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Short Term Gain For Long Term Pain
Short Term Gain For Long Term Pain
poor planning or earlier operational decisions – it will For a full understanding of modern cutoff theory, it is important
sometimes be necessary to disrupt production activities in order to appreciate these differences. All operations will have
to install infrastructure for the future of the operation. Where capacity limitations for all three material types, and at least one
the decision involves for example access to future production of these will normally be constraining the operation. Often, and
areas, the short-term disruption will usually be seen as a particularly in mature operations, ongoing debottlenecking will
necessary evil, and the planned work will proceed. But if the result in a balance of both rock and ore capacities – in open
planned work is for services, such as ventilation and drainage, pits, both the mining fleet and the treatment plant will be
then depending on the culture of the company, the relative working at capacity, though the run-of-mine (ROM) cutoff may
power of operators and planners, and the time horizon of vary to maintain this situation. In underground operations,
management, it may be that the decision is to forego the waste access development and ore throughput will be at their
installation to avoid the short-term disruption. The long-term limits, though the ore limitation may be in either the mine or
effect of this may be that the operation can never deliver the the treatment plant. In underground operations that continue
planned production rate, as the facilities to support it have not below a previous open pit, it is not uncommon to find that the
been provided. access development rate is the overall limitation – even if
performing at its maximum capability, insufficient
As indicated above, if all of this has been evaluated, and the mineralisation with grades adequate to cover marginal costs of
relative costs and benefits of the alternative plans have been production and treatment is exposed to “fill the mill”. Product
assessed, then it is the prerogative of the management to make constraints are not a concern for most operations. Treatment
the decision as they see fit. Unfortunately, it is often the case plants are usually designed to handle maximum ore quantities
that the downsides of these options are not fully evaluated: at grades above the expected average, and downstream product-
planners may have significantly less power than operators who handling facilities are also designed to cope with these, perhaps
perceive that the temporary reduction in output will reflect with some short-term stockpiling of product, so normal grade
badly on them, and / or the shortage of technical staff currently fluctuations do not constrain the ore throughput. However,
experienced in the industry results in there being insufficient some operations have genuine constraints on the amount of
time to evaluate fully the relative effects of the two options. In product they can sell, and many operations experience periods
the absence of information about the downsides, an uninformed of extra-high grade production, when the amount of product
and ultimately costly decision is made. that can physically be generated or handled becomes the overall
production constraint. However, strategic options that involve
Cutoffs and Production Rates increasing the cutoff and therefore the head grade may result in
scenarios where the capacity of the product part of the mill
In many operations, the importance of cutoff for delivering circuit becomes the overall constraint.
long-term value from the operation is still not well understood.
The optimum cutoff will generally vary over time, and at any Underground Operations
point in time (Lane, 1988) depends on the prices for the Existing strategies have been found to be suboptimal in a
product(s), the cost structure of the operation, the tonnage / number of strategy optimisation studies conducted by the
grade relationships of the mineralisation accessible in the author and his colleagues in recent years. Figure 1 shows a
period being assessed, and the capacities of the operation to: typical “Hill of Value” (HoV) for an underground metalliferous
1. Mine “rock”, which is then available for classification mine. The vertical axis is Net Present Value (NPV), though
as “ore” or “waste”, HoVs can be generated for all parameters of interest to the
company (Hall, 2003, Hall and de Vries, 2003), to allow
2. Produce and treat “ore”, and selection of strategic policies that deliver close to the best for a
3. Produce, handle and sell “product” number of corporate goals, rather than the best for one goal
only.
The term “ore” in this context refers to mined material that is
sold or sent for processing to generate a saleable product. It is Operations are found to be frequently operating with both
not used in the strict sense of the definitions in the various cutoff and production rate lower than optimal, as shown in the
international codes for the public reporting of resources and figure. Some of the reasons for this are discussed below.
reserves.
Typical causes of sub-optimal strategies
In open pits, “mining” in the simplest cases is the removal of all The sub-optimal production rate is often found to result from
the “rock” from within the designed pit limits, and this does not failure to utilise the existing productive capacities, which in
notionally become “ore” or “waste” until trucks diverge on the turn is often due to cost savings that result in insufficient
haul routes to ore and waste dumps on surface. In more development of ore sources to ensure that planned production
complex cases, with different drilling patterns and / or loading can be maintained should something go wrong with one of
and trucking fleets for ore and waste, there is a more complex them. “Just In Time” development in underground mines
relationship between ore and waste handling capacities, and frequently turns out to be “Just Too Late”. Cost savings can
hence between rock and ore handling capacities, within the pit. severely reduce overall value.
In underground mines, “mining” in this context typically relates
to development of declines and strike access development in Cutoffs are frequently too low because they typically fail to
waste. These openings give access to mineralised material account for “sustaining” capital expenditure (the regular
which can then be classed as “ore” and stoped, or left in-situ as ongoing cost of maintaining the productive capacities of the
“waste”. In this three-fold classification of material as rock, ore, plant and equipment and mine accesses), and the time-value-of-
or product, most activities in open pit mines are typically money “opportunity” cost of deferring higher-grade sources in
dealing with rock, whereas most activities in underground order to produce from lower-grade sources. Sustaining capex is
mines are typically dealing with ore. simply another regular cash outgoing, the same as
administration overheads. Its separate treatment in the financial
accounts should not cause it to be ignored in cutoff between development and production rates and developed ore
determinations. In fact it can be shown (though it is beyond the stocks has been re-established.
scope of this paper to do so) that the net cost of capital
expenditure is higher than that of an equivalent amount of This does not imply that cutoffs cannot be changed quickly.
operating expenditure, and it should therefore if anything bear a Rather it highlights that cutoff is an important strategic mine
surcharge rather than be ignored in “breakeven” calculations. design parameter, and changing from an existing strategy to a
(It should be noted that the terms “breakeven” and “cutoff” are new one is not a simple operational tactical issue, but one that
not synonymous, though breakeven calculations are frequently requires careful planning and scheduling of the transition to
used to determine the value used as the cutoff.) predict and avoid problems such as those described.
Moving to an optimal strategy Varying multiple strategic policy items over time
The “production rate” axis in Figure 1 is the ore production and It is assumed in Figure 1 that at each cutoff and production rate
treatment rate. Maximising value at the same cutoff will combination, the optimum mining schedule has been
typically involve an injection of working capital by way of a developed. There is no guarantee that a general development
temporary increase in the development rate. This will increase and stoping sequencing strategy that is optimal for one set of
the number of sources producing concurrently, in order to design parameters will be optimal for another. A full
guarantee delivery of the actual ore handling and treatment optimisation methodology must be able to account for this.
capacity already available. Increasing the cutoff at the same
production rate will require both a permanent increase in the Also, the three-dimensional nature of the chart allows plotting
development rate, since the ore tonnes per metre of of only two independent design variables and one dependent
development will typically reduce with increasing cutoff, and a variable. The cutoff specified on the cutoff axis is fixed for the
further temporary increase, to re-establish the working stocks of life of the mine, which is how many if not most mining
“developed ore”. The HoV shown also accounts for product operations are planned. Even with this limitation, increases in
constraints that may become active at high production rates and NPV of 10% to 50% have been observed in a number of
/ or cutoffs. studies, for cutoff increases ranging from 30% to 50% of the
value in use at the start of the study (Hall and Stewart, 2004).
Many operations that increase their cutoffs, particularly as a However, cutoff and the rock, ore, and product capacities can
rapid response to poor profitability and a perceived need to all vary, and it is well known that maximum value is obtained
increase head grade, do so almost instantaneously, with little or with a cutoff that can vary over time. The HoV shown could
no planning or immediate increase in development capacity. therefore be at least four-dimensional, with another independent
Developed ore stocks remaining at the higher cutoff are quickly variable axis for time, or perhaps six-dimensional, to allow for
consumed and within a few months, the mine has a production independent specification of alternative mine access
shortfall, as there are insufficient sources developed to sustain development and product handling capacity changes. By
the planned production rate at the new cutoff. If lower grade varying the cutoff over time, additional value is potentially
sources that had been developed at the previous lower cutoff obtainable by mining higher-grade material first, then lower-
are still accessible, these may have to be mined as marginal grade material at a later date, to the extent that it has not been
material, but often with increased costs for access rehabilitation sterilised by the earlier higher-cutoff mining. But even if all
and / or extra development, and with a significant reduction in lower grade material is sterilised at any cutoff, the HoV as
overall head grade. If these areas have been sterilised, there shown indicates what the best cutoff is.
may be no alternative but to suffer the loss until the balance
In caving mines, there may also be at least two different breakeven and cutoff, are mined. Different lives for the two
cutoffs, the one defining the “footprint” or in-situ volume of areas result in an unprofitable low production rate tail that will
ground planned to be developed as “ore”, the other being the be truncated by mine closure (if fixed costs cannot be
“shutoff” defining the lowest grade of broken rock to be sufficiently reduced to allow it to be mined profitably). During
extracted from drawpoints. the life of the mine, production from the longer-life area will
contain material that is above the common cutoff for both areas,
Varying strategic policy items by location but which is of lower grade than some of the material that
remains unmined when the mine closes. The second plot shows
Different cutoffs can also be applied to different areas within a how the cutoff in this area can be increased so that, at the time
mine to increase value (Hall and Stewart, 2004, Horsley, 2005). the mine does close, the best possible grades have been mined
Figure 2 shows schematically how this arises. In the first part of from both areas.
the figure, two areas with similar mineralisation, mining
methods, and costs structures, and therefore notionally the same
In this simple example, the cutoff policies to maximise value Consider for example spare ore development capacity.
would be easily determined. In a real operation, dependencies Although the mill is being kept full at the optimum cutoff, there
between various mining areas and other scheduling and is always the temptation to mine lower-grade material, whose
sequencing constraints and options may make the selection of grade nevertheless is sufficient to pay for its own marginal
the optimal cutoff policy for all areas over time non-intuitive costs, because “if it’s not mined now, it will be sterilised
and non-trivial. Sophisticated optimisation techniques may be forever”. There is therefore the temptation to utilise the spare
required to select the best strategy. ore development capacity to extend ore development into
material slightly below the identified optimum cutoff, which
Dangers of sub-optimising for subsidiary parameters improves the utilisation statistics for the development
equipment. Although the mill is being filled with above-
Assume an underground operation that is both developing at the optimum-cutoff material, developing into lower-grade areas
maximum rate in waste access headings, and, at the identified will result in those areas also being produced, effectively
optimum cutoff, delivering the maximum quantity of ore that lowering the cutoff, and thereby moving to a lower-value area
the mill can treat. There are also a number of activities in the on the Hill of Value, by deferring production of the higher-
mine that could potentially constrain the amount of ore grade ore that should have been mined.
produced. These include the in-ore development rate, the
production drilling rate, the charging and blasting rate, the ore If the mill were not being filled with above-optimum-cutoff
mucking rate, and the ore trucking or shaft hoisting rate. Given material, this would be a good tactical plan in the short-term.
the variations in these over time, and the different sizes of However, it must cause the mine staff to question why this
incremental capacity steps in each, it is unlikely that all of these situation has arisen. If simply a result of “normal” variations in
will always be in balance. the mining cycle, short-term variations in effective cutoff are an
appropriate response. But if the shortage of above-optimum-
Short-term tactical key performance indicators (KPIs) for cutoff material is longer-term and resulting from a deviation
operating managers typically include such things as maximising from the strategic long-term plan, it will be necessary to not
equipment utilisation. While this is notionally good, a better only devise a short-term tactical plan to get back to the
KPI is optimising utilisation. The difference is subtle but optimum long-term plan, but also to identify what led to this
critical. Because of the imbalance in capacities of the various situation and take appropriate steps to prevent its reoccurrence
potential ore-constraining activities, the optimum mining in the future.
strategy will involve some activities, and therefore the
associated equipment, operating under capacity, rather than at The big danger, however, is for the short-term tactical response
maximum capacity. Attempting to operate all activities and to become the long-term strategy by default. It is easier to fill
equipment at maximum capacity will at best increase costs, and the mill with a lower cutoff (it takes some of the pressure off
at worst, result in a defacto lowering of the effective cutoff, the waste access development), the additional “ore” is
thereby reducing value. apparently “economic”, and the jumbo utilisation statistics
improve. The apparent tactical benefits will result in a move to
a sub-optimal strategic plan. If there were no other productive are the ROM cutoff (for ore sent directly to the mill) and the
work for them, it would actually be preferable to pay the overall “rock” (i.e. ore + waste) mining rate, expressed in this
development crews to do nothing, rather than to incur the case as a percentage of the base case rates in the pre-existing
additional variable costs of extra development that then causes plan, which may vary from period to period.
value-destroying material to be added to the ore stream.
The figure indicates that, as the mining rate increases from low
A similar situation often exists in sublevel caving operations, values, more material is available for treatment, and the cutoff
where the shutoff used is often a relatively low marginal can be increased to supply higher grades to the mill. Material
breakeven grade. Significant value can be destroyed by below the ROM cutoff is stockpiled for later treatment if
continuing to draw low-grade material when the next ring could profitable. Up to a point, the higher grade, and hence increased
have been blasted and higher-grade ore produced. revenue, more than pays for the increased mining costs, and
value increases. Eventually, the mining rate will increase to the
Open Pit Operations point where the tonnage / grade relationships of the deposit are
such that any revenue gains are exceeded by the extra mining
Suboptimal strategies have also been found in use in open pits. cost.
Figure 3 shows a typical “Hill of Value” for an open pit base
metal mine, plotted as contours of NPV. The independent axes
Figure 3 - Variation of NPV with cutoff and mining rate – open pit
Varying multiple strategic policy items over time Dangers of sub-optimising for subsidiary parameters
Figure 3 has been generated simply by accelerating or It was noted above that the simple picture presented by Figure 3
decelerating the existing planned mining sequence. There is no at higher mining rates might not be achievable, but a more
guarantee that this sequence is the best, or is even practical, at detailed analysis would account for any implicit
all mining rates evaluated in the initial calculation. As with the impracticalities. However, a reduced mining rate will always be
underground situation in Figure 1, the three-dimensional nature a practical alternative. It is not uncommon to encounter a desire
of the chart allows plotting of only two independent design to reduce the mining rate, in effect by deferring waste stripping,
variables and one dependent variable. The cutoff and mining which reduces the overall rock mining capacity earlier in the
rate factors in Figure 3 are fixed for the life of the mine, but mine’s life. (This may or might not be countered by an increase
cutoff and rock, ore, and product capacities can all vary, and it later.) The effect of a lower mining rate is to reduce the amount
is well known that maximum value is obtained with a cutoff of mineralised material available for classification as ore in the
that can vary over time. Other design parameters that can be time period in question. To maintain mill throughput, it is
varied include such things as the sinking rate of the pit (e.g. in necessary to reduce the ROM cutoff, moving to a new mining
terms of metres or benches per year) and the ultimate size of the position below and to the left of the current position on the plot.
pit (expressed perhaps as a volume, tonnage, or Whittle “Pit The value of the operation reduces, as the cost savings from
Shell Number”). The HoV shown could again be multi- reduced mining rates are more than offset by a drop in revenue
dimensional, to allow for independent specification of from lower ore grades.
alternative mining and treatment capacity and rate changes.
It can also be seen in Figure 3 that the value contours are
significantly closer to the left of and below the peak in the
figure than in the other areas of the chart. The overall
implication of this pattern is that it is more costly in the long exploration and / or more detailed studies. Subsequent studies
run to be mining too slowly than to be mining too fast by the often then result in the specification of mining fleets and
same proportion. facilities and treatment plants designed to handle waste and ore
quantities (and qualities) defined by the initial approximate
Issues Common to Open Pits and Underground cutoff, with no guarantee that the best combination of capacities
Operations and cutoffs has been selected. Tactical decisions (i.e. to save
time and costs) during the evaluation and feasibility study
The danger of evaluations at one cutoff or production process can result in the specification of a significantly
rate suboptimal strategy.
Many operations still use a simple break-even grade as the
cutoff. This takes account of prices and costs only, though the Figure 4 illustrates how this can happen. Using only a single
rock, ore and product production capacities provided will cutoff in the evaluation, “Strategy A” may appear significantly
influence the costs used in the calculation. It is also not better than “Strategy B”. An analysis at a range of cutoffs can
uncommon to find that these cutoffs are set early in the give a significantly different outcome. The same effect may be
exploration process, using high-level cost estimates, when the seen for other strategic decision parameters, such as rock
size and shape of the “orebody” is first becoming apparent. mining and ore production rates.
Scoping studies are conducted to obtain an initial estimate of
the value of the potential project and to justify further
Testing the impact of apparent limitations within acceptable ranges for the various parameters, there are
no problems. But if the peak of the HoV lies beyond one of
There will be practical upper limits on many physical capacity these limits, the difference between the peak value and the
parameters, such as the rock, ore, and product rates, which will value at the limit gives an indication of what could be spent to
make some parts of the HoV impractical. If the value of the remove the limitation, which in many cases will be more a
HoV surface is increasing at those limits, the “hill” effectively function of current practices than an absolute and unchangeable
ends at a “cliff”, and the indicated optimum strategy will be to constraint.
work with that particular limiting parameter at its limiting
value. In other cases, the value of the operation will be falling
when it reaches the cliff, and the optimum strategy will then
The effect of mining rate on optimum cutoff
occur at the peak of the HoV. It is not uncommon to find that an increase in mining rate is the
solution proposed to get a marginal mine out of trouble. The
As well as the more usual apparent constraints, such as limits assumption is that similar head grades, and hence cutoff grades,
on the various production rates, there may be practical upper can be maintained. If the transition to a higher rate is properly
limits on, for example, cutoff. The nature of the mineralisation planned and executed, with a corresponding increase in the
may be such that zones above a particular grade may not be waste development (underground) or waste stripping (open pit)
able to be delineated for selective mining in practice, even rate, this may be so, and value gains can be realised – e.g. by
though geologically they are known to exist. The cutoff cannot moving higher up the HoV in Figure 1 at the same cutoff, but
practically be specified above that grade. Similarly, the existing not going as far as the “Typical improvement proposal” shown
geological model may have been developed to identify material there. (If waste mining rates are not increased, similar
above a certain grade, and “orebodies” at cutoffs significantly production shortfalls such as those described above for
below that grade may be unreliable. However, it is often increasing the cutoff in an underground mine may occur.)
worthwhile continuing calculations and evaluations beyond
these apparent limits. If the peak of the HoV is found to lie
It is often then postulated that, if the production rate is The Timing of Infrastructure Capital
increased, the cutoff can be reduced to increase the reserve and
the return. It is reasonable to expect that increasing the Spending
production rate will reduce the breakeven cost per tonne of ore.
However, Figure 1 demonstrates clearly that reducing the Saving or deferring of costs is always an important and valid
cutoff, though it may increase the reserve, will reduce the NPV, way of improving the value of an operation. Frequently,
not increase it. The cutoff will however have to be reduced if however, the short-term tactical benefits cause long-term
the waste mining rate does not increase in line with the ore strategic problems. The issues often arise at the time of
production rate: this is the same situation as reducing the waste preparing the annual capital and operating cost budgets.
mining rate at the same ore treatment rate, as described for open Provisional budget items are often treated as “wish lists”, and
pits above. the question will often be to the effect of: “Do we have to do or
spend this now? Can it be deferred?” The answer is often “Yes,
The implication of this is that the optimum combination of but . . .” “Yes”, the item can be deferred, in the sense that the
waste mining and ore treatment rates and cutoff will vary mine is not going to come to a complete standstill overnight if it
depending on whether one of the constraints is to be artificially is not done. “But” the operation may be less efficient, and the
constrained or not, e.g. by deliberately reducing the waste cost, either extra direct costs of doing it later, or lost revenue
mining rate, or by deliberately or unconsciously not allowing it from lower production, may be significantly greater than the
to increase in line with a planned ore production rate increase. immediate savings apparently made.
The costs savings from imposing a limit may be more than
eroded by loss of revenue from lower head grades. As above, if all aspects of the alternatives have been evaluated,
and the relative costs and benefits of the alternative plans – to
The effect of metal prices and costs on optimum cutoff spend or not to spend – have been assessed, then it is the
prerogative of the management to make the decision as they see
Conventional wisdom suggests that if prices go up, cutoffs fit. But again, it is often the case that the effects are not fully
should go down in inverse proportion, and vice versa. And evaluated – the downside costs or loss of revenue may be
similarly, if costs reduce, cutoffs should go down in direct difficult to quantify, while the direct cost of the item in question
proportion, and vice versa. These are true of breakeven grades, is plain – and in the absence of information about the
and if the cutoff selected is a breakeven, then they will be true downsides, an uninformed decision to “save costs” is made.
of those cutoffs also. However, Hall (2003) and Hall and
deVries (2003) have demonstrated that this is not the case for Service Facilities
optimum cutoffs that maximise NPV.
If the planned work is for service facilities, foregoing the
For optimum cutoffs, a number of case studies have installation to save costs in the short-term may result in a
demonstrated that the changes in optimal cutoffs are failure to provide the services needed to support the planned
substantially less than suggested by the preceding hypotheses. production in the future. “Required Volume of Clean Air” is a
The methodology developed by Lane (1988) indicates resource that rarely appears in mine scheduling systems, but it
theoretically why this is so. If a “balancing cutoff” as defined may be crucial to enable various planned activities to proceed
by Lane is the current effective cutoff, it will be unaffected by in parallel. If it is not available, activities may have to proceed
price and cost variations, being solely the result of the physical sequentially, extending the overall duration of mining activities
plant capacities and the nature of the mineralisation. The associated with a given tonnage of ore, thereby reducing the
“opportunity cost” terms in two of Lane’s “limiting” cutoffs overall mining rate. Similarly, inadequate drainage can not only
even make it possible for these cutoffs to move in the opposite result in increased wear and tear on equipment, but can also
direction to that suggested by the conventional wisdom, and reduce the rate at which it can operate, restrict access to
this effect in the optimum cutoff has been seen by the author in working places, and / or require labour and equipment that
some studies. could otherwise be allocated to productive activities to be
allocated to drainage system maintenance and clean-up of mine
These effects make it impossible to predict the movement in openings.
optimum cutoffs for any specified price or cost changes without
performing a full analysis of the strategic plan. Mining Information and Production Infrastructure
Cost savings by deferring capital development underground or
Hall (2003) and Hall and deVries (2003) have also waste stripping in open pits, and expenditure on exploration or
demonstrated how working with a typical sub-optimal cutoff infrastructure such as a shaft, can also have a significant
will increase the volatility of returns as prices change, and can negative impact on overall profitability. Deferral of waste
significantly increase the risk of achieving low or negative stripping in open pits has been discussed above. Slowing
returns when prices fall. Operating with optimum cutoffs for decline advance rates in underground operations can have a
lower prices will frequently capture most of the upside from similar effect.
price rises, and can significantly reduce the downside risk of
price falls. The relatively small changes in optimum cutoffs While improving truck haulage efficiencies are continuing to
observed, coupled with the relative flatness of the peaks of the extend the economic depth of trucking – in many instances to
Hills of Value, often mean that optimum mining strategies are below 1000m below the tipping point – this does not
relatively insensitive to changes in economic conditions, necessarily imply that a shaft should not be sunk until that
whereas suboptimal strategies on the slopes of the HoVs may depth is reached. Deferring the sinking of a shaft can both
require significant changes, perhaps with little notice, when reduce the value of the operation and significantly shorten its
conditions change. life. However, the increasing economic depth of trucking
appears to provide some comfort to managers deciding to defer
shaft sinking capital expenditure. Also, many operations limit
in-mine exploration expenditure to merely continue to provide
perhaps two or three years’ worth of reserves. Together these
types of cost-saving policies can have a major negative impact Value lost by deferring spending on infrastructure
on value. The limited reserves may never be sufficient to justify
the capital outlays for more efficient infrastructure, by reducing Hall (2005) describes a hypothetical steeply-dipping orebody,
operating costs over a long enough period of time. If sufficient with a single production front moving vertically down through
mineralisation is eventually proven, it may be too late to have it. Production is by truck haulage, currently to surface, and a
an effect. shaft to 1000m depth has been proposed. In the scenario
presented, Proven and Probable Reserves currently extend to
The example below relates to trucking all ore to surface, versus 900m depth, and Inferred Resources extend some distance
installation of a shaft, with reduced trucking up to the bottom of beyond that. The deposit is still open at depth. The analysis has
the shaft. The rationale however applies to any situation where projected the known orebody characteristics to 2000m depth to
major capital expenditure to install efficient systems can assess what the company’s options might be. Figure 5 shows
significantly reduce future operating costs. the effect of deferring the shaft sinking decision.
Figure 5 - NPV with trucking only, and a shaft starting at different times
The “trucking only” curve shows a maximum value at a little about 1030m. The value of the shaft option falls below the
over 1000m depth, which is therefore the economic limit of maximum value with trucking only if the start of shaft hoisting
trucking. A dashed line at this value to greater depths indicates is deferred beyond when the production front is at about
the value that a shaft option must have to be better than 1140m. If the mineralisation is closed off at a shallower depth,
trucking only. A dotted and dashed line $5M dollars above this earlier shaft starting times are needed to make the shaft option
indicates the value that a shaft option must have to be that much viable.
better than trucking only – a “safety margin” to perhaps account
for some of the risk associated with the large up-front capital If analyses were done at one final depth of the mine only
cost of the shaft option. With a 1000m deep shaft, the economic (typically the known bottom of mineralisation at the time of the
depth of the mine – with trucks hauling up to a tipping point evaluation, and often with a downgrading factor applied to
above the skip loading station – is about 1550m - 1575m. Inferred Resources), a value destroying decision could be made.
This is similar to the situation in Figure 4, for analyses done at
The time of the start of shaft hoisting is expressed as the one cutoff. Although the value of the shaft option is greater
elevation of the production front, which in the scenario than the value of trucking only for most specified final depths
illustrated is moving down at 40 vertical metres per year (“vm / below the shaft starting depth, shaft hoisting is nevertheless not
yr”). The lines plotted for shaft hoisting starting at 100 vm always the best option. As is evident in Figure 5, the value of
intervals therefore represent deferral time increments of 2.5 the shaft option at a range of final depths of the mine can be
years. It can be clearly seen that deferring the shaft option (the significantly less than the value at the economic limit of
value of which includes the capital costs thereof) results in trucking only if the shaft is deferred too long.
decreasing value, as the later the start, the less ore is hoisted at
the lower shaft operating costs. It can also be seen that deferral of the shaft effectively results in
a range of uneconomic final depths of mining. For shaft
If the mineralisation extends to at least the economic depth of hoisting starting when the production front is at 1000m depth,
say 1550m, then the shaft option will no longer deliver the mineralisation extending below the economic limit of trucking
required $5M margin over trucking only if the start of shaft (at approximately 1030m depth) is uneconomic unless it
hoisting is deferred beyond when the production front is at extends below 1150m, at which point the shaft curve exceeds
the maximum trucking-only value. If the shaft is deferred to depth, the mineralisation must extend to 1030m for the shaft
start when the production front is at 1100m, the uneconomic option to break even with trucking only, and to 1130m to
final depth extends to approximately 1230m. If mineralisation generate an extra $5M, which are 130m and 230m respectively
extends only to these depths, its value will be lost if the shaft is below the hoisting starting point. However, if shaft hoisting
deferred too long – the mine should cease with trucking only at starts when production is at 1000m depth, the required
the economic limit of 1030m depth. But if the shaft is built minimum depths of mineralisation become 1150m and 1330m,
early enough, the mine will be economic for any depth of 150m and 330m respectively below the hoisting starting point.
mineralisation, down to the economic depth with shaft hoisting Working backwards from the starting point of shaft hoisting, to
of 1550m, and the value will be significantly greater than with allow for construction, preceded by analysis and decision-
trucking only. making, the time when the exploration data must be available
can be estimated. In the example used, this is a total of 2.5
Identifying the exploration target required to justify the years, or 100 vertical metres of production advance. Depending
infrastructure on the existing knowledge, the timing of the start of the
exploration programme and the overall depth that it has to
Hall (2005) also describes how hypothetical calculations for a cover can be determined. Applying this process to a range of
range of potential depths of mineralisation can identify the shaft starting depths, curves such as in Figure 6 can be derived.
reserves required to justify the proposed infrastructure. It can be
seen that, if shaft hoisting starts when production is at 900m
The dotted lines show the minimum depth, in absolute terms, of 240m, with hoisting starting when production is at
mineralisation required, which is shown on the left-hand approximately 920m. This is equivalent to 6 years’ production
vertical axis. The solid lines show this as the extra depth or at 40 vm / yr.
exploration lead at the time of starting the analysis and
evaluation, after the exploration results are available, with If it is decided to limit exploration costs by maintaining say 2 or
values shown on the right-hand vertical axis. 3 years’ reserves only ahead of the production front, it is clear
that a shaft will never be justifiable, even though it may have
It can be seen, as is also evident in Figure 5, that as shaft been a better option. As well as limiting exploration
sinking is deferred, the required depth of mineralisation to expenditure, the mine can also now avoid the costs of an
justify it increases, and at an increasing rate. The required expensive study of shaft hoisting, since this will never generate
exploration lead, however, has a minimum at somewhat less a better scenario with the limited reserves data available. The
than the trucking-only economic limit. Although Figure 5 mine must close at the economic limit of trucking only,
indicates that, if it is justified, the earlier a shaft can be installed regardless of how much deeper the mineralisation may
the better, Figure 6 suggests that there may be practical ultimately be found to extend, and the fact that, with hindsight,
constraints on this. If for example drilling cannot be done to the shaft could have been installed with significant benefits.
depths beyond 300m, it will never be possible to prove a shaft
with a $5M margin over trucking only. If however it is only Conclusions
necessary for the shaft to break even with trucking only, this
will be feasible for shaft hoisting starting when the production Numerous strategic plan optimisation case studies are showing
front is anywhere between 700m and 1080m. The absolute that conventional wisdom is often far from wise. Typical
minimum exploration lead for breaking even is approximately industry practices for determining cutoffs result in mine plans
that are often far from optimal. Significant extra value can be Hall, B.E. and deVries, J.C. (2003) Quantifying the economic
obtained from many operations, often by increasing the cutoff risk of suboptimal mine plans and strategies. AusIMM
and thereby reducing the reserve and the mine life. These Managing Risk in Mining Projects Conference, Sydney,
strategies can also reduce the volatility of returns when prices Australia, September 2003.
change, and in particular can reduce the risk of negative returns
when prices fall. Hall, B.E. and Stewart, C.A. (2004) Optimising the strategic
mine plan – methodologies, findings, successes and failures.
The natural desire to reduce costs is often counter-productive. AusIMM Orebody Modelling and Strategic Mine Planning
Reducing the waste-stripping rate in open pits, and the rate of Conference, Perth, Australia, November 2004.
decline advance underground, reduces the amount of Lane, K.F. (1988) The economic definition of ore; cutoff grades
mineralised material available to work with, and will typically in theory and practice. Mining Journal Books, London.
result in reduced cutoffs to keep the mill full, and reduced
revenues that more than outweigh the mining costs saved. Horsley, T.P. (2005) Differential cut-off grades. 9th AusIMM
Delaying or failing to provide apparently expensive services Underground Operators' Conference, Perth, Australia, March
infrastructure can later result in the services being unable to 2005
support the planned production rates, with the loss of revenue
again outweighing the apparent saving.
Acknowledgements
The author wishes to thank the management of AMC
Consultants Pty Ltd for permission to prepare and present this
paper. Past and present members of the AMC strategy
optimisation team are thanked for their contributions to the
development of the methodologies and knowledge and the
conduct of case studies that support the findings presented in
this paper.
References
Hall, B.E. (2003) How mining companies improve share price
by destroying shareholder value. Paper 1194, CIM Mining
Conference, Montreal, Canada, May 2003.
Hall, B.E. (2005) A quantitative assessment of the factors
influencing the shaft vs trucks decision. AusIMM Hoist and
Haul 2005 Conference, Perth, Australia, September 2005.