Cut Off Optimization

August 2007
Whittle
Cut-off Optimization
Prepared by Norm Hanson
Copyright 2008, Imageo & Gemcom Software International Inc.
This Mornings Objectives The purpose of this session is to present the theory behind cut-off optimisation, in easy to understand manner and to provide participants with the knowledge required to apply an elevated cut-off strategy to their own deposit.
Pit Optimization
Copyright 2007, Gemcom Software International Inc.
August 2007
This session
Introduction to Value Concepts Understanding Value
Marginal Condition How cut-off can be calculated?
Risk of not using the best cut-off

Subsidizing Waste Sterilizing Resource/Reserves
Time Value of Money Cut-off & Cut-Overs
Pit Optimization
What is Value?
Which Truck is Worth the Most?
1. 2. 3. 50 tonnes of 2g/t Gold 100 tonnes of 1 g/t Gold 250 tonnes of 0.5 g/t Gold
Pit Optimization
August 2007
What is Value?
Dollar Value = Revenues Costs
Revenues can be calculated from:
Ore tonnages Grades Recoveries Product price
Costs can be calculated from:

Mining cost Milling cost
Pit Optimization
50 tonnes of 2g/t Gold
= [(2* 50 * 92.5%* $27.97) - (50 * $17.5)]- (50 * $2.00)
Revenue
[(2587) - (875)]- (100)
Costs
$1612
Pit Optimization
August 2007
100 tonnes of 1g/t Gold
= [(1* 100 * 92.5%* $27.97.15) - (100 * $17.5)]- (100 * $2.00)
Revenue
Costs
[(2587) - (1750)]- (200)
$637
Pit Optimization
250 tonnes of 0.5g/t Gold
= [(0.5* 250 * 92%* $27.97) - (250 * $17.5)]- (250 * $2.00)
Revenue
Costs
[(3234) - (4375)]- (500)
-$1641
Pit Optimization
August 2007
But wait!
If we just call this truck load waste We only pay $500 to mine it. We would be $1141 better off
Pit Optimization
10
What is the marginal Condition?
Whenever the cost of processing is higher than the revenue, we should treat the truck load as waste Value =
The Section in square Brackets must => 0
[ (Ore*Grade*Recovery* Price) - (Ore*CostP) ] - Rock*CostM
Pit Optimization
August 2007
11
The Marginal Situation
Ore *Grade *Recovery*Price = Ore *CostP
Revenue
by transformation this becomes
Cost
Marginal Grade =
Ore * CostP Ore * Recovery * Price
Pit Optimization
12
Marginal Cut-off
Marginal Grade =
CostP Recovery* Price
This marginal cut-off condition will change whenever, Processing costs, Recoveries or Prices change!
Pit Optimization Copyright 2008, Imageo & Gemcom Software International Inc.
August 2007
13
250 Tonnes of 0.25% Copper & 0.5 g/t Gold (process SXEW)
Revenue from gold
Revenue from Copper
= [(0.25*250 * 65%* 27.97 + 0.25%*250 *30%*7840) - (250 * $7.5)]- (250 * $2.00)
Costs
[(2273)+ (1470) - (1875) ]- (500) 3743- 2375
$1368
14
250 Tonnes of 0.25% Copper & 0.5 g/t Gold (process Floatation)
Revenue from gold
Revenue from Copper
= [(0.25*250 * 25%* 27.97 + 0.25%*250 *75%*7840) - (250 * $12.5)]- (250 * $2.00)
Costs
[(874)+ (3675) - (3125) ]- (500) 4559- 3625
$924
August 2007
15
Value
Dollar Value = Revenues Costs Revenues can be calculated from:
Ore tonnages Grades Recoveries Product price Mining cost Milling cost Selling Costs Overheads
15
Costs can be calculated from:
16
What affects the optimal outline?
In general:
If the price increases, the pit gets bigger If the costs increase, the pit gets smaller If the slopes are steeper, the pit gets deeper
Pit Optimization
August 2007
17
Finding the Optimal
AIR
WASTE
MINERAL
Once price, costs and slope are fixed The optimal outline is fixed
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A Simple Example
Pit Optimization
August 2007
19
Pit Tonnages and Value
Tonnages
Pit Ore Waste Total 1 2 3 4 2,000 1,600 3,600 5 2,500 2,500 5,000 6 3,000 3,600 6,600 7 3,500 4,900 8 4,000 6,400
Ore is Worth 500 1,000 1,500 Waste $ 2.00 100 400 900 $ 1.00
600 1,400 2,400
8,400 10,400
Values
Pit Value 1 900 2 1,600 3 2,100 4 2,400 5 2,500 6 2,400 7 2,100 8 1,600
Pit Optimization
20
Size .vs. Value
$3,000 $2,500 Pit Value $2,000 $1,500 $1,000 $500 $0 0 2,000 4,000 6,000 8,000 10,000 12,000
Pit Tonnes
Pit Optimization
10
August 2007
21
Design Sensitivity
$3,000 $2,500 B Pit Value $2,000 $1,500 $1,000 $500 $0 0 2,000 4,000 6,000 8,000 10,000 12,000 A
Pit Tonnes
Pit Optimization
22
Finding the Outline
Heuristics (searches)
Trial & Error Floating Cone Lerchs-Grossman Johnsons Network Flow
Four-X
Guarantee One Optimal Solution
Pit Optimization
11
August 2007
23
How does 3-D Lerchs-Grossman Algorithm Work?

Works with block values Works with block mining precedences (arcs) Guarantees to find the three-dimensional outline with the highest possible value Completely Searches the model
Pit Optimization
Arc Relationships
If A is to be mined, B must be mined to expose A The reverse is not true If B is to be mined, A may or may not be mined
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B Arc from A to B A
Pit Optimization
12
August 2007
25
Arc Chaining
C
All slopes are translated into a large number of block relationships It is wrong to assume we need an arc from each block to every block which is above it This is because arcs can chain
B If A is mined so is C A
26
Chaining of Three Arcs per Block
Pit Optimization
13
August 2007
27
Lets Do It
Demonstration using Gemcom Whittle
Pit Optimization
28
Block Value - Rule 1
The value must be calculated on the assumption that the block has already been uncovered.
Pit Optimization
14
August 2007
29
The value must be calculated on the assumption that the block will be mined.
Pit Optimization
30
Any expenditure that would stop if mining stopped must be included in the cost of mining, processing or selling.
Pit Optimization
15
August 2007
31
Minimum Arcs per Block
Desired Slope
Pit Optimization
32
Demonstration of L-G Algorithm
A simple example 45 degree slopes 2-dimensions Blocks are cubic Principles are the same for 3-dimensions but harder to show.
Pit Optimization
16
August 2007
33
Three Arcs per Block
Pit Optimization
2-Dimensions & 45 slopes = 3 arcs per block

34
Start
23.9
6.9
23.9
Starting with a 2-dimensional cross sectional model. Only 3 blocks contain ore & have values as shown. All other blocks are waste and have a value of 1.0
17
August 2007
35
Step 1
23.9
6.9
23.9
The first arc from a block containing value that we find is to a block which is not flagged for mining
Pit Optimization
36
Step 2
23.9
6.9
23.9
22.9 We link the two blocks together. The total value of the two-block branch is 22.9, therefore both blocks are now flagged to be mined.
18
August 2007
37
Step 3
23.9
6.9
23.9
20.9 We deal with the other two arcs from this block in the same way. The total value of the four-block branch is 20.9
38
Step 4
23.9
6.9
23.9
20.9
3.9
20.9
We can continue the same process to the end of the first bench
19
August 2007
39
Step 5
23.9
6.9
23.9
17.9
3.9
20.9
We then moved along the next bench, and find a block which has no value itself, but is part of a branch with value
40
Step 6
23.9
6.9
23.9
17.9
3.9
20.9
The next flagged block has an arc to a block which is also flagged. We do not create a link for this arc or for the vertical one from the same block, because nothing new has to be resolved.
20
August 2007
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Step 7
23.9
6.9
23.9
15.9
3.9
20.9
The next arc from a flagged to another flagged block is between two branches. The procedure is unchanged we do not insert a link
42
Step 8
23.9
6.9
23.9
15.9
0.9
20.9
We continue adding links. The dotted link when added will change the value of the branch to 0.1. All blocks in this branch have their flags turned off.
21
August 2007
43
Step 9
23.9
6.9
23.9
15.9
20.8
The Lerchs-Grossman includes a procedure for combining the two linked branches into one branch, with only one total value. Note that there is no requirement to always branch upwards from the root.
44
Step 10
23.9
6.9
23.9
15.9
16.8
At the end of the second bench we have now have only two branches
22
August 2007
45
Step 11
23.9
6.9
23.9
8.9
16.8
Lerchs-Grossman detects that the extra waste will remove the ability of the centre branch to co-operate with the right hand branch in paying for the mining of the circled block.
46
Step 12
23.9
6.9
23.9
8.9
15.9
Lerchs-Grossman includes a procedure for breaking the single branch into two branches by removing a link
23
August 2007
47
Step 13
23.9
6.9
23.9
8.9
8.9
At the end of this third bench we have drop the central sub branch above the low grade block
48
Step 14
23.9
6.9
23.9
-0.1
8.9
Continue adding links and eventually the total value of the left-hand branch becomes negative. The next arc after this is again between a positive and negative branch.
24
August 2007
49
Step 15
23.9
6.9
23.9
0.8 At the fourth bench we have just one branch and the combined value is now only 0.8
50
Step 16
23.9
6.9
23.9
0.8
The L-G program scans for arcs from blocks which are flagged to blocks which are not flagged. We can see The search has reach the top of the model and not more block have to be removed.
25
August 2007
51
Optimal Pit
23.9
6.9
23.9
0.8
The flagged blocks constitute the optimal pit. The W-shaped pit is worth 0.8. The centre branch has a negative value so none of its blocks are flagged and none are mined.
52
Lets Do It
Demonstration using Gemcom Whittle
Pit Optimization
26
August 2007
53
Which would you choose?
Now you must decide. Do you want $6 million now in your hand or $1 million a year for 10 years?
Lets review Worksheet 3

54
DCF Analysis
2 1.00
3 1.00
4 1.00 1.00
6 1.00
7 1.00
8 1.00
9 1.00
10 1.00
11
Total
Actual
Cash Flow
1.00
10.0
Discount Factor
0.91
0.83
0.75
0.68
0.62
0.56
0.51
0.47
0.42
0.39
DCF
0.91
0.83
0.75
0.68
0.62
0.56
0.51
0.47
0.42
0.39
6.14
NPV
"Financial" NPV Factor 10%(1/(1+D/100))
Pit Optimization
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August 2007
55
DCF Analysis
The Discounted Casflow Method allows us to compare investment in Todays Dollar Terms. Expected future cash flows are discounted by a percentage each year
Allow for cost of capital Allow for risk
Sum of discounted cash flows is called NPV Net Present Value
Pit Optimization
56
The Time Value of Money
A dollar we receive today is more valuable than a dollar we may receive in the future
NPV =
CashFlow n n 1 (1 + Disc )
This is important when we wish to make a decision about a some Long Term Investments.
Pit Optimization
28
August 2007
57
Cut-Off Grade
Cut-off grade has been sacrosanct over long time periods
Marginal Grade =
CostP Recovery* Price
The formal method to define what might be considered economically viable to mine (ie what is the Ore Reserve)
Pit Optimization
58
Cut-Off Grade - example
Cut-Off Grade = COSTP / (PRICE* REC) = $15 / ( $12.70* 92.5%) Cut-Off Grade = 15 / 12.06 = 1.24
Pit Optimization
29
August 2007
59
Revenue vs Grade
Revenue per tonne
yx er ov c Re
ice Pr
ie ad Gr
= nt
0
Cut-off
Grade
Cost of processing
Pit Optimization
60
Non-Linear Recovery
The percentage recovered in the mill depends on the head grade Usually increases with increasing head grade Some mills have a constant tailings grade
60
30
August 2007
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Non-Linear Recovery
Revenue per tonne
x ry ve co
ice Pr
ien ad Gr
t=
Re
0
Cut-off
Grade
Cost of "processing"
Threshold grade
61
62
Revenue vs Grade
Revenue per tonne

x ry ve co e R
ice Pr
ie ad Gr
= nt
0
Cut-off
Grade
Cost of processing
0
31
August 2007
63
Multiple Processing Methods

At any particular grade, we usually choose the processing method that produces the highest value (cash flow per tonne)
Heap Leach
CIP
The cut-over is where there is a profit cross over.

A common mistake is to calculate the two cut-offs independently
63
64
Multiple Processing Methods
64
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August 2007
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Multiple Products
Have to handle different proportions of products (metals) Value of products may also vary of time Common Approaches
Use equivalent metal Use Value based cut-offs Use CashFlow grades
Pit Optimization
66
Equivalent Metal
GRADE1*REC1*PRICE1 + GRADE2*REC2*PRICE2 => PRCOST
Equiv GRADE1 = GRADE1 + K2*GRADE2 where K2=(REC2*PR2)/(REC1*PR1) Equiv GRADE2 = GRADE2 + K1*GRADE1 where K1 = (REC1*PR1)/(REC2*PR2)
Only applies if PRCOST is independent of grade, or varies linearly with grade Only applies if recovery is independent of grade
Pit Optimization
33
August 2007
67
Equivalent Metal
Alternatively calculate each cut-off separately and then use a cut-off of 1.0 with: (GRADE1/CUTOFF1) + (GRADE2/CUTOFF2)
Pit Optimization
68
Equivalent Metal (Graphically)
Pit Optimization
34
August 2007
69
Gold Price is the same but Project Size Varies

100 g/t ) 100 ( g/t ) 100 ( ( g/t )
Cut-off off Grade Grade Cut-off Grade Cut
10 g/t ) 10 ( g/t ) 10( ( g/t )
1 g/t ) 1 ( g/t ) 1( ( g/t )
0.1 g/t ) 0.1 ( g/t ) 0.1( ( g/t )
Small Small Small Openpit Openpit Openpit
Small Small Small Open Pit Pit Open Pit Open & Leach & Leach Leach &
Large Large Large Opens Pit Pit Opens Pit Opens
Large Large Large Open Pit Pit Open Pit Open
&CIP &CIP &CIP
Small Small Small U/Ground U/Ground U/Ground
& Gravity Gravity & Gravity &
Large Large Large Decline& & Decline & Decline
Mining/Milling Mining/Milling Combinations Mining/Milling Combinations Combinations
Underground
Pit & CIP
Pit & Leach
Pit Optimization
& Leach Leach & Leach &
& CIP CIP & CIP &
CIP CIP CIP
Likely Cut-offs for Gold with a US$325/oz Gold Price
70
Type of Mining/Milling Underground Mines Open Pit with CIP
Likely Cut-Off
Open Pit with Heap Leach Large Scale Open Pit with Leach
5.0 2.5 2.0 1.5 1.0 0.75 0.50 0.25
Pit Optimization
35
August 2007
71
Grade/Tonnage Relationship
Cut-off 0.25 0.50 0.75 1.0 1.5 2.0 2.5 5.0

Pit Optimization
Tonnes 70,291,800 54,429,300 43,173,000 35,316,000 26,152,200 19,750,500 15,106,500 3,385,800
Grade Contained Gold

(Ounces)
1.66 2.03 2.40 2.74 3.28 3.78 4.26 6.20
3,739,727 3,552,484 3,332,800 3,115,192 2,757,878 2,400,648 2,067,253 674,896
72
Traditional Grade/Tonnage Curves
80 80 70 70 60 60 Tonne (m) (m) Tonne 50 50 40 40 30 30 20 20 10 10 0 0 0 1 2 3 4 5 Tonnes Grade
7 7 6 6 5 5 Grade ( (g/t) g/t) (g/t Grade 4 4 3 3 2 2 1 1 0 0
Cut-off Grade (g/t)
Pit Optimization
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August 2007
73
Alternate Grade/Tonnage Curve
7.00 7.00 6.00 6.00 5.00 5.00 Grade ( (g/t) g/t) (g/t Grade 4.00 4.00 3.00 3.00 2.00 2.00 1.00 1.00 0.00 0.00 0 0 20 20 40 40 60 60 80 80 100 100 2.5 2.0 1.5 5.0
1.0
0.75
0.50
0.25
Tonnes Tonnes (m) (m)
Pit Optimization
74
Mineral Resources
The shape, quantity and quality of a resource varies with the concentration of mineral product
Pit Optimization
37
August 2007
75
The Economic Reality

The reality of mining today is that prices and economic constraints can significantly vary over time Therefore the cut-off grade and the shape of a resource may also change
Pit Optimization
76
Inappropriate Cut-off
If the Cut-off is too low.
Subsidizing processing of uneconomic mineralization. Loose Value
If the cut if is too high

Lower resource can be exploited [Potentially] Loose Value
Pit Optimization
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August 2007
77
What you have Learnt

The value of any unit of material mined can calculated It is sometimes better to throw mineralization away as waste, eg cost of processing is higher than revenue generated. CUTOFF A dollar we receive today is worth more than a dollar which may be received in the future. When there are more than one possible processing stream, send ore to the one that generates the highest value, CUTOVER
Pit Optimization
39

Cut Off Optimization

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Cut Off Optimization

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August 2007

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2007, Gemcom Software International Inc.

Risk of not using the best cut-off

Time Value of Money Cut-off & Cut-Overs

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2007, Gemcom Software International Inc.

Costs can be calculated from:

Copyright 2008, Imageo & Gemcom Software International Inc.

50 tonnes of 2g/t Gold

= [(2* 50 * 92.5%* $27.97) - (50 * $17.5)]- (50 * $2.00)

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2007, Gemcom Software International Inc.

100 tonnes of 1g/t Gold

= [(1* 100 * 92.5%* $27.97.15) - (100 * $17.5)]- (100 * $2.00)

[(2587) - (1750)]- (200)

Copyright 2008, Imageo & Gemcom Software International Inc.

250 tonnes of 0.5g/t Gold

= [(0.5* 250 * 92%* $27.97) - (250 * $17.5)]- (250 * $2.00)

[(3234) - (4375)]- (500)

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2007, Gemcom Software International Inc.

Copyright 2008, Imageo & Gemcom Software International Inc.

What is the marginal Condition?

[ (Ore*Grade*Recovery* Price) - (Ore*CostP) ] - Rock*CostM

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2007, Gemcom Software International Inc.

The Marginal Situation

Ore *Grade *Recovery*Price = Ore *CostP

Ore * CostP Ore * Recovery * Price

Copyright 2008, Imageo & Gemcom Software International Inc.

CostP Recovery* Price

Copyright 2007, Gemcom Software International Inc.

Revenue from gold

Revenue from Copper

= [(0.25*250 * 65%* 27.97 + 0.25%*250 *30%*7840) - (250 * $7.5)]- (250 * $2.00)

Revenue from gold

Revenue from Copper

= [(0.25*250 * 25%* 27.97 + 0.25%*250 *75%*7840) - (250 * $12.5)]- (250 * $2.00)

Copyright 2007, Gemcom Software International Inc.

Costs can be calculated from:

What affects the optimal outline?

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2007, Gemcom Software International Inc.

Finding the Optimal

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2007, Gemcom Software International Inc.

Pit Tonnages and Value

Copyright 2008, Imageo & Gemcom Software International Inc.

Size .vs. Value

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2007, Gemcom Software International Inc.

Copyright 2008, Imageo & Gemcom Software International Inc.

Finding the Outline

Guarantee One Optimal Solution

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2007, Gemcom Software International Inc.

How does 3-D Lerchs-Grossman Algorithm Work?

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2008, Imageo & Gemcom Software International Inc.

Copyright 2007, Gemcom Software International Inc.

[ (OreGradeRecovery* Price) - (OreCostP) ] - RockCostM

Ore Grade RecoveryPrice = Ore CostP

= [(0.25250 65%* 27.97 + 0.25%250 30%7840) - (250 $7.5)]- (250 * $2.00)

= [(0.25250 25%* 27.97 + 0.25%250 75%7840) - (250 $12.5)]- (250 * $2.00)

GRADE1REC1PRICE1 + GRADE2REC2PRICE2 => PRCOST