IDEAS home Printed from https://ideas.repec.org/a/eee/jrpoli/v63y2019ic43.html
   My bibliography  Save this article

Better management of production incidents in mining using multistage stochastic optimization

Author

Listed:
  • Reus, Lorenzo
  • Pagnoncelli, Bernardo
  • Armstrong, Margaret

Abstract

Among the many sources of uncertainty in mining are production incidents: these can be strikes, environmental issues, accidents, or any kind of event that disrupts production. In this work, we present a strategic mine-planning model that takes into account these types of incidents, as well as random prices. When confronted by production difficulties, mines which have contracts to supply customers have a range of flexibility options including buying on the spot market, or taking material from a stockpile if they have one. Earlier work on this subject was limited in that the optimization could only be carried out for a few stages (up to 5 years) and in that it only analyzed the risk-neutral case. By using decomposition schemes, we are now able to solve large-scale versions of the model efficiently, with a horizon of up to 15 years. We consider decision trees with up to 615 scenarios and implement risk aversion using Conditional Value-at-Risk, thereby detecting its effect on the optimal policy. The results provide a “roadmap” for mine management as to optimal decisions, taking future possibilities into account. We present extensive numerical results using the new sddp.jl library, written in the Julia language, and discuss policy implications of our findings.

Suggested Citation

  • Reus, Lorenzo & Pagnoncelli, Bernardo & Armstrong, Margaret, 2019. "Better management of production incidents in mining using multistage stochastic optimization," Resources Policy, Elsevier, vol. 63(C), pages 1-1.
    • Handle: RePEc:eee:jrpoli:v:63:y:2019:i:c:43
    DOI: 10.1016/j.resourpol.2019.101404
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0301420718307013
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.resourpol.2019.101404?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Margaret Armstrong & Alain Galli & Rija Razanatsimba, 2012. "Using multistage stochastic optimisation to manage major production incidents," Post-Print hal-00771482, HAL.
    2. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    3. Shapiro, Alexander & Tekaya, Wajdi & da Costa, Joari Paulo & Soares, Murilo Pereira, 2013. "Risk neutral and risk averse Stochastic Dual Dynamic Programming method," European Journal of Operational Research, Elsevier, vol. 224(2), pages 375-391.
    4. Sánchez Lasheras, Fernando & de Cos Juez, Francisco Javier & Suárez Sánchez, Ana & Krzemień, Alicja & Riesgo Fernández, Pedro, 2015. "Forecasting the COMEX copper spot price by means of neural networks and ARIMA models," Resources Policy, Elsevier, vol. 45(C), pages 37-43.
    5. Savolainen, Jyrki, 2016. "Real options in metal mining project valuation: Review of literature," Resources Policy, Elsevier, vol. 50(C), pages 49-65.
    6. Andy Philpott & Vitor de Matos & Erlon Finardi, 2013. "On Solving Multistage Stochastic Programs with Coherent Risk Measures," Operations Research, INFORMS, vol. 61(4), pages 957-970, August.
    7. James L. Paddock & Daniel R. Siegel & James L. Smith, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 103(3), pages 479-508.
    8. Alonso-Ayuso, Antonio & Carvallo, Felipe & Escudero, Laureano F. & Guignard, Monique & Pi, Jiaxing & Puranmalka, Raghav & Weintraub, Andrés, 2014. "Medium range optimization of copper extraction planning under uncertainty in future copper prices," European Journal of Operational Research, Elsevier, vol. 233(3), pages 711-726.
    9. Wan, Yang & Clutter, Michael L. & Mei, Bin & Siry, Jacek P., 2015. "Assessing the role of U.S. timberland assets in a mixed portfolio under the mean-conditional value at risk framework," Forest Policy and Economics, Elsevier, vol. 50(C), pages 118-126.
    10. B. K. Pagnoncelli & S. Ahmed & A. Shapiro, 2009. "Sample Average Approximation Method for Chance Constrained Programming: Theory and Applications," Journal of Optimization Theory and Applications, Springer, vol. 142(2), pages 399-416, August.
    11. Webby, R.B. & Adamson, P.T. & Boland, J. & Howlett, P.G. & Metcalfe, A.V. & Piantadosi, J., 2007. "The Mekong—applications of value at risk (VaR) and conditional value at risk (CVaR) simulation to the benefits, costs and consequences of water resources development in a large river basin," Ecological Modelling, Elsevier, vol. 201(1), pages 89-96.
    12. Najafi, Amir Abbas & Mushakhian, Siamak, 2015. "Multi-stage stochastic mean–semivariance–CVaR portfolio optimization under transaction costs," Applied Mathematics and Computation, Elsevier, vol. 256(C), pages 445-458.
    13. Cortazar, Gonzalo & Schwartz, Eduardo S, 1993. "A Compound Option Model of Production and Intermediate Inventories," The Journal of Business, University of Chicago Press, vol. 66(4), pages 517-540, October.
    14. James E. Smith & Robert F. Nau, 1995. "Valuing Risky Projects: Option Pricing Theory and Decision Analysis," Management Science, INFORMS, vol. 41(5), pages 795-816, May.
    15. Margaret Insley & Kimberly Rollins, 2005. "On Solving the Multirotational Timber Harvesting Problem with Stochastic Prices: A Linear Complementarity Formulation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(3), pages 735-755.
    16. G Barbarosoǧlu & Y Arda, 2004. "A two-stage stochastic programming framework for transportation planning in disaster response," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 55(1), pages 43-53, January.
    17. James E. Smith & Kevin F. McCardle, 1998. "Valuing Oil Properties: Integrating Option Pricing and Decision Analysis Approaches," Operations Research, INFORMS, vol. 46(2), pages 198-217, April.
    18. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
    19. Cortazar, Gonzalo & Kovacevic, Ivo & Schwartz, Eduardo S., 2015. "Expected commodity returns and pricing models," Energy Economics, Elsevier, vol. 49(C), pages 60-71.
    20. Dehghani, Hesam & Ataee-pour, Majid & Esfahanipour, Akbar, 2014. "Evaluation of the mining projects under economic uncertainties using multidimensional binomial tree," Resources Policy, Elsevier, vol. 39(C), pages 124-133.
    21. Philippe Artzner & Freddy Delbaen & Jean‐Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228, July.
    22. Slade, Margaret E., 2001. "Valuing Managerial Flexibility: An Application of Real-Option Theory to Mining Investments," Journal of Environmental Economics and Management, Elsevier, vol. 41(2), pages 193-233, March.
    23. Bernardo K. Pagnoncelli & Adriana Piazza, 2017. "The optimal harvesting problem under price uncertainty: the risk averse case," Annals of Operations Research, Springer, vol. 258(2), pages 479-502, November.
    24. Henrik Andersson, 2007. "Are commodity prices mean reverting?," Applied Financial Economics, Taylor & Francis Journals, vol. 17(10), pages 769-783.
    25. Guigues, Vincent & Sagastizábal, Claudia, 2012. "The value of rolling-horizon policies for risk-averse hydro-thermal planning," European Journal of Operational Research, Elsevier, vol. 217(1), pages 129-140.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Oscar Dowson & Lea Kapelevich, 2021. "SDDP.jl : A Julia Package for Stochastic Dual Dynamic Programming," INFORMS Journal on Computing, INFORMS, vol. 33(1), pages 27-33, January.
    2. Lorenzo Reus & Guillermo Alexander Sepúlveda-Hurtado, 2023. "Foreign exchange trading and management with the stochastic dual dynamic programming method," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-38, December.
    3. Nesbitt, Peter & Blake, Lewis R. & Lamas, Patricio & Goycoolea, Marcos & Pagnoncelli, Bernardo K. & Newman, Alexandra & Brickey, Andrea, 2021. "Underground mine scheduling under uncertainty," European Journal of Operational Research, Elsevier, vol. 294(1), pages 340-352.
    4. Lorenzo Reus, 2020. "Efficient selection of copper sales contracts for small‐ and medium‐sized mining," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(4), pages 624-630, June.
    5. Lorenzo Reus & Rodolfo Prado, 2022. "Need to Meet Investment Goals? Track Synthetic Indexes with the SDDP Method," Computational Economics, Springer;Society for Computational Economics, vol. 60(1), pages 47-69, June.
    6. Gilani, Seyyed-Omid & Sattarvand, Javad & Hajihassani, Mohsen & Abdullah, Shahrum Shah, 2020. "A stochastic particle swarm based model for long term production planning of open pit mines considering the geological uncertainty," Resources Policy, Elsevier, vol. 68(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Savolainen, Jyrki, 2016. "Real options in metal mining project valuation: Review of literature," Resources Policy, Elsevier, vol. 50(C), pages 49-65.
    2. Insley, M.C. & Wirjanto, T.S., 2010. "Contrasting two approaches in real options valuation: Contingent claims versus dynamic programming," Journal of Forest Economics, Elsevier, vol. 16(2), pages 157-176, April.
    3. Armstrong, Margaret & Langrené, Nicolas & Petter, Renato & Chen, Wen & Petter, Carlos, 2019. "Accounting for tailings dam failures in the valuation of mining projects," Resources Policy, Elsevier, vol. 63(C), pages 1-1.
    4. Alejandro Mac Cawley & Maximiliano Cubillos & Rodrigo Pascual, 2020. "A real options approach for joint overhaul and replacement strategies with mean reverting prices," Annals of Operations Research, Springer, vol. 286(1), pages 303-324, March.
    5. Chris Kenyon & Stathis Tompaidis, 2001. "Real Options in Leasing: The Effect of Idle Time," Operations Research, INFORMS, vol. 49(5), pages 675-689, October.
    6. Luiz E. Brandão & James S. Dyer & Warren J. Hahn, 2005. "Using Binomial Decision Trees to Solve Real-Option Valuation Problems," Decision Analysis, INFORMS, vol. 2(2), pages 69-88, June.
    7. María Luisa Saavedra García & Máximo Jorge Saavedra García & Deyanira Bernal Domínguez, 2013. "A foreign investment project of an autoparts firm: Real options versus financial valuation," Economía, Instituto de Investigaciones Económicas y Sociales (IIES). Facultad de Ciencias Económicas y Sociales. Universidad de Los Andes. Mérida, Venezuela, vol. 38(35), pages 127-156, January-J.
    8. Alonso-Ayuso, Antonio & Escudero, Laureano F. & Guignard, Monique & Weintraub, Andres, 2018. "Risk management for forestry planning under uncertainty in demand and prices," European Journal of Operational Research, Elsevier, vol. 267(3), pages 1051-1074.
    9. Mehrdoust, Farshid & Noorani, Idin & Kanniainen, Juho, 2024. "Valuation of option price in commodity markets described by a Markov-switching model: A case study of WTI crude oil market," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 215(C), pages 228-269.
    10. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
    11. Babak Jafarizadeh & Reidar B. Bratvold, 2021. "Project Valuation: Price Forecasts Bound to Discount Rates," Decision Analysis, INFORMS, vol. 18(2), pages 139-152, June.
    12. Lorenzo Reus, 2020. "Efficient selection of copper sales contracts for small‐ and medium‐sized mining," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(4), pages 624-630, June.
    13. Galay, Gregory, 2018. "The impact of spatial price differences on oil sands investments," Energy Economics, Elsevier, vol. 69(C), pages 170-184.
    14. Siña, Matías & Guzmán, Juan Ignacio, 2019. "Real option valuation of open pit mines with two processing methods," Journal of Commodity Markets, Elsevier, vol. 13(C), pages 30-39.
    15. Carlos Andrés Zapata Quimbayo, 2020. "OPCIONES REALES Una guía teórico-práctica para la valoración de inversiones bajo incertidumbre mediante modelos en tiempo discreto y simulación de Monte Carlo," Books, Universidad Externado de Colombia, Facultad de Finanzas, Gobierno y Relaciones Internacionales, number 138, April.
    16. Guedes, José & Santos, Pedro, 2016. "Valuing an offshore oil exploration and production project through real options analysis," Energy Economics, Elsevier, vol. 60(C), pages 377-386.
    17. Abdullah Almansour and Margaret Insley, 2016. "The Impact of Stochastic Extraction Cost on the Value of an Exhaustible Resource: An Application to the Alberta Oil Sands," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2).
    18. Chen, Shan & Insley, Margaret, 2012. "Regime switching in stochastic models of commodity prices: An application to an optimal tree harvesting problem," Journal of Economic Dynamics and Control, Elsevier, vol. 36(2), pages 201-219.
    19. Seiji Harikae & James S. Dyer & Tianyang Wang, 2021. "Valuing Real Options in the Volatile Real World," Production and Operations Management, Production and Operations Management Society, vol. 30(1), pages 171-189, January.
    20. Insley, Margaret, 2017. "Resource extraction with a carbon tax and regime switching prices: Exercising your options," Energy Economics, Elsevier, vol. 67(C), pages 1-16.

    More about this item

    Keywords

    Mining incidents; Optimal policy; Stochastic dual dynamic programming; Risk-aversion; CVaR; Julia language;
    All these keywords.

    JEL classification:

    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jrpoli:v:63:y:2019:i:c:43. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30467 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.