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The Cut-Off Grade and the Theory of Extraction

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  • Jeffrey A. Krautkraemer

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.

Suggested Citation

  • Jeffrey A. Krautkraemer, 1988. "The Cut-Off Grade and the Theory of Extraction," Canadian Journal of Economics, Canadian Economics Association, vol. 21(1), pages 146-160, February.
  • Handle: RePEc:cje:issued:v:21:y:1988:i:1:p:146-60
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    Citations

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    Cited by:

    1. 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.
    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. Asad, Mohammad Waqar Ali & Qureshi, Muhammad Asim & Jang, Hyongdoo, 2016. "A review of cut-off grade policy models for open pit mining operations," Resources Policy, Elsevier, vol. 49(C), pages 142-152.
    4. Akpalu, Wisdom & Parks, Peter J., 2007. "Natural resource use conflict: gold mining in tropical rainforest in Ghana," Environment and Development Economics, Cambridge University Press, vol. 12(01), pages 55-72, February.
    5. Steinbuks, Jevgenijs & Satija, Gaurav & Zhao, Fu, 2015. "Sustainability of solar electricity : the role of endogenous resource substitution and market mediated responses," Policy Research Working Paper Series 7178, The World Bank.
    6. Thompson, Matt & Barr, Drew, 2014. "Cut-off grade: A real options analysis," Resources Policy, Elsevier, vol. 42(C), pages 83-92.
    7. repec:eee:resene:v:49:y:2017:i:c:p:218-232 is not listed on IDEAS
    8. 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.
    9. Zhang, Kuangyuan & Kleit, Andrew N., 2016. "Mining rate optimization considering the stockpiling: A theoretical economics and real option model," Resources Policy, Elsevier, vol. 47(C), pages 87-94.
    10. repec:eee:jrpoli:v:53:y:2017:i:c:p:384-393 is not listed on IDEAS
    11. 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.

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