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MINING / 16 Aug 2019

Strategic open pit mine plan can unlock your mine´s hidden value – Optimization of an open pit mine can multiply mining related cash flow

Strategic mine optimization and development should be the focus of every mining company.

In light of the current shakedown in metal and commodity prices, strategic mine optimization and development should be the focus of every operating or developing mining company to ensure that operations not only reduce operational costs but also maximize value generated throughout the lifetime of the mine.  Strategic open pit mine optimization and planning is a fundamental part of any profitable and feasible mining operation whether the mining operation is private or government run. A strategic mine plan must provide a real excavation and material processing schedule, as well as a trusted value of the mining project. There are multiple challenges when generating a feasible and profitable strategic open pit mine plan.  Input information required for open pit optimization and planning, such as validated ore grades and commodity prices should be carefully validated in order to create reliable results and strategy.

An example of a strategic change to an open pit mine plan as metal prices rise and therefore allow production access to deeper ore.

Open pit optimization in general

Open pit optimization is a method to optimize and evaluate the economically best mineable shape of the open pit in terms of data available. Open pit optimization software calculates the net present value (NPV) of the open pit using different algorithms that optimize the open pit using a geological model, open pit slope angles and profiles, mine investments and operational costs. Calculations can be performed according to nominal or real costs depending on the estimation method and objectives of the estimation.

The open pit optimization calculation is applied to a geological model called a block model. The blocks in the model include operational costs, metal contents and all other relevant data for the optimization. The open pit optimization software progressively constructs a list of related blocks that should or should not be mined from the block model based on the block data.  The final block list defines an ultimate open pit outline that has the highest possible NPV value or other target in question, while considering the required economical parameters, pit slope angles and other physical constraints.

Revenue factors are used to define the final ore inventory and select the ultimate open pit. At a revenue factor of 1 the cash flow is maximized and hence also defines the ultimate pit size and shape. At lower revenue factors (<1) optimization produces smaller pits with high grades but a reduced mine life. At higher revenue factors (>1) optimization produces larger pits and a longer mine life, but with reduced outcomes in profitability. It is very simple and straight forward in the end.

The optimization produces pit shells that are later on used for open pit design procedure. In practice open pit designs, haulage ramps, pit safety berms and bench slopes will change the shape of the optimized open pit shell. This will make changes to the reported ore inventory depending on how accurately the original pit shell was used in the practical pit design. The ultimate open pit is finally designed according to the rock mechanical stability parameters that are gained from separate rock mechanical studies including analysis and simulations.

Example of a mining project optimization results and various pit size vs. NPV options available.

Pöyry conceptual model and terminology of an open pit slope design.

What are the objectives of your mining project?

Before any open pit optimization or evaluation is initiated, a strategic goal must first be crystal clear. The strategic goals define the target that the mining company is aiming for. Whether the target is maximum profits or long and stable cash flow with reduced NPV, the target must be set prior to any analysis. Setting new targets during operation is common whatever the business is. The same principles apply for the open pit optimization and planning.

Most commonly, new Greenfield mining projects are aiming for maximum NPV with maximized cash flow first i.e. aiming to the best ore grade first and minimizing costs. This applies in most of the open optimization and design projects globally. But there are situations where reduced NPV scenarios are studied and finally applied to the design of the open pit and to the whole mine strategy. Reduced NPV scenarios can mean two opposite directions of the mining project.

The first is to shorten mine life by selecting a smaller open pit size, focusing on high ore grades (first) and simultaneously reducing risks of the project.
The second option is to select a larger open pit, meaning longer mine life. Both options reduce NPV but have their own advantages and disadvantages.

Shorter mine life and smaller open pit reduces risks related to the profitability of the mining project but can also be difficult to reason for investors. Shorter mine life can also be socially difficult to justify due to shorter employment expectations given by the mine for the community. Smaller open pit size can also make the practical operations more challenging in the open pit causing extra operational costs. Sometimes open pit size can be restricted by environment. For example a lake or environmentally protected land area can be in the vicinity of the planned open pit. It may be even more profitable and acceptable to avoid applying mining permits and commence mining in such areas if the rest of the reduced mining scenario is still feasible to execute.

Selecting a longer mine life and larger open pit by sacrificing NPV is common as it provides other advantages. Longer mine life is better accepted in the social community than shorter ones as it provides more trust in the project and longer term employment prospects. Longer mine life also evens the production of the mine and gives more room for adjusting the mining strategy later on.

Commonly, multi stage open pit operations are developed if the ore deposit is large enough. Multi stage open pit operations are initiated from a smaller starter pit with high cash flow first and later on the pit is extended using pushbacks to a much larger pit. Multi stage mining strategies are commonly applied to ore deposits that have a high waste rock to ore ratio (lots of waste rock material requires excavation in order to access the ore).

At the more detailed strategy level, traditional strategic mine planning includes a series of sequential processes to evaluate the tradeoffs of different open pit scenarios. Typically, a detailed open pit plan is generated based on pre-analyzed ore grade cut-off grades, and aims to achieve desired goals, such as a target processing plant mill production, while keeping a smooth total rock material movement to simulate the operation of a mining fleet. The detailed open pit plan is then used to calculate equipment numbers and running times. Both are the input into operative cost models that calculate more detailed mining costs and overall project value than are estimated in the preliminary open pit optimization phases.

Whatever your mining strategy is, be sure to know the effects of it.

Different goals of a mining strategy and their relevance.

Initial parameters - What is crucial?

Initial data for strategic open pit planning is crucial and bad data can lead to very misleading judgements if not recognized in the evaluation process. The most important and “dangerous data” in the open pit optimization is geology and how it is interpreted and modelled. If geology goes wrong the whole optimization goes wrong no matter how correct your other parameters are. Geological information fed to the open pit optimization process must be understood and verified by more than one experienced and qualified geologist.

Other parameters fed to the optimization are rather simple due to their nature of being engineering or an economical parameter. Geology being a descriptive natural parameter that is squeezed into numerical world and having lots of gaps and interpretations are commonly the faulty component that leads to incorrectly evaluated mining project. Failure to evaluate mineral processing recoveries or commodity prices are also crucial to the whole evaluation. Incorrectly forecasted metal or commodity prices may not even be noticed in the first 1-5 years of the mining operation but seen later on in the project economics.

Global standards - Love them, hate them

Global standards are to secure mining operators, investors, local communities and governments in making reliable mining project evaluations.

Most commonly used international standards are JORC- code and NI43-101 that are more less the certificates of trust. Mining project evaluations prepared according to such standards are trusted in the stock exchanges globally. JORC- code and NI43-101 codes have strong focus in the mineral resources and ore reserves that are interpreted from the geology. Standards classify mineral resources and ore reserves in to classes depending on the accuracy of the geological investigations. For example JORC- code classifies mineral resources into inferred, indicated and measured mineral resource classes. Ore reserves can be defined only from indicated and measured mineral resource categories in order to have a reasonable amount of geological data to support the ore reserve estimate.

Advice: top ten tips on how to succeed in open pit strategy development

Mikko Lamberg
Design Manager, Mining
Pöyry Finland Ltd.

Pöyry has successfully completed many open pit optimization projects and studies. Our mine planning team has a strong practical and theoretical background from multiple projects and mining environments around the globe. Many new approaches to the strategic mine planning are continuously developed and tested in customer cases in order to gain even more added value to the client´s mining projects.