Impact of Rehabilitation and Closure costs on Production Rate

and Cut-off Grade Strategy

B.M. King
Rio Tinto Technical Services Limited, Bristol, United Kingdom

Abstract

Even after the last bucket of ore has been mined, a number of activities must take place before
the mining operation is considered closed. This may include revenue generating activities, such
as selling off equipment, supplies and infrastructure, and closure costs, including
decommissioning and rehabilitation of the mine, treatment plant, tailings and waste dump sites.
In the past the value of the revenue generating components were considered greater than the
closure costs giving little impact on the mining strategy. However, any substantial mining
venture must account for appropriate rehabilitation of the land impacted by the mining
activities. This paper shows how rehabilitation and closure costs may impact the production
rate and cut-off grade strategy for a mining operation. The paper also highlights the need to
understand the assumption base of software optimization tools when applying them in practice
and interpreting their results.

Introduction - Mining Objectives and Constraints

One of the objectives of a mining operation is to maximize the net present value (NPV) of the
project. This objective is subject to many constraints including long term responsible
stewardship of the resource and the environment.

In the past, mine closure may have been seen as a positive contribution to the company cash
flow, as the equipment salvage value is considered. Responsible mining ventures now consider
rehabilitation and decommissioning costs that often exceed the salvage values. These may
include reprofiling waste dumps, removal and disposal of buildings and infrastructure,
hazardous materials disposal and native revegetation of impacted areas. Mine closure and
rehabilitation policies should also conform to the mine objectives and constraints.

The purpose of this paper is to show how closure and rehabilitation costs can be incorporated
into the mine schedule to maximize the NPV within operational constraints. In order to clearly
illustrate the issues, examples have been chosen which exaggerate the impact of these
parameters. While showing these results the paper also highlights the importance of knowing
the assumption base that is used by “optimizing” tools.

Production Rate and Cut-off Grade Optimization Background

A breakeven mining strategy may simply process all the material that would cover its mining
and treatment costs. This would result in a long life operation with a large amount of rock
processed. This policy does not guarantee the best return on the project and could, in some
cases, make a project unable to cover initial capital costs. 4, 5

The objective of cut-off grade optimization tools is to maximize the value of the entire reserve
model, considering both the present value of mining a reserve block with the discounted benefit
of mining it at some time in the future. This often leads to higher processed grades in the early
life of the mining operation, then gradually reducing towards the breakeven grade at the end of
the mine life. As a consequence of maximizing the project value, the mine life is often reduced
as a declining cut-off grade policy applied.5

A number of examples have been prepared to illustrate the value of incorporating closure and
rehabilitation costs during mine design. Initially, an example was chosen with a simple
geometry in order to highlight the impact of the production rate and cut-off grade, without the
complexity of real geological and economic variability. A more complex example follows with
a sequence of realistic rock properties.

In each case, the material is scheduled to maximize the net present value of the operation.

Simple Examples

The same mining parameters used by Dowd3 to illustrate dynamic programming has been used
in this paper. The deposit consists of mixture of high grade and low grade rock. This material
is evenly distributed requiring simultaneous mining. The high grade portion can be separately
processed if necessary. The entire deposit consists of 400 t of low grade and 200 t of high
grade material.

A treatment plant with an annual capacity of 100 t can treat either high and low grade material
together or the high grade ore only. If both rock types are treated then a net cash flow of $ 5
is achieved from each tonne of rock. If only the high grade material is processed then a net
cash flow of $ 10 per tonne of rock processed is generated.

The mining rate is not constrained for the purposes of these examples. A discount rate of 20%
is assumed for the project.

Case A - No closure costs

In this first case, the material is scheduled without any other costs impacting on the schedule
(Table 1). This case equates to the example given by Dowd3 to illustrate the principals of
dynamic programming.1

Period Processed Mass Mass Cash Discounted

material Mined Processed Flow Cash Flow
1 High grade only 300 100 $ 1,000 $ 1,000
2 Low and High 100 100 $ 500 $ 417
3 Low and High 100 100 $ 500 $ 347
4 Low and High 100 100 $ 500 $ 289
Totals 600 400 $ 2,500 $ 2,053

Table 1 : No closure costs

As can be seen in the above schedule, the first period uses half the resource to enable the mill
to be filled with high grade ore. The remaining periods fill the mill with the high and low grade
mixture.
Case B - Closure Cost as a Terminal Value

The next case considers closure as a cost after all the mining is complete. This may represent
the case where the major proportion of the closure costs are concerned with decommissioning
the tailings dams and removing surface infrastructure.

For this example a cost of $1 000 in the period following the completion of processing is used.

Case B-1 Ignoring Closure Costs During Planning

By ignoring the closure cost during the planning stage, the same mine plan is developed as
above except the cash flow is added in the period following exhaustion of the resource (Table
2).

Period Processed Material Mass Mass Cash Discounted

Mined Processed Flow Cash Flow
1 High 300 100 $ 1,000 $ 1,000
2 Low and High 100 100 $ 500 $ 417
3 Low and High 100 100 $ 500 $ 347
4 Low and High 100 100 $ 500 $ 289
5 Closure Costs -$ 1,000 -$ 482
Totals 600 400 $ 1,500 $ 1,571

Table 2 : Ignoring Closure Costs During Planning

As can be seen by the resulting NPV, the project still has an overall positive value after the
closure cost is incorporated.

Case B-2 Considering Closure Costs During Planning

By incorporating the closure information during the planning stage, a new mine plan is
developed to maximize the NPV and keep the mill operating at full capacity (Table 3).

Period Processed Mass Mass Cash Discounted

Material Mined Processed Flow Cash Flow
1 Low and High 100 100 $ 500 $ 500
2 Low and High 100 100 $ 500 $ 417
3 Low and High 100 100 $ 500 $ 347
4 Low and High 100 100 $ 500 $ 289
5 Low and High 100 100 $ 500 $ 241
6 Low and High 100 100 $ 500 $ 201
7 Closure Costs -$ 1,000 -$ 335
Totals 600 600 $ 2,000 $ 1,660

Table 3 : Considering Closure Costs During Planning

The project has a 5.7% increase in NPV by modifying the schedule to fill the mill with low
grade ore throughout the mine life.
After some thought, it is apparent that an even greater project NPV could be achieved by
reducing the production rate in the last periods. Table 4 illustrates this schedule:

Period Processed Mass Mass Cash Discounted

Material Mined Processed Flow Cash Flow
1 Low and High 100 100 $ 500 $ 500
2 Low and High 100 100 $ 500 $ 417
3 Low and High 100 100 $ 500 $ 347
4 Low and High 100 100 $ 500 $ 289
5 Low and High 100 100 $ 500 $ 241
6 Low and High 30 30 $ 150 $ 60
7 Low and High 10 10 $ 50 $ 17
8 Low and High 10 10 $ 50 $ 14
9 Low and High 10 10 $ 50 $ 12
10 Low and High 10 10 $ 50 $ 10
11 Low and High 10 10 $ 50 $8
12 Low and High 10 10 $ 50 $7
13 Low and High 10 10 $ 50 $6
14 Closure Costs -$ 1,000 -$ 93
Totals 600 600 $ 2,000 $ 1,834

Table 4 : Considering Closure Costs During Planning with Reduced Mining Rates

In this case the project NPV was raised another 10%. The question that arises now is why
drop down to only 10 t in the final periods and not down to say 1 t, or 0.1 t? The schedule
that would theoretically maximize the NPV would be to not mine the last block of material
unless the discounted closure cost was less than the value of the last increment of resource.
This may be likened to maintaining a nominal mining capacity to avoid incurring the closing
costs.

There are several reasons why this does not occur in practice. Firstly, if fixed annual costs are
higher than the benefit of delaying closure may also stop this type of solution from being
considered optimum. Secondly, at low production rates, operating costs tend to increase,
making the business a loss making operation.

A third reason is of a more practical nature, at some low production rate, the operation
violates constraints under which the deposit can be mined. Responsible stewardship
constraints on the resource will remove schedules with periods of no production since they are
no longer “mining”. Minimum mining rates and environmental constraints are specific to the
mining operation being considered so a general answer can not be prescribed for all operations.

While this simple example does not warrant detailed study into how to overcome the problem,
it does highlight the advantages of understanding the assumption used in optimization
software, and the need to check the results in the light of these assumptions.

Case C - Rehabilitation Cost as an Annual Cost

For the final situation, rehabilitation costs are assumed to be distributed throughout the life of
the project. This may be caused by the rehabilitation of old mining areas and the clean up of
moving heap leach pads or tailings dams.
Case C-1 Fixed Annual Rehabilitation Costs

Consider firstly a deposit where the annual rehabilitation costs are not related to how much
material is mined. In this case the annual rehabilitation cost are $ 200 which cover regulatory
surveys and reports. The first schedule shows the case of simply adding these costs after the
schedule has been developed (Table 5).

Period Processed Mass Mass Cash Discounted

Material Mined Processed Flow Cash Flow
1 High 300 100 $ 800 $ 800
2 Low and High 100 100 $ 300 $ 250
3 Low and High 100 100 $ 300 $ 208
4 Low and High 100 100 $ 300 $ 174
Totals 600 400 $ 1,700 $ 1,432

Table 5 : Schedule Without Considering Fixed Annual Rehabilitation Costs During

Design

If these costs are included as fixed annual costs the optimum schedule mines all the resource in
two years as shown in Table 6:

Period Processed Mass Mass Cash Discounted

Material Mined Processed Flow Cash Flow
1 High 300 100 $ 800 $ 800
2 High 300 100 $ 800 $ 667
Totals 600 200 $ 1,600 $ 1,467

Table 6 : Schedule Considering Fixed Annual Rehabilitation Costs During Design

The resulting schedule is 2 years shorter and has just over 2 % higher NPV. It should be noted
that this optimum schedule does not simply change depending on the whether or not fixed
costs are included, it is also important what level of fixed annual costs. For example, fixed
annual costs of $ 150 would not have changed the scheduled quantities and cut-off grade.
Annual costs of $ 250 would have led to the same high grade processing schedule but with an
8 % improvement in NPV.

Case C-2 Rehabilitation Costs Per Mass Processed

A second example may contain rehabilitation costs that are proportional to the mass of material
mined. Typical costs that may be in this category are revegetation costs, acid water treatment,
dust suppression and contaminated waste disposal. The following example shows the original
schedule to which a further $ 1.0 t-1 charge has been added (Table 7).
 Period Processed Mass Mass Cash Discounted
Material Mined Processed Flow Cash Flow
1 High 300 100 $ 700 $ 700
2 Low and High 100 100 $ 400 $ 333
3 Low and High 100 100 $ 400 $ 278
4 Low and High 100 100 $ 400 $ 231
Totals 600 400 $ 1,900 $ 1,543

Table 7 : Without Considering Rehabilitation Costs Per Mass Processed During Design

By scheduling this material taking into account the rehabilitation charge a better schedule is
found (Table 8):

Period Processed Mass Mass Cash Discounted

Material Mined Processed Flow Cash Flow
1 Low and High 100 100 $ 400 $ 400
2 Low and High 100 100 $ 400 $ 333
3 Low and High 100 100 $ 400 $ 278
4 Low and High 100 100 $ 400 $ 231
5 Low and High 100 100 $ 400 $ 193
6 Low and High 100 100 $ 400 $ 161
Totals 600 600 $ 2,400 $ 1,596

Table 8 : Considering Rehabilitation Costs Per Mass Processed During Design

In this case a 3 % increase was realized though again how much the schedule changes is
dependent on the surcharge level.

Realistic Example

The importance of applying appropriate rehabilitation and closure costs has been highlighted
with a simple example. This section of the paper presents a more realistic example where a
combination of these factors is shown.

The mine is a hypothetical small copper deposit that may be purchased. Existing mining and
processing equipment will be used with no requirement for additional capital expenditure. All
cash flows were discounted by 15 % per year.

For the purpose of mine scheduling the following costs and capacities were used (Table 9).

Description Value/Capacities
Ore and Waste Mining cost and capacity $ 1.0 t-1, 20 000 t year-1
Ore Processing cost and capacity at 90 % recovery $ 5.0 t-1, 2 000 t year-1
Equivalent Metal Value $ 1500 t-1 of copper

Table 9 : Mining Capacities and Costs

A number of other costs were associated with the rehabilitation and closure of the mine. In
this example, the rehabilitation was associated with downstream tailings treatment so was
added to the cost of processing ore. Closure was associated with decommissioning of three
separate pits. High costs have been used to illustrate the way these properties impact on the
schedules (Table 10).

Description Value
Rehabilitation $ 2.0 t-1 of ore

Three Stage Decommissioning of mine

Stage 1 - After 120 Mt $ 50 M
Stage 2 - After 130 Mt $ 50 M
Stage 3 - After 140 Mt $ 50 M

Table 10 : Rehabilitation and Closure Costs

The above parameters were used to schedule the deposit in three different ways. On each
occasion the full rehabilitation and closure costs were applied to the total cash flow and
incorporated in the NPV calculation (Table 11).

Design Remaining NPV

Mine Life

Ignoring both rehabilitation and closure costs 13 years $ 96 M

during design, then adding these costs to the
resulting cash flows and NPV.

Incorporating rehabilitation costs during design 12 years $ 92 M

but ignoring closure costs. Closure costs were
then added to the final cash flows and NPV.

Incorporating both rehabilitation and closure costs 15 years $ 100 M

in the design.

Table 11 : Summary of Schedule Results

Detailed schedules are provided in the appendices, however the main points are illustrated in
the Figures 1 and 2.
1.2

0.8

0.6

0.4 Designed without Rehabilitation or Closure

Costs Considered
Designed with Rehabilitation but without
Closure Costs Considered
Designed with both Rehabilitation and Closure
0.2 Costs Considered

0
0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150
Cumulative Mass Of Reserve Mined (kt)

Figure 1 : Cut-off Grade Applied to the Resource

160.00

140.00

120.00

100.00

80.00
Designed without Rehabilitation or Closure
Costs Considered
60.00 Designed with Rehabilitation but without
Closure Costs Considered
Designed with both Rehabilitation and Closure
40.00 Costs Considered

20.00

0.00
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
Period

Figure 2 : Time Of Mining the Resource

Several points can be seen from Figures 1 and 2:

• The inclusion of rehabilitation considerations during the design process led to higher cut-off
grades and production rates throughout the mine life. The total mine life was reduced by
this process and so brought forward the decommissioning costs.

• The incorporation of the decommissioning costs led to a longer mine life with lower cut-off
grades used to mine the majority of the reserve.

• The best discounted value for the project was achieved when both rehabilitation costs and
closure costs were included in the design.

• By incorporating the costs selectively (rehabilitation but not decommissioning costs) during
the design process, the NPV of the mining schedule was worse than using the original, less
complex information.

By inspecting the final schedule in Appendix C, questions of what stopped the optimization
algorithm further reducing production after year 18 are raised (after an NPV of $ 114 M was
found). While the schedule produced may be acceptable, it is not, for the costs and constraints
specified, the optimal solution. The reason for this is thought to be that the optimization
software tool used assumed the optimal solution was always at one of the maximum capacity
constraints (mine, mill or market capacity). While this is normally a reasonable assumption, it
is important to interpret the solutions in the light of the optimization assumption base as well
as the input data.

This highlights the importance of knowing the assumptions used in the software being used and
checking the solutions that are produced.2, 6 Remaining closure costs should be modeled using
assumptions that reflect the way they are actually paid. For example, money would normally
be put aside for meeting mine closure so that the remaining costs are less than the remaining
value of the reserves.

Conclusions

This paper has shown the way mine rehabilitation and closure costs can impact the mine
schedule. Large closure costs at the end of a mine life generally tend to drop the optimum cut-
off grade in the last periods of the mine life and extend the period over which the resource is
mined. Rehabilitation costs related to the material processed, tended to increase the cut-off
grade and reduce the mine life. Other types of rehabilitation costs may not follow the same
trend as those related to the quantity of material processed.

Appropriate modeling of rehabilitation and closure costs may lead to small, but significant,
changes to the mining schedule and thus improve the NPV.

A black box approach to applying an optimization tool could lead to sub-optimal schedules.
Optimization tools should be used carefully, with a clear understanding of the assumptions that
the algorithms are based on. Suppliers of such software can help reduce inappropriate
application by providing clear details of their algorithm assumption base. These assumptions
can be considered when applying the software and interpreting the results.
Acknowledgements

The author wishes to thank the management of Rio Tinto Technical Services for permission to
publish this paper and study some of the optimization techniques discussed. Also to Nigel
Forward, Dr Mike Whateley, Richard Wooller, Dave Hamilton and Ken Lane for their support
during the project and assistance in preparing the paper.

References

1. R. BELLMAN: “Dynamic Programming”, Princeton University Press, 1957, 3-9.

2. B. DENBY and D. SCHOFIELD: “Inclusion of risk assessment in open pit scheduling”,

Transactions of the Institute of Mining and Metallurgy, London, pages A67-A71.

3. P.A. DOWD: “Application of dynamic and stochastic programming to optimise cut-off

grades and production rates”, Transactions of the Institute of Mining and Metallurgy, London,
1976, A22-31.

4. R. D. KELSEY: “Cut-off grade economics”, 16th APCOM, Littleton, Colombia AIME,

1979, 286-292.

5. K. F. LANE: “The Economic Definition of Ore: Cut-Off grades in Theory and Practice”,
Mining Journal Books, London, 1988.

6. G. A. MATHERSON: “Open pit sequencing and scheduling”, SME-AIME Fall meeting,

Honolulu, Hawaii, 1982, 1-15.
Appendix A - Designed without Rehabilitation or Closure Costs Considered

Period Cut Off Cumulative Quantity Quantity Quantity Average Cash Flow Rehabilitation Total Cash Discounted Cash Cumulative
Grade Mass Mined Mined Milled Metal Grade without and Closure Flow Flow Discounted
Recovered Milled R&C costs Costs Cash Flow

(% Cu) (Mt) (Mt) (Mt) (kt) (% Cu) ($ x 1000) ($ x 1000) ($ x 1000) ($ x 1000) ($ x 1000)

Year 10 1.11 15.38 15.38 2.00 45.43 2.39 42,765 -4,000 38,765 38,765 38,765
Year 11 0.98 27.94 12.56 2.00 38.08 2.00 34,555 -4,000 30,555 26,570 65,335
Year 12 0.88 39.61 11.67 2.00 36.63 1.93 33,276 -4,000 29,276 22,137 87,472
Year 13 0.78 55.53 15.92 2.00 27.34 1.44 15,085 -4,000 11,085 7,289 94,761
Year 14 0.77 71.69 16.17 2.00 26.33 1.39 13,336 -4,000 9,336 5,338 100,099
Year 15 0.76 87.75 16.05 2.00 26.25 1.38 13,327 -4,000 9,327 4,637 104,736
Year 16 0.75 103.67 15.93 2.00 26.16 1.38 13,316 -4,000 9,316 4,028 108,764
Year 17 0.74 118.04 14.37 2.00 26.52 1.40 15,420 -4,000 11,420 4,293 113,057
Year 18 0.72 125.43 7.39 2.00 28.67 1.51 25,623 -54,000 -28,377 -9,276 103,781
Year 19 0.66 132.36 6.94 2.00 27.72 1.46 24,644 -54,000 -29,356 -8,345 95,436
Year 20 0.57 138.76 6.40 2.00 26.48 1.39 23,325 -4,000 19,325 4,777 100,213
Year 21 0.48 144.67 5.91 2.00 25.22 1.33 21,927 -54,000 -32,073 -6,894 93,319
Year 22 0.37 149.15 4.49 1.65 19.70 1.26 16,814 -3,298 13,516 2,526 95,845

Total 149.15 149.15 25.65 380.53 1483.61 293,413 - 201,298 92,115 95,845 95,845
Appendix B - Designed with Rehabilitation but without Closure Costs Considered

Period Cut Off Cumulative Quantity Quantity Quantity Average Cash Flow Closure Costs Total Cash Discounted Cash Cumulative
Grade Mass Mined Mined Milled Metal Grade without Flow Flow Discounted
Recovered Milled Closure Cash Flow
costs

(% Cu) (Mt) (Mt) (Mt) (kt) (% Cu) ($ x 1000) ($ x 1000) ($ x 1000) ($ x 1000) ($ x 1000)

Year 10 1.13 15.66 15.66 2.00 45.81 2.41 39,062 39,062 39,062 39,062
Year 11 1.01 28.56 12.90 2.00 38.59 2.03 30,993 30,993 26,950 66,012
Year 12 0.91 40.52 11.96 2.00 37.12 1.95 29,718 29,718 22,471 88,483
Year 13 0.82 57.63 17.11 2.00 27.10 1.43 9,542 9,542 6,274 94,757
Year 14 0.82 74.79 17.17 2.00 27.02 1.42 9,368 9,368 5,356 100,113
Year 15 0.82 91.98 17.18 2.00 27.03 1.42 9,367 9,367 4,657 104,770
Year 16 0.82 109.19 17.21 2.00 27.05 1.42 9,367 9,367 4,050 108,820
Year 17 0.82 121.41 12.23 2.00 28.91 1.52 17,137 -50,000 -32,863 -12,354 96,466
Year 18 0.77 129.23 7.82 2.00 29.49 1.55 22,423 22,423 7,330 103,796
Year 19 0.72 136.58 7.35 2.00 28.59 1.50 21,543 -50,000 -28,457 -8,089 95,707
Year 20 0.63 143.35 6.77 2.00 27.34 1.44 20,251 -50,000 -29,749 -7,353 88,354
Year 21 0.54 149.15 5.80 1.86 24.25 1.37 17,568 17,568 3,776 92,130

Total 149.15 149.15 23.86 368.30 1543.65 236,339 - 150,000 86,339 92,130 92,130
Appendix C - Designed with both Rehabilitation and Closure Costs Considered

Period Cut Off Cumulative Quantity Quantity Quantity Average Cash Flow Closure Costs Total Cash Discounted Cash Cumulative
Grade Mass Mined Mined Milled Metal Grade without Flow Flow Discounted
Recovered Milled Closure Cash Flow
costs

(% Cu) (Mt) (Mt) (Mt) (kt) (% Cu) ($ x 1000) ($ x 1000) ($ x 1000) ($ x 1000) ($ x 1000)

Year 10 1.02 14.53 14.53 2.00 44.19 2.33 37,764 37,764 37,764 37,764
Year 11 0.88 26.27 11.74 2.00 36.74 1.93 29,379 29,379 25,547 63,311
Year 12 0.78 37.22 10.95 2.00 35.35 1.86 28,086 28,086 21,237 84,548
Year 13 0.69 50.73 13.52 2.00 28.38 1.49 15,047 15,047 9,894 94,442
Year 14 0.66 65.08 14.35 2.00 24.89 1.31 8,989 8,989 5,139 99,581
Year 15 0.63 79.05 13.96 2.00 24.55 1.29 8,860 8,860 4,405 103,986
Year 16 0.6 92.59 13.55 2.00 24.16 1.27 8,700 8,700 3,761 107,747
Year 17 0.57 105.69 13.10 2.00 23.73 1.25 8,500 8,500 3,195 110,943
Year 18 0.53 117.53 11.84 2.00 23.59 1.24 9,550 9,550 3,122 114,065
Year 19 0.49 123.49 5.97 2.00 25.38 1.34 18,108 -50,000 -31,892 -9,066 104,999
Year 20 0.49 129.46 5.97 2.00 25.38 1.34 18,108 18,108 4,476 109,475
Year 21 0.49 135.42 5.97 2.00 25.38 1.34 18,108 -50,000 -31,892 -6,855 102,620
Year 22 0.49 141.39 5.97 2.00 25.38 1.34 18,108 -50,000 -31,892 -5,961 96,659
Year 23 0.49 147.85 6.46 2.00 26.64 1.40 19,492 19,492 3,168 99,827
Year 24 0.49 149.15 1.30 0.43 5.51 1.34 3,933 3,933 556 100,383

Total 149.15 149.15 28.43 399.25 1404.13 250,732 - 150,000 100,732 100,383 100,383