CHAPTER TWO Economic Principles tion is— Does it contain ore? Or potential ore? ‘An inconvenient consequence of adopting an economic definition of ore is that there is no longer any mini which permits an isolation. 4 ground treated and delivered to the economies of ore dei ofthe total mi 1g process. Indeed, ir determine the economic defini such can be mis! They that might be compared wit ground. The only immediate value they could possess is the price mining company might bid for the right to mine them. More re a Any val n ved as an integral part of the proceeds of the operation, It follows from these considerations that, in order to establish an 6 ee Econ economie bas to an operat which influence ore standing of the economic process. ~ ‘The factors concerned costs, but they can be t he directed ig mine. An understanding of the economic factors ries must be derived ore, some The basis, optiinum and. this basis on of the ore. In other words, d be scheduled for: estab he material from the ore if, and only if, the decisis value of the operation. This Economie Asa result of earning rev operation generates ann mated into a value, strictly a ‘present’ an ‘The theory of present values — o: return —and methods for dete the mining industry, certainh universally used f However, policy is less common. Of course, this does not make ing new projects. um operating, cantly from conventiona Present value maximisation indicates higher grades and higher rates of mining which seem inconsistent with trusted conservative mining policies.FOSCPFFFFFFSIFIFFIIFIIFIFIIFIFLIFIIIIIIISS:I tions 1) miner: contribs from the application of these 12 upon the definition of the terms ie cut-off ps ia can be the same, depen ion to the recovered mineral will exceed the cost of treating it should be ore. Sometimes a contribution towards to the costs and so beyond also added. Thi re th overlooks capi ons apply to the try to stock the more prc \S 9 capacity which is limit , the mill, pment, etc. — and withi the margin, pretation of the but the supporters of the criterion usuallly give no b: the margin, other than company policy. The pre t. gives a precise basis derivedas a trade-off between present and future earnings via the present value function ‘The seconde at the extraction of valuable mineral should be maximised is frequently proposed by mineral rights owners, local 8 Leonomie Principles . mediately begs a ? An extreme argu reserves (w ey are) should rests of conserving resources, This is an suailly stems from a misunderstanding of the the ground. A less extreme ped hricher ma istic stance whi rial of necessity determine just how poor poorer the maxim c criteria, howevei ‘gree 0 not be economic on its ‘oming; they do not ns. Nor do they deal satisfac- compare inherent value w lower cut-off grades. Now, grades and if the y often does, the output of miner: what ge the same, as it most ite th ly ad i! and should prompt an Present vi lue is the only criterion which does i ling with varying economic conditions. Parameters delinine the conditions are included in the present value estimates and affect ‘the optimum cut-off calculations in a way which avoids nonsensical 9ed in Case Study 2 ly wish t0 see industrial continuing employment, iy taxes and, per continu " an apparent conflict here between the Th nterests of the 12 parties but, from a strictly economic point of view, itis 1s to ble conflict. If a mine is planned in su ise its net present value (excess of present value over caj costs) then, in theory, there is more wealth to share between the in the event they art them. or not depen presei n spe ion, necessarily sub- this book except for of 2 mining cases, for adopt optimum, but su occasional incidenta ier bases of defi re not covered references. 10 See “to the present. If these cash flows, year by year, are Cy, Cy, CHAPTER THREE ite Resources and Present Values ona body of Some are very ite and, sooner or later, wi ings, The fundame: by maximising present vi fe not and, hence, current oper the and analysis. It is, of course, the provides the m times, commensu cut-off strategy ed upon an exhaustable resource ing strategies do not react on the f mining rates wi is must somehow be also given Denote the present v resource by V. The ope general and co: for example, the liquidation of a stockpi ed as the total of the future cash flows discounted back ing paragraphs. ulisd ( V = Cy(l + 8) + CYC + OY + the cos IW) x Bas a perc ves and casts e dependent on the ue of pe cash flows Cy. Co. prevailing at the time and therefore the upon the present tinie, 7, which forms the base of the present value of two exactly s jerent times will, in general, dilfer. ie. V= V(T) je. zero e. V-= VER) and V(T.0) = 0 resource. R. is consum This, however, is not the end of the story. V must depend upon convention Q, Q defines the ope in the future an V = V(T.R.Q) mine, Q would e¢ ’) which can take on different ing years of the mine’s life. Su 'y and therefore gy cutolf grades are strategies for Q= 2 v=va Now, rever the general case, of all the sets of operating strategies, Q, which could be adopted, there must be one set, at least, which is optimum in the sense that this set gives rise to the maximum value for V( ues for Q R.Q). Or, to putit another way, any set of 2 Finite Resources and Present Vatiu will give rise to some va every conceivable s and one, for V(T.R.Q), and if Q is varied ove Fy correspondingly be least, of bu but itis dependent nothing else, Thus Maxo{V(T.R.Q} = V"( sR) Before de V*(T,R) more closely. Itis a functioy formsa surface. For R = 0, whe! the surface slopes to ze must decrease, in gen strategy involves ac A possib this figure is down towards the This axis i itself the zero ‘prese figure, the conto decline into a sh and then ris years, For example, if the oper ow (T = 0). usted. V* = Oso so, the function gen 83:4 million gradually increases to over $5 million after 10 years, A pattern of th which deteriorate ini of constant prices and costs give rise to horizontal parallel values which imply that present valuesare not affected unless some resource is consumed, rove, Project BFigure 3.1 ° « Fone) ‘An Exploitation Track Tine T yews) ices and Present Vai ce'is consumed at every and hence it is a ategy. Itean be with res tonnes per 05 a of nine years, Every ex values. Given ied sequence of prese ied prices, costs These present values can be ints on the maximum pres. none can exceed the corresponding ma: Ibe y m strategy track. Moreover, the present values at every subsequent point along su track n contradiction to the d This pr track must optimum for every point nd all the associated present values must be ma: her words, optimum strategy tracks must be embedded in ue surlace.PETIT TTT TTT TTT TCT CSCC TTT TEST ETIEBIESSi Finite Resources and Present Values surface as ite 3.3 Le. € = (0,0) nd ¢ = c(w,t) y{—~ Optra Satay ‘Face am VAD entation of Optimum Embodsed in taximum Prosont Value Surace optimum strategy V(THUR=1,2') = V4(T4.R-1) 16 ”SPFFSFSSSSSCSCSSFSFTSFIVFSSESSSEESESSESTEGewA Now, ximising VUT.R) = Max (re(w,t) + V(THR=1)(145)') ig by the binomial theorem and assuming rand t s h sides of the equation with respect to w but ex; Ve(THR=1)( 148)! = (V*CE.R) + dT — rdV4dR}(-81) = (ed) V"(T,R) + dV*dT ~ rd 7G to the first order of approximation ‘ming the differentials are at the point T.R. . ° T,R dependence to simplify the notation ) + V* = 3tV* + tdV/dT ~ rd VIR} However, both V* and rd V"VdR are independent of w and ay be removed from the maximisation expression. V* cancel rd VFR = Max {re(o.t) + (Vid — 8V*)} Here VAT. like V*, is also independent of o. Pu = dV" — dV"AT the equation may be rewritten nV"dR = {re—Ft} or dV*/dR = Max {c—Fvr} where F is constant and the m This equation is a quite remar must be a maximum at all points This means that the strategi decrement rin R intuitively obvious bi xin tion is with respect to w. result. 1 aV"AR along an optimum strategy track, be chosen so that every test possible effect on V+. then give the greatest total, Or, in reverse. if an op! ick is followed backwards from R = 0/in steps of r, her s n of steepest ascent up surface V*. le owever, are on 1} no more difficult than the maxim ofc itself. The only difference introduced by considering the present value of a sequence of cash flows inst 8 1 Values dependent of w, me cost term and one term of ady in c. ‘optimum exploitation Secondly, i atany point, th of the opti - of course, be a bonus is positive), jods for determining a value ent optimum is required. In ion for F gives an adeq y. This subject is discussed The second method is to employ a nique. A starting value for F i exploitation strategy calei 19Economie Definition of Ore in certain cases, can be important, Chapter 10 describes the technique in the context of determining an optimum cut-off grade policy Summarising, the optimum exploitation strategy for the present determined ing the expression =e-Fr... (I) om a unit decrement of resource, me taken 10 process the unit and V* is the maximum present is formula is necessary for the calculation of alt grades in conjunction with a suitable economic optimum model 2» CHAPTER FOUR Economic Models ration is to provide a in certain variables, present purposes, it is nec changes in cut-olf grades, thi opel res have unique features so lored to if process is si construct a basic model to which v. ‘There are three main components to which the component is of components in this way is fundamental but the n of the definition differs for various types of mine. Itis concerned Costs are {In an underground mine this component would norma “levelopment. It consists of driving headings, raises etc. and formingPHFFFFFFFFFIFBHHFGFFIFGIIFAIFGSIOSSIASESi Econom an open pit itis the ed body which is e ore. The costs are incurred per tonne of oreand the the maximum throughput of ore that the installation can mining, come: he ren to this category. In an he process throuigh which the ‘open pit ore passes It is important to appreciate components in mining do ent usage lerpretation of cert significant departures from normal n words. The reason for this is the 2 Figure 4.1 UNDERGROUND SURFACE “Developing D MINING Raising Loading Cross-cutting Hauling Stoping Tramming Hoisting TREATING Crushing Grinding Separating Smelting MARKETING Refining consistent with both undergr tions and to id and ccommodate the three compo structure, example , in an underground operation, stopi would normally be classified as min ies which are the respon: more doubtful but it, In this analysis, however, a s treatment activities because they are concerned with ore. The point is that material within the mineralised body only incurs stoping, 2B» ® » ® ® ® . ® ® ® » » . » ® » ® ® rocess of creating access to the c adequately wer or notitis to be jore, development costs are opened up. Rai jon costs are also essemtially access its grade access has been develop) y mineralised body. However, on closer examination mining removed is ore, beneath it of we term has been adopted in er term where the definition requires n whieh mil inned. In n the mining leases to which A mineralised body contains ut normally some of it will be of zero grade — for © overburden and dykes — and only a proportion of the remainder will prove to be economic and hence |. by en elaborated at length because they source of some confusion, Most profe ig costs are by their own definition adapt to the id for cut-off grade determ should, in certain circumstances, be renamed. problem. The pract 4 -Which of the three components of the mining operation is Economie Models nine the fixed and i accepted fixed costs } of course, the word “fixe h costs vary with time and are more A convenient not tio Capa (ihva'p M ‘Tre HW Marke! a where x is the proportion of mineralised material classified as ore and Gis the average grade of the ore as a mineral : ore ratio. Other process (100 y% time costs per year (sometimes referred to as fixed costs) price per © cash flow per unit of ised mate + time taken ‘one unit o Any of these p: represented by q| used U ry from ye ent upon the context. for the cash flow arising from one ¢ = (p-k)xyg—xh—m—fr.. . (1 where tis the time taken to progress through the unit. depends upon 25FEPFFFFFHFFIFIFIFTFFGFFIIIISISIIIIIIII ISAS: imiting throughput. Thus ect of the next chaptei Examples of some other models are given in Chapter 17. CHAPTER FIVE, Limiting Economic Cut-Off Grades Having derived an expression to be maximise ‘optimum operating resource (1), cut-off grades for a mine (II), and to quote an expression for determ Tt is: in order to obtain an the two ff grades, 1g optimum cu Max,{(p—k)xy8—xh~m—fr—-1(8V*—dV"VdT)} ‘or Max, ((p-k}xyg—xh—m~(f+F)1) For future reference call we expression in (+P)... a) It corresponds to dV*/AR, the rate at whieh the present value is changing with respect to changes in R. the resource available. In this expression x, the ore to ised material ratio, and g, ectly dependent upon the c 1 ke sv. ive, v = (p—K)xy8—yh- time t, isl be recognised three cases give ris limiting output. The to three optimum cut-off grades which are calle from Case Study 3 (p.116) are used to . The operation concerned is a medium-sized open mine, For ease of reference, the relevant here $1-32/tonne of material (m) “Treating variable cost 83-41/tonne of ore (h) 7VPVPVVVIVVVSVSsSTVVVVsVVsseTTTTFeSeSEBE F ing Economic Cut-Off Grades 12 million tonnes/y derived on the assumption that the decision to continue operating 3-9 million tonnes/year (H) beyond the curren \d already been taken. If it had 0-9 thousand tonnes/year (K) not, different conside ipply. These are illustrated in Case Study 1 (p.108). Price net of marketing costs it does not involve any reference to present Recovery Estimate y cost this wi here is no trade-off of future, losse 12 (O/P) or the rate of development (LG) cut-off fhe corresponding capacity isM units per yearso | oxi 6 grade should be ression becomes | because a lower grade Ai assified as ore and Maxy{via = (P—K)sye—xh—m~ (FF FYM) ere is no restriction on the with g $0 gq, the optimum cut-off ly to limit the throughput of the extra ore. ‘There- es as the price rises. hn} Substituting the data presented above & Here g be represente of the grade m determined by calculus, However, possi because of the form of the expression x{(p~k)ya—h} Acu that g can be lowered for as long as (p—K)yg is greater than >the min is Hence the breakeven point is given by throughput so everyt plant and market are starved of ig possible is classified as ore. 2) Treatment Limit This is the con ig ies; mineralised material shou (p= k)yg, exceeds ing throughput. In one unit of ives rise to x units of ore and these take x/H Units of time to treat, Therefore t = x/H and the expression becomes Max, (vy, = (p=k)syg—sh—m-— (1+ F)x/H) Following the same rea re are two significant it means that the impli only cover the variable cost of treatment (after due marketing cost, k). Time costs are not relev: ning as before, this is equivalent to r Max, (x|(p—K)yB-h=(F+EVH]} 29PFFFFFFHFFIFIFFVIIFGIIFGHAIFGTIFISSESSSi and is given by (p—k)ygy = bh + (4 n= (h-+ (FFRYH)(p-B)y int that the present value term F = 8v’-dV*4dT simply as an addition pear formula is very differe from {3-41 + (11-9 + 15-2)13-9} / 60 x 087 20 kilo/tonne ‘This figure is probably similar to those derived from traditional cut-off grade analyses which take no account of present value The difference illustrates the premium attach ows when only the treatment facilities are throughput. 3) Market Limiting This can be a genuine market restris A exclusive sales ct oF it can be. pacity of a refinery or smelter. One unit of mineralised material gives rise to xyB units of mineral which take » of time 10 process or sell. Thus, the optimising expression becomes Max, {v, = (p—k)xyh—xh—m—(f+F)xyB/K} 30 5 Economic Cu-Off Grades As before this is equivalent to Maxy {x[(p—k=(+ EVR )y8—h]) and gy is given by (p-k~(+FY/K) yg, = or gy = W/(p—k—(E+B)/K Fy ng formulae have in common the property d to the limiting : ie. for the ‘This and the prece the fixed costs id adlded to the correspondi lent cost becomes b+ ((+EVH ing case, the marketing cost becomes k+ (GPK ‘The lutter formula is novel in form but it posse characteristic that the cut-off remaining life of the mine is reduced. ing this formula to the given e Be = S41 / (60-(11 = 0-13 kilo/tonne 15-2009) x 0-87 This lower figure is a consequence of the fact that a market restricts the extent 10 whieh the cash flow pattern can be by the cut-off grade pol ey wel itcomes with correspondingly differe on derived in Case Study typical figure for a mine of this kind and its use gives le, They reveal the profound ‘effects which capacities have on cut-off grade determinations. 3FEFTFTSTSTSCSCSSSESSCSFSISIESEEERSSSSSSSEEEI of Ore des actually present jneralised body. N breakeven formulie. A cut-olf grade solely t0 costs, p grades actually v in general, is ves sed grade distribution chapter. However, in the part component of the m One very important reservation about the apy formul formulae is that they ground. These are not measured for not one which is generally yy be exercised on the ay be ational cut-off grade is called a paramet because it is indirectly related to the real grade ing economic cut-off gra exist but must be calculated with care. This subject is discussed more fully in Chapter 11. 2 Economie Cut-Off Grades her rese} s he formulae are dependent ups A different model ty is mentioned in er I]. An example of is given in Chapter 17. s and also desi nisation formula 23