Surface mine reserve definition and the high-grading fallacy (Technical Note)

Lemieux, M.
Organization: Society for Mining, Metallurgy & Exploration
Pages: 3
Publication Date: Jan 1, 2000
Introduction Surface mining is a business, and the objective of most businesses is to make as much money as possible within certain responsible constraints. Businesses normally measure their potential to make money by estimating the discounted cash flow rate of return on new projects or the net present value for ongoing projects. These estimators of profitability are calculated using the following well-known equation: [ ] where i is the year, n is the total number of years, A, is the after tax net cash generation in year I, r is the discount rate and NPV is the net present value. In its simplest form, when the value of r makes the NPV equal to zero, the discounted cash flow-rate of return (DCF-ROR) is defined. The maximum economically recoverable reserve is identified at the point where the NPV or DCF-ROR is at a maximum. Depending on the measure used (DCF-ROR or discount rate) for calculating the NPV, the definition of recoverable reserve will be different for exactly the same deposit. Maximization of the measure of profitability and the economically recoverable reserves should not be separated from the mining method and sequence of exploiting the reserve. The surface mining methods may involve multiple-pass development of the resource, mining to the ultimate limit in one pass or a combination of the two methods with backfill. Multiple-pass development When planning a multiple-pass mining operation, it is important to determine the width of pit expansions that are appropriate for a specific situation. Production personnel typically want wide, open work areas where operations can be set up to run at peak efficiency. While this is understandable, the trade-off between highly efficient production operations and an overinvestment in stripping should be carefully weighed. As long as safety is not compromised, a few cents per bank cubic yard increase in operating cost due to lower productivity by working in more confined spaces may well be offset by a decrease in the overall short-term stripping requirements. A mini study on productivity and cost should help quantify this cost before deciding on minimum phasing requirements. The bigger challenge associated with establishing smaller work areas is securing operations and management buy-in to marginally lower productivity when reporting results. When cost reduction is the important management goal and everyone is focusing on unit costs, one sometimes loses sight of the goal of total cost management and, even more importantly, maximum profitability. The first pit should be defined by the first grouping of recoverable mineral that has the highest after-tax unit value and forms a feasible mining unit. The assumed mining of the first pit should be followed by the assumed mining of the second most profitable practical pit or pit expansion. If this process of grouping and sequencing is followed until the profitability approaches zero, the general sequence required to extract the maximum economically recoverable reserve is identified. The curve in Fig. 1 is constructed for a rate of production, R, and a quality management strategy, Q, by calculating the NPV for a series of sequences, with each sequence assuming that the operations are terminated on successively lower profit pits. These values are plotted to form the curve in Fig. 1. If the operation ceases on a pit that has too high of a profit, opportunity is lost, and the NPV is lower than the maximum. The NPV curve peaks and starts to decline before the zero-profit pit is assumed mined. This occurs because the money invested in advanced stripping would have made more money invested at the discount rate than by mining the next pit expansion. Therefore, the maximum economically recoverable reserve is defined by the pit limit corresponding to the maximum NPV. There may be an opportunity to refine the definition of the "ultimate pit" around the maximum-value point. The precise definition of the ultimate pit early in the mine life may or may not be important today, depending on how far off in the future these limits will be reached. By the time an operation must decide on its last increment of economically recoverable reserve. much of the
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