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SME Annual Meeting

Feb. 25-Feb. 28, 2007, Denver, CO

Preprint 07-088

DETERMINATION OF A MINING CUTOFF GRADE STRATEGY BASED ON AN ITERATIVE FACTOR

A. Bascetin, Istanbul Univ., Istanbul, Turkey


A. Nieto, Virginia Poly. Inst. and State Univ., Blacksburg, VA

ABSTRACT achieving a higher rate of production of mineral. This is equivalent to a


mine operating at an above breakeven cutoff grade, sacrificing some of
One of the most difficult problems in mining operation is how to the low-grade resource to obtain higher cash flow. This analogy
determine optimum cutoff grades of ores at different periods over the suggests that tools developed for determining the optimum cutoff
lifespan of the mine that will maximize the net present value (NPV) of grade strategy in the mine might also be used to find a solution for the
the mine. Cutoff grade optimization maximizes the NPV of a project mill. Because the mine and mill are interdependent one cannot be
subject to capacity constraints in the mine, mill and the market.. This optimized independently of the other.
paper describes the determination of a cutoff grade strategy based on
K. Lanes algorithm adding an iterative optimization factor calculated Cutoff grade optimization maximizes the NPV of a project subject
for every year during the live of the mine to maximize the projects to capacity constraints in the mine, mill and the market. These are
NPV. The introduced algorithm is a windows based program usually expressed as annual constraints to the tonnage mined,
developed at Virginia Tech which coded in visual-basic within a tonnage milled and product sold. At any point in time at least one
spreadsheet environment (Excel). The resulting cut-off windows based constraint, and possibly two or all three, will be constraining the
program is a user-friendly tool which calculates interactively different system. For cutoff optimization to work correctly, capacity constraints
mining cutoff grade scenarios. The benefits of the methodology are must be independent of the cutoff grade (Wooler 1999).
demonstrated using a hypothetical case study. The authors have
observed an improvement of the total NPV using this iterative Lane (1964, 1988) has developed a comprehensive theory of
approach using a year by year optimization factor. cutoff grade calculation. Whittle and Wharton added the idea of using
opportunity cost. They are referred to as delay cost and the change
Keywords: Modeling, Mineral economics, Mining, Metal ores, cost (Whittle and Wharton 1995). Asad, on the other hand, used the
Cutoff grade optimization dynamic metal price and cost escalation during mine life for cutoff
grade optimization (Asad, 2005). Table 1 shows the notation used in
INTRODUCTION Lanes algorithm.
For a long time, the Optimum Cutoff Grade has been a Table 1. The notations of the algorithm.
controversial concept to metal miners all over the world. In later times,
the Opportunity Cost theory has given a new theoretical approach to Notatiton Explain Unit
the definition of Cutoff Grade when the optimization of NPV is one of I Year --
the objectives. The typical variables associated with the cutoff grade N Mine Life Years
(COG) definition are the technical parameters and a given economic P Metal Price $/oz
scenario as shown in Table 1. S Sales Cost $/oz
M Mining Cost $/ton
Some researchers have developed new optimization techniques C Processing Cost $/ton ore
based on K. Lanes algorithm to determine a cutoff grade policy. fa Fixed Costs $/year
Cutoff grade optimization is used to derive an operating strategy that F Fixed Cost $/ton
maximizes the profit of a mine. Where the mines capacity allows, Y Recovery %
sacrificing low-grade material during the first stages of the mine D Discount Rate %
enables the mill to process ore that delivers a higher cash flow. Hence, CC Capital Costs $
the cutoff grade policy has a significant influence on the overall M Mining Capacity Tons/year
economics of the mining operation. The determination of cutoff grade C Milling Capacity Tons/year
policy, which maximizes the NPV is already established in the industry. R Refining Capacity Tons/year
It has been realized that as opposed to constant breakeven cutoff Qm Material Mined Tons/year
grade, the optimum/dynamic cutoff grades, which change due to the Qc Ore Processed Tons/year
declining effect of NPV during mine life, not only honor the metal price Qr Concentrate Refined Tons/year
and cash costs of mining, milling, and refining stages, but also take
into account the limiting capacities of these stages and grade-tonnage In his approach K. Lane demonstrates that a cutoff grade
distribution of the deposit (Dagdelen 1992, Lane 1964). In other words, calculation which maximizes NPV has to include the fixed cost
the techniques that determine the optimum cutoff grade policy consider associated with not receiving the future cash flows quicker due to the
the opportunity cost of not receiving the future cash flows earlier during cutoff grade decision taken now. The cutoff grade when the
the mine life due to limiting capacities present in the stages of mining, concentrator is the constraint is given below.
milling, or refining (Lane 1988).
c + f + Fi
A. OPTIMIZATION OF CUTOFF GRADE g m (i ) = (1)
Optimizing mine cutoff grades has long been searched as a ( P s ) xy
means to maximize the Net Present Value (NPV) of mining projects. In
recent years the theory behind mine cutoff optimization has been Where g m (i ) : milling cutoff grade, f : fixed cost, Fi :
extended to encompass other parts of the operation. Primarily this
involves optimizing the throughput and recovery in the mill. A mill may opportunity cost per ton of material milled in Year i, P: profit ($), s:
be operated at a high throughput rate, sacrificing recovery but selling price ($/unit of product), y: recovery (%).

1 Copyright 2007 by SME


SME Annual Meeting
Feb. 25-Feb. 28, 2007, Denver, CO

The opportunity cost is determined as: iterations the process is just repeted. A spreadsheet could also be
used to generate iterations. By generating many iterations the
dxNPVi algorithm should be able to determine whether the process converges
Fi = , (2) or diverges.
C
The algorithm introduced here, finds the optimum cutoff grade
f policy in an iteration process. The steps of the algorithm as mentioned
f = a where f a is the annual fixed costs. (3) above (eq. 1) are as following:
C
1. Reading the input files;
Where d is the discount rate, NPVi is the NPV of the future cash
flows of the years (i) to the end mine life N, and the C is the total a. Economic parameters (price, selling cost, capacities
milling capacity in Year i. and etc.)

In this study, an interactive user-friendly computer program based b. Grade-tonnage distribution


on K. Lanes algorithm and written in Visual Basic within an Excel
Interface has been developed to implement the algorithm. 2. Determining the cutoff grade g m (i ) by the following
The algorithm has been developed to find the optimum cutoff equation:
grade policy using an iterative optimization factor (t) substituting
c+ m + t
f and Fi in the original Lanes algorithm. Using this new g u (i ) = ; where is the optimization factor. (4)
optimization factor, the total Net Present Value was improved within in ( P s ) xy
the course of the mine life. The results are presented in the next
section of this paper. The cutoff grade program developed is used to Setting V = NPVi , the initial NPVi = 0
incorporate the optimization factor (t) which is included in the ultimate 3. Computing the ore tonnage (To) and waste tonnage (Tw)
cutoff grade equation, which considers the mining (m) cost, from the grade-tonnage curve of the deposit:
c+ m + t
g u (i ) = to further maximize the total NPV of the mine
a. the ore tonnage (To) and the grade gc above the cutoff
( P s ) xy grade g m (i )
project. Where t is the iterative optimization factor and m is the mining
cost per ton. b. the waste tonnage (Tw) that is below the cutoff grade

The most important contribution given in this paper is the g m (i )


computation of the COG by modifying the optimization factor t in an
iterative-nested approach for every year during the mine lifethis is c. Also, compute the stripping ratio SR where SR = (Tw)/
done by iteratively calculating the COG in a year by year basis by (To)
maximizing the total NPV of the mine project. This new approach 4. Setting Qci = C, if To is greater than the milling capacity,
resulted in an improved total NPV. otherwise, Qci = To. Also, set the Qmi quantity mined (Qmi = Qc
The cutoff grade policy calculated, dictates the quantity to be x (1+SR)) and Qri = Qc x gavg x y
mined, processed and refined in a given period i, and accordingly, the 5. Determining the annual profit by using the following
profits becomes dependent upon the definition of cutoff grade. equation.
Therefore, the solution of the problem is in the determination of an
optimum cutoff grade in a given period, which ultimately maximizes the Pi=(Si-ri)xQri Qci x( ci + f ) miQmi
objective function (Asad 2005).
B. ALGORITHM PROCEDURE 6. Adjusting the grade tonnage curve of the deposit by
subtracting ore tons Qci from the grade distribution intervals
The cutoff grade g m (i ) depends on the NPV , which cannot be
i above optimum cutoff grade g m (i ) and the waste tons Q mi

determined until the optimum cutoff grades have been decided. The - Qci from the intervals below optimum cutoff grade
solution to this type of interdependency problem is obtained by an
iterative approach. g m (i ) in proportionate among such that the distribution is
not changed.
In mathematics, and in particular functions, iteration is the
process of evaluating a function repeatedly. In iteration the same 7. Checking, if Qci less than the milling capacity (C), then set
mathematical operation is performed several times using the output mine life N=i and go to step 8; otherwise set the year
from the previous operation as the input for the next. For example: we indicator i = i + 1 and go to step 2.
could apply the iterative process to the square root function given by
8. Calculating the incremental NPVis for the cash flows by
using the profits (Pi) estimated in Step 5 to be generated
. In this example five iterations are computated for some from i to N by using the following equation;
specific value for "x". In a mathematical sense this iteration process is
N Pj
denoted = 1.090508 for a seed of 16. In this case the number NPVi =
five (5) does not represnt an exponent, inestead it represents the j =1 (1 + d ) j i +1
number of iterations peroformed, in this case the fifth iteration.
for each year i = 1, N where N is total mine life in years.
As seen from the square root funtion example, the amount of
calculation can become tedious. Most of the graphing calculators can 9. Comparing the NPVi computed in step 8 with the previous
do this with ease. One way to perform the iterations is to assign the iteration. If the computed NPVi does not converge, goes to
seed to the variable "x" (16 => x) and also assign the function to step 2 or changes the optimization factor (), otherwise,
stops; the cutoff grade gis for years i = 1, N is the optimum
"x"( => x) to calculate the first iteration and to get successive

2 Copyright 2007 by SME


SME Annual Meeting
Feb. 25-Feb. 28, 2007, Denver, CO

policy that gives maximum net present value of future profits Table 2. Mine Design Parameters
for the operations. Parameters Values
The algorithm was tested using the new optimization factor Price 500 $/oz
introduced in this paper to find the maximum the NPV, these results Sales Cost 4 $/oz
are then compared with results coming from the traditional breakeven Processing Cost 17 $/ton
COG estimation approach and with results form the COG estimation Mining Cost 1,3 $/ton
based on Lanes algorithm. The results were examined and presented Capital Costs $ 154 M
in the next section. Fixed Costs (fa) $ 9,2 M/year
Fixed Cost (f) 9,2 $/ton
C. CUTOFF GRADE OPTIMIZATION SOFTWARE
Mining Capacity --
The introduced algorithm is a windows based program developed Milling Capacity 1,00 M
at Virginia Tech which is based on a series of visual-basic routines Discount Rate 14 %
within a spreadsheet environment (Excel). The program which has Recovery 95 %
been developed within a windows environment is a user-friendly tool
and calculate interactively different mining cutoff grade scenarios. The traditional cutoff grade is defined as breakeven cutoff grade
and referred to as the ultimate pit cutoff grade:
The program consist of two different components: 1) Input
parameters (economic parameters and grade-tonnage distribution) are Mining Cost + Milling Cost (5)
taken by the program that is programmed in the Visual Basic Ultimate pit cutoff grade =
(Pr ice Saling Cost ) x Re cov ery
Programming Language (Fig. 1), 2) The optimum cutoff grade values
and maximum NPV value are solved by using new algorithm (Fig. 2). Table 3 presents the breakeven cutoff grade. As indicated in
Table 3, this approach gives a total NPV of $128.0 million and $601.4
million of none discounted profit.
Table 3. Breakeven cutoff grade policy of the gold mine
Optimum
Quantity Quantity Quantity
Cutoff Profit
Year Mined Concentrated Refined
grade ($M)
(ton) (ton) (ton)
(oz/ton)
1 0.039 3.333.869 1.000.000 93.468 15.826.346
2 0.039 3.333.869 1.000.000 93.468 15.826.346
3 0.039 3.333.869 1.000.000 93.468 15.826.346
4 0.039 3.333.869 1.000.000 93.468 15.826.346
5 0.039 3.333.869 1.000.000 93.468 15.826.346
6 0.039 3.333.869 1.000.000 93.468 15.826.346
7 0.039 3.333.869 1.000.000 93.468 15.826.346
8 0.039 3.333.869 1.000.000 93.468 15.826.346
9 0.039 3.333.869 1.000.000 93.468 15.826.346
10-38 0.039 3.333.869 1.000.000 93.468 15.826.346
601,401,148
Toplam 126.687.022 38.000.000 3.551.784 NPV
($127,984,981)
Figure 1. The window shows using the tools of the program.
Table 4 presents the optimum cutoff grade policy based on Kane
Lanes algorithm, using the fixed cost and opportunity cost:

m+c+ f +F
(6)
( P s ) xr
As indicated in Table 4, this optimization approach gives a total
NPV of $354.6 million and $676.5 million of none discounted profit.
On the other hand, Table 5 presents the results of the optimum
cutoff grade approach using the optimization factor (t) year by year.
The cutoff grade policy that is determined by this optimizing approach
using the optimization factor (t) gives a total NPV of $377.5 million
and $676.5 million of none discounted profit.
According to the values shown in Tables 3-5, the cutoff grade
policy determined by the optimization approach using the (t) factor
Figure 2. The algorithm procedure of the program. which is determined year by year (Table 5) gives a higher NPV than
the cutoff grade policy estimated using the traditional breakeven and
At the starting point, the user enters the input parameters. Then, Lanes cutoff grade approach . The results are given graphically in
the maximum NPV value can be obtained using the NPV OPTIMIZER Figure 4.
button.
th
As seen in Figure 5 the program ends in the iteration of 6 and it
D. ALGORITHM APPLICATION AND RESULTS is obtained the maximum total NPV ($377,476,180). After the iteration
th
Consider the following hypothetical case of an open pit gold mine of 6 , the NPV values are constant.
(Dagdelen 1992). The tonnage grade distribution and mine design
parameters are shown in Tables 2-Figure 3, respectively. The values in
Table 2 give assumed capacities and accepted costs to mine this
deposit at 2,857.14 ton/day milling rate. The mine will be worked at the
rate of seven days a week for 350 days per year.

3 Copyright 2007 by SME


SME Annual Meeting
Feb. 25-Feb. 28, 2007, Denver, CO

the use of an iterative optimization factor in a year by year basis,


0,12 constantly maximizing the NPV. As shown, the total NPV was
Cutoff Grade ($/oz)

0,1 improved in comparison with other reviewed approaches. The program


0,08 has been developed within a windows environment which can be
0,06
considered as a user-friendly tool which is used to calculate
interactively different mining cutoff grade scenarios. Another potential
0,04
benefit of this user-friendly application is an eventual adaptation to
0,02 Year 38 handle multiple ore sources/grades and to incorporate cost escalation
0 factors based on striping ratios. Further research is being done to
1 2 3 4 5 6 7 8 9 10 11 12 13 14 incorporate grade distribution geometry defined from grade block
Years modeling analysis to calculate the cutoff grade policy.
Ultimate Pit Cutoff Grade Lane Algorithm Iteration Algorithm ACKNOWLEDGMENT
Dr. Atac Bascetin has been supported for the research by The
70 Scientific and Technical Research Council of Turkey. This Research
60 was performed during Dr. Bascetin tenure at Virginia Tech in
collaboration with Dr. Antonio Nieto, Mining and Minerals Engineering.
Profits (M$)

50
40
REFERENCES
30
20 Asad M. W. A. Cutoff Grade Optimization Algorithm for open Pit Mining
10 Operations with Consideration of Dynamic Metal Price and Cost
Year 38
0 Escalation during Mine Life. Application of Computers and
1 2 3 4 5 6 7 8 9 10 11 12 13 14 Operations Research in the Mineral Industry (APCOM 2005).,
Years March 2005, (Tuscon, USA), 273-277.
Ultimate Cutoff Grade Lane Algorithm Iteration Algorithm
Dagdelen K. Cutoff grade optimization. Application of Computers and
rd
Operations Research in the Mineral Industry (23 APCOM
Figure 4. Comparison of Traditional Cutoff Grade, K. Lanes and the Symposium)., 1992 (Littleton, Colorado, USA), 157-165.
Iteration Algorithm.
Lane K. F. Choosing the optimum cutoff grade. Colorado School of
CONCLUSIONS Mines Quarterly., 59, 1964, 485-492.
The results given by the presented case study indicate that the Lane K. The economic definition of ore, cutoff grade in theory and
impact of the optimization factor ( t) on the objective function (NPV) is practice. London: Mining Journal Books Limited., 1988.
significant at $249,491,199.00 and $22,801,533.00 increase which is
equivalent to a 195% and 6.4% NPV increment according to Whittle J., and Wharton C. Optimizing cutoff grades. Mining Magazine.,
breakeven and Lanes cutoff grade policy respectively. Therefore, the 173, 5, Nov. 1995, 287-289.
cutoff grade optimization algorithm presented here is a tool that Wooler R. Cutoff grades beyond the mine-optimizing mill throughput.
improves the cutoff grade policy and serves as a user friendly platform The Biennal Conference Strategic Mine Planning., March 1999,
for eventual algorithm adaptations such as the use of cost escalation Autralia.
and simulation for risk analysis. This approach provides great flexibility
at the mine planning stage for evaluation of various economic and
grade/ton alternatives. The other important feature of the algorithm is

Grade Category Tons (000)


0 0.025 70,000 80
70
Tons (in thousands)

0.025 0.030 7,257


0.030 0.035 6,319 60
50
0.035 0.040 5,591
40
0.040 0.045 4,598
30
0.045 0.050 4,277
20
0.050 0.055 3,465
10
0.055 0.060 2,428 0
0.060 0.065 2,307
0,025

0,03

0,035

0,04

0,045

0,05

0,055

0,06

0,065

0,07

0,075

0,08

0,085

0,15

0,25

0.065 0.070 1,747


0.070 0.075 1,640 0 0,025 0,03 0,035 0,04 0,045 0,05 0,0550,06 0,065 0,07 0,075 0,08 0,085 0,15
0.075 0.080 1,485
Grade Category
0.080 0.085 1,227
0.085 0.150 3,598
0.150 0.250 9,576

Figure 3. The grade-tonnage distribution of the deposit.

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SME Annual Meeting
Feb. 25-Feb. 28, 2007, Denver, CO

380
Iteration NPV ($M)
375 1 365.801.976
NPV Value ($M)

2 375.056.288
370 3 376.409.151
4 377.171.471
365
5 377.396.725

360 6 377.476.180
7 377.476.180
355 8 377.476.180
1 2 3 4 5 6 7 8 9 10 9 377.476.180

Number of Iteration 10 377.476.180

Figure 5. The changes of NPV vs. number of iteration.

Table 4. Cutoff grade policy of the gold mine using Kane Lanes algorithm.
Optimum Quantity Quantity Quantity
Profit NPV
Year Cutoff grade Mined Concentrated Refined
($M) ($M)
(oz/ton) (ton) (ton) (ton)
1 0.096 12.274.288 1.000.000 209158 61.585.935 354.674.647
2 0.092 11.336.481 1.000.000 199710 58.118.871 293.088.712
3 0.088 10.624.419 1.000.000 192537 55.486.385 242.107.246
4 0.084 10.069.606 1.000.000 186947 53.435.245 199.412.274
5 0.081 9.628.546 1.000.000 182504 51.804.650 163.345.006
6 0.078 9.182.735 1.000.000 177583 49.943.365 132.672.494
7 0.076 8.797.020 1.000.000 173216 48.278.930 106.733.475
8 0.073 8.437.322 1.000.000 168992 46.651.502 84.738.244
9 0.072 8.132.220 1.000.000 165372 45.252.454 66.094.563
10 0.070 7.880.241 1.000.000 162369 44.090.812 50.230.905
11 0.068 7.652.378 1.000.000 159528 42.977.995 36.672.630
12 0.067 7.652.378 1.000.000 159528 42.977.995 25.079.582
13 0.066 7.652.378 1.000.000 159528 42.977.995 14.910.242
14 0.065 7.652.378 809551 129146 32.898.270 5.989.768
Total 126.972.390 13.809.551 2.426.118 $676,480,404 $354,674,647

Table 5. Cutoff grade policy of the gold mine using optimization factor (t).
Optimization Optimum Quantity Quantity Quantity
Profit NPV
Year Factor Cutoff grade Mined Concentrated Refined
($M) ($M)
(t) (oz/ton) (ton) (ton) (ton)
1 28,87 0.100 13.112.225 1.000.000 217.550 4.658.907 377.476.180
2 28,82 0.100 13.107.389 1.000.000 217.550 .665.194 312.817.273
3 28,83 0.100 13.108.385 1.000.000 217.550 4.663.899 256.093.418
4 28,83 0.100 13.108.178 1.000.000 217.550 4.664.169 206.336.648
5 28,68 0.100 13.034.557 1.000.000 216.818 4.396.643 162.690.175
6 28,65 0.100 13.018.831 1.000.000 216.659 4.338.503 124.562.193
7 28,60 0.100 12.994.065 1.000.000 216.410 4.246.945 91.146.790
8 27,50 0.097 12.450.271 1.000.000 210.931 2.236.542 61.876.747
9 24,90 0.092 11.335.723 1.000.000 199.703 8.116.070 37.004.702
10 21,81 0.085 10.245.376 1.000.000 188.718 4.085.064 16.631.587
Total 125.515.000 10.000.000 2.119.439 626,071,936 $377,476,180

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