.3 186.1 219.0 86.11
0 0 0 6 8 9 8 1

24 9.20 276.0 13.2 372.0 1.25 13.92 85.56 106.9 130.3 155.2 183.8 215.4 84.44
0 0 0 2 1 2 6 3

25 9.00 270.0 13.0 370.0 1.20 26.25 87.18 107.6 130.1 154.0 181.5 211.8 82.74
0 0 0 9 3 5 5 6

26 8.80 264.0 12.8 368.0 1.15 38.57 88.80 108.4 129.9 152.8 179.2 208.2 81.02
0 0 0 5 6 8 3 8

27 8.60 258.0 12.6 366.0 1.11 48.03 88.89 107.8 128.6 150.7 176.1 204.2 79.28
0 0 0 6 2 5 8 2

28 8.40 252.0 12.4 364.0 1.07 57.49 88.98 107.2 127.2 148.6 173.1 200.1 77.52
0 0 0 7 9 1 3 6

29 8.20 246.0 12.2 362.0 1.03 66.95 89.08 106.6 125.9 146.4 170.0 196.0 75.74
0 0 0 8 5 8 8 9

30 8.00 240.0 12.0 360.0 1.00 73.54 87.65 104.7 123.4 143.3 166.2 191.5 73.95
0 0 0 4 5 7 9 5

30Mt) for 30Mtpa extraction rate:

margin is $12/t.
tpa = 1.00 year.
tpa × $12.00/t = $360.00M.
M - ((0.20 × $934.8M) + ($934.8M - $835.3M) × 1.00) = $73.54M.
(10Mt) for 20Mtpa extraction rate:
margin is $10/t.

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tpa = 0.50 years.

t × $10.00/t = $100.00M.
M - (0.20 × $90.72M × 0.50) = $90.93M.

Source: Nehring and Shafiee (2016)

Table 3: Calculation of the fraction r (30Mt) value added for iron ore resource as part final iteration to
determine optimal exploitation strategy at price of $24/t in year 1

The net present value of this exploitation strategy is $943.24M, which is greater than the initial starting value
of $932.0M. Another iteration starting with a value between $932.0M and $943.24M as the initial seed would
iterate closer to the optimal result. Once again, this process should continue until convergence is obtained
whereby the starting point equals the final net present value. To demonstrate this, the whole process is now
repeated using a starting value of $934.8M. Once again, the size of each fraction is set at 30Mt, with an
adjustment made to accommodate the final (eighth) fraction of 10Mt. The value added v for each extraction
rate at the $934.8M starting seed value (for fraction 1) is contained in Table 3 (right).

Table 3 shows that the highest value for the first 30Mt fraction for r across each extraction rate occurs at
30Mtpa. This is thus set at the rate of extraction for the first year of exploitation, producing a cash flow profit
of $360.0M (30Mt × $12.00/t), using the increased margin of $12.00/t, which reduces the size of the reserve
from 180Mt to 150Mt.

Table 4: Optimal production plan at price of $24/t in year 1 using a starting seed value of $934.8M

Yearly Reserve Yearly Extraction Rate Yearly Profit Remaining Value W Final Value Added v
Year
(Mt) (Mtpa) ($M) ($M) ($M)

1 180 30 360.00 761.76 173.04

2 150 29 237.80 676.31 85.45

3 121 26 228.80 582.77 93.54

4 95 23 216.20 483.13 99.65

5 72 22 211.20 368.56 114.57

6 50 20 200.00 242.27 126.29

7 30 20 200.00 90.72 151.55

8* 10 20 100.00 0 90.93

∑ $935.01

*only part of the year

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Mine Planning - Operations April 14, 2016

Source: Nehring and Shafiee (2016)

Table 4: Optimal production plan at price of $24/t in year 1 using a starting seed value of $934.8M

The next (second) fraction, which has also been set at a size of 30Mt, is also assessed for each extraction rate
after firstly calculating the net present value V (or remaining value W) of $761.76M ($934.8M × (1 + 0.2) –
$360.0M), which is used in the next (second) fraction. This process is again repeated to determine the optimal
extraction rate in each year until the resource is fully exploited, remembering to revert back to the original
margin generated at the original iron ore price of $20/t. Table 4 (right) summarizes the result of the fully
completed iteration. The final value added v component of each yearly segment is again calculated and summed.
For the first year's production of 30Mt, this equals $173.04M ($360.0M – 0.2 × $934.8M × 1). Since year 8 is
only in production for part of the year, its final value added v component is $90.93M ($100.0M – 0.2 × $90.72M
× (10Mt/20Mtpa)).

The net present value of this exploitation strategy is $935.01M, which is virtually the same as the starting value
of $934.8M. Since convergence between the starting value and the final net present value has been achieved,
the iteration process can stop as this represents the optimal exploitation strategy. The value of $935.01M
achieved when allowing further changes to yearly extraction rates results in a $3.01M higher value than the
initial starting value of $932.0M, which was achieved when adding the price effect to the original mine plan of
$96.67M. Notice that there is no difference between the optimal exploitation strategy and the exploitation
strategy achieved after the initial full iteration. The only change in the mine plan across both iterations under
the increased price scenario is that the extraction rate in year 1 is 30Mtpa as opposed to 29Mtpa. Once again,
the yearly rate of resource consumption declines to ultimately reach the extraction rate that matches the lowest
average cost. Apart from the first year's final value added v, the yearly growth in the value of the extracted
resource more or less equals the discount rate.

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Mine Planning - Operations April 14, 2016

Mine Closure Planning

Introduction

Mine closure costs are an inevitable expense that must be incurred once an operation commences both during
and after exploitation of an orebody. Closure costs are often not given the recognition that they deserve as part
of the holistic mine planning process. This may be because these costs are generally incurred at the end of the
mine life and the view is thus taken that these will be dealt with once mine closure approaches. However, as
this session demonstrates, the impact of mine closure costs can have a very significant and profound impact on
the optimal mine plan and, therefore, needs to be accurately investigated and fully incorporated into the mine
planning process from the very outset. Companies today operate against a backdrop of increasing public
scrutiny over environmental issues and community relations. Mine closure will, therefore, become increasingly
important.

Mine Closure Considerations

The term mine closure is most commonly associated with the environmental remediation of a closed/depleted
mine site or the site of a decommissioned process plant. Mine closure can also have significant economic
impacts on local communities as a result of a loss of employment opportunities, which can thus result in
negative impacts on local businesses. The environmental and social impacts of mine closure and how they may
be improved have been well-documented.

The field of mine closure planning is a relatively new aspect as part of the broader field of mine planning. Mine
closure planning should commence very early on as part of the general mine planning process. This should
continue throughout the mine life and be continually updated until decommissioning has been achieved.

Environmental legislation typically requires mining companies to return mine sites to a state that resembles
their natural surroundings. This may require (but is not limited to):

 dismantling of infrastructure;

 appropriate disposal/burial of waste/reactive materials and products;

 reclamation and revegetation of disturbed land; and

 re-introducing native flora and fauna.

Mine closure also presents other costs to mining companies, which may include (but is not limited to):

 redundancy payments to the workforce;

 contract closure payments; and

 community and native title settlement payments.

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For new operations in many mining jurisdictions, legislation requires that mining companies make a bond
payment before project approval to cover the costs of unfinished environmental rehabilitation in the event that
the company enters bankruptcy. A mining operation may also receive a salvage value for old plant and
infrastructure (typically 5%–10% of CAPEX ). Mine closure is an important part of the mine financial
evaluation process. It must be considered from the outset during the feasibility and strategic planning phase.

From an NPV perspective, in many cases it is actually better for a company to extend mine life by continuing to
mine and process low grade ore (even at a negative cash flow) if it means that this delays the cost associated
with closure. The result of an extended mine life is a higher resource recovery at minimal additional
environmental disruption.

Activity: Mine Closure Investigation for a Metalliferous Deposit

Table 1: Details of 7 potential remaining open pit copper satellite deposits

Tonnes (Mt) Grade (% Cu)

Deposit L 5.0 0.50

Deposit M 5.0 0.44

Deposit N 5.0 0.41

Deposit O 5.0 0.37

Deposit P 5.0 0.35

Deposit Q 5.0 0.33

Deposit R 5.0 0.22

Source: Nehring and Shafiee (2016)

Table 1: Details of 7 potential remaining open pit copper satellite deposits

A small mining operation nearing the end of its life has seven potential remaining open pit copper satellite
deposits (5.0Mt each) as displayed in Table 1 (right) in descending order of grade.

The operation is utilizing its lowest feasible process plant throughput rate of 5Mtpa in order to achieve a
maximum recovery of 95% Cu. The cost associated with mining and processing each tonne of ore is $17.80. A
discount rate of 18% applies. The copper price is $5,000/t.

In order to investigate the impact of mine closure on the mine plan and its associated NPV, consider net present
value mine closure costs of $30M, $50M and $70M (in addition to any previously set aside remediation bond)

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Mine Planning - Operations April 14, 2016

to be incurred in the year immediately after processing has ceased. The purpose in this case is to determine if
different closure costs in any way impact upon the optimal production schedule for this operation.

The net present values for each deposit is firstly calculated to form the basis for production scheduling as
shown in Table 2 (below).

Table 2: Net present values associated with each deposit

Tonnes (Mt) Grade (% Cu) Net present Value ($M)

Deposit L 5.0 0.50 29.75

Deposit M 5.0 0.44 15.50

Deposit N 5.0 0.41 8.38

Deposit O 5.0 0.37 -1.13

Deposit P 5.0 0.35 -5.88

Deposit Q 5.0 0.33 -10.63

Deposit R 5.0 0.22 -36.75

Source: Nehring and Shafiee (2016)

Table 2: Net present values associated with each deposit

As expected, the breakeven cut-off grade is somewhere between the grades for deposit N and O as this is the
transition point between where a positive and negative cash flow occurs. As such, the cut-off grade is
determined to be 0.3747% Cu using the equation below.

Under normal circumstances, any grade below 0.3747% Cu would thus not be considered as part of the mine
planning and production scheduling process. Table 3 (below) shows the yearly cash flows that would occur if
ceasing operations after mining and processing to each deposit, assuming a $30M closure cost is incurred in
the year immediately after.

Table 3: Cash flows ($M) using $30M closure cost

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Year
Cash Flows
1 2 3 4 5 6 7 8

Deposit L 29.75 -30.00 -$0.25M

Deposit M 29.75 15.50 -30.00 $15.25M

Deposit N 29.75 15.50 8.38 -30.00 $23.63M

Deposit O 29.75 15.50 8.38 -1.13 -30.00 $22.50M

Deposit P 29.75 15.50 8.38 -1.13 -5.88 -30.00 $16.62M

Deposit Q 29.75 15.50 8.38 -1.13 -5.88 -10.63 -30.00 $5.99M

Deposit R 29.75 15.50 8.38 -1.13 -5.88 -10.63 -36.75 -30.00 -$30.76M

Source: Nehring and Shafiee (2016)

Table 3: Cash flows ($M) using $30M closure cost

As expected, the highest cumulative cash flow ($23.63M) occurs if the mine plan foresees mining and
processing to cease at deposit N. Table 4 (below) shows the discounted cash flows and the NPV when applying
an 18% discount rate associated with each mine plan for a net present value closure cost of $30M.

Table 4: Discounted cash flows ($M) using $30M closure cost

Year
NPV
1 2 3 4 5 6 7 8

Deposit L 25.21 -21.55 $3.67M

Deposit M 25.21 11.13 -18.26 $18.08M

Deposit N 25.21 11.13 5.10 -15.47 $25.97M

Deposit O 25.21 11.13 5.10 -0.58 -13.11 $27.75M

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Deposit P 25.21 11.13 5.10 -0.58 -2.57 -11.11 $27.18M

Deposit Q 25.21 11.13 5.10 -0.58 -2.57 -3.94 -9.42 $24.94M

Deposit R 25.21 11.13 5.10 -0.58 -2.57 -3.94 -11.54 -7.98 $14.84M

Source: Nehring and Shafiee (2016)

Table 4: Discounted cash flows ($M) using $30M closure cost

As shown, the optimal mine plan for an assumed $30M closure cost is the one that foresees mining and
processing to cease at deposit O, giving an NPV of $27.75M. This process is able to be repeated for net present
value closure costs of $50M and $70M to be incurred in the year immediately after the processing has ceased
to ultimately produce the results contained in Table 5 (below).

Table 5: NPV associated with ceasing operations at each deposit at each closure cost

Closure Costs

$30M $50M $70M

Deposit L 3.67 -10.70 -25.06

Deposit M 18.08 5.91 -6.26

Deposit N 25.97 15.65 5.34

Deposit O 27.75 19.01 10.26

Deposit P 27.18 19.77 12.36

Deposit Q 24.94 18.66 12.38

Deposit R 14.84 9.51 4.19

Optimal Mine Life 4 years 5 years 6 years

Source: Nehring and Shafiee (2016)

Table 5: NPV associated with ceasing operations at each deposit at each closure cost

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It can be seen that since deposits L, M and N are above the economic breakeven cut-off grade, these will always
be the first three deposits to be exploited sequentially regardless of the closure cost. It can be seen that at a
$30M, $50M and $70M net present value closure cost, the optimal mine plan changes to include deposits O
($30M), P ($50M) and Q ($70M) for a mine life of four, five and six years respectively. As shown through the
case study, the increase in mine life and thus the decrease in the present cost of closing the operation, to a
certain point, more than offset the losses associated with mining and processing deposits that are below the
economic breakeven cut-off grade. While this is a very simple example, it highlights the importance that the
time value of money has in generating an optimal mine plan and how changing closure cost will alter this plan.

Since mine closure costs are an inevitable expense once an operation has commenced, it is therefore vital that
closure costs are fully incorporated into the overall mine planning process from the outset. Operations that fail
to do this are compromising the value that can be attained from exploiting their deposit. Since mining
companies deal with a resource that is non-renewable and is therefore only ever able to benefit society once, it
is critical that as much value be derived from this as possible.

You have covered the following points in Part 3: Advanced Mining Economics and
Closure Planning.

 optimum rate of exploitation

 change in commodity price

 mine closure considerations

References

Camus, J. P. (2002) Management of Mineral Resources: Creating Value in the Mining Business. Society for Mining,
Metallurgy, and Exploration, Inc (SME), Littleton, CO, USA.

Hustrulid, W. A. and Kuchta, M. (2006) Open Pit Mine Planning & Design, Volume 1—Fundamentals, 2nd Edition. Balkema:
Rotterdam/Taylor and Francis: London.

Lane, K. F. (1988) The Economic Definition of Ore—Cut-Off Grades in Theory and Practice. Mining Journal Books Limited:
London.

Rudenno, V. (2004) The Mining Valuation Handbook—Australian Mining and Energy Valuation for Investors and
Management. WrightBooks: Victoria.

Runge, I. C. (1998) Mining Economics and Strategy. Society for Mining, Metallurgy, and Exploration, Inc. Littleton, CO, USA

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Mine Planning 2 - Operations

Table of Contents
About this Course

1. Help

2. Author

3. Preface

4. Copyright

5. Credits

Part 1: Sequence and Scheduling

1. Introduction

2. Open Pit vs Underground

3. Market Conditions

4. Underground Mining

5. Sublevel Stoping

6. Review #1

Part 2: Cut-Off Grade Policy

1. Breakeven Cut-Off Grade

2. Lane's Cut-Off Grade

3. Economic and Balancing Cut-Off Grades

4. Cut-Off Grade Investigation

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5. Review #2

Part 3: Advanced Mining Economics and Closure Planning

1. Rate of Exploitation

2. Change in Commodity Price

3. Closure Planning

4. Review #3

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