The Determination of a Dynamic Cut-Off Grade for the Mining Industry

  • P. V. Johnson
  • G. W. Evatt
  • P. W. Duck
  • S. D. Howell
Chapter
Part of the Lecture Notes in Electrical Engineering book series (LNEE, volume 90)

Abstract

Prior to extraction from a mine, a pit is usually divided up into 3-D ‘blocks’ which contain varying levels of estimated ore-grades. From these, the order (or ‘pathway’) of extraction is decided, and this order of extraction can remain unchanged for several years. However, because commodity prices are uncertain, once each block is extracted from the mine, the company must decide in real-time whether the ore grade is high enough to warrant processing the block further in readiness for sale, or simply to waste the block. This paper first shows how the optimal cut-off ore grade—the level below which a block should be wasted—is not simply a function of the current commodity price and the ore grade, but also a function of the ore-grades of subsequent blocks, the costs of processing, and the bounds on the rates of processing and extraction. Secondly, the paper applies a stochastic price uncertainty, and shows how to derive an efficient mathematical algorithm to calculate and operate a dynamic optimal cut-off grade criterion throughout the extraction process, allowing the mine operator to respond to future market movements. The model is applied to a real mine composed of some 60,000 blocks, and shows that an extra 10% of value can be created by implementing such an optimal regime.

Keyword

Real-options Mining Stochastic control Reserve valuations Cut-off grade 

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Copyright information

© Springer Science+Business Media B.V. 2011

Authors and Affiliations

  • P. V. Johnson
    • 1
  • G. W. Evatt
    • 1
  • P. W. Duck
    • 1
  • S. D. Howell
    • 2
  1. 1.School of MathematicsUniversity of ManchesterManchesterUK
  2. 2.Manchester Business SchoolUniversity of ManchesterManchesterUK

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