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Modelling the initial pit design: the first step for project valuation

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  • Rodney C Wolff
  • Luis A Martinez

    (School of Economics and Finance, Queensland University of Technology)

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    Abstract

    One critical factor in open pit mining projects is the estimation of the recoverable reserves. The reason for this is that at the valuation stage there is a lack of information about future metal prices and production costs. Consequently, the estimation of the recoverable reserves needs to be done based on a fixed break-even cut-off grade (BECG), in which fixed expected metal prices and production costs are assumed throughout the operating life of the mine (OLM). In this paper, an alternative technique for estimating the recoverable reserves of an open pit mining project is presented and explained in detail. The main characteristic of this technique is that it estimates the recoverable reserves of the project using mining costs as reference: this is done due to the fact that mining costs are easier to model than metal prices. Another important characteristic of this technique is that it uses the uncertainty of the geology of the orebody, given by simulations of the deposit, to make final strategic decisions, such as the selection of the operating life of the mine and the optimal production rate, which minimise the risk of not achieving future production targets while maximising the upside potential of future rewards. As it will be shown, the final outcome of the proposed technique is the generation of a robust open pit design, that include cutbacks and ultimate pit limits, called the marginal open pit mine design (MOPMD). One characteristic of the MOPMD is that, at each production period, it will be characterised by their respective geological uncertainty, given as probability distributions of ore, waste and metal quantities, and by marginal economical project indicators, such as cut-off grades and metal prices, among others. The details follow in the paper.

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    File URL: http://eprints.qut.edu.au/5940/
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    Bibliographic Info

    Paper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 208d.

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    Date of creation: 15 Jun 2006
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    Handle: RePEc:qut:dpaper:208d

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    Keywords: Metal price; mining risk; open pit design; orebody estimation; production costs; real options;

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