Applying Risk Analysis to Assess Economic Viability

of Underground Mining at the Golden Sunlight Mine

James Sherialan

'

ABSTRACT
Risk can generally be defined as the possibility or chance of a loss corresponding to uncertainty. Analysis is
the process for examining the components and relationships of a complex system in order to determine the
impacts of its variables. Risk analysis is therefore a course of action taken to analyze multiple variables of a
system that is subject to speculative outcome. When risk analysis is applied to mine development, it becomes
the means for assessing and measuring those parameters that contribute to economic viability.
Mining can be a risky business. It is composed of an assortment of factors that contribute to its financial
outcome. Of these factors, the most consequential output is the net present value (NPV). Applying risk
analysis in mine development can identify those factors having the most significant impacts and applying
limits to those impacts.
Mathematical computer modeling using Monte Carlo techniques is available and can be customized to suit
specific mine development ventures. Essentially, those parameters that are not fixed values can have input
variability. Rationally deduced engineering estimates should be the basis for determining the initial values
applied as inputs in the models.
Risk analysis therefore provides the user a means to identify, rationalize and assess the risks in mine
development in an informed, calculated, and unbiased format for making economic decisions.

OBJECTlVE
The objective was to compare the net present value (NPV) of an underground mining operation at an existing
open pit mine operated by Golden Sunlight Mine, by applying Monte Carlo risk analysis techniques. This
analytical method provides a range of output values for those inputs that have uncertainty or variability rather
than a singular value. The results return a minimum, maximum, and mean outcome for each of the items that
variability was applied to. Though there may be several inputs that variability could be applied to, for this
specific task it was applied to those factors that would have the greatest significance on the economics of the
project. These factors included underground (UG) tons of ore, UG ore grade, UG mining costs, and gold
price.
BACKGROUND
Previous drilling from the surface had intercepted high-grade gold mineralization below and outside the
ultimate open pit limit. A total of twenty-two drill holes indicated the potential exists for underground
mining. However, due to pit geometry and operational constraints, sufficient delineation of underground
mine reserves could not be achieved by further surface drilling.
A plan of action was developed. It was decided to conduct a feasibility study. The first stage was to model the
current drill information. The second stage outlined an underground development ramp to provide access for
a drill program to confirm and strengthen the initial drilling. The third stage presumed that the drill program
was successful and that a production schedule would be created based on the mining method selected.
I

The geologic model was evaluated in exhaustive detail to provide the best information regarding structure,
origin of ore deposition, and localization of mineable ore zones based on existing drilling. Geologic ore
targets were anticipated based on the known drill intercepts that would yield the necessary tons and grade for

' Sr. Mine Engineer, Bechtel / SAIC LLC., Las Vegas, Nevada

an underground operation. Plans were developed to access the underground from both within the operating
pit and from a site outside of the ultimate pit limits.
Costs were gathered by means of spreadsheet modeling, vendor solicitation, and previous cost data sources.
A comprehensive spreadsheet was developed that linked production data to financial aspects. In this way, if a
change in production input were made, a corresponding change in financial output would be calculated.

RATIONAL of FEASIBILITY STUDY

To date all exploration drilling for the potential underground resource had been from the surface and was
essentially down-dip. Surface drill holes would typically average 1,200 feet in length. The alignment of the
drill holes could not adequately pierce the ore targets in a perpendicular fashion. A regularly spaced drill
pattern required to delineate the underground reserve could not be achieved due to the on-going mining
activity in the open pit operation. A drill study was done and costs for further surface exploration drilling
were estimated to be $6 million. It was decided that further drilling from the surface would be nonproductive, as a reasonable amount of drilling would not increase the understanding of the geologic model.
Underground exploration would be the best option .to obtain the necessary information for improving the
geologic model and to provide the data needed to complete a pre-production feasibility study. The
exploration drill program would require 60,000 feet of underground diamond core drilling. Drilling would be
carried out on regularly spaced intervals in vertical fan arrays from designated drill stations.
The feasibility study would examine the costs for an initial development access and definition drill program.
Assuming that the drilling proved up a mineable resource, costs that would support a production mine were
defined. The location of the development access was chosen to be outside of the open pit limits. This
selection was attributed to the fact that an in-pit access would significantly disrupt current open pit operations
but also that an in-pit access would be at a much higher elevation thus adding increased costs for the
additional development footage to be driven.
The feasibility study also examined the alternative of delaying the underground development access until the
open pit was finished being mined. This choice was eliminated since the mill would be idle for a prolonged
period of time while the underground access was being developed, the drilling was completed and
refinements to cost, and production scheduling were worked out.

MONTE CARLO ANALYSIS

.
In order for the feasibility study to arrive at some sort of conclusion, there must be specific values that can be
analyzed and compared to a base case in an unbiased manner. Mining only the open pit with no further action
being taken represents the base case for this exercise. The combined case is that case in which the
underground project is combined with the open pit operation. Therefore, the combined case will be compared
to the base case for economic evaluation. The specific values to be analyzed in the combined case were
derived by using the Monte Carlo or economic risk analysis technique. The Monte Carlo technique works by
applying a statistical formula that generates a distribution of possible outcomes. These outcomes were refined
through iterative simulations to produce the expected outcome values. These outcome values then were
integrated into a spreadsheet that incorporated both production and financial information. The key values of
the spreadsheet used for economic determination are the NPV and the cashflow. Since cash flow typically
identifies year by year values, this paper will only look at the NPV whose value is calculated once for the
entire project.
As mentioned previously, only four parameters were selected for the variability analysis. These parameters
were the UG tons of ore, UG ore grade, UG mining costs, and gold price. The basis of derivation for each of
these is rationalized in the following sections.

Derivation of UG Tons of Ore

Extensive geologic modeling was completed to derive volumetric data on the targeted ore zone. Polygons
containing ore grades of 0.070 opt Au and 0.100 opt Au were drawn on vertical sections spaced 25 feet apart

using VulcanB software. These polygons were constructed by constraining the drill hole intercepts
influenced by structural geology and the breccia ore boundary. The polygons were then triangulated and
volumes generated. The tonnage volumes generated around the 0.070 opt Au were 3.875 million tons and
around the 0.100 opt Au were 2.125 million tons. These volumes include tonnage from the. crown pillar. A
target of 4.375 million tons was defined based on geologic information but not supported by current drilling.
A mineable block of ore with grades greater than 0.100 opt Au was also digitized on the vertical sections that
yielded a volume of 1.125 million tons.
Due to the nature of the zones, it was recognized that not all of the ore-tons would be above the required
underground cut-off grade of 0.100opt: This percentage was estimated at approximately 50% of the tonnage
based on a cumulative probability distribution plot of the diamond drill intersections within the target areas.
It was also recognized that there was a significant overlap between the four volumes. Therefore only the
incremental volume was considered and the 50% factor was applied to these tons. The resulting tonnage's are
shown in Table I and were used the basis in assigning probability distributions for underground tons of
ore.
Table I.Derlvatlon ot UG Tons of Ore

I
I

Tonnage for Distribution

Target Tonnage

Ore Target Description

I

Mineable Ore Blocks

> 0.100 opt Au

1.125 million

1.125 million

Ore Blocks Between

0.100 opt Au

2.125 million

(2.125- 1.125)12 + 1.125

= 1.625 million

O r Blocks Between
0.070 O D Au
~

3.875 million

Geologic Potential

4.375 million

(3.875 2.125)12 + I 6 2 5
= 2.500 million
(4.37512) + 1.625
= 3.812 million
Source: Sheridan 1997

This tonnage reduction was considered prudent to account for the overlapping targets and waste areas within
the targets themselves.
Four separate Monte Carlo simulations were then run using the above information as a starting point. These
simulations were then averaged and a final cumulative distribution was run. The result of this simulation
appears in the Figure 1 graph. The type of graph is a "cumulative descending". Interpreting the graph is done
by reading the percent probability across on the y-axis and down on the x-axis. For example, a 50%
probability on the y-axis corresponds to tonnage of 2,170 on the x-axis.
Other pertinent information on the data sheet related to the graph are the minimum and maximum tonnage
values for the simulation run. The mean, mode and 50" percentile are also represented. The mean is the
arithmetic average of the data points. The mode is that value that occurs most often. The 50" percentile or
median, is the mid-point of the data meaning that half the values are higher than this point and half the values
are lower than this point.

Figure I.Underground Tons of Ore

Distribution for Underground Tonnage

RiskCumu1(757,4708,{1208,1613,2189,2885,4071),{0.05,0.25,0.50,0.75,5))
Iterations = I 0 0

UG Tons x I000
Source: Sheridan 1997
Statistical Value

I
I

Minimum

'

Maximum

805

4,679

5%
25%

I
I

1,169
1,596

Mean

2.355

50%

2.170

Mode

1,763

75%

2.858

Std. Deviation
I

I
I

~I

UG Tonnage
Distfibution

Percentile

UG Tonnage

916
I

Source: Sheridan 1997

NOTE: Tonnages are x 1000

In the risk formula for the tonnage distribution, for every tonnage number there is a corresponding number
indicating the probability or percent level of confidence that those tons will occur. Interpreting the graph
reveals the following information, There is a 95% likelihood of 1.169 million tons, a 50% likelihood of 2.170
million tons, and a 5% likelihood of 4.019 million tons.
Derivation of UG Ore Grade
The distribution for the underground ore grade was conducted in a similar manner. The same polygons used
for tonnage volumes were drawn around actual intercepts of 0.070 opt and 0.100 opt respectively. This is not
to say that all values of grade contained in these tonnage envelopes averaged 0.070 opt or 0.100 opt, but that
the likelihood of the cut-off grade is artificially set at 0.070 opt and 0.100 opt.
Since little information exists for assessing grades, four reasonable intuitive estimates for grade were
developed using the polygon information. A level of confidence probability was assigned to the

corresponding range of grades. Simulations were run on these four possible distributions and then averaged.
This average was then run again using a cumulative distribution.

An independent statistical analysis was done using the drill hole database in VulcanB. This analysis resulted
in producing. a distribution of grades that correlated with the previous intuitive estimates. Therefore,
confidence in the grade distribution was substantiated for use in the Monte Carlo analysis. The result of this
simulation appears in the Figure 2 graph.
Figure 2. Underground Ore Grade

Distributionfor Underground Grade

RiskCumu1(0.094,0.265,{0.099,0.115,0.140,0.174,0.229),{.05,.25,:50,,75,.95))
Iterations = 100

Underground Grade (Au opt.)

Source: Sheridan 1997
Statistical Value

UG Ore Grade

I
I

Maximum

I
I

Mean

Minimum

0.265

1
I

0.150

0.095

UG Ore Grade
Distribution

Percentile

25%

1
I

0.115

I
I

50%

0.140

5%

Mode

0.134

75%

Std. Deviation

0.042

95%

0.098

0.174
0.227

Source: Sheridan 1997

NOTE: Ore Grade is in opt (ounces per ton)

Interpreting the graph reveals the following information. There is a 95% likelihood of 0.098 opt Au, a 50%
likelihood of 0.140 opt Au, and a 5% likelihood of 0.227 opt Au.

Derivation of UG Mine Costs

A detailed production schedule was developed based on the mining method selected. From this spreadsheet
values for underground mine costs per ton were formulated. These values were assumed to have a standard
4.3

deviation of 10% and a minimum and maximum mining cost. This represented the distribution for mining
costs as shown in Figure 3 graph.
Mining costs derived fiom this spreadsheet correlated quite well with statistical averages in the mining
industry for the type of mining method selected. For this reason the risk formula could be written to reflect
the minimum, maximum and mean cost with a much narrower range of values and a higher level of
confidence probability.
Figure 3. UndergroundCost per Ton Mined

Distribution for UG Cost per Ton Mined

RiskTnorma1(23.5,2.5,22,27)
Iterations = 100

UG Cost ($US per ton)

Source: Sheridan 1997

Statistical Value

UG Cost per Ton Mined

Minimum

22.03

Maximum

26.97

Mean

24.21

Mode

23.11

Std. Deviation
50% Percentile

1.33

24.07
Source: Sheridan 1997

NOTE: Costs are $US

Interpreting the graph reveals the following information. The minimum cost is $22.03 per ton, the maximum
cost is $26.97 per ton, and the mean cost is $24.21 per ton. There is a 95% likelihood of a cost of $22.33 per
ton, a 50% likelihood of a cost of $24.07 per ton, and a 5% likelihood of a cost of $26.48 per ton.

Derivation of Gold Price

The corporate office established the distribution of gold prices. This practice enabled the company to report
uniform values by controlling the variability of gold prices at individual mine operations. Figure 4 shows the
distribution of the gold price.

Figure 4. Gold Price

Distribution for Gold Price

RiskLognorm(375,37.5)
Iterations = 100

Gold Prlce ($US per 02.)

I

Source. Sheridan 1997

StatisUcal Value

Gold Price
I

Minimum

280.69

Maximum

Mean

375.06

Mode

367.08

Std. Deviation

37.81

50% Percentile

373.03
Source: Sheridan 1997

NOTE: Gold Price in $US per ounce.

Interpreting the graph reveals the following information. The minimum price for gold is $280.69 per ounce,
the maximum price for gold is $498.16 per ounce, and the mean price for gold is $375.06 per ounce.
There is a 95% likelihood of the price of gold to be $315.20 per ounce, a 50% likelihood of the price of gold
to be $373.03 per ounce, and a 5% likelihood of the price of gold to be $440.80 per ounce.

INTERPRETATION OF THE MONTE CARLO VALUES

Probabilistic distribution formulas were applied to each of the four parameters. The resulting values returned
ranges of outcomes. A simulation was run on the base case only. This established the initial values with
which to compare the combined case values. The mean values calculated in each of the four parameters that
variability was applied to was the value represented in the production / financial spreadsheet.
Interpretation of the results indicated that profitable scenarios are not restricted to high tons, high grade, low
costs or high gold prices. For example, a combination of low grade and high tons could be as profitable as a

case with high grade and low tons. Profitability is not dependent upon all parameters of variability being
maximized to achieve the best outcomes.
Base Case Net Present Value
Deciphering the outcomes generated by the Monte Carlo analysis is best served by graphical representation.
illustrates a plot of the ranges of NPV's for the open pit only base case. Variability was only
~ i ~ u5i e
applied to the gold price. One hundred iterations were run on this simulation.
Figure 5. Base Case Net Present Value

NPV Open Plt Only

250.000 -

---

...........................................................................................

200.000 -

NWOpenPiOnly

I
...................................................................................................................
I

150,000

t
b
100,000 -

50.000 - r
...................................................................................................................

>

. - m m

h.tbn.

Source: Sheridan 1997

Net Present Value
Base Case

Mlnimum NPV

Mean NPV

NPV @ 5%

46,789

1 17,451

Maximum NPV
206,512
Source: Sheridan 1997

NOTE: NPV are $US x 1000

Combined Case Net Present Value

After running the simulations on the four parameters that variability was applied to, one hundred iterations
were run. The combined case NPV graph has been overlaid on the base case NPV graph. Notice that the
combined case graph has a definite clipped shape to it. This is because the minimum combined case NPV
would represent the base case NPV reduced by the NPV of the exploration project. The base case NPV has a
value of $1 17,45 1,000. The exploration project has an NPV of negative $6,000,000. Therefore, the minimum
combined case NPV is $1 11,45,1,000. All values returned by the combined case have been truncated to show
this $6 million difference. The graph shown in Figure 6 illustrates this representation.

Figure 6. Combined Case Net Present Value

N W Comparison
Open Pit Only va. Combined Case

m,cc
'Q

--N

N W Open Pit Only

V Combined Case

Source: Sheridan 1997

Net Present Value
Combined Case

Minimum

Mean

NPV @ 5%

111,451

117,551

Maximum
273.474

Source: Sheridan 1997

NOTE: NPV are $US x 1000

The results of the combined case graph indicate that the mean is only slightly better than the mean produced
by the base case. This represents a difference of $10,000. This variance is hardly worth the investment to
proceed with an underground development program. .However, when comparing the maximum values of the
two cases, the difference is much more significant. This variance is nearly $67 million. Certainly there is a
possibility of the combined case to make more money than the base case, but how much more?
In order to determine what amount of iterations run on the combined case whose NPV's were greater than
those run by the base case, another graph was developed. This graph is shown in Figure 7. The graph
represents the arithmetic difference between the combined case NPV and the base case NPV. The
incremental NPV values were then sorted in ascending order to better exemplify the number of iterations that
would be greater,than the base case NPV.

Figure 7. Base Case and Combined Case Incremental NPV

Incremental NPV

Source: Sheridan 1997

Interpreting the graph reveals the following information:

A total of I00 iterations were run.

Of the 100 iterations, 67 were below the base case NPV.

Of the 100 iterations, 33 were greater than the base case NPV.
The average incremental NPV of these 33 iterations was $23 million.
The average of all 100 iterations had an incremental NPV of $4 million.

CONCLUSION
By applying Monte Carlo techniques using probabilistic distribution formulas on the four selected parameters
in this study, values for NPV were obtained. The significance of this technique is that a range of outcomes
could be generated rather than a singular value. This information provides the user with values for potential
downside as well as for potential upside. It also generates the mean or expected outcome. In this manner, an
unbiased economic decision could be made to proceed with the project by examining the NPV of the base
case and comparing it to the combined case NPV.

ACKNOWLEDGMENTS
I am grateful to the following people that worked at the Golden Sunlight Mine and who contributed their
expertise when necessary: Paul Buckley, Dan Banghart, Rick Jordan, Joan Gabelman-Brink, John Coulthard,
Marilyn Bartlett, Gail Arnicucci, Jesse Noel, and A l Storey. Thank you all.
REFERENCES
J. Sheridan, 1997, Proposal f o r , Financial Approval for Deep Breccia Exploration Development,
Underground Project Engineer, Golden Sunlight Mines, Whitehall, Montana