Harnessing Uncertainty for Orebody Modelling and Strategic Mine Planning

Roussos Dimitrakopoulos
Canada Research Chair in Sustainable Mineral Resource Development and Optimization under Uncertainty

Department of Mining, Metals and Materials Engineering

Keynote speech to AMEC Internal conference, Vancouver, November 2005

Overview

The economic side of uncertainty Models of geological uncertainly Limits of traditional mine design optimization Shifting the paradigm: Stochastic mine planning Using uncertainty to improve project performance Conclusions - Uncertainty is great!

Uncertainty Matters: The Economic Side of Uncertainty

Changing the way we do things

Uncertainty Matters: Return on Investment is Uncertain, therefore Risky

Possibility of not making a return on capital (NPV<0)

Reserve

-100

NPV, $MM

600

Alternative development plans may have different risk profiles and expected values. Example:
Design - cant capture high reserves Design can capture

-100

NPV, $MM

600

-100

NPV, $MM

600

Risk in Mining: A World Bank Survey

60% of mines had an average rate of production LESS THAN 70% of planned rate In the first year after start up, 70% of mills or concentrators had an average rate of production LESS THAN 70% of design capacity Key contributor to mining risk felt in all downstream phases: Geology and reserves

Uncertainty is not a Bad Thing

Many managers believe that uncertainty is a problem and should be avoided.. you can take advantage of uncertainty. Your strategic investments will be sheltered from its adverse effects while remaining exposed to its upside potential. Uncertainty will create opportunities and value. Once your way of thinking explicitly includes uncertainty, the whole decision-making framework changes.
Martha Amram and Nalin Kulatilaka in Real Options

Real Options vs DCF View of Value

$+ Current Asset Value

Real Options View: Current Value of Option to Produce Contingent Decision Payoff Function (future price known)

$0
No production NPV = 0 Production NPV > 0

Future Gold Price

$-

Traditional DCF View (now or never)

Accurate Uncertainty Assessment Needed

1

Probability

Unknown, true answer

Single, often precise, wrong answer

Accurate uncertainty estimation

Reserves

Reserves

The goal of technical evaluation should be to strive for an accurate assessment of uncertainty, not a single precise answer

Mining Project Valuation

Single estimated model

Traditional view
Reserves

Mining Process or Transfer Function

Orebody Model Mine Design Production Scheduling Financial and Production Forecasts
Accurate uncertainty estimation

Risk oriented view

Probability

Multiple probable models

Probability

Unknown, true answer

Single, often precise, wrong answer

Reserves

Quantitative Models of Geological Uncertainty:

Stochastic or geostatistical conditional simulations

Describing the Uncertainty about a Mineral Deposit

Actual but unknown mineral deposit Information about the deposit Probable models of the deposit

Describing the Uncertainty about a Gold Deposit

Model characteristics: o Large number of blocks o Multiple domains o Resource classes with specific sample selection criteria

A gold load

Lode 1502 Simulation #1

Lode 1502 Simulation #2

Lode 1502 Simulation #3

Moving Forward in Optimization: Limits of Traditional Mine Design

Using Models of Uncertainty

Risk Analysis in a Mine Design

Objective Quantify the impact of grade uncertainty to tonnage, grades, metal and net present value - net present vnalue vs risk exposure Methodology
Mine Design (Scenario)
. . .

Multiple simulations

Distribution of outcomes for a scenario

Mine Design (Scenario X)

Open Pit Mine Design and Production Scheduling

Intermediate pushbacks

Pit Limit

Limits of Traditional Modelling

The expected project NPV has only 2 4% probability to be realised
25 Probability

NPV (m$, i = 8%)

20 15 10 5 0 0 5 10 15 20 25 30 35 40 45 50 Stochastic Orebodies Conventional

Pit Shells

Limits of Traditional Modelling

Discounted Cash Flow
9

Cash Flow (m$ p.a.)

7 5 3 1 0 -1 -3 -5 0 2

First 2 years of production

Final year likely to be negative cash flow

10

12

14

Production Period (1/4 Year)

Probabilities on Pit Limits

100% probability of falling within the pit for a given metal price Pit limit determined conventionally

This is Not ...

Moving Forward .. Step 1

Exploring existing technologies

Past Work Open Pit Mine Design

Upside Potential / Downside Risk

DCF

Upside
Min acceptable return

Downside Value
1 2

Pit design

Upside or D ow nside =

AR ([V alue MAvg ] * probability )

Past Work Open Pit Mine Design

Upside Potential / Downside Risk
Pit Design Upside Potential (m$)
CB-1 2.3
2

Downside Potential (m$)

CB-1 0.0 CB-2 -0.079 CB-3 -0.20

CB-2 2.41

CB-3 1.8

1.3
4

2.1

1.6

-0.78

-0.15

-0.51

2.4
6

2.43

1.9

0.0

-0.022

-0.28

2.9
12

2.40

1.2

0.0

-0.16

-0.96

Moving Forward .. Step 2

Re-writing optimizers

Models of Uncertainty in Optimization

Integer Programming
An objective function Maximise (c1x11+c2x21+. ) Subject to c1x11+c2x21+. b1
Orebody model

c1

c2 c4

c3

c = constant X11 = binary variable

Period 1

c1x1p+c2x2p+. bp

Period p

Stochastic Integer Programming

The objective function now .. Maximise (s11x11+s21x21+. s12x11+s22x21+.) Subject to s11x11+s21x21+. b1 s11 s21 s31
1 41 1 s 1 s1 s s2 3 1 s 1 s 1 s1 1 2 3 ns4s n s n s1 2 s41 3 s41

Period 1 Simulated model 1 Simulated model 2 Simulated model r

s11x1p+s21x2p+.

b1

s12x1p+s22x2p+. b1 s1rx1p+s2rx2p+. b1 Period p

Uncertainty Will Create Opportunities and Value

Higher NPV for less risk

Base Case: Geological Risk Assessment of Ore Production

Uncertainty in Ore Production - Base Case Schedule
Mt Mt 70% 60% 50% 40% 30% 20%
12.3% 12.9%

Ore Production

Mt Mt Mt Mt
13.9% 13.5% 8.7% 18.2% 12.7% 12.4% 12.5%

Avrg. Deviation Target Ore Production Maximum Ore Expected Ore Minimum Ore
10.8% 11.4% 12.4% 10.4% 12.3% 9.0% 14.5% 11.9%

Mt Mt 1 2

10% 0%

10

11

12

13

14

15

16

17

Period

Average Deviation (%)

Risk-based: Assessment in Ore Production

Uncertainty in Ore Production - Risk-based Schedule
Mt Mt Mt Mt Mt Mt Mt 0.5% Mt 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 3.0% 1.2% 0.7% Avrg. Deviation Target Ore Production Maximum Ore Expected Ore Minimum Ore

70% 60% 50% 40% 30% 20% 10%

1.9% 0.2% 2.7% 1.6% 0.0% 0.6% 0.4% 0.1% 0.0% 0.7%

3.5%

0%

Period

Average Deviation (%)

Ore Production

Uncertainty is Good: Base case vs Risk-based

Multistage combinatorial optimization
Risk-Based Difference 28%
NPV

Traditional and Risk

Traditional Expected
2001 2003 2005 2007 2009 2011 2013 2015 2017

Year

Uncertainty is Good: Discounting Geological Risk

The discounting goes along with production sequencing

SIP - Production Scheduling Model

Objective function

Max [ E{(NPV) } b
t =1
U

i =1

t i

t i

Mill & dump

Part 1

- E{(NPV) + MC } s
i =1 M t i

t t i * i

Part 2

Stockpile input
Part 3

+ (SV) (P) q
s =1 t s

t s

Stockpile output
Part 4

ty ty - (c d su + clty d sl )] s =1 ty u

Risk management

Stochastic Integer Programming - SIP

Deviation 1
Orebody Model 1 A production schedule Ore Grade 1 Metal Ore Grade 2 Metal

- TARGET [ ] Deviation 2 - TARGET [ ]

2 4

Orebody Model 2

Deviation R
Ore Grade R Metal

Orebody Model R

- TARGET [ ]

Cross-Sectional Views of the Schedules

SIP Whittle Four-X

Periods 1 2 3 4 5 6

Managing Risk Between Periods

Deviations from metal production target
33

Metal quantity (1000 Kg)

2.5

22
1.5

11
0.5

00
0 1 1 2 2 3 3 4

Periods Ct=Ct-1 * RDFt-1 RDF risk discounting factor RDFt=1/(1+r)t r orebody risk discount rate

Case Study on a Large Gold Mine

The SIP specific information

Orebody risk discounting rate Cost of shortage in ore production Cost of excess ore production Cost of shortage in metal production Cost of excess metal production Number of simulated orebody models

20 % 10,000 /t 1,000 /t 20 /gr 20 /gr 15

Deviations from Production Targets

Metal Production
- 20

Metal quantity (1000 Kg)

- 16 - 12 -8 -4 0 1 2 3 4 5 6

SIP model WFX

Periods

Stockpiles Profile
6 Tonnes (million) 4 2 0 1 5 Tonnes (million) 4 3 2 1 0 1 2 3 4 5 6 Periods 2 3 4 5 6

Available ore at the end of each period

SIP model WFX

Ore taken out from the stockpile

Uncertainty is Good: Traditional vs Risk-Based

Stochastic Integer Programming

1000 800 600 $ (million) 400 200 0 1 2 3 4 5 6 Periods

$723 M Risk Based $609 M Traditional

Difference = 17%

Cumulative NPV values SIP model WFX

Average NPV values SIP model WFX

Geological Risk Discounting= 20%

Some conclusions

. uncertainty is (not) a problem and should be avoided ? you can take advantage of uncertainty. .uncertainty will create opportunities and value.

once your way of thinking explicitly includes uncertainty, the whole decision-making framework changes. We need: Stochastic mine planning and NEW mathematical models

And

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