SME Annual Meeting Feb. 25-Feb.

28, 2007, Denver, CO

Preprint 07-088
DETERMINATION OF A MINING CUTOFF GRADE STRATEGY BASED ON AN ITERATIVE FACTOR A. Bascetin, Istanbul Univ., Istanbul, Turkey A. Nieto, Virginia Poly. Inst. and State Univ., Blacksburg, VA

ABSTRACT One of the most difficult problems in mining operation is how to determine optimum cutoff grades of ores at different periods over the lifespan of the mine that will maximize the net present value (NPV) of the mine. Cutoff grade optimization maximizes the NPV of a project subject to capacity constraints in the mine, mill and the market.. This paper describes the determination of a cutoff grade strategy based on K. Lanes algorithm adding an iterative optimization factor calculated for every year during the live of the mine to maximize the projects NPV. The introduced algorithm is a windows based program developed at Virginia Tech which coded in visual-basic within a spreadsheet environment (Excel). The resulting cut-off windows based program is a user-friendly tool which calculates interactively different mining cutoff grade scenarios. The benefits of the methodology are demonstrated using a hypothetical case study. The authors have observed an improvement of the total NPV using this iterative approach using a year by year optimization factor. Keywords: Modeling, Mineral economics, Mining, Metal ores, Cutoff grade optimization INTRODUCTION For a long time, the Optimum Cutoff Grade has been a controversial concept to metal miners all over the world. In later times, the Opportunity Cost theory has given a new theoretical approach to the definition of Cutoff Grade when the optimization of NPV is one of the objectives. The typical variables associated with the cutoff grade (COG) definition are the technical parameters and a given economic scenario as shown in Table 1. Some researchers have developed new optimization techniques based on K. Lanes algorithm to determine a cutoff grade policy. Cutoff grade optimization is used to derive an operating strategy that maximizes the profit of a mine. Where the mines capacity allows, sacrificing low-grade material during the first stages of the mine enables the mill to process ore that delivers a higher cash flow. Hence, the cutoff grade policy has a significant influence on the overall economics of the mining operation. The determination of cutoff grade policy, which maximizes the NPV is already established in the industry. It has been realized that as opposed to constant breakeven cutoff grade, the optimum/dynamic cutoff grades, which change due to the declining effect of NPV during mine life, not only honor the metal price and cash costs of mining, milling, and refining stages, but also take into account the limiting capacities of these stages and grade-tonnage distribution of the deposit (Dagdelen 1992, Lane 1964). In other words, the techniques that determine the optimum cutoff grade policy consider the opportunity cost of not receiving the future cash flows earlier during the mine life due to limiting capacities present in the stages of mining, milling, or refining (Lane 1988). A. OPTIMIZATION OF CUTOFF GRADE Optimizing mine cutoff grades has long been searched as a means to maximize the Net Present Value (NPV) of mining projects. In recent years the theory behind mine cutoff optimization has been extended to encompass other parts of the operation. Primarily this involves optimizing the throughput and recovery in the mill. A mill may be operated at a high throughput rate, sacrificing recovery but

achieving a higher rate of production of mineral. This is equivalent to a mine operating at an above breakeven cutoff grade, sacrificing some of the low-grade resource to obtain higher cash flow. This analogy suggests that tools developed for determining the optimum cutoff grade strategy in the mine might also be used to find a solution for the mill. Because the mine and mill are interdependent one cannot be optimized independently of the other. Cutoff grade optimization maximizes the NPV of a project subject to capacity constraints in the mine, mill and the market. These are usually expressed as annual constraints to the tonnage mined, tonnage milled and product sold. At any point in time at least one constraint, and possibly two or all three, will be constraining the system. For cutoff optimization to work correctly, capacity constraints must be independent of the cutoff grade (Wooler 1999). Lane (1964, 1988) has developed a comprehensive theory of cutoff grade calculation. Whittle and Wharton added the idea of using opportunity cost. They are referred to as delay cost and the change cost (Whittle and Wharton 1995). Asad, on the other hand, used the dynamic metal price and cost escalation during mine life for cutoff grade optimization (Asad, 2005). Table 1 shows the notation used in Lanes algorithm. Table 1. The notations of the algorithm. Notatiton I N P S M C fa F Y D CC M C R Qm Qc Qr Explain Year Mine Life Metal Price Sales Cost Mining Cost Processing Cost Fixed Costs Fixed Cost Recovery Discount Rate Capital Costs Mining Capacity Milling Capacity Refining Capacity Material Mined Ore Processed Concentrate Refined Unit -Years $/oz $/oz $/ton $/ton ore $/year $/ton % % $ Tons/year Tons/year Tons/year Tons/year Tons/year Tons/year

In his approach K. Lane demonstrates that a cutoff grade calculation which maximizes NPV has to include the fixed cost associated with not receiving the future cash flows quicker due to the cutoff grade decision taken now. The cutoff grade when the concentrator is the constraint is given below.

g m (i ) =
Where

c + f + Fi ( P s ) xy
milling cutoff grade,

(1)

g m (i ) :

: fixed cost,

Fi :

opportunity cost per ton of material milled in Year i, P: profit ($), s: selling price ($/unit of product), y: recovery (%).

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SME Annual Meeting Feb. 25-Feb. 28, 2007, Denver, CO

The opportunity cost is determined as: iterations the process is just repeted. A spreadsheet could also be used to generate iterations. By generating many iterations the algorithm should be able to determine whether the process converges or diverges. The algorithm introduced here, finds the optimum cutoff grade policy in an iteration process. The steps of the algorithm as mentioned above (eq. 1) are as following: 1. Reading the input files; a. b. 2. Economic parameters (price, selling cost, capacities and etc.) Grade-tonnage distribution

Fi =

dxNPVi , C f f = a where f a is the annual fixed costs. C

(2)

(3)

Where d is the discount rate, NPVi is the NPV of the future cash flows of the years (i) to the end mine life N, and the C is the total milling capacity in Year i. In this study, an interactive user-friendly computer program based on K. Lanes algorithm and written in Visual Basic within an Excel Interface has been developed to implement the algorithm. The algorithm has been developed to find the optimum cutoff grade policy using an iterative optimization factor (t) substituting

Determining the cutoff grade equation:

g m (i ) by

the following

f and Fi

in the original Lanes algorithm. Using this new

g u (i ) =

optimization factor, the total Net Present Value was improved within in the course of the mine life. The results are presented in the next section of this paper. The cutoff grade program developed is used to incorporate the optimization factor (t) which is included in the ultimate cutoff grade equation, which considers the mining (m) cost,

c+ m + t ( P s ) xy

; where is the optimization factor.

(4)

Setting V = NPVi , the initial NPVi = 0 3. Computing the ore tonnage (To) and waste tonnage (Tw) from the grade-tonnage curve of the deposit: a. the ore tonnage (To) and the grade gc above the cutoff grade b.

g u (i ) =

c+ m + t ( P s ) xy

to further maximize the total NPV of the mine

project. Where t is the iterative optimization factor and m is the mining cost per ton. The most important contribution given in this paper is the computation of the COG by modifying the optimization factor t in an iterative-nested approach for every year during the mine lifethis is done by iteratively calculating the COG in a year by year basis by maximizing the total NPV of the mine project. This new approach resulted in an improved total NPV. The cutoff grade policy calculated, dictates the quantity to be mined, processed and refined in a given period i, and accordingly, the profits becomes dependent upon the definition of cutoff grade. Therefore, the solution of the problem is in the determination of an optimum cutoff grade in a given period, which ultimately maximizes the objective function (Asad 2005). B. ALGORITHM PROCEDURE The cutoff grade

g m (i )

the waste tonnage (Tw) that is below the cutoff grade

g m (i )
c. 4. Also, compute the stripping ratio SR where SR = (Tw)/ (To)

Setting Qci = C, if To is greater than the milling capacity, otherwise, Qci = To. Also, set the Qmi quantity mined (Qmi = Qc x (1+SR)) and Qri = Qc x gavg x y Determining the annual profit by using the following equation. Pi=(Si-ri)xQri Qci x( ci +

5.

) miQmi

6.

Adjusting the grade tonnage curve of the deposit by subtracting ore tons Qci from the grade distribution intervals above optimum cutoff grade

g m (i ) depends on the NPV , which cannot be

i

g m (i ) and the waste tons Q

mi

determined until the optimum cutoff grades have been decided. The solution to this type of interdependency problem is obtained by an iterative approach. In mathematics, and in particular functions, iteration is the process of evaluating a function repeatedly. In iteration the same mathematical operation is performed several times using the output from the previous operation as the input for the next. For example: we could apply the iterative process to the square root function given by . In this example five iterations are computated for some specific value for "x". In a mathematical sense this iteration process is denoted = 1.090508 for a seed of 16. In this case the number five (5) does not represnt an exponent, inestead it represents the number of iterations peroformed, in this case the fifth iteration. As seen from the square root funtion example, the amount of calculation can become tedious. Most of the graphing calculators can do this with ease. One way to perform the iterations is to assign the seed to the variable "x" (16 => x) and also assign the function to "x"( => x) to calculate the first iteration and to get successive 9. 7.

- Qci from the intervals below optimum cutoff grade

g m (i ) in proportionate among such that the distribution is

not changed. Checking, if Qci less than the milling capacity (C), then set mine life N=i and go to step 8; otherwise set the year indicator i = i + 1 and go to step 2. Calculating the incremental NPVis for the cash flows by using the profits (Pi) estimated in Step 5 to be generated from i to N by using the following equation;

8.

NPVi =
j =1

Pj (1 + d ) j i +1

for each year i = 1, N where N is total mine life in years. Comparing the NPVi computed in step 8 with the previous iteration. If the computed NPVi does not converge, goes to step 2 or changes the optimization factor (), otherwise, stops; the cutoff grade gis for years i = 1, N is the optimum

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SME Annual Meeting Feb. 25-Feb. 28, 2007, Denver, CO

policy that gives maximum net present value of future profits for the operations. The algorithm was tested using the new optimization factor introduced in this paper to find the maximum the NPV, these results are then compared with results coming from the traditional breakeven COG estimation approach and with results form the COG estimation based on Lanes algorithm. The results were examined and presented in the next section. C. CUTOFF GRADE OPTIMIZATION SOFTWARE The introduced algorithm is a windows based program developed at Virginia Tech which is based on a series of visual-basic routines within a spreadsheet environment (Excel). The program which has been developed within a windows environment is a user-friendly tool and calculate interactively different mining cutoff grade scenarios. The program consist of two different components: 1) Input parameters (economic parameters and grade-tonnage distribution) are taken by the program that is programmed in the Visual Basic Programming Language (Fig. 1), 2) The optimum cutoff grade values and maximum NPV value are solved by using new algorithm (Fig. 2). Table 2. Mine Design Parameters Parameters Price Sales Cost Processing Cost Mining Cost Capital Costs Fixed Costs (fa) Fixed Cost (f) Mining Capacity Milling Capacity Discount Rate Recovery Values 500 $/oz 4 $/oz 17 $/ton 1,3 $/ton $ 154 M $ 9,2 M/year 9,2 $/ton -1,00 M 14 % 95 %

The traditional cutoff grade is defined as breakeven cutoff grade and referred to as the ultimate pit cutoff grade:

Ultimate pit cutoff grade =

Mining Cost + Milling Cost (Pr ice Saling Cost ) x Re cov ery

(5)

Table 3 presents the breakeven cutoff grade. As indicated in Table 3, this approach gives a total NPV of $128.0 million and $601.4 million of none discounted profit. Table 3. Breakeven cutoff grade policy of the gold mine
Year 1 2 3 4 5 6 7 8 9 10-38 Toplam Optimum Cutoff grade (oz/ton) 0.039 0.039 0.039 0.039 0.039 0.039 0.039 0.039 0.039 0.039 Quantity Mined (ton) 3.333.869 3.333.869 3.333.869 3.333.869 3.333.869 3.333.869 3.333.869 3.333.869 3.333.869 3.333.869 126.687.022 Quantity Concentrated (ton) 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 38.000.000 Quantity Refined (ton) 93.468 93.468 93.468 93.468 93.468 93.468 93.468 93.468 93.468 93.468 3.551.784 Profit ($M) 15.826.346 15.826.346 15.826.346 15.826.346 15.826.346 15.826.346 15.826.346 15.826.346 15.826.346 15.826.346 601,401,148 NPV ($127,984,981)

Figure 1. The window shows using the tools of the program. Table 4 presents the optimum cutoff grade policy based on Kane Lanes algorithm, using the fixed cost and opportunity cost:

m+c+ f +F ( P s ) xr

(6)

As indicated in Table 4, this optimization approach gives a total NPV of $354.6 million and $676.5 million of none discounted profit. On the other hand, Table 5 presents the results of the optimum cutoff grade approach using the optimization factor (t) year by year. The cutoff grade policy that is determined by this optimizing approach using the optimization factor (t) gives a total NPV of $377.5 million and $676.5 million of none discounted profit. According to the values shown in Tables 3-5, the cutoff grade policy determined by the optimization approach using the (t) factor which is determined year by year (Table 5) gives a higher NPV than the cutoff grade policy estimated using the traditional breakeven and Lanes cutoff grade approach . The results are given graphically in Figure 4. As seen in Figure 5 the program ends in the iteration of 6 and it is obtained the maximum total NPV ($377,476,180). After the iteration th of 6 , the NPV values are constant.
th

Figure 2. The algorithm procedure of the program. At the starting point, the user enters the input parameters. Then, the maximum NPV value can be obtained using the NPV OPTIMIZER button. D. ALGORITHM APPLICATION AND RESULTS Consider the following hypothetical case of an open pit gold mine (Dagdelen 1992). The tonnage grade distribution and mine design parameters are shown in Tables 2-Figure 3, respectively. The values in Table 2 give assumed capacities and accepted costs to mine this deposit at 2,857.14 ton/day milling rate. The mine will be worked at the rate of seven days a week for 350 days per year.

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SME Annual Meeting Feb. 25-Feb. 28, 2007, Denver, CO

0,12 Cutoff Grade ($/oz) 0,1 0,08 0,06 0,04 0,02 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Years Ultimate Pit Cutoff Grade Lane Algorithm Iteration Algorithm Year 38

the use of an iterative optimization factor in a year by year basis, constantly maximizing the NPV. As shown, the total NPV was improved in comparison with other reviewed approaches. The program has been developed within a windows environment which can be considered as a user-friendly tool which is used to calculate interactively different mining cutoff grade scenarios. Another potential benefit of this user-friendly application is an eventual adaptation to handle multiple ore sources/grades and to incorporate cost escalation factors based on striping ratios. Further research is being done to incorporate grade distribution geometry defined from grade block modeling analysis to calculate the cutoff grade policy. ACKNOWLEDGMENT Dr. Atac Bascetin has been supported for the research by The Scientific and Technical Research Council of Turkey. This Research was performed during Dr. Bascetin tenure at Virginia Tech in collaboration with Dr. Antonio Nieto, Mining and Minerals Engineering. REFERENCES Asad M. W. A. Cutoff Grade Optimization Algorithm for open Pit Mining Operations with Consideration of Dynamic Metal Price and Cost Escalation during Mine Life. Application of Computers and Operations Research in the Mineral Industry (APCOM 2005)., March 2005, (Tuscon, USA), 273-277. Dagdelen K. Cutoff grade optimization. Application of Computers and rd Operations Research in the Mineral Industry (23 APCOM Symposium)., 1992 (Littleton, Colorado, USA), 157-165. Lane K. F. Choosing the optimum cutoff grade. Colorado School of Mines Quarterly., 59, 1964, 485-492. Lane K. The economic definition of ore, cutoff grade in theory and practice. London: Mining Journal Books Limited., 1988. Whittle J., and Wharton C. Optimizing cutoff grades. Mining Magazine., 173, 5, Nov. 1995, 287-289. Wooler R. Cutoff grades beyond the mine-optimizing mill throughput. The Biennal Conference Strategic Mine Planning., March 1999, Autralia.

70 60
Profits (M$)

50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12 Years
Ultimate Cutoff Grade
Lane Algorithm
Iteration Algorithm Year 38

13

14

Figure 4. Comparison of Traditional Cutoff Grade, K. Lanes and the Iteration Algorithm. CONCLUSIONS The results given by the presented case study indicate that the impact of the optimization factor ( t) on the objective function (NPV) is significant at $249,491,199.00 and $22,801,533.00 increase which is equivalent to a 195% and 6.4% NPV increment according to breakeven and Lanes cutoff grade policy respectively. Therefore, the cutoff grade optimization algorithm presented here is a tool that improves the cutoff grade policy and serves as a user friendly platform for eventual algorithm adaptations such as the use of cost escalation and simulation for risk analysis. This approach provides great flexibility at the mine planning stage for evaluation of various economic and grade/ton alternatives. The other important feature of the algorithm is

Grade 0 0.025 0.030 0.035 0.040 0.045 0.050 0.055 0.060 0.065 0.070 0.075 0.080 0.085 0.150

Category 0.025 0.030 0.035 0.040 0.045 0.050 0.055 0.060 0.065 0.070 0.075 0.080 0.085 0.150 0.250

Tons (000) 70,000 7,257 6,319 5,591 4,598 4,277 3,465 2,428 2,307 1,747 1,640 1,485 1,227 3,598 9,576

Tons (in thousands)

80 70 60 50 40 30 20 10 0
0,025 0,035 0,045 0,055 0,065 0,075 0,085 0,03 0,04 0,05 0,06 0,07 0,08 0,15 0,25

0 0,025 0,03 0,035 0,04 0,045 0,05 0,0550,06 0,065 0,07 0,075 0,08 0,085 0,15

Grade Category

Figure 3. The grade-tonnage distribution of the deposit.

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SME Annual Meeting Feb. 25-Feb. 28, 2007, Denver, CO

380
Iteration NPV ($M) 365.801.976 375.056.288 376.409.151 377.171.471 377.396.725 377.476.180 377.476.180 377.476.180 377.476.180 377.476.180

NPV Value ($M)

375 370 365 360 355 1 2 3 4 5 6 7 8 9 10 Number of Iteration

1 2 3 4 5 6 7 8 9 10

Figure 5. The changes of NPV vs. number of iteration.

Table 4. Cutoff grade policy of the gold mine using Kane Lanes algorithm. Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Total Optimum Cutoff grade (oz/ton) 0.096 0.092 0.088 0.084 0.081 0.078 0.076 0.073 0.072 0.070 0.068 0.067 0.066 0.065 Quantity Mined (ton) 12.274.288 11.336.481 10.624.419 10.069.606 9.628.546 9.182.735 8.797.020 8.437.322 8.132.220 7.880.241 7.652.378 7.652.378 7.652.378 7.652.378 126.972.390 Quantity Concentrated (ton) 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 809551 13.809.551 Quantity Refined (ton) 209158 199710 192537 186947 182504 177583 173216 168992 165372 162369 159528 159528 159528 129146 2.426.118 Profit ($M) 61.585.935 58.118.871 55.486.385 53.435.245 51.804.650 49.943.365 48.278.930 46.651.502 45.252.454 44.090.812 42.977.995 42.977.995 42.977.995 32.898.270 $676,480,404 NPV ($M) 354.674.647 293.088.712 242.107.246 199.412.274 163.345.006 132.672.494 106.733.475 84.738.244 66.094.563 50.230.905 36.672.630 25.079.582 14.910.242 5.989.768 $354,674,647

Table 5. Cutoff grade policy of the gold mine using optimization factor (t). Year 1 2 3 4 5 6 7 8 9 10 Total Optimization Factor (t) 28,87 28,82 28,83 28,83 28,68 28,65 28,60 27,50 24,90 21,81 Optimum Cutoff grade (oz/ton) 0.100 0.100 0.100 0.100 0.100 0.100 0.100 0.097 0.092 0.085 Quantity Mined (ton) 13.112.225 13.107.389 13.108.385 13.108.178 13.034.557 13.018.831 12.994.065 12.450.271 11.335.723 10.245.376 125.515.000 Quantity Concentrated (ton) 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 1.000.000 10.000.000 Quantity Refined (ton) 217.550 217.550 217.550 217.550 216.818 216.659 216.410 210.931 199.703 188.718 2.119.439 Profit ($M) 4.658.907 .665.194 4.663.899 4.664.169 4.396.643 4.338.503 4.246.945 2.236.542 8.116.070 4.085.064 626,071,936 NPV ($M) 377.476.180 312.817.273 256.093.418 206.336.648 162.690.175 124.562.193 91.146.790 61.876.747 37.004.702 16.631.587 $377,476,180

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