Journal of Mining Science, Vol. 43, No.

1, 2007

A MAXIMUM UPSIDE / MINIMUM DOWNSIDE APPROACH TO

THE TRADITIONAL OPTIMIZATION OF OPEN PIT MINE DESIGN

R. Dimitrakopoulos, L. Martinez*, and S. Ramazan** UDC 622.013

The management of cash flows and risk during production is a critical part of a surface mining venture as
well as an integral part of a strategy in developing new and existing operating mines. Orebody uncertainty
is a critical factor in strategic mine planning, the optimization of mine designs and long-term sequencing.
Traditional optimization approaches do not account for in situ grade variability or deal with geological
risk. This paper presents a new approach to mine design based on risk quantification and alternative
strategic decision-making criteria.

Open pit optimization, stochastic simulation, economic evaluation, upside, downside

INTRODUCTION
Open pit mine design and long-term sequencing is an intricate and critically important part of
mining ventures. It provides the technical plan to be followed from mine development to mine closure
having a profound effect on the economic value of the mine. Mathematical methods provide analytical
tools used for optimizing open pit mine designs. The most established, commercially available and
frequently used approach since the 1980’s is based on the Lerchs-Grossman three-dimensional graph
theory or L-G algorithm [1]. This theory is implemented as the nested L-G algorithm [2, 3] and remains
a very efficient and most commonly used pit optimization method.
This paper presents a new approach to developing open pit mine designs that, unlike traditional
optimization, capture the upside potential of the deposit whilst minimizing downside risk for key
project performance indicators, such as periodical discounted cash flows (DCF), and amount of ore
tons and metal production. The methodology employs stochastically simulated orebody models to
quantify grade uncertainty and the nested pits implementation of the L-G algorithm with the heuristic
Milawa mine production scheduler, widely available in the industry [3]. This approach complements
other advancements moving towards developing optimization under uncertainty [4 – 7]. In the next
sections, the approach for maximum upside / minimum downside proposed herein is first detailed and
followed by an application at a typical low-grade open pit gold mine. Subsequently, the effect of the
gold price on preferred designs is assessed and conclusions follow.
KEY LIMITATIONS OF TRADITIONAL PIT OPTIMIZATION
Despite the routine utilization of mathematical optimization in mining practice, traditional open pit
optimization is affected by uncertainty in the key input parameters leading to sub-optimal net present
value (NPV) solutions and deviations from production plans. A critical source of technical risk is
geological, including the expected ore grade and tons within a given design layout. The importance of

COSMO Laboratory, Department of Mining, Metals and Materials Engineering, McGill University, E-mail:
roussos. dimitrakopoulos@mcgill.ca, Montreal, Qc, Canada. *School of Economics and Finance, Faculty of
Business, Queensland University of Technology, Brisbane, Qld, Australia. **Rio Tinto, Perth, WA, Australia.
Translated from Fiziko-Tekhnicheskie Problemy Razrabotki Poleznykh Iskopaemykh, No. 1, pp. 81-90, January-
February, 2007. Original article submitted June 27, 2006.
1062-7391/07/4301-0073 © 2007 Springer Science + Business Media, Inc.
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geological risk to pit design and mine planning is well acknowledged in the technical literature. For
example, Baker and Giacomo [8] show that out of 48 mining projects in Australasia, nine realized
reserves less than 20% of the originally expected, and 13 over 20% more reserves than forecasted. For
Canada and the USA, Vallee [9] refers to a World Bank survey showing that 73% of mining projects
failed due to problems in their ore reserve estimates, and led to a loss of US$1106 million in capital
investment.
More recently, a study [10] tests the performance and limitations of a traditional optimization
approach through the resulting predicted project NPV using a conventionally estimated orebody model
and its application using the nested L-G algorithm. Stochastically simulated orebody representations [11]
were used to assess grade uncertainty within the pit limits producing results, which highlighted a
substantial risk associated with the traditional design. This risk assessment indicated a four per cent
probability of the traditional design to realize its predicted NPV. In addition, this example shows
substantial negative differences in expected quarterly DCFs and a shorter life of mine, considering
grade uncertainty within the conventionally derived ultimate pit. This study demonstrates the
limitations of traditional technologies, which combine estimated smooth orebody models with
complex, non-linear pit optimization algorithms that assume certainty in their inputs.
Assessing grade risk suggests that there is a probability that a given design may perform better than
forecasted; thus, there is an upside potential associated with the orebody considered, similarly to a
downside risk where forecasts are not materialized. Seeking mine designs and long-term extraction
sequences that have the possibility of capturing the upside potential of the deposit and at the same time
minimize any possible downside risk is desirable and now possible. Figure 1 elucidates the concept of
“maximum upside / minimum downside” mine designs based on grade risk. It shows the distribution
of DCFs for a pit design that can be generated from simulated orebody models and used to assess the
mine design and production sequence. With a defined point of reference such as the minimum
acceptable return (MAR) on investment, the distribution that minimizes risk or downside and
maximizes reward or upside leads to selecting a preferred mine design. Note that in general the MAR is
different than the average or median of a distribution.
QUANTIFIED RISK AND AN UPSIDE / DOWNSIDE APPROACH TO OPTIMIZATION
The maximum upside / minimum downside approach to open pit optimization suggested here is
based on the quantification of geological uncertainty through the generation of a series of equally
probable representations of the orebody. Stochastic simulation [12, 13] may be seen as a family of
techniques that allow the generation of these orebody representations, all reproducing the in situ
variability, the available conditioning data and information, the data histogram, and spatial continuity
of the orebody. The steps taken by the upside/downside approach are as follows.
(a) Stochastically simulate several orebody models using the available data.
(b) Implement the nested pits implementation of the L-G algorithm with the Milawa scheduler to
design a pit for each simulated orebody model; each design maximizes the discounted net value to be
generated from the mine, within operational constraints such as slope angle, mill plant capacity and
total mining capacity of available equipment.
(c) With the pit limits and sequence of extraction including annual production generated, quantify
grade risk in each pit design for the selected key project performance indicators, such as total project
NPV, periodical amount of ore material to feed the mill, metal production and cashflows. Risk analysis
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is performed similarly to [10]. For a given schedule, a set of DCFs is calculated using each of the
simulated orebody models for the material in each pushback or year of production. Similarly to
cashflows, distributions can be generated for any other indicator, including ore tonnage and metal
quantity considering mill capacity and market demand providing the reference levels needed.
(d) Discard pit designs that may not meet the key project performance indicators deemed
necessary; for example, the tons of ore that is required at the mill, or cash flows to be met in a given
production period and so on. Lastly,
(e) using the distribution of possible values for any project indicator as found in step (c), calculate
the upside potential and downside risk for selected project indicators with the remaining designs using
a point of reference (eg. minimum acceptable return on investment, mill demand, market
specifications). Select the designs that meet the preset decision making criteria.
A comparison of two designs for a given orebody is shown graphically in Fig. 2. Given a value of a
project’s MAR, the expected DCF above this value provides an assessment of the upside potential
whilst the same measure below the MAR is considered the design’s downside risk indicator. Different
criteria and key project performance indicators lead to selecting a desirable pit design. The discussion
on the effect of metal prices on the pit design process above is deferred until a later section.
The approach outlined above provides a process that leads to the selection of a single pit design
that captures the upside potential of the orebody and minimizes the potential downside risk, given the
available data and information integrated into the simulation process. A case study presented next
illustrates the practical aspects of the approach.

Fig. 1. Uncertainty in a distribution of a key project performance indicator (DCF), reward or upside potential
and downside risk with respect to a point of reference such as minimum acceptable return (MAR)

Fig. 2. Upside potential and downside risk for two pit designs for the same orebody
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APPLICATION AT AN EPITHERMAL GOLD DEPOSIT

A typical disseminated low-grade epithermal quartz breccia gold deposit occurring in volcanic
rocks and sediments is used to illustrate the approach for the pit optimization procedure outlined above.
The mine produces free milling and refractory ores delivered to a CIL processing plant, with a
floatation circuit added for the refractory ore. General information on the deposit and resource as well
as the details pertaining to the simulated orebody models available from previous studies [14]. The
simulation method used is outlined in Appendix I. Figure 3 shows an east-west section of the orebody
with closely located drillholes and their three meter composite grades. This same cross section will be
shown in figures through out the study. The first priority of this mine is to meet mill ore demand,
particularly during the first year and, is deemed in the present case, a higher priority than the economic
performance of the operation over the life-of-mine.
Optimization and the development of a mine design for each of the simulated orebody models are
generated in all cases using the parameters given in Table 1. In the example presented here, 13 simulated
orebody models are used and are sufficient to illustrate the practical aspects of the suggested
approach. After designing the ultimate pit limits and generating the corresponding pit shells for each
of the 13 simulated orebody models, the mill’s demand for one million tons of ore per year is considered
and three pushbacks are generated as an approximate annual schedule using the Milawa scheduler
mentioned in a previous section. Fig. 4 shows cross-sectional views of the 13 designs generated
indicating differences in terms of location of pushbacks to be mined periodically and the ultimate pit
limits between the designs. Differences in the schedules often result in significant variations in expected
cash flow returns.
It is appropriate to note some aspects of the designs generated above. Firstly, an optimal design
based on a given simulated orebody model is not, in general, optimal for other stochastically simulated
orebody models. Secondly, although the simulated orebody models are equally probable, the
corresponding designs are not; there is no reason, for example, why there cannot be less designs than
simulated orebodies being optimized. Thirdly, the optimization process is a non-linear function and,
therefore, it is not possible to select “representative” realisations of the orebody to generate
“optimistic”, “average” or “pessimistic” scenarios. For example, a decile, say 90 %, with respect to a
potential grade tonnage curve of the resource in the ground will not provide a similar or even
predictable decile of any project performance indicator. These aspects of the designs make the selection
of a single optimal pit more complex than the traditional pit design approach. The risk analysis
discussed next is proposed as a tool that can be used to choose the best design from the available
designs. “Best” is considered here the design that minimizes the potential for losses whilst maximizes
the possibility of better financial performance.
For the gold mine considered in this case study, the key project indicators are DCF, periodical ore
tonnage and metal content. For a given mine design a distribution of the discounted economic value,
total ore tonnage and recoverable metal content for each pushback is calculated using each of the
simulated orebody models. Figure 5 illustrates this process. The distributions of the key project
indicators are calculated for the three pushbacks (PB-1, PB-2 and PB-3) with respect to pit design
number 2 where each simulated orebody model is represented by a single bar in each pushback of each
indicator. This process is repeated for all 13 designs.
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Fig. 3. Cross-section showing geology and closest drillholes from the epithermal gold deposit considered
in this study

TABLE 1. Technical and Economic Parameters Considered for Developing Mine Designs for the
Gold Deposit under Study
Parameter Value
Pit slope, deg 54
Mining cost, USD / t 1.0
Ore processing cost, USD / t:
oxide ore 8.195
fresh ore 16.86
Ore mill recover, %:
oxide ore 90
fresh ore 84
Discount rate, % per year 8
Cold prices, Au USD / oz 600

Fig. 4. Cross-sections of 13 pit designs and their pushbacks generated from optimizing individual
simulated orebody models
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 Fig. 5. Illustration of the steps used to quantify risk in a given pit design

Prioritizing the importance of the key performance indicators is important for the approach used
here. In this case study, meeting ore production targets is the more important performance indicator in
the first year of operation. However, it is common, for example, that repayments of possible loans and
hence the recovery of the initial investment makes DCFs more significant in the first year rather than
later years. Fig. 6 plots the risk profile of the key project indicator ore tonnage, within the first
pushback for the 13 pit designs. Considering the mill feed requirement of one million tons of ore and
the requirement that there is a 70 % chance of producing at least one million tons leads to designs 2, 4,
6, and 12 being retained for further assessment. The remaining designs are excluded from further study
whilst the selected designs will be tested with the second performance indicator of interest, DCF.
Figure 7 shows the DCF project performance indicator for the selected designs within the first,
second and third pushbacks. The MARs considered per pushback are $12M, $2M and $1M during the
first, second and third years of operation, respectively, and are shown in Fig. 7 as cumulative DCF. If
Ct is the MAR value in period t, it is possible to calculate the upside potential UPi and downside risk
DRi of design i (or pushback) using the following:
UPit = ∑ (V
j
+
i j t − Ct ) Pj , (1)

DRit = ∑ (C − V
j
t
−
i j t ) Pj , ∀t , (2)

where V j is the total discounted economic value to be generated for simulated orebody model j; if V j
is greater than Ct then V j is represented as V+ j , otherwise, V j is represented as V− j ; Pj is probability
from simulated orebody model j. In Eq. (1), j refers to the index of the simulated orebody models that
have a total discounted economic value greater than Ct during period or pushback t, and in Eq. (2), j is
the index of simulated orebody models where V j ≤ Ct during period or pushback t.
Figure 7 shows the V j values for each design as cumulated over the production periods, or
pushbacks. If cumulated values are used, this case study shows a value of $12M for C1, $14M for C2
and $15M for C3. Table 2 shows the UPi and DRi values for the selected designs within each
pushback to be mined in successive production periods. The table shows that design 12 has a somewhat
higher UP within the first pushback and also shows zero risk for the same pushback. However, it has
the highest DR during the last year of production (– 0.96 m$).
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 Fig. 6. Cmparing risk profiles for ore tonnage within the first pushback for 13 pit designs generated using
simulated orebody models. Arrows on top indicate selected designs with at least a 70 % chance of being
above one million tons of ore

Designs 2 and 6 also have relatively high UP values, zero DR for pushback 1 and DR values are
better within the second pushback than those in design 12. Both designs 2 and 6 have relatively higher
total upside potentials with less risk over their production life than the two others.

Fig. 7. Comparison of risk profiles for the key project indicator DCF per pushback for selected pit designs

TABLE 2. Upside Potential and Downside Risk Values for Selected Mine Designs within Each
Pushback (CB)

Upside potentials UP, million USD Downside risk DR, million dollars
Design
PB1 PB2 PB3 PB1 PB2 PB3
2 2.3 2.41 1.8 0.00 – 0.08 – 0.20
4 1.3 2.1 1.6 – 0.78 – 0.15 – 0.51
6 2.4 2.43 1.9 0.00 – 0.02 – 0.28
12 2.9 2.4 1.2 0.00 – 0.16 – 0.96

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 It is worth noting for reasons of comparison that the design and sequence generated using a smooth
estimated orebody model of this deposit and traditional optimization approach as reported in [8] has a
15 % chance of not achieving the MAR specified during the first year, 8 % during the second
production period and 31 % during last year.
EFFECT OF PRICE VARIABILITY ON AN OPTIMAL DESIGN
Designs 2 and 6 are selected as the best performing mine designs based on the quantified risk of
project indicators for a fixed gold price of 600Au$/oz. To assess the impact of gold price variations on
the total upside potential of the project, Figure 8 shows the total upside potentials of the selected designs,
2 and 6, when the gold price is increased from $600/oz to $650/oz and to $700/oz. The upside potential of
design 2 decreased significantly when the unit price is increased to $650. This unexpected reduction in
UP indicates that design 2 is sensitive to price variations. This sensitivity is confirmed by the significant
increase in the UP value to $5.4M when the gold price is $700/oz. Design 6 shows an increasing trend on
the total UP value as the price is increased. Although UP values of designs 2 and 6 are comparable to
each other at $600/oz price, the difference becomes significantly large when the price is increased to
$700/oz. The increasing difference in the UP values indicate that design 6 provides the highest upside
potential should there be an increase in gold price to $700/oz and would potentially generate larger
revenues. Figure 9 shows the expanding pit design number 6 for the different gold prices considered.
CONCLUSIONS AND FURTHER WORK
Geological uncertainty has a significant impact on the real value of mining projects. A new approach
was proposed for designing open pit mines based on geological uncertainty that combines stochastically
simulated orebody models and traditional optimization with routinely used implementations. The
approach is based on developing designs that capture maximum upside potential whilst minimizing
downside risk.
The utility of the approach is that it allows the use of traditional and commercially available
optimization tools to address risk issues and produce better designs. However, two main weaknesses
may be identified. The approach may be operationally tedious, particularly in the case of larger
orebodies and depends on the ability to efficiently simulate orebody models at the scale required for
managing substantial volumes of data. This suggests how it is imperative to consider stochastic
simulation methods that are truly efficient and can facilitate studies within weeks rather than months.

Fig. 8. Upside potential for designs 2 and 6 for different gold prices
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 Fig. 9. Pit design 6 and its expansion for different gold prices

An additional issue is that conventional optimizers cannot really provide the optimal upside/downside
solution for a set of criteria. The solution provides a single design preferable to the remaining in the
group of designs being compared. However, one cannot ensure that the approach will generate the best
possible design and mining sequence over the life-of-mine for the criteria used stochastic to the
understanding of the orebody being considered. The ability to provide truly optimal upside/downside
approaches where the upside/downside profile of a mine design is defined by the user requires further
development and forms the key reason for research in stochastic mine planning [4, 5, 15, 16].
Although this study focuses on specific key project indicators, the method presented is general and
suitable for any user defined decision-making process and indicators that may be chosen. The approach
can be used in any type deposit and open pit optimization study.
The work presented herein was part of a research project funded by Anaconda Operations, Anglo
Gold Ashanti, BHP Billiton, Highlands Pacific, MIM Holdings (now Xstrata), Pasminco, Rio Tinto and
WMC Resources (now part of BHP Billiton).

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