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Conference Proceedings 2012 ISBN: 978-979-15458-4-6
www.sbm.itb.ac.id www.cob.uum.edu.my
The 3rd International Conference on Technology and Operations Management
Sustaining Competitiveness through Green Technology Management
Bandung Indonesia, July 4-6, 2012
Cut-off Grade Optimization at Grasberg Surface Mine in
Considering Environmental Impact
Lukman Budi Prasetya
1
, Togar M. Simatupang
2,*
1
PT Freeport Indonesia: an affiliate of Freeport McMoran Copper and Gold,
Plaza 89 (5
th
floors), Jl. HR. Rasuna Said Kav. X-7 no.6, Jakarta 12940, Indonesia
2
School of Business and Management (SBM) - Institut Teknologi Bandung (ITB),
Jl. Ganesha 10 (Gedung SBM-ITB), Bandung 40132, Indonesia
Abstract. A developed model for optimum cut-off grades is presented that not only relies on economics aspect but also
minimizes adverse environmental impact in the form of acid mine drainage elimination or mitigation against the approach of
postponing the restoration/reclamation activities at the end of the projects life. There are three model alternatives developed
in this paper: the first model considers the environmental cost during the mining operation, the second model ignores and
postpones the environmental cost to the end of the mine life, and meanwhile, the last model considers fixed breakeven cut-off
grade during the mining operation. The criteria to choose the best alternative are based on environmental acceptance
(indicator for minimizing environmental impact) and financial analysis result. Using these criteria and SMART analysis,
Model 2 is chosen as best alternative in cut-off grade optimization at Grasberg surface mine to minimize environmental
impact.
Keywords: Cut-off grade, Optimization, Environmental impact, Mine planning
1. Introduction
There are many sources to increase value in mining operations. The optimal cut-off grade strategy and
tactics is one of these sources. The elements of mining operations from resources, infrastructure, mining site,
processing, and marketing are mutually dependent, and reinforce and interact positively with each other to
generate combined value greater than the sum of their individual contributions.
It is believed that the public expect the mining industry show care of the environment and try to eliminate
the adverse environmental impacts or at least minimize the intensity as well as the length of them. Sustainable
development requirements finally lead to using improved and environmentally-friendly technologies. Using
sustainable development principles must be started at the beginning of the project.
To produce sustainable results of mining operations, holistic design criteria must be integrated in the design
process. The best practice is consideration of environmental mine-waste management requirements with special
* Corresponding author.
E-mail address: togar@sbm-itb.ac.id
90 L.B. Prasetya and T.M. Simatupang Cut-off Grade Optimization at Grasberg ...
The 3rd International Conference on Technology and Operations Management (ICTOM)
reference to eliminate or minimize the waste and pollution in the first place at the source. Open pit mining, froth
flotation and smelting are the most commonly practice in metal production. This process associated with land
disturbance and causes pollution on the mine site and groundwater contamination in the vicinity by the waste
materials and tailings.
Vietor (2002) reports that the Grasberg mining operation is so large that an immense amount of rock from
above the ore some 2.8 billion tons of overburden has to be dug and safely stored. When the mine was
expanded, a plan was developed to store 2.4 billion tons over 30 years, with a stated margin of safety, barring
earthquakes or sliding due to weak compressible soils. Four valley locations were planned for storage
Carstenszweide, North Grasberg, West Grasberg, and Wanagon.
According to this plan, overburden would be deposited in layers 100 meters thick, separated by berms 100
meters wide. Although such storage changed local topography and destroyed vegetation, it maximized stability
and provided adequate drainage. Overburden storage is the biggest environmental problem in short term. The
difficulty is acid drainage from sulfides in the overburden. PTFI has taken plenty of samples of overburden to
determine its likelihood for acidification. Some of samples do indeed show acid rock drainage. Wanagon Lake,
next to one of the storage sites, registered a pH as low as 4 acidity strong enough to kill any plants were it to be
released from the lake.
To deal with this, PTFI has to develop short-term, medium-term, and long-term plans. Freeport is currently
putting lime into the east stream of West Grasberg to neutralize the low pH coming out of the overburden. That
should raise the pH of Lake Wanagon to 7.0 and keep it there, to prevent any acid mine drainage. Next, Freeport
is also driving a tunnel (3.5 kilometers) under Lake Wanagon and would bore up under the east stream to collect
the runoff water. It would be brought to the mill for treatment to recover dissolved copper and used as feedstock
for mill production. In the long term, limestone would become available in huge quantities as part of the
overburden to neutralize any acidity.
Nevertheless, optimum cut-off grade should be determined for each period to reduce the amount of waste
materials stored as overburden.
Deposition of tailings, the waste ore after extraction, is a serious and certainly the most visible
environmental problem facing Freeport (Tailing Management Plan 2007). About 223,000 tons of finely ground
rock is discharged from the extraction mill every day. These tailings, together with the effluent water from the
extraction mill, flows into the Aghawagon and the Otomona Rivers, which merged with the Ajkwa River further
down the mountain. From there, the river carries tailings to the lowlands, and the lost speed as the topography
flattened out. In the freshwater swamp area below Timika, the Ajkwa overflows its low banks in a sheetflow and
deposits the tailings as it meandered back and forth, shifting its flow as the tailings filled in vast stretches of
riverbed.
The very process of mining inevitably creates a tailings problem; there is simply no way to avoid it. The
environmental problem has two components: water quality and the effects of tailing deposits on flora and fauna.
The physical extraction process used by Freeport does not change the rock chemically. The solvents are
added to help flotation evaporated before the river flowed very far, and are undetectable in the lowlands (Vietor
2002). Although the river carries an immense amount of tailings, they are chemically similar to natural
sedimentation, albeit ground somewhat finer. And as a fast-flowing mountain river, the Ajkwa carries a huge
volume of natural sedimentation, even in the absence of mining.
To deal with water quality, PTFI should undertake a long-term environmental monitoring program to
measure the mines effects on water. The metals contained in the tailings are tightly bound in the rock matrix and
are not readily bio available. Dissolved arsenic, lead, mercury and other potentially dangerous metals showed
concentrations near detection limits with modern equipment. The effect of tailings deposition on freshwater
swamp forest is a serious problem. Considering the immense impact of tailings as waste ore after extraction,
optimum cut-off grade should be determined for each period to reduce the amount of waste materials sent to the
river as tailings (James 1999).
Cut-off grade is one of the most important parameters in mining because of its impact on the overall
economic value of a mining operation. In practice, achieving the optimum balance is a real challenge. Cut-off
grade optimization is now an accepted principle for open pit planning studies. The objective of cut-off grade
optimization of mining operation is to maximize the net present value (NPV) of the whole mining project over
the lifespan of the mine. The problem discussed in this paper is to find an optimum balance between the cut-off
grade and environmental management consideration. By using environmental management consideration, it is
expected the cut-off grade optimization not only focusing on maximizing metal production and NPV of the mine,
but also reducing environmental impact through optimizing waste production (overburden and tailing materials).
L.B. Prasetya and T.M. Simatupang Cut-off Grade Optimization at Grasberg ... 91
2. Company Profile
Grasberg is a world-class mining complex in Papua, Indonesia, where Freeport-McMoRan Copper & Gold
(FCX) is engaged in exploration and development, mining and milling of ore containing copper, gold and silver.
PT Freeport Indonesia (PTFI) commenced mining operations at this site in 1972 and in 1988 discovered the
Grasberg mine. Today, after significant production, the Grasberg mining district contains the worlds largest
recoverable copper reserve and the largest gold reserve. FCX own 90.64% of PT Freeport Indonesia, the
principal operating subsidiary in Indonesia, including 9.36% owned through its wholly owned subsidiary, PT
Indocopper Investama. The Government of Indonesia owns the remaining 9.36% of PT Freeport Indonesia. FCX
operates under an agreement with the Government of Indonesia, which allows the company to conduct
exploration, mining and production activities.
The PTFI Contract of Work (COW) area is located in Papua on the western half of the island of New Guinea,
bordered on the south by the Torres Strait and Arafura Sea, which are relatively shallow and transient marine
environments (Tour Companion 2009). The site is located near Puncak Jaya, or Mount Carstensz, of the
Sudirman Mountain Range. According to the COW signed between the Government of Indonesia (GOI) and
PTFI in 1991, PTFI was granted two working areas defined as:
Contract of Work (COW) Mining Area (COW Area A), covering an area of 100 km2. Activities
conducted in this area include open-cut and underground mining, ore processing at the mill, and
overburden placement in stockpiles.
Contract of Work (COW) Project Area, a north-south corridor connecting the mining area to the
Arafura Sea and covering an area of approximately 2,890 km2. The supporting facilities and
infrastructure, including Tembagapura, Ridge Camp, Kuala Kencana, Amamapare Portsite, Timika
airport and others, are situated in this COW Project Area.
The COW Mining and Project Areas of PTFI include all major supporting facilities and infrastructure
required for operations as well as extensive tropical forest systems that extend from the Arafura Sea up to the
highland area. In addition, some settlement areas are located within the COW Project Area as seen in Figure 1.
Figure 1. PT Freeport Indonesias Geography
Portions of the eastern side of the COW Project Area and the eastern and northern sides of the COW Mining
Area border the Lorentz National Park (Tour Companion 2009). The boundary between the Park and the COW
Areas was previously not clearly defined and appeared to overlap. However, in 1993 and again in 2004, the
COW boundary was redefined to ensure that no conflict occurred on the border between the COW Areas and the
Lorentz National Park. As a result, the PTFI mining and project activities do not overlap the park area.
When the original COW with the GOI was signed on April 7, 1967, Freeport became the first company to
reach a Foreign Capital Investment agreement under a new Indonesian law. Freeport was given full management
control over its operations and undertook to provide all the necessary financing for the project, including
infrastructure development. The GOI had no obligations and provided no guarantees.
Freeport established a subsidiary, Freeport Indonesia, Incorporated (now PTFI), to undertake development
of the mine, mill and all appurtenant facilities for an ore deposit known as Ertsberg (Tour Companion 2009).
Exploration drilling at Ertsberg began in December 1967. This program was carried out with helicopter logistic
support. The engineering feasibility investigations were completed in December 1969.
In January 1970, construction began on the necessary engineering works extending 119 km from the coast to
the mine site. A seaport, barge port, road, airstrip, town, mining and processing facilities, slurry pipeline and
concentrate drying facilities were all built in less than three years, where previously there had been no such
facilities. The first shipment of copper concentrates was made in December 1972.
Initial mining activities exploited the Ertsberg ore body, which has since been depleted. In addition, the
GBT (Gunung Bijih Timur) and IOZ (Intermediate Ore Zone) ore bodies have also been mined and are depleted.
Currently, mining activities are taking place in the Grasberg, and DOZ (Deep Ore Zone) orebodies. Additional
proven reserves remain to be mined, including DOM open pit and underground, the Big Gossan, Grasberg Block
Cave and Kucing Liar as shown in Figure 2.
Figure 2. Grasberg Complex Future Mines
Initial production from the Ertsberg mine was approximately 7,500 tons of ore/day. Current open-pit and
underground production is approximately 250,000 tons/day. However, production expansion programs continue
to be investigated to possibly incrementally increase production up to the permitted 300,000 tons/day. The
Grasberg surface mine life will be until 2017. Meanwhile the Underground mine life will be until 2042 as
illustrated in Figure 3.
Figure 3. Projection Mine Scheduling
3. Methodology
By conducting brainstorming with Mine Planning engineers, conceptual framework used in this paper can be
shown on Figure 4. Using this information, a framework can be created for structured analysis limitation to find
the root cause of the problem and alternative solutions to overcome the problem.
Figure 4. Conceptual Framework
3.1. Analysis of Business Solution
The gold, copper, and silver metal price has increased significantly since 2008 to early of 2011. According
to data from London Metal Exchange shown on figures below, the gold, copper, and silver price in January 2011
has increased by 52%, 35%, and 78% respectively compared to price in January 2008.
Figure 5. Historical Gold Price
Data source: http://www.kitco.com
Figure 6. Historical Copper Price
Figure 7. Historical Silver Price
The increased trend of metals price as shown on Figures 5-7 above has boosted PT Freeport Indonesia to
increase its mining productivity, especially in Grasberg surface mine to get significant profit along with metals
price increase.
3.2. Root Cause Analysis
PTFI has planned to increase its copper and gold concentrate production along with the increase trend of
copper and gold prices in world metal market. The fluctuation of metal price in the world market will drive PTFI
to set its cut-off grade following the movement of metal price. If metal price increases, the value of mineral
reserve at Grasberg mine will also increase. PTFI will decrease the cut-off grade thus giving the company larger
mineable reserve. When the cut-off grade is dropped off, the mill will require more ore to produce the same
amount of metal on a daily basis. Using the same stripping ratio, more ore to produce will result in the increased
amount of waste materials to be stored as overburden materials and increased amount of tailings as the result of
produced ore in processing mill.
Referring to the explanation about Overburden Storage and Tailings Deposition on Chapter I, cut-off grade
optimization should consider the environmental impact by optimizing the number of waste materials in the form
of overburden and tailings materials.
Most mining companies, including PTFI, use common cut-off grade optimization that only considers the
economic aspect. Variables that are involved on common cut-off grade optimization are:
a. Mining throughput/mining capacity
b. Milling throughput/milling capacity
c. Recovery rate (%)
There will be one additional variable that becomes important factor in this paper and need to be optimized as
the result of environmental consideration. It is waste production in Table 1.
Table 1. Correlations of Cut-Off Grade and Its Variables
Variable Increased cut-off grade Decreased cut-off grade
Mining throughput Increased Decreased
Milling throughput Increased Decreased
Recovery rate Decreased Increased
Waste production Decreased Increased
Definition of each variable can be explained as follow:
a. Mining throughput or mining rate is the total ore excavated from pit and dumped to ore crushers,
typically expressed as tons per hour (tph), tons per day (tpd), or million tons per year (Mtpa).
b. Milling throughput or milling rate is the quantity of ore processed (comminuted) by a mill per unit time,
typically expressed as tons per hour (tph), tons per day (tpd), or million tons per year (Mtpa). Milling
throughput is dictated by the ore hardness and the power available in the milling circuit to reduce the
particle size to economically liberate the valuable mineral from the gangue material.
c. Recovery rate is typically denoted percent recovery. So for the amount of mineral/valuable metal that
enters a processing circuit, there is a certain amount that is recovered to product and there is a certain
amount which is lost to tailings. The recovery is normally associated with product and is a ratio of
amount of mineral in product over the amount of mineral in feed, for a given time (hourly, daily,
weekly, monthly or yearly recovery).
Recovery = [tons product per unit time produced x %metal in product]
[tons feed processed per unit time x % metal in the feed]
d. Waste production is the total waste excavated from pit and dumped to waste dump areas, typically
expressed as tons per hour (tph), tons per day (tpd), or million tons per year (Mtpa).
The correlations of cut-off grade and its variables above is depicted in general and not absolute since there
are another uncertain factors that gives contribution to the movement of this correlation such as mining
equipments availability, manpower availability, plant/mill availability, etc, which are not discussed in this paper.
According to the latest mine plan (version 11Q1-R2) of Grasberg mine, the actual 2010 data for Grasberg
cut-off grade, mining throughput, milling throughput, recovery rate, and waste production can be seen on Table
2 below.
Table 2. Actual Grasberg Mine and Mill Production in 2010
Period
Grasberg Cut-off
Grade (CuEq) %
Mining Throughput
(million tons)
Milling Throughput
(thousand tons)
Recovery Rate
(%)
Waste Production
(million tons)
Jan-2010 0.30 4.88 207 89.6 15.93
Feb-2010 0.62 4.37 213 88.6 14.28
Mar-2010 0.64 4.75 190 86.2 16.61
Apr-2010 0.56 3.90 201 87.5 15.87
May-2010 0.53 5.36 218 89.3 17.50
Jun-2010 0.45 3.79 202 90.6 18.45
Jul-2010 0.30 4.20 241 89.8 19.01
Aug-2010 0.30 3.78 224 88.8 19.21
Sep-2010 0.29 3.37 213 88.8 17.35
Oct-2010 0.30 3.60 216 86.9 18.67
Nov-2010 0.28 4.16 231 89.4 16.83
Dec-2010 0.26 3.50 218 90.2 16.43
There is an opportunity to optimize the number of waste production (waste mined) without jeopardizing the
economic value of the existing Grasberg mine since the cut-off grade that has been used so far has not
considered waste production as important variable to minimize environmental impact.
Figure 8 below shows that the cut-off grade will increase starting in the end of 2011 since ore with higher
grade will be mined at that time that drives the higher cut-off grade setting to maximize the NPV of the
remaining reserve.
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Grasberg Cut-off Grade (CuEq) %
Figure 8. Grasberg Cut-off Grade (2010 Actual and 2011-2012 Forecast)
(Metal Production Plan 2011)
However, the throughput of Grasberg mine will start decreasing from the beginning of 2012 along with the
depletion of Grasberg mines reserve.
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Mining Throughput
(milliontons)
Figure 9. Grasberg Mining Throughput (2010 Actual and 2011-2012 Forecast)
In the end of 2012, the milling rate or milling throughput is planned to increase since the material
characteristic processed from Grasberg mine will come from soft zone area. The characteristic of the ore will
affect the tonnage number that mill can process on given time. Figure 10 below depicts that the recovery rate
will decrease starting from 2011 as the result of material type and characteristic of type D-ore that will be mined
and milled at that time.
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Recovery Rate
(%)
Figure 10. Recovery Rate (2010 Actual and 2011-2012 Forecast)
Along with the decreased of mining throughput, the waste production will also start decreasing starting early
of 2011as shown in Figure 11. This happens due to the decrease in stripping ratio (the ratio of the amount of
waste removed to recover ore). The stripping ratio in 2010 is 4.15. Meanwhile, the stripping ratio in 2011 and
2012 are 3.75 and 3.27.
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Waste Production
(milliontons)
Figure 11. Grasberg Waste Production (2010 Actual and 2011-2012 Forecast)
By using waste production as additional variable in cut-off grade optimization, it is expected that the chosen
cut-off grade will produce waste:
a. in minimum result (by limiting economic cut-off grade), or
b. in optimum result (by balancing cut-off grade)
4. Data Collection and Analysis
4.1. Modeling the effect of modern optimal cut-off grades in profitability of the Grasberg mine
According to Cut-off Grade Optimization theory, operating costs per unit of operation is recognized to be
the most important sustainable mining practice indicator. In addition, mining operating cost and milling
operating cost will have important roles in determining optimum cut-off grade of mining operation. In this paper,
waste disposal operating cost, considered as environmental cost, will also have important role since there is one
additional variable (waste production). Thus, the background in developing models can be broken down as
follow:
Variable cut-off grade, with waste disposal operating cost considered every year
Variable cut-off grade, with waste disposal operating cost considered in the end of the mine life
Fixed cut-off grade
Given this consideration, three alternatives/models are developed in this paper to show the effect of the
modern optimal cut-off grades in profitability of the Grasberg mine. In the first model, environmental cost is
considered during the mining operation. In the second model, the environmental cost ignored and postponed to
the end of the mine life. Meanwhile, in the last model, fixed breakeven cut-off grade considered during the
mining operation. When doing calculation for each model, all variables are included, namely mining throughput,
milling throughput, recovery rate, and waste production.
4.1.1. Consider the Environmental Cost during the Mining Operation (Model 1)
This alternative will consider the waste disposal operating cost per unit ($/ton of waste) as environmental
cost that occurs during the mining operation until the end of mine life. According to the conceptual framework
defined on section 3, the appropriate solution identification for this model will be by balancing cut-off grade
since the cut-off grade on Model 1 will not be limited and be varied. The input data for this model is presented
on Table 3.
Given this alternative, it is expected that environmental impact in form of waste disposal included on
determining optimum cut-off grade so the NPV of the mining project will also include waste disposal operating
cost per annual. This model will reflect the actual life time of the mine, it is until 2017.
Table 3. Input Data for Model 1
Period
Mining Throughput
(million tons)
Milling Throughput
(thousand tons)
Recovery
Rate
(%)
Waste
Production
(million tons)
Waste disposal
operating cost per
unit ($/ton of waste)
2011 49.68 2,088 83.8 186.20 1.34
2012 48.15 2,177 84.3 157.66 1.47
2013 54.41 2,221 85.9 93.98 1.62
2014 49.73 2,538 87.5 59.82 1.78
2015 55.09 3,343 92.1 3.25 1.96
2016 11.38 2,235 88.3 0.23 2.16
2017 29.42 1,607 86.1 0.23 2.37
4.1.2. Ignore and Postpone the Environmental Cost to the End of the Mine Life (Model 2)
On second alternative, the waste disposal cost as environmental cost will be ignored during the calculation
and will be postponed to year 2018 (one year after the end of the mine life). According to the conceptual
framework defined on section 3, the appropriate solution identification for this model will be by balancing cut-
off grade since the cut-off grade on this model will not be limited and be varied. The input data for this model is
presented on Table 4.
Using this model, there will be rehabilitation/reclamation cost in 2018 on the calculation as the result of the
annual waste disposal operating cost that is postponed after the end of the mine life.
Period
Mining Throughput
(million tons)
Milling Throughput
(thousand tons)
Recovery
Rate
(%)
Waste
Production
(million tons)
Waste disposal
operating cost per
2011 49.68 2,088 83.8 186.20 -
2012 48.15 2,177 84.3 157.66 -
2013 54.41 2,221 85.9 93.98 -
2014 49.73 2,538 87.5 59.82 -
2015 55.09 3,343 92.1 3.25 -
2016 11.38 2,235 88.3 0.23 -
2017 29.42 1,607 86.1 0.23 -
4.1.3. Consider Fixed Breakeven Cut-Off Grade during the Mining Operation (Model 3)
Model 3 will use fixed breakeven cut-off grade during the mining operation. This alternative will also ignore
and postpone the environmental cost after the end of the mine life, same as Model 2. Based on conceptual
framework defined on section 3, the appropriate solution identification for this model will be by limiting
economic cut-off grade since the cut-off grade on this model will be fixed and be limited on defined number.
The input data for this model is presented on Table 5.
Using this alternative, it is expected that the profitability of the project can be maintained on certain level
and the waste production can be produced on optimum result. This model will ignore the lost opportunity that
can be received if the metal price is getting higher since the cut-off grade is fixed.
Period
Grasberg Cut-
off Grade
(CuEq) %
Mining
Throughput
(million tons)
Milling
Throughput
(thousand tons)
Recovery
Rate
(%)
Waste
Production
(million tons)
Waste disposal
operating cost per
2011 0.41 49.68 2,088 83.8 186.20 -
2012 0.41 48.15 2,177 84.3 157.66 -
2013 0.41 54.41 2,221 85.9 93.98 -
2014 0.41 49.73 2,538 87.5 59.82 -
2015 0.41 55.09 3,343 92.1 3.25 -
2016 0.41 11.38 2,235 88.3 0.23 -
2017 0.41 29.42 1,607 86.1 0.23 -
4.2. Analysis of Business Solution
The objective of the analysis is to find maximum NPV of mining operation and the optimum result of waste
production. The maximum NPV can be represented mathematically as following:
To find optimum cut-off grade for Model 1 and Model 2, the limiting economic cut-off grade approach is
performed. Balancing cut-off grade is undertaken for Model 3. The optimum cut-off grade by limiting economic
cut-off grade can be determined by using given equation below (Rashidinejad 2008):
c
i
D
i
+ e
i
F
i
G
opt
= ------------------------
(S
i
r
i
+ a
i
B
i
) x y
where:
a
i
= Waste disposal operating cost ($/ton of waste)
B
i
= Waste production (ton)
c
i
= Mining operating cost ($/ton of ore)
D
i
= Mining throughput (ton)
e
i
= Milling operating cost ($/ton of ore)
F
i
= Milling throughput (ton)
S
i
= Metal price ($/ton of product)
r
i
= Cost to sell metal ($/ton of product)
y = Recovery rate
Meanwhile, the optimum cut-off grade by balancing cut-off grade is middle value between:
F
i
F
i
----- and -----
D
i
B
i
The interaction between variables that depicts the correlation between cut-off and NPV can be seen on the
Figure 12.
Mining
Throughput
Recovery
Rate
Waste
Production
Milling
Throughput
Mining Cost Milling Cost Recovery Cost
Waste
Disposal Cost
Total Cost
NPV Cut-Off Grade
Marketable
Product
Figure 12. Variables Interrelationship between Cut-Off and NPV
4.2.1. Consider the Environmental Cost during the Mining Operation (Model 1)
Based on input data from Table 5 and limiting economic cut-off grade, the result of optimum cut-off grade
of Model 1 can be depicted from Table 6. During seven years mining operation until end of mine life in 2017,
the total waste produced will be 501 million tons with 2,832 million kgs of marketable product. The NPV of the
project is positive US$ 4,589,689,946 at discount rate 10%. The cash flow already considers the annual
operating cost spent for environmental cost allocation.
Table 6. Optimum Cut-Off Grade for Model 1
Year Pushback Gopt g (g/t) OSR
Mining
Throughput
Milling
Throughput
Recovery
Rate
Waste
Production
Marketable
Product
CF
Cumulative
Discounted CF
2011 9 0.27 1.07 3.75 49.68 2.09 83.8 186.20 339 406,758,080 369,780,073
2012 9 0.56 1.15 3.27 48.15 2.18 84.3 157.66 359 532,653,611 809,989,669
2013 9 0.30 1.30 1.73 54.41 2.22 85.9 93.98 410 808,729,762 1,417,600,309
2014 9 0.78 1.72 1.20 49.73 2.54 87.5 59.82 519 1,231,234,905 2,258,550,315
2015 9 0.50 2.74 0.06 55.09 3.34 92.1 3.25 809 2,287,038,617 3,678,621,359
2016 9 0.15 1.26 0.02 11.38 2.24 88.3 0.23 280 873,905,431 4,171,918,192
2017 9 0.25 0.52 0.02 29.42 1.61 86.1 0.23 116 397,888,020 4,376,097,660
Total 297.86 16.21 501.37 2,832
Note: g = grade (gram/ton)
OSR = overall stripping ratio
Mining Throughput (million tons)
Milling Throughput (million tons)
Recovery Rate (%)
Waste Production (million tons)
Waste Disposal Opr Cost ($/ton)
Marketable Product (million kgs)
0% 10% 15%
NPV (US$) 6,538,208,426 4,589,689,946 3,921,306,862
This cut-off grade optimization model offers good profitability in term of good financial evaluation and
optimum waste production to minimize environmental impact.
4.2.2. Ignore and Postpone the Environmental Cost to the End of the Mine Life (Model 2)
On Model 2 there is reclamation cost in 2018 after end of mine life that is estimated US$ 350,592,880 and
has a negative impact on the cumulative discounted cash flow. By using limiting economic cut-off grade, the
result of optimum cut-off grade of Model 2 can be seen from Table 7 below. The total waste produced will be
501 million tons (same as Model 1) with 2,834 million kgs of marketable product (more products resulted than
Model 1). The NPV of the project is positive US$ 5,232,804,619 at discount rate 10%.
Year Pushback Gopt g (g/t) OSR
Mining
Throughput
Milling
Throughput
Recovery
Rate
Waste
Production
Marketable
Product
CF
Cumulative
Discounted CF
2011 9 0.27 1.07 3.75
49.68 2.09 83.8 186.20 339 656,266,080
596,605,528
2012 9 0.56 1.15 3.27
48.15 2.18 84.3 157.66 359 764,413,811
1,228,352,478
2013 9 0.30 1.30 1.73
54.41 2.22 85.9 93.98 410 960,977,362
1,950,348,994
2014 9 0.78 1.72 1.20
49.73 2.54 87.5 59.82 519 1,337,714,505
2,864,026,000
2015 9 0.50 2.74 0.06
55.09 3.34 92.1 3.25 809 2,293,408,617
4,288,052,313
2016 9 0.15 1.26 0.02
11.38 2.24 88.3 0.23 280 874,402,231
4,781,629,576
2017 9 0.25 0.52 0.02
29.42 1.66 86.1 0.23 118 404,658,638
4,989,283,441
2018 - - - -
- - - - - (350,592,880)
4,825,729,276
Total 297.86 16.26 501.37 2,834
Recovery Rate (%)
0% 10% 15%
NPV (US$) 7,291,841,243 5,232,804,619 4,520,896,192
Model 2 offers better profitability and NPV (compared to Model 1) as decision criteria for financial
investment and optimum waste production (same result with Model 1) to minimize environmental impact.
4.2.3. Consider Fixed Breakeven Cut-Off Grade during the Mining Operation (Model 3)
Model 3 uses fixed breakeven cut-off until end of mine life. This fixed cut-off causes two years extension of
mining operation due to the additional reserve comes from the lower mining rate compared to the mining rate
of Model 1 and Model 2. The optimum cut-off grade from this model is using balancing cut-off grade approach.
This is because of the specific interrelationship between the grade-tonnage distributions in the pushbacks and
mining throughput, milling throughput, and waste production.
There is reclamation cost as well as Model 2 in 2020. By using balancing cut-off grade, the result of
optimum cut-off grade of Model 3 can be seen from Table 8. The total waste produced will be 436 million tons
(the least amount compared to other models) with 2,688 million kgs of marketable product (the lowest amount
amongst the other models). The NPV of the project is positive US$ 4,552,540,019 at discount rate 10%.
Year Pushback
Breakeven
Cut-Off
g (g/t) OSR
Mining
Throughput
Milling
Throughput
Recovery
Rate
Waste
Production
Marketable
Product
CF
Cumulative
Discounted CF
2011 9 0.41 0.59 1.13 32.29 1.36 84.6 121.03 295 570,951,490 519,046,809
2012 9 0.41 0.63 0.98 31.30 1.42 85.1 102.48 312 665,040,015 1,068,666,656
2013 9 0.41 0.72 0.52 35.37 1.44 86.8 61.09 357 836,050,305 1,696,803,625
2014 9 0.41 0.95 0.36 32.32 1.65 88.4 38.88 451 1,163,811,619 2,491,702,620
2015 9 0.41 1.51 0.02 35.81 2.17 93.0 21.61 704 1,995,265,497 3,730,605,512
2016 9 0.41 0.69 0.01 13.90 1.45 89.2 22.25 244 760,729,941 4,160,017,732
2017 9 0.41 0.29 0.01 14.57 1.08 87.0 20.30 103 352,053,015 4,340,676,594
2018 9 0.41 1.24 0.01 15.20 1.45 85.1 22.90 157 591,516,780 4,932,193,374
2019 9 0.41 0.29 0.01 19.12 1.08 82.9 25.50 66 273,744,012 5,205,937,386
2020 - - - - - - - - - (350,592,880) 4,177,122,428
Total 229.88 13.10 436.04 2,688
Recovery Rate (%)
0% 10% 15%
NPV (US$) 6,343,901,882 4,552,540,019 3,933,179,687
The profitability of this model is 5% and 14% lower than profitability of the first and the second model
respectively. In addition, the marketable product is also decreased. However, this model offers better result in
term of waste production since it produces the least amount of waste compared to Model 1 and Model 2.
5. Proposed Solution
According to the analysis of three models above, each model can be compared, as seen in Table 9, based on
its total result in terms of mining throughput, milling throughput, waste production, marketable product,
cumulative discounted cash flow, and NPV.
Table 9. Comparison of All Models
Alternative
Mining
Throughput
Milling
Throughput
Waste
Production
Marketable
Product
Cumulative
Discounted CF
NPV @0% NPV @10% NPV @15%
Model 1 297.86 16.21 501.37 2,832 4,376,097,660 6,538,208,426 4,589,689,946 3,921,306,862
Model 2 297.86 16.26 501.37 2,834 4,825,729,276 7,291,841,243 5,232,804,619 4,520,896,192
Model 3 229.88 13.10 436.04 2,688 4,177,122,428 6,343,901,882 4,552,540,019 3,933,179,687
Note: Mining Throughput (million tons)
The technique used to analyze the selection of three models above is based on the Simple Multi-attribute
Rating Technique (SMART) analysis. According to Decision Analysis for Management Judgement (Goodwin
2004), the main stages in the SMART analysis are shown below:
Stage 1: Identify the decision maker (or decision makers).
In this paper, it is assumed that this is just the business owner.
Stage 2: Identify the alternative courses of action.
In this paper these are represented by the different three models the business owner can choose.
Stage 3: Identify the attributes which are relevant to the decision problem.
The attributes/parameters which distinguish the different models will be environmental acceptance and
financial analysis (NPV).
Stage 4: For each attribute, assign values to measure the performance of the alternatives on that attribute.
Stage 5: Determine a weight for each attribute.
Stage 6: For each alternative, take a weighted average of the values assigned to that alternative.
This will measure how well a model performs over all the attributes/parameters.
Stage 7: Make a provisional decision.
Stage 8: Perform sensitivity analysis to see how robust the decision is to changes in the figures supplied.
The analysis will determine the sensitivity of the outcomes of the model to changes in its parameters.
In order to make a decision there is a need to combine values for different attributes/parameters to gain a
view of overall benefits which each model has to offer. An intuitive appealing way of achieving this is to attach
weights to each attributes/parameters that reflect their importance to the decision maker. Thus, each attribute for
each model can be assigned with certain weight based on judgment. By using SMART analysis and stages
defined above, the raw weight and normalized weight for each attribute/parameter can be seen on Table 10.
Table 10. Raw Weights and Normalized Weight of All Models
Model 1
Model 2
Model 3 Sum of
weights
Raw weight 80 180
Normalized weight 44.44 55.56
70
80
75
80
70
100
Attribute/Parameter
Alternative
Cut-off grade optimization at Grasberg surface mine in
considering environmental impact
Environmental Acceptance Financial Analysis
70
In Figure 13 the aggregate value of benefits has been plotted against the waste production (in million tons)
for each of the models. Model 2 lies on the efficient frontier that comprised of optimal portfolios. Thus the only
model which is worth considering is Model 2.
38
40
42
44
46
300 400 500 600
A
g
g
r
e
g
a
t
e
B
e
n
e
f
i
t
Waste Production (Mt)
Efficient
Frontier
Model 3
Model 2
Model 1
Figure 13. A Plot of Aggregate Benefits against Waste Production for the Three Models
Sensitivity analysis shows that the each model is less sensitive to change in environmental acceptance as
shown in Figure 14 for the Cut-off Grade Optimization Model. The aggregate benefit of each model is more
sensitive to change in the financial analysis (NPV) as shown in the Figure 15. Furthermore, Model 2 gives the
highest value of benefits for all weights between 0 and 100.
30
40
50
60
70
80
90
0 50 100
A
g
g
r
e
g
a
t
e
b
e
n
e
f
i
t
s
Rawweight on Environmental Acceptance
Model 1
Model 2
Model 3
Figure 14. Sensitivity of Cut-off Grade Optimization Model to Environmental Acceptance
0
10
20
30
40
50
0 50 100
A
g
g
r
e
g
a
t
e
b
e
n
e
f
i
t
s
Rawweight on Financial Analysis
Model 1
Model 2
Model 3
Figure 15. Sensitivity of Cut-off Grade Optimization Model to Financial Analysis (NPV)
6. Conclusions
In this paper cut-off grade optimization in Grasberg surface mine in considering environmental impact not
only focusing on maximizing net present value (NPV) of the whole mining project over the lifespan of the mine,
but also finding an optimum balance between the cut-off grade and environmental management consideration
through optimizing waste production (overburden and tailing materials).
There are three models developed (based on Rashidinejad et al., 2008) as follows:
Model 1 Consider the Environmental Cost during the Mining Operation
Model 2 Ignore and Postpone the Environmental Cost to the End of the Mine Life
Model 3 Consider Fixed Breakeven Cut-Off Grade during the Mining Operation
Model 2 is chosen according to the SMART analysis result based on weighting on environmental acceptance
and financial analysis (NPV).
References
[1] Goodwin, P. and Wright, G. (2004). Decision Analysis for Management Judgment. 3rd ed. West Sussex: John Wiley
& Sons, Ltd.
[2] James, P. M. (1999). The Miner and Sustainable Development. Min. Eng-Littleton, SME, pp. 89-92.
[3] Lane, K.F. (1988). The Economic Definition of Ore: Cutoff grades in Theory and Practice. London: Mining Journal
Books Ltd.
[4] Metal Production Plan (2011). 11Q1-R2 Forecast Metal Production Plan. PT Freeport Indonesia: Mine Engineering
Department.
[5] Rashidinejad, F., Osanloo, M. and Rezai, B. (2008). An environmental oriented model for optimum cut-off grades in
open pit mining projects to minimize acid mine drainage, International Journal of Environmental Science and
Technology, Vol. 5, No. 2, pp. 183-194.
[6] Tailing Management Plan (2007). PT Freeport Indonesia, Geo and Technical Services Department.
[7] Tour Companion (2009). PT Freeport Indonesia: Corporate Communication Department.
[8] Vietor, R. (2002). Freeport Indonesia. Harvard Business Case. Harvard Business School.
Cite this paper
Prasetya, L.B., and Simatupang, T.M. (2012). Cut-off Grade Optimization at Grasberg Surface Mine in Considering
Environmental Impact, Proceedings of The 3
rd
International Conference on Technology and Operations Management:
Sustaining Competitiveness through Green Technology Management, BandungIndonesia (July 4-6), pp. 89-106. ISBN:
978-979-15458-4-6.

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