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The Cut-Off Grade and the Theory of Extraction

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  • Jeffrey A. Krautkraemer
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    Abstract

    The cutoff grade problem arises when technological infeasibility or high cost prevents an extractive firm from exploiting a heterogeneous deposit in strict sequence. The optimal cutoff grade varies directly with anticipated changes in present value price. A stochastic price path induces a higher (lower) initial cutoff grade if the marginal profit function is concave (convex). The optimal response to an unanticipated price change depends on the difference between the rates of change in price along the new and original price paths and whether or not the firm can increase extractive capacity, including the life of the mine.

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    File URL: http://links.jstor.org/sici?sici=0008-4085%28198802%2921%3A1%3C146%3ATCGATT%3E2.0.CO%3B2-E
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    Bibliographic Info

    Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

    Volume (Year): 21 (1988)
    Issue (Month): 1 (February)
    Pages: 146-60

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    Handle: RePEc:cje:issued:v:21:y:1988:i:1:p:146-60

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    Cited by:
    1. Cairns, Robert D. & Van Quyen, Nguyen, 1998. "Optimal Exploration for and Exploitation of Heterogeneous Mineral Deposits," Journal of Environmental Economics and Management, Elsevier, vol. 35(2), pages 164-189, March.
    2. Azimi, Yousuf & Osanloo, Morteza & Esfahanipour, Akbar, 2013. "An uncertainty based multi-criteria ranking system for open pit mining cut-off grade strategy selection," Resources Policy, Elsevier, vol. 38(2), pages 212-223.
    3. Shinkuma, Takayoshi, 2000. "A generalization of the Cairns-Krautkraemer model and the optimality of the mining rule," Resource and Energy Economics, Elsevier, vol. 22(2), pages 147-160, May.
    4. Shinkuma, Takayoshi & Nishiyama, Takashi, 2000. "The grade selection rule of the metal mines; an empirical study on copper mines," Resources Policy, Elsevier, vol. 26(1), pages 31-38, March.
    5. Akpalu, Wisdom & Parks, Peter J., 2005. "Natural Resource use Conflict: Gold Mining in Tropical Rainforest in Ghana," Working Papers in Economics 182, University of Gothenburg, Department of Economics.

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