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Strategic Mine Planning
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8th Edition
David Whittle
Jeff Whittle
Chris Wharton
Geoff Hall
© Gemcom Software International Inc. 2005

Whittle Strategic Mine Planning i
Table Of Contents
Strategic Mine Planning........................................................................... 1
The Process of Design .......................................................................... 31
Sensitivity Analysis in Strategic Mine Planning ..................................... 41
Introduction to Optimization................................................................... 55
Open Pit Optimization............................................................................ 63
Economic Model for Pit Optimization..................................................... 83
Generation of Nested Pit Shells ............................................................ 89
Calculating Block Values ....................................................................... 95
Producing a Practical Pit Design from an Optimal Outline ................. 103
The Effects of Underground Mining..................................................... 117
Multiple Mines ..................................................................................... 125
The Effects of Sequencing & Scheduling ........................................... 137
Economic Model for Schedule Optimization........................................ 143
Schedule Optimization......................................................................... 147
Stockpiles ............................................................................................ 155
Blending .............................................................................................. 159
Cost Models for Different Purposes..................................................... 175
Cut-Offs ............................................................................................... 192
Cut-off Optimization............................................................................. 203
The DC Model for material classification and NPV maximization........ 211
References .......................................................................................... 223
Whittle Strategic Mine Planning 1

2 Whittle Strategic Mine Planning
Introduction
Strategic Mine Planning is the art and science of the management of
businesses involved in resource exploitation. It is the convergence of
business strategy on the one hand and mining optimization on the other. It
therefore embraces the general nature of mining as a business, as well as
the special nature of mining as an application of economic geology and
engineering. The driving force behind this convergence has been
information technology, in particular full value chain modeling systems
such as those that have been developed around pit optimization cut-off
optimization and schedule optimization.
The decision-making model presented here seeks to link business strategy

and optimization in a relatively sophisticated, but easy to use way. The
model was first developed in a paper presented at an AusIMM conference
on the subject of The Relationship between Economic Design Objectives
and Reserve Estimates (Whittle 1997). The model has since been refined
and presented at short courses at the University of Queensland and at
training events in Canada, Chile, Brazil and other countries.
In order to properly explain the model it is useful to articulate a range of

concepts in a variety of fields before drawing them into the final
argument.
The fields are organized under the following headings:
Strategic Business Planning

Situational Analysis
Market Analysis
Economic Evaluation
These sections leading up to the explanation of the model have been

covered to a greater extent than is strictly necessary to support the
decision-making behavior model. This has been done in the hope that the
extra information will be interesting and useful to readers who have not
received training in commerce, but who are nevertheless involved in it
through their engineering or geological input to the strategic mine
planning process.
Strategic Business Planning
Military Strategy
Cleisthenes became the leader of Athens ~ 500 B.C., and introduced a

democratic political system which included ten Strategi, each Strategus
being the military leader and representative of one of the tribes of Athens.
The manner in which Cleisthenes and his Strategi organized and directed
the military forces is credited with the Athenians successfully defeat of the
Spartans. They achieved this victory despite the fact that the Spartans
were greater in number, and were considered to be individually better
warriors.
Strategi were leaders in the military sense, but also more broadly they
were community leaders. They drew on a whole range of different
resources in order to achieve a military result.
Strategy is a Greek word meaning “Art of the Strategi”.
Quotation from Encyclopedia Britannica on the subject of contemporary
(1700 onwards) military strategy:
‘The strategist deals with many uncertainties and imponderables. Indeed
the art of the strategist is the art of the “calculated risk”.’
Business Strategy
1971 - Kenneth Andrews published “Business Strategy”:

• look at opportunities out in the world and match them with our
capabilities.
• SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats).
1980 - Michael Porter published “Competitive Strategy - Techniques for

Analyzing Industries and Competitors”:
• understanding of economic and business environment is key to

strategic management.
• critical success factors.
• forces driving change.
Dr Jim Landau - July 1998:

• “Look to your core competencies when trying to determine your
strategic direction.”
• “To be strategic, you need a window to the future.”
• “Optimize your resource usage to get a future advantage.”
Situational Analysis
Contemporary Template for Strategic Planning
Situation Analysis
• Size and structure of the market – refer to the Market Analysis section
below.
• Strengths – Those qualities that the company possesses which can
contribute to its success.
• Weaknesses – Qualities that could contribute to the company’s
success, but which the company lacks.
• Opportunities – Factors, events or circumstances in the marketplace
that the company can use to its advantage.
• Threats – Factors, events or circumstances in the marketplace that
could hinder the company’s success.
• Forces driving change – Factors that will influence the market in the
future, including changes in competitive structures, the emergence or
disappearance of substitutes or competitors in the market place, and
any other factors that affect demand.
• Critical success factors – Those qualities, attributes and assets that a
company needs in order to succeed in its chosen market.
• Competitor Analysis – All of the above, analyzed from the perspective
of the company’s competitors, so that their actions in the market place
may be anticipated.
The Strategic Plan

Below is a list of common strategic plan components for any company:
• Vision - a view of the future that is important to the organization.
• Mission - key statement of the purpose of the organization
• Values - wider responsibilities and guiding principles
• Sustainable Competitive Advantage – A combination of strengths and
critical success factors that the company understands to be vital to
future success, and which must be preserved or fostered.
• Strategic Thrust – There are three choices. Firstly a company could
choose to be a cost competitor. This would be an appropriate strategic
thrust where an un-differentiated high volume (and/or high value)
commodity is being sold. Secondly, a company could choose to be a
differentiator. Differentiation either costs money to achieve, or it
exploits one of the company’s sustainable competitive advantages.
Either way, provided it is positive an useful differentiation in the eyes

or some or all of the buyers, then the seller can command a higher
price. The third alternative, is to have a niche strategic thrust. This is
appropriate if the product is a low volume product with few buyers,
and few competitors.
• Objectives - major milestones
• Strategies - what things will be done in order achieve the objectives
Market Analysis
Market analysis is an important part of Situation Analysis.
There are two markets that are of interest to mining companies, the
commodities market for whatever the mine produces, and the share
markets where capital is raised and share value is determined. The
commodities market determines the income of the business. The share
market determines the shareholder wealth. Performance in the former
market of course has a great impact on the performance in the latter.
Commodities Markets
In market theory there is the concept of a Perfect Market. This is a model

of a market, which has defined characteristics and behavior. It provides a
reference for discussion and analysis of real markets.
Behavior of a Perfect Market

The price and volume traded on a market is determined by the intersection
of the supply and demand curves. Refer to Figure 1. If the market price
should rise, then suppliers will be encouraged to produce greater
quantities, even if their marginal cost of production increases as a result.
In the long term additional suppliers will be encouraged to commence
production. This potential additional supply is represented by the section
of the supply curve to the right of the intersection. The section of the
supply curve to the left of the intersection represents the contraction of
supply that would occur should the price drop. Suppliers who can no
longer make a profit will be forced out of the market, reducing the amount
of the commodity available for sale on the market. The quantity of the
commodity demanded by the market is determined by the demand for the
utility imparted by the commodity and by the availability of substitutes.
Figure 1: Determination of the long-term stable price in a perfect market
Characteristics of a Perfect Market

Key characteristics of a Perfect Market:
• Homogeneous product (product from supplier X is much the same as

product from supplier Y).
• Substitutes are available – If the price of a commodity rises too much,

buyers will stop buying that commodity, and instead purchase a
substitute.
• Large number of sellers – no individual seller has independent

influence over the market price.
• Large number of buyers – no individual buyer has independent

influence over the market price.
• Perfect Information – All buyers and sellers know what other buyers
and sellers are trading, and the price at which they trade.
If these conditions are met, then it is believed that the market is operating
efficiently in the long term. Sellers cannot make excessive profits, and
they are forced to maintain the lowest possible cost of production. Excess
demand or excess supply is remedied by a movement in either the demand
curve or the supply curve, which leads to a return to equilibrium.
Other Market Models

Other market models include:
• Monopoly - one dominant seller. In a monopoly, the seller has a

significant influence over the price at which his or her commodity is
sold. Monopolies generally lead to higher prices than might prevail in
a Perfect Market. The seller has the power to adjust his or her price in
order to maximize their profits. 1
• Duopoly - two dominant sellers. Duopolies, like monopolies, give

significant market power to the sellers. It is not uncommon for the two
suppliers in a duopoly to behave as if they are colluding to exploit the
market. This is even the case when no actual collusion occurs.
• Oligopoly - a few dominant suppliers. Markets tend to operate like

oligopolies when the percentage of supply provided by three or four
suppliers reaches around 40%. Refer to Figure 2 for an illustration of
this. As the market concentration increases, the sellers profits
increase, because as a collective (even if no actual collusion occurs),
they have more influence over the price at which products sell than in
a perfect market. Monopolies, Duopolies and Oligopolies represent
different degrees of seller power. Such power is advantageous to
sellers, and in some cases, sellers will cooperate, rather than compete,
to collectively achieve that power. An example of this happening is
OPEC, a cartel of oil producers. The collective has significant more
market influence than would the sum of the members, should they act
independently.
• Monopsony - one dominant buyer. The market power is with this

buyer.
• Oligopsony - a few dominant buyers. Buyers can cooperate through

cartels to create oligopolies.
1
Refer to the section Introduction to Optimization. The example optimization problem in
that section is one in which the seller has considerable power in setting prices, and
utilizes an optimization approach to determine the price at which his or her profit is
maximized.
Figure 2: The relationship between market concentration and profitability

(Return on Capital Employed) J B Were circa 2001
How “Perfect” is the Copper Market?

Characteristic Score Notes
Homogeneous product 9
Substitutes are 9 Aluminium for electrical uses and
available car radiators, optical fibres in
telecommunications, plastic in
plumbing. 2
Large number of sellers ? 400 operating mines, but much

fewer companies. Some suppliers
are big enough to have an
influence on the market. 3
Large number of buyers 9

Perfect Information 9 Excellent price and trading
information available through
commodities markets, internet
etc.
Copper is an example of a market that has many characteristics in

common with a perfect market. There is however a moderate degree of
market concentration, which contributes to the market tending slightly
towards oligopolistic behavior (refer to Figure 2).
2
Source: Crowson, P., Minerals Handbook 1996-97, Stockton Press, New York, p.115
3
Ibid.
How “Perfect” is the Iron Ore Market?

Homogeneous product 9/ 8 Iron is differentiated by its grade,

and the grade of a number of
contaminants and by its texture.
Never the less,
Substitutes are 9 Aluminum, wood, plastics.

available
Large number of sellers 8 Production is dominated by Rio

Tinto, BHP Billiton and CVRD.
The market has oligopolistic
characteristics.

Perfect Information 9/ 8 Level of prices in general are
known, but individual contract
information is not. Reserves, rates
of production and cost of
production are generally known.
Iron ore market has characteristics of an oligopoly. Seller power in the

market was illustrated by CVRD’s ability in early 2005 to negotiate a
71.5% increase in price with a significant buyer. The effect of this was to
boost the fortunes of all sellers. 4
4
MiningNews.net 23 February 2005 “IRON ore majors BHP Billiton and Rio Tinto led
the charge on the Australian Stock Exchange this morning with iron ore explorers in their
wake as Brazilian giant CVRD announced a price hike of 71.5% overnight after
finalizing negotiations with long term partner, Japanese giant Nippon Steel Corporation.”
How “Perfect” is the Gold Market?

Homogeneous product 9
Substitutes are 9 Platinum, palladium, silver,
available titanium, chromium based alloys.
Dollars and other currencies,
currency hedging instruments,
stock.
Large number of sellers 9

Perfect Information 9 Excellent price and trading
information available through
commodities markets, internet
etc.
Despite all of the above, the gold market does not work anything like a
perfect market. This is because gold is not only consumed in the
production of goods, it is also used as a store of wealth, both in the form of
jewelry and in bullion. This gold can and does find its way back into the
market from these above ground stocks. This secondary market is larger
than the primary market for gold.
“Above ground stocks of gold are very high, and the willingness to add to,
or release from, these stocks largely determines the state of the market. 5
5
Source: Crowson, P., Minerals Handbook 1996-97, Stockton Press, New York, p.147
Share Markets
What factors drive the price of shares?

The product is not gold, silver coal etc. The product is company shares,
which need to satisfy one or more of the following buyer needs:
• Potential cash flows (dividends) - Buy shares in the expectation (or
hope) that the company will pay dividends in the future.
• Potential cash flows (realization of capital gains) - Buy shares in the

expectation (or hope) that the market value will increase and that the
increase can be realized.
• Potential unrealized capital gains - Buy shares in the expectation (or

hope) that the market value will increase and use the additional value
as security.
• Exposure / Diversification - Buy shares in many different companies

in many different industries so as to spread the risk of investment.
How ‘perfect’ is the share market?:

Homogeneous product 8 Shares are strongly differentiated.
Substitutes are 9 Because shares are so strongly

available differentiated, shares in one
company are a substitute for
shares in any other. Substitutes
also include all forms of financial
instruments.
Large number of sellers 9

Perfect Information 9/8 Prices and trades are public,
“insider information” is not.
The primary market for shares applies to newly issued capital. A large
secondary market exists for re-traded shares.
Economic Evaluation
Strategic planning cannot proceed without having a method to determine
the value of the various strategic options that will be considered. If you
cannot measure the value of a plan/design, you cannot know whether or
not a change in it will improve it or make it worse. In a market economy,
and in relation to economic matters, it is usual to represent all things in
terms of their impact, or potential impact, on cash flows. Doing so gives a
single-value measure of a plan/design, which allows easy comparison to
all others.
Simple Cash Flow Analysis

Simple or undiscounted cash flow analysis involves adding up the
negative and positive cashflows that are predicted for a project, yielding
the net cash flow. By convention, simple cash flow analysis is performed
with real dollars 6 as opposed to nominal dollars 7.
The simplest possible rules that could be applied to analysis based on
simple cashflows are as follows:
• If the net cash flows are positive, the plan/design is profitable. If the
net cashflows are negative, the plan/design is unprofitable.
• In choosing between two or more plans, you should choose the one
with the highest net cashflows.
Some of the shortcomings of this approach are immediately obvious:

• The approach does not take into account the cost of capital or the
time-value of money.
• There is no account made of uncertainty or risk in the predicted

cashflows.
• Simple cash flow analysis is a poor platform for calculating /

predicting future tax liabilities as tax liabilities are principally based
on accrual account calculations (see below).
Despite its shortcomings, it has the advantage of being very simple, and it
is commonly used for planning functions such as pit optimization.
Discounted Cash Flow (DCF) Analysis

DCF Analysis takes account of the fact that a dollar that we receive today
is more valuable to us than a dollar that we might receive in a year’s time,
and expected cash flows are discounted by an amount which increases
6
Real dollars are dollars with constant buying power.
7
Nominal dollars are dollars at their face value, with buying power which changes over
time subject to inflation or deflation.
with time. The rate of increase is expressed as a discount rate, such as ten
per cent per year. It is the application of the discount rate which
differentiates DCF Analysis for simple cash flow analysis.
The discount rate can be defined or determined in various ways, including:
• Type 1 - risk adjusted discount rate consists of two components:
opportunity cost and risk adjustment. Assuming it is your own money
that you will invest, the opportunity cost is the rate you could earn
(risk free) with the capital elsewhere. The risk adjustment is an
additional amount to account for the geological, geotechnical,
economic and political risks associated with the project. The risk
adjustment must reflect all of the risk associated with the project.
• Type 2 – risk adjusted discount rate consists of two components: cost

of capital and risk adjustment. The cost of capital is the interest rate
you must pay to borrow the money. The lender may assume some risk
in providing the funds, and to the extent that they do, it will be
reflected in the interest rate that they set. The borrower (you) also
assume the remaining risk associated with the project, and this is
reflected in the risk adjustment. However the risk is shared, the total
discount rate must reflect all of the risk associated with the project.
• The cost of capital (in the context of this discussion) is the rate of
return investors require to supply the funds for the project where they
are assuming all the risk associated with the project. It is common for a
cost of capital approach to be taken when funding is provided
internally, for example, from a head office to a project office.
The formula for calculating the net present value (NPV) for a project is as
follows:
n
Rt
NPV = ∑ t −C
t = 1 (1 + k )
Where:
Rt = cash flow for period t
k = discount rate
C = initial capital expenditure
Internal rate of return (IRR) is calculated by solving the following

equation for k:
n
Rt
0= ∑ (1 + k )
t =1
t −C
To explain the application of DCF Analysis, it is useful to go through an
example. Consider a five year project with an expected cash flow of one
million dollars per year and a discount rate of ten per cent. The cash flow
calculations are shown below.
This gives a total value today, the Net Present Value (NPV), of
$3,790,787.
If the project had cash flows of $1.5M, $1.5M, $1M, $0.5M and $0.5M,
which gives the same total undiscounted cash flow of $5M, the figures
would be as shown below.
The NPV would then be $4,006,588. The increase of $215,801 (5.7%) is

caused by $1M of the cash flow being brought forward from years 3 & 4
to years 1 & 2.
The simplest possible rules that could be applied to analysis based on

simple cashflows are as follows:
• If the NPV is positive, the plan/design is profitable, and the decision

should be to invest in the project. If the NPV is negative, the
plan/design is unprofitable and the decision should be not to invest in
the project.
• In choosing between two or more plans (mutually exclusive

alternatives), you should choose the one with the highest net
cashflows.
Advantages of DCF Analysis include:

• DCF Analysis differentiates between projects with identical total cash
flows but with different cash flow timings.
• It is very simple to calculate and understand.
• Evaluation method independent of the method for generating

scenarios.
• Takes account of risk.
• Allows comparison of different projects with different risk profiles.
• Independent of inflation.
Disadvantages:
• Does not take account of a project manager’s ability to adapt to future
changes as they occur. Some argue accordingly that DCF analysis will
underestimate ‘true’ value.
• The accounting for risk is by an extremely crude mechanism, and the

process yields a single risk-weighted value, with no indication of the
degree of uncertainty about the outcome (i.e. there is no probability
distribution associated with the outcome).
• DCF analysis is a poor platform for calculating / predicting future tax

liabilities as tax liabilities are principally based on accrual account
calculations (see below).
DCF Analysis is the foundation upon which schedule optimization and

cut-off optimization are based in Whittle. DCF also plays a vital role in pit
optimization because despite the fact that conventional pit optimization
proceeds on the basis of simple cash flow analysis, it is DCF analysis that
is applied when evaluating and choosing between various pit outlines
produced by the optimizer.
Although DCF Analysis is a poor platform for calculating future tax

liabilities, in the context of Strategic Mine Planning, it is generally
sufficient to work towards maximization of pre-tax NPV, with the
knowledge that with few exceptions, there is a positive relationship

between pre-tax NPV and post-tax NPV. Accordingly maximization of
pre-tax NPV, should lead indirectly to the maximization of post-tax NPV.
Projected Accrual Accounts

Accrual accounting is the normal method for calculating past financial
performance and present financial position. It is possible to use accrual
accounting, with forecast cashflows used as inputs, to calculate future
profitability. The process of accrual accounting proceeds on the basis of
nominal dollars.
Advantages:
• Better than simple cash flow analysis of discounted cash flow analysis
for projecting future financial reports and tax liabilities.
Disadvantages:
• Deals very poorly with risk concepts.
• Subject to inflation.
In the context of Strategic Mine Planning, projected accrual accounts is

best applied purely for the purpose of projecting future financial reports
and tax liabilities.
Option Pricing Techniques

Options Pricing is a method whereby the ability to make future decisions
is taken into account. It requires the determination of the probability of
certain future events occurring, and also the response / decision that would
be associated with those conditions in the future. The method deals with
multiple future conditions/decisions. The outcome is a probability
distribution of NPV.
Advantages:
• Can account for a project manager’s ability to adapt to future changes /
future information.
Disadvantages:
• Requires more data.
• The application is an order of magnitude more complex that DCF

Analysis.
• The evaluation technique is closely tied to the method for generating

scenarios, which makes it difficult to implement dynamically with
other strategic mine planning tools such as pit and schedule
optimizers.
• Requires the generation of a large number of scenarios.

Options Pricing is a subject of much interest in the mining industry, yet it

is not commonly applied. Apart from its complexity compared to DCF
analysis, the main reason it is not commonly applied is that because it
cannot be applied dynamically with other strategic mine planning tools,
what is gained in analytics, is lost in modeling precision and optimization.
Monte-Carlo Analysis
Monte-Carlo Analysis uses probability distributions as inputs for major
economic parameters and it produces a probability distribution for value
outcomes.
Advantages:
• Provides a probability distribution for value outcomes.
Disadvantages:
• Existing systems cannot incorporate pit optimization, schedule

optimization and cut-off optimization.
Monte Carlo Analysis is often implemented in spreadsheet programs with

factors such as ore/waste discrimination, pit outline and schedule fixed
and/or grossly simplified. As such it is generally used as an adjunct
analytical process to the strategic planning function, rather than as a core
function.
Discrete Probability Analysis

Discrete probability analysis uses simplified probability distributions for
major parameters. For example, there may be three representative
geological models, each assigned with a probability of it being the most
representative. Refer to McRostie and Whittle (1999).
Advantages:
• Provides a probability distribution for value outcomes.
• Unlike Monte Carlo analysis, Discrete Probability Analysis can be

implemented in a pit optimization / schedule optimization framework,
allowing more complex interactions between major input variables.
Disadvantages:
Common Practice
A survey of the evaluation practices of mineral projects in the mining
industry was conducted by the Canadian Institute of Mining Management
& Economics Society (CIM MES) in 2005. Refer to Figure 3 for the
results of the survey. This study indicates that Discounted Cash Flow
analysis is the preferred method for evaluation of feasibility studies, with
NPV and IRR topping the list of evaluation metrics 8. Accounting- and
market-based methods are seen to be of significantly less importance in
the evaluation process.
Evaluation Metric at Feasibility Stage
NPV
IRR
Cash cost $/oz or $/lb
Experience
Hurdle Rate
Payback
NAV = NPV + cash - debt
Break-Even Price
Real Options
Price/EBITDA
ROCE
EV = Market Cap + debt - cash
Profitability Index
Price/EBIT
Price/Earnings
NAV (SEC def)
Price/Cash Flow
Market Cap
Book Value
Price/Book Value
0 2 4 6 8 10
0 = no importance high importance = 10
Figure 3: Evaluation Methods of Mineral Projects at the Feasibility Study Stage

(CIM MES Survey of Evaluation Practices 2005)
8
Source: Smith, L.D., 2005 Survey of evaluation practices in the mineral industry, CIM
Management and Economics Society.
Counterpoint
We started out this section by stating that strategic planning cannot
proceed without having a method to determine the value of the various
alternatives that will be considered. We looked at various systems for
measuring value, which cater variously for factors such as opportunity
cost, cost of capital, inflation, taxation and risk. However, none of these
systems are perfect, and none could be considered “complete”, where
“complete” means that all decision-influencing factors are considered.
Despite the apparent sophistication of some of the methods, they are only
as good as the data that is entered into them and they are poor when it
comes to taking into account more qualitative factors.
History has provided some spectacular failures for economic analysis
being applied to qualitative factors. For example, in the 1970s Ralph
Nader drew the world’s attention to a leaked Ford Motor Company report
which showed that the location of the fuel tank in the Ford Pinto made it
prone to explode in common types of accidents. The report calculated the
cost of relocating the tanks in future production (a few dollars per vehicle)
and compared it to the cost of legal action against the company as a result
of the deaths of future Pinto owners, if the tank was not relocated. The
report concluded that the net cost to Ford would be lower if it did not
change the design, so condemning scores of future Pinto occupants to
death. People died as a result and when the news leaked, Ford’s good-will
was seriously eroded.
One could argue that the economic model Ford employed could have been
corrected by taking into account (in dollar terms) the potential loss of
good-will associated with the deaths, should the news have been leaked. It
might have led to the fuel tank being relocated, with consequent saving of
lives and of good-will. However there are perhaps some things that
should be left out of cold-hearted analytical processes, including human
lives.
Decision-making behavior
Decision-making behavior affects performance in terms of the
commodities markets and share markets, and is influenced very much by a
desire to avoid or seek exposure to risk. It is a key factor in the
determination of strategies.
Risk Neutral
In the piloting of a corporation, the CEO is charged with the responsibility

of maximizing shareholder value and it is generally accepted that the
maximization of Net Present Value (NPV) is consistent with this
objective. Where a decision is required as to whether or not to invest in a
project, the NPV is calculated. If the NPV is positive, then this indicates
that the investment should be made.
In choosing the exact configuration of a mining operation for a given
resource, the designer is effectively choosing between a large number of
mutually exclusive projects. Stermole (1993) states that in deciding
between mutually exclusive projects, you should choose the alternative
with the highest NPV. In doing so, you would be exhibiting risk neutral
behavior. You can afford to be risk neutral if the project under
consideration is only a part of your risk exposure. If you have many
projects and one fails, it is not a catastrophe. You can, in fact, diversify-
away the risk.
Even if you do not have a diversified portfolio, risk neutral behavior can
be appropriate. An example of this can be found in the Chairman’s
Statement of the Homestake Gold Annual Report 1994, which declares
that:
“The company’s policy of not hedging the gold price continues in order to
provide shareholders full exposure to its fluctuations.”
Newmont Mining Company and many others, have similar policies.
These company are making themselves attractive to potential investors by
exposing themselves to the risk (and upside) associated with fluctuations
in the commodity price. The advantages of making themselves more
attractive to investors must outweigh any tendency of the companies to
avoid risk.
Risk Averse
Walls (1996) performed some research on the decision-making behavior

of mining CEOs and found that they do not generally make highest NPV
decisions, their decisions being tempered by risk averse behavior. He
found that CEOs of smaller mining companies tend to be more risk averse,
and suggested that this is because the higher risk projects carried with
them a greater risk of company failure for small companies. Interestingly,
Walls also found that Australian small company CEOs were more risk
averse than their U.S. counterparts but could offer no explanation for this.
An alternative approach to the tempering of NPV objectives with risk
averse behavior is given by Smith (1997), who suggests that rather than
choose the maximum NPV production rate, this rate should be seen as the
maximum rate and that the actual rate should be less than this. Part of the
reasoning behind the attenuation is that a maximum NPV production rate
tends to lead to a short mine life, leaving minimum time to recover from
early difficulties.
Sating the Market’s Thirst
It is the underlying purpose of most companies to maximize shareholder

wealth. For the shareholders of a company, it is advantageous to have the
share market determine a high value for the shares. The market
determines the value of the shares using a number of subjective and
strategic criteria, but also uses a selection of quantitative measures. These
measures are not necessarily the best way to measure a mining company’s
value, but being based on readily available information, they are practical.
The methods include 9:
• Earnings per share (EPS) and Price Earnings Ratio (PER)
• Cash Flow and Price to Cash Flow Ratios (PCFR)
• Dividend Yield
• Commodity and Reserve Exposure
• Market Value
If these methods are being used to value the shares, then a strategic mine
plan may be influenced by the need to sate the market’s thirst for
measurable value. For instance, it may be better to structure a project so
that it leads to early payment of dividends, even if this means a sacrifice of
NPV.
A major non-financial measure used in the valuation of shares is the

Reserve.
Appleyard (1997) writes:

".. the reserve is probably the major input in a company's ability to raise
debt or equity finance, and, if listed, in its rating on the sharemarket."
Burmeister (1997) states that:
“One of the simplest yardsticks for comparing gold companies is the
market capitalization per ounce of reserve or resource. Since the adoption
of The AUSIMM Code for reporting on Reserves and Resources by all
9
Refer to Rudenno (1998) for a more comprehensive discussion of how investors value
mining company shares.
listed Australian gold companies, the quality of disclosure has improved to

such an extent that this comparative tool can now be taken seriously. It is
widely used in the USA.”
If these views are truly representative of investor behavior, one could

conclude that the CEO of a mining company will be inclined to quote the
highest reserves that he is entitled to.
Taking a Cost Position in the Market
Reducing costs is always a sub-objective to maximize profit, but for

strategic reasons, low costs may override the objective to maximize profit.
This is the case if a company has a relative cost objective - for example, to
only produce copper if it can be produced at a marginal cost in the bottom
half or quartile of the marginal costs for the industry. Producers with high
production costs will be the first to fall should the price fall. Because of
the behavior of the market, unless massive changes occur to the demand
for the commodity, low cost producers are assured of survival.
Example - Copper
Negatively sloping demand curve will ensure equilibrium of supply and
demand is achieved if supply reduces.
Contra-example - Gold
A drop in primary supply will be easily taken up by supply from the
secondary market.
Changing the Market Structure and Behavior
When one company merges with or acquires a competitor, or through

project start-up gains a larger percentage share of the market, this leads to
incrementally greater market concentration. In other words, the market
gets a little closer to behaving like an oligopoly, a duopoly or a monopoly.
With that comes the potential for increased in commodity prices and
potentially beneficial changes in the price cycles (both amplitude and
frequency) for all industry suppliers. It would be rare for one single
project start-up or small-scale merger to have a measurable effect, never
the less, it may be the company’s strategy to pursue market consolidation,
and this objective might over-ride to a certain extent an NPV
maximization strategy.
Other Decision-making Behavior
Walls & Eggert (1996) suggested reasons why mining CEOs do not follow
classic highest NPV decision-making patterns. Risk aversion associated
with potential company failure has already been discussed. Other reasons
included:
1. The desire to avoid making a short term loss. The CEOs’ continued
employment may be linked to their ability to consistently deliver a
profit (even if this is at the expense of NPV).
2. Attempts to reconcile the interests of stakeholders other than

shareholders, including CEOs themselves, employees and the
communities affected by the project.
In order to further delineate the basis of CEOs’ decisions, 20 Annual

Reports for a variety of Australian mining companies for years 1994, 1995
and 1996 were studied (not necessarily a representative sample, but useful
nevertheless). Many companies did not state objectives. Of those that
did, the most common objective was to maximize shareholder value. A
good example is that stated by Posgold and related companies:
“…to maximize returns to shareholders in the form of dividends and
capital appreciation by the creation of wealth through long term
growth in earnings and assets.”
Objectives stated by other companies include the following:
1. To maximize shareholder wealth through growth as a first ranking
Australian resource company.
2. To achieve economies of scale through international expansion.
3. To be a low cost gold producer.
4. To operate profitably and to increase the resource base.
Bad Behavior!
Sometimes economic and strategic objectives are inappropriately reduced

to technical objectives.
For example:
5. Mining to a prescribed cut-off.
6. Mining to a prescribed stripping ratio.
These are old heuristic techniques for achieving a satisfactory economic

result. They are entirely superseded by modern optimization techniques
discussed in this book.
Representing decision-making behavior on a Reserve-tonnage / NPV curve.
It is possible to conceive a set of feasible mine designs, each for a

different value of a major parameter, and each of which is optimal in that
all other parameters are optimized in order to maximize NPV. The major
parameter itself affects NPV, and, if you were to graph the NPV against
the parameter values, you would have a graph which illustrates the
relationship.
The major design variables that we have in mind include the size of the
ultimate pit, the cut-offs and the investment in processing plant (and
consequently its throughput rate). The curve will typically be convex,
with a single maximum. Figure 4 shows an example of such a curve for
the pit tonnage of a mine.
Figure 4: The typical shape of a Pit Tonnage / NPV graph.
Such curves have been produced in countless papers. Hanson (1997) for
example, like most people who produce such graphs, shows only the
middle part of the curve. This is because it is the area around the
maximum which is generally considered to be most interesting. Smith
(1997) presents a number of similar looking graphs, but for NPV v.
Production-Rate.
Figure 5 is an idealized example of an NPV / Ore-Tonnes-Processed

curve. It is possible to create such curves for real data using one of a
number of different software packages such as Whittle. These packages
design optimal pits and the total ore tonnes is a function of the size of the
ultimate pit and other design parameters. The total ore is equivalent to the
reserve.
Figure 5: The typical shape of an Ore Tonnes (Reserve) / NPV graph.
It is useful to describe the nature of the curve in detail:

• The maximum of the curve represents the optimal design from the
point of view of the maximization of NPV.
• Every point on the curve represents an optimal design given the

corresponding ore tonnage on the horizontal axis.
• There are infinite feasible designs which could be represented as

points on the graph, but none of these points could occur above the
curve. Those designs which are represented by points under the curve
are sub-optimal in one or more of the other design criteria not graphed.
• The area under the curve but above the x-axis represents the feasible
domain for pit designs which have a positive NPV and which are
therefore economically viable.
Figure 6 is similar to Figure 5, except that we have overlaid our comments

in relation to the decision-making behavior discussed in the previous
section.
Figure 6: Representing decision making behaviour

on an ore tonnes / NPV graph.
A risk neutral design will seek to maximize NPV. A risk averse design
will not succeed in maximizing NPV because it will employ less capital
than is required. This will lead to a smaller than optimal processing
capacity, less efficiency and probably a less ambitious mine design. At
the far right of the graph is the mine design which maximizes the reserve,
while having a positive NPV. A company which is primarily motivated
by the need to raise capital could present such a mine design as evidence
that the reserve is economically viable.
A company taking a cost position in the market may choose a design other
than that which provides the highest NPV. The same can be said for a
company that is seeking to effect market consolidation – that objective
may lead it to choose alternatives other than those that are indicated
through DCF Analysis to achieve the highest NPV.
An example of such a decision-making behavior feasible domain has been
creased using the Whittle package and a training data set called “Monte
Bojo”. It is presented below. Several hundred life of mine simulations
were performed for a range of processing plant configuration and pit size
alternatives. In total, 588 life-of-mine schedules were created and
analyzed. The results are shown in Figure 7. For this example, the
processing plant and pit sizes were varied, but similar results could be
achieved by varying any major mining parameter. One of the interesting
features of this example is the flatness of the curve at its maximum. The
maximum NPV (Net Present Value) design is 67 million tonnes, but the
NPV curve is very flat over a range of between about 55 million and 75
million tonnes.
In the example, the optimal design and schedule involved a mine life of
only 2.3 years with an optimum processing throughput rate of 29 million
tonnes per annum. We would imagine that most miners would be
reluctant to engage in such a schedule. The risks are extremely high, if for
example, the mining were to commence in a cyclical low price period, or
if there were difficulties getting the processing plant to perform to
boiler-plate recovery 10. In this case the theoretical maximum NPV is
unrealistically high, and the achievable best NPV will be somewhat lower.
The theoretical maximum NPV is, however, still very useful as a reference
point for the economic evaluation of different practical alternatives which
the engineer devises.
All Production Rates
800
600
400
200
0 opvalue/db ($m)
-200 0 20,000 40,000 60,000 80,000 100,000
-400
-600
-800
Figure 7: Example of a feasible domain. The dots represent a total of

about 600 complete mine designs and schedules produced by
Whittle.
Application of the Decision-Making Behavior Model
The purpose of the Decision-Making Behavior Model is to provide a

mechanism by which the value of a broad range of strategic options can be
compared and contrasted. DCF Analysis is one dimensional and
quantitative. The Decision-Making behavior model provides a structure to
analyze some of the qualitative or hard-to-quantify factors and objectives
that influence strategic mine planning to be considered in a quantitative
framework.
For example, it is possible to see through the Decision-Making Behavior
Model what sacrifice in NPV is being made in order to achieve Reserve
Maximization or to achieve some degree of Risk Aversion. Is it better to
pursue reserve maximization and make significant sacrifices in NPV, or is
it better to strike a balance?
10
Smith (1997) analyses this particular issue, and in relation to production rates,
concludes that the ‘optimum’ production rate should really be regarded as the maximum
rate. The most sensible rate may be somewhat lower.
If a project must be approached with Risk Averse behavior, due to the

resources or structure of the operating company, might it be more valuable
to (and worth selling to) a larger company, that can operate it with Risk
Neutral behavior and consequently achieve a higher NPV?
The Process of Design

Overview of a Simple Planning Process

Every ore body is different, but we will now go through the main steps
involved in designing an open pit when optimization tools are available to
you and where maximization of NPV is the principal objective. The steps
are presented as linear for clarity. The actual process of design is iterative,
with some steps or combination of steps being repeated many times, and
with sensitivity analysis, what-if analysis and auditing being intermingled
with the simple steps.
Open pit mine planning can be broken down into a series of steps, where
each leads into the next. In one such breakdown we produce each of the
items shown in Figure 8.
Ore-body Model
Ultimate Pit Design

Long-term Schedule
Cut-off Schedule
Short-term Schedule
Figure 8: Open pit planning steps
While each item has a real effect on any following items, the reverse is not
necessarily true, and they are grouped accordingly. For example, while
the ore body model is rarely affected by what follows, the pit design, long-
term schedule and cut-off schedule can affect each other a great deal.
The aims are also different for the three boxes.
In creating the ore body model, the aim is to be as accurate as possible,
and to record data that will be important to the planning and subsequent
mining of the ore body.
In the second box, the aim is to maximize the value of the mine by
deciding approximately what will be mined and processed in each year of
the life of the mine. Here, the year in which a cash flow occurs can have a
significant effect on the value of the pit. The emphasis is on getting the
over-all scale and mining sequence right.
In short-term scheduling, we aim for the smooth and efficient use of the
equipment on a day-to-day basis. This affects the value of the mine by its
effect on the daily cash flow. Note that, in short-term scheduling, we
often have more detailed information about the ore body than is available
when doing long-term scheduling.
From hereon we will focus on the first two activities in the second box:
Ultimate Pit Design and Long-Term Schedule. The cut-off schedule is
discussed in the section titled “Cut-Off Optimization”.
We will assume that a block model has been prepared. Each block will
have a total tonnage and may have one or more “parcels”. Each parcel
will have a tonnage and a quantity of each element of interest.
The main steps:
1. Create a selective mining model
2. Create a sensitivity work model
3. Estimate the general size of the ultimate pit
4. Introduce pushbacks
5. Check the work with the pit design model
6. Adjust the minimum mining width
7. Do the final design and schedule
The steps are discussed in greater detail below.
Create a Selective Mining model
There are two issues to consider with regards to selectivity:

Mining Selectivity – In a selective mining model, the shape and
size of the blocks is representative of the degree of selectivity that
can be achieved in mining operations, most particularly that
selectivity that can be achieved at the pit floor and at the pit walls.
It is not critical that this be directly representative (this would in
fact be difficult to achieve), as the consequences of imprecision are
minor. So in practical terms, it means that blocks should be the
same height as a bench, and that their width be appropriate for
accurate modeling of pit slopes. As a general guideline, it is best to
have a block width of no more than 1.5 times the block height,
though this is not a hard and fast rule.
Geostatistics block shapes and pit optimization pit shapes

Note that this aspect ratio (between 1.5:1 and 1:1) may differ considerably
from that used in the original generation of the model. Many geostatistical
processes lead to blocks which are considerably wider than they are high.
They may be longer in one direction (along strike) than the other. There
are valid geostatistical reasons why this should be so, and equally valid
reason why such a model must be modified to have blocks which are
much closer to square, for the purposes of pit optimization.
In Whittle, wide blocks can be split into smaller blocks. When this is done,
the contents of the original block are distributed evenly between the new
smaller blocks.
Processing Selectivity – The unit size to be considered when

determining which material may be sent to alternate processes or to
the waste dump. In pit optimization and scheduling it is the parcel
which represents processing selectivity. Accordingly, if there is an
ability to segregate some material within a block for channeling to
a process, then this can be represented by the use of multiple
parcels per block.
Multiple Parcels – Where they come from

Within each block of a model there may be one or more parcels, each
parcel having its own tonnage, rock type and grade characteristics. In pit
optimization and later in life-of-mine (LOM) simulation and scheduling,
the parcels represent processing selectivity, however many models are
created in which parcels represent something else.
Firstly, if a model starts out as a sub-blocked model 11 (a partial model),
then it is converted to a regular block model 12, the sub-blocks may end up
being represented in the new model as parcels. The sub-blocks in this case
are a part of an approximate representation of a surface in the model,
rather than as a representation of selectivity.
Secondly, some geostatistical techniques generate multiple parcels
(sometimes more than 100) in each block. Each set of parcels represent a
grade distribution for the block, or a probability distribution of grade for
the block. This is a different usage of parcels, which may bear little
relation to processing selectivity.
Whatever the original reason for the existence of these multiple parcels, it
is important to remember that in pit optimization and later, in life-of-mine
(LOM) simulation, each individual parcel will be assigned to a particular
processing stream or assigned as waste as if it could be completely
segregated from the rest of the material in the block. If the parcels in the
model do not appropriately represent procession selectivity, then the result
may be that when you come to actually mine the plan that was based on
the optimized pit and LOM schedule, you find that you are achieving
lower grades and higher tonnages than expected. The result economically
will be worse than expected.
One solution to this problem is to reduce the number of parcels. This can
be achieved by using software such as Whittle to operate on a model to
combine parcels, so that each block ends up with a smaller number of
larger parcels. The user controls the combination of parcels by setting a
maximum to the number of parcels that will be allowed in any block of the
resultant model. A better solution is to use a model in which the parcels
have been created by the geostatistician to properly represent individually
selectable unit of material, for the purposes of pit optimization and LOM
scheduling.
11
Sub-Block Model - A model in which some blocks are split up into smaller blocks,
often to provide greater precision at contacts.
12
Regular Model - A model in which all blocks are exactly the same shape and size, with
no sub-blocks.
Create a Sensitivity Work model
If the selective mining model is very large, it can lead to long processing
times and slow analysis. If this is the case, then for the purposes of
performing high-level analysis and sensitivity analysis, a smaller model
should be produced, which will process much more quickly. This can be
achieved in Whittle by “re-blocking” the selective mining model,
combining blocks by a factor of 2 in each direction.
Most of the analysis work can be done using this model, which makes it
very quick. During this work you will home in on a design that best meets
your corporate aims. You can then do a final check on the design by
repeating the final simulations on the design model. It is unlikely that you
will find that there is any significant change.
Estimate the general size of the Ultimate Pit
Set up the base case economics

You need a starting point for prices, costs and recoveries. These need not
be too accurate or detailed at this point. For example, if the recovery is
expected to be non-linear, you can either use an average value or use a
grade threshold to simulate the non-linearity approximately.
In establishing costs, some assumptions will have to be made about the
eventual size of the pit.
Set up the slope requirements

Use the average slopes, including safety berms but not haul roads at this
stage, because you do not yet know where the haul roads will be.
Produce a set of pit shells

Rather than generating one optimal pit, generate a set of pit shells using
the revenue factor parameterization technique (refer to the Pit
Optimization section for details). This process provides a database of pits
which are used to choose final pits and pushback designs for a broad range
of economic conditions. Use revenue factors in the range 0.2 to 1.5 with
100 steps. The very low factor is required in order to generate small
internal pit shells which can be used for scheduling. All the pit shells are
useful for performing various kinds of sensitivity analysis and for the
generation of benchmark schedules.
Do Best and Worst case simulations

Plot graphs of the NPVs for Best and Worst case simulations of all the pit
shells and see how much the two curves differ. If they do not differ by
more than two or three per cent, then the sequence of mining is
unimportant, and much of what follows can be ignored. In the more
normal case, where they differ by twenty or more per cent, the two curves
will peak at different pit sizes. Although you will not be able to mine like
the Best case simulation, you can expect to get fairly close to its NPV with
suitable scheduling.
Choose a pit outline which lies between the two peaks, but is closer to the
Best case peak. Let us call this pit shell the “working shell”.
If this shell is significantly different from the pit size you assumed when
setting up the base case economics, adjust the base case economics and
repeat the above work.
Slope sensitivity
At an early stage of analysis, you may only have a rough idea of how steep
the slopes can be. It is useful to know in advance just how sensitive the
economics of the operation are to the pit slopes. You can check the
approximate effect on NPV of changes in the pit slopes, by rerunning the
pit optimization several times, each time with different pit slope settings.
By rerunning the graphs for the Best and Worst case simulations and
comparing the results to those for the original slope settings, you will be
able to determine the sensitivity of NPV to the pit slopes.
You may also have alternatives available as to pit slope angles. For
example, it is sometimes possible, by using techniques such as cable
bolting, to increase the pit slopes safely.
You can check the approximate effect on NPV of increasing the pit slopes
by, say, five degrees, increasing the mining cost by an amount
commensurate with the rock-bolting costs, and re-running the above
graphs. This will allow you to decide whether it is economic to use cable
bolting.
Roughly design the haul roads for the working shell

Examine the shape of the working shell and decide where the haul roads
are going to go.
Set up the slopes more accurately, with allowance for the haul roads where
required.
Repeat the pit shell generation, simulation and the production of the graph.
Again choose a working shell.
Introduce pushbacks
If the expected mine life is going to be more than two or three years, and
the pit is physically big enough, the use of pushbacks will probably
increase the pit value and allow a more constant stripping ratio.
Examine the layout of the working shell and the shells within it. Choose
one, two or three shells which could make reasonable intermediate
pushbacks. Here the concern is mining width. Providing the separation of
shells is sufficient round, say eighty per cent of their circumference, don’t
worry at this point if it is too narrow elsewhere, this can be fixed later.
Through simulations plot a graph showing NPVs for Best, Specified (with
the pushbacks you have chosen) and Worst cases for several pit shells
either side of the current working shell.
Do this both with schedule optimization for improved NPV and for
improved balance. How close are the NPV values to the Best case NPV
values?
Does the working shell still look the best?
If it doesn’t, re-design the pushbacks for a new working shell, and produce
the graph again.
Experiment with different numbers of pushbacks. If increasing the
number of pushbacks increases the NPV only a little, it may be wise to use
the smaller number of pushbacks. This is because:
• Wider pushbacks require less adjustment later, and adjustment always
reduces the apparent value of the pit.
• It costs money to effect a pushback, and unless you have carefully

adjusted the cost models to reflect it, there will be a unmeasured
differential in the values of scenarios with fewer pushbacks compared
with those with more pushbacks.
Some issues to consider at this time:

• Is the processing capacity or mining capacity consistently
underutilized? If so, there is a mismatch of capacities and you should
reconsider your assumptions / designs.
• Are there a few periods in which the processing capacity is not fully
utilized? If so, you may be able to overcome this by increasing the
mining rate temporarily (contract mining for example) or by choosing
different pushbacks or by introducing buffer stockpiles.
• Do the mining rates vary wildly from one period to the next? This is
rarely desirable, as it means that a large mining fleet is often
underutilized, and the cost of underutilization may not be adequately
modeled in the simulation. The problem may be overcome by
choosing different pushbacks, or by making appropriate adjustments
to the cost model so that the schedule optimizer produced a more
appropriate schedule.
Check the work with the selective model
Re-run your final version of the above work using the pit design model
rather than the sensitivity work model. There will usually be very little
change (1% to 2%) to any of the key figures.
Adjust the minimum mining width
Using the selective mining model and the pushbacks you have established,
run the Whittle Mining Width module to adjust the mining widths before
re-running again. There will be a loss in value, but it should not be
anything like as big as the gain made by using pushbacks in the first place.
Do the final design
You now have a final pit and one or more pushbacks which you can use as
guides in using the final design. This will usually be done in your GMP.
Sensitivity Analysis and What-If Analysis

The need for sensitivity analysis and what-if analysis cannot be over-
emphasized. The more you do, the better your design and long term
schedule will be.
Sensitivity analysis is performed in order to determine the overall impact
of variance in major input variables, such as grade, commodity price and
costs. What-if analysis is used to examine alternative operational and
investment scenarios.
The whole design process is iterative. Do not imagine that you create a
geological model, create a value model, optimize it and then do the final
design.
Much of what we discuss from now on will relate to sensitivity work, but,
before we begin, there are two aspects of sensitivity work which are worth
emphasizing.
Optimization is important in sensitivity work
Although an optimized outline and the corresponding detailed pit design

are not the same, they do have a close relationship. Consequently,
provided you are using a mathematical optimizer rather than an
approximation, it is not necessary to do two detailed pit designs in order to
compare the values of two optimal outlines for different conditions.
Because true optimization is objective and single-valued, it is quite
reasonable to take note of small value differences due to, say, changing the
slopes by a few degrees or changing the price of gold by $5. This is not
true when designs are done by hand, because an engineer would probably
produce different designs on different days, without any change of slopes
or price. Two engineers would certainly produce different designs for the
same conditions.
The main sensitivity is to economic uncertainty
The size and shape of an ultimate pit outline is affected more by the
economic conditions when mining ends than the economic conditions
when mining starts. If the mine life is to be only a year or two, then we
can probably predict the economic conditions reasonably well. Otherwise
we have a problem.
We can see from the formula for a block value 13:

VALUE = (METAL*RECOVERY*PRICE - ORE*COSTP) -
ROCK*COSTM
that there are three relevant economic variables.
These are PRICE, COSTP and COSTM. Sensitivity to all of these must
be explored.
What-if Analysis
There are many operational alternatives which can be checked by

performing what-if analysis. Here we give just three examples.
Is the processing plant the right size?

You can quickly check the effect of different processing plant sizes by re-
running simulations with different throughputs and processing costs. This
should always be done with schedule optimization. Of course you have to
allow for the different construction costs of different sizes of processing
plant.
If the change looks promising, you should check if it would have an effect
on the best pit size.
Should we build a second processing plant later?

This is very similar to the previous check.
The pit is restricted by some infrastructure - should we move it?

This is a bit more complicated to check because you have to produce new
pit shells without the obstruction, but most of the work can be done by
repeating previous runs, which is very easy.
If, at this stage you find that you have to add a significant amount of waste
to the pit, then the amount by which you laid back the slopes was
insufficient, and you should go back and repeat some of the work above,
otherwise the pit will be deeper than it should be.
13
Refer to the section “Calculating Block Values for Pit Optimization” for an explanation
of the equation and terms.
Sensitivity Analysis in Strategic Mine Planning

Originally presented as:
Whittle, D, 2000, Proteus Environment: Sensitivity Work Made Easy, in

Proceedings Whittle North American Strategic Mine Planning
Conference, (Breckenridge, Colorado)
Abstract
There are many inputs to the process of designing an open cut mine and
uncertainty in the value of any of these inputs leads to uncertainty in the
economic outcomes. For example, a change in one input, such as the
commodity price, can have a direct influence on the economics of resource
exploitation.
This paper provides general discussion of how Whittle software can be

used to address the two questions:
• What is the impact of input uncertainly on the project?

and,
• What, if anything, should be done about it?
The first question is answered by performing one of several forms of

sensitivity analysis. This involves varying the inputs to the design process
and measuring the impact on the value of the project. This sort of analysis
is easily achieved using the Whittle package and various techniques are
presented.
The second question is dealt with by designing and testing a number of

different scenarios, which involve one of the following strategies:
• Take steps to reduce the uncertainty.
• Design in such a way as to reduce the impact of the uncertainty.
• Tolerate the uncertainty and accept the associated risks.
Measuring the Impact of Input Uncertainty on the Project

Various forms of sensitivity analysis can be performed in order to measure
the impact of input uncertainty. They include:
Spider diagrams.
Single or multi-variable sensitivity analysis.
The McRostie/Whittle method for determining probability distributions

for project Net Present Value (NPV).
Examples of these forms of analysis are given below.
Spider Diagrams
A spider diagram allows the rapid testing of a variety of inputs, to

determine which ones the project value is most sensitive to. The example
shown in Figure 9 tests the sensitivity of a variety of inputs. The base case
is the centre of the spider, and each of the legs represents a simulation in
which a variable is changed plus or minus a fixed percentage. In this
example, the inputs were varied plus and minus 10%. The diagram clearly
shows that, in this example, the processing throughput limit to the
processing plant is the input to which project value is most sensitive.
Figure 9: A spider diagram, created by Whittle. To create this graph, it is

necessary to produce 15 life-of-mine schedules and graph selected results.
These operations are carried out by Whittle. Once the basic operational
scenario has been built, the user need only specify the parameters that are
to be tested in the spider diagram.
Single or Multi-variable Sensitivity Analysis
Those inputs that are deserving of further investigation can be tested in

detail by running multiple scenarios, for a range of different values of the
input. An example of this is shown in Figure 10.
Figure 10: Sensitivity analysis for the recovery of sulphide rock in the
processing plant. The recovery was varied in steps from 70% to 96%. For
each of the 14 scenarios, Whittle produced a life of mine schedule,
complete with recalculation of the cut-offs, and recalculation of discounted
cashflows. The graph, which has been produced by Whittle, shows the
result in terms of the total ore tonnes and NPV for the mine.
The McRostie/Whittle Determination of Probability Distributions for Project NPV
McRostie and Whittle (1999) determined a method which utilized the

scenario branching capabilities of Whittle to produce results that could be
graphed to show the probability distribution of project values, depending
on a number of uncertain inputs. The statistical concepts relied upon by
McRostie and Whittle are comprehensively described in Gentry & O’Neil
(1984). A summary of McRostie and Whittle (1999) is given below.
This probabilistic approach to risk analysis is extremely useful as it gives

not only a central NPV estimate, but also provides a range of NPV and the
likelihood of the project falling within that estimate. This approach is
preferable to producing a spot estimate of a project’s worth, and, using the
tree structure in Whittle, risk that is associated with the assumed
geological, geotechnical and operational limitations and environment can
be evaluated simultaneously.
To study the concept, we will use a simple example that is derived from
the Whittle tutorial data set. The simple example presented here uses only
27 tests, and so provides very rough results. Tests of 125 or more are
recommended if a reasonable estimate of the final distribution is to be
made.
The first step in determining the risk associated with the operation is to
determine the subjective probability distribution of each major risk factor,
including the geological, geotechnical and operational
limitations/environment.
Table 1: Subjective Probability Distribution of the Resource Model
Model
Name Probability Notes
Model A 20% Simulated by removing last 12 benches
of the model.
Model B 60% Simulated by removing last 6 benches
of the model.
Model C 20% Complete model
Sum: 100%
Table 2: Subjective Probability Distribution of Geotechnical Model
Slope Name Probability Notes

Geotechnical A 15% Shallow slopes, 41°
Geotechnical B 70% Normal slopes, 45°
Geotechnical C 15% Steep slopes, 49°
Sum: 100%
Table 3: Subjective Probability Distribution of Operational Limitation /

Environment Risk Factors
Name Probability Notes

Operational A 25% Low gold price (US$300/oz.)
T Operational B 50% Current14 gold price
h (US$400/oz.)
e Operational C 25% High gold price (US$500/oz.)
Sum: 100%
The probability of each result is calculated by multiplying together the

subjective probabilities of each node that contributed to the result. For
14 The current gold price indicates the price at the time the Whittle tutorial data set was created, not the current gold price at the time of
writing.
example, the first branch shown in Figure 11 consists of a Block Model

(20%), a Slope Set (15%) and the Pit Shell/Scenario/Analysis combination
(25%) giving a probability for the result of 0.75%.
Figure 11: Probabilistic Risk Analysis Using Whittle. This screen dump
shows some expanded and some collapsed branches of the analysis tree.
In total there are 27 analyses (not all visible here), representing all possible
combinations of the three uncertain inputs.
The probability of each result, and the NPV result itself were entered into
a spreadsheet from which the weighted mean and standard deviation can
be calculated.
The weighted mean was calculated by summing the product of each NPV
result and its associated calculated probability. The standard deviation
was calculated using Equation 1.
Equation 1: Standard deviation for infinite population.
σ = ∑(X 2
p( X )) − X 2
Graphing the cumulative probability versus NPV produces an unusual

curve (see Figure 12) that does not look much like the classic S curve for
cumulative normal distributions. The strange shape of the curve is due to
the small number of NPV results and because of the discrete form of the
input variables.
Cumulative Probability
3x3x3 data set
1.00
0.90
0.80
0.70
0.60
Probability
0.50
0.40
0.30
0.20
0.10
0.00
- 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000
NPV
Figure 12: Cumulative Probability for Simple 3x3x3 Data Set (27 Data
Points)
A more advanced test was conducted which consisted of five block

models, five different slope sets and five different gold prices, producing a
total of 125 NPV results. This test produced a very interesting cumulative
probability curve (see Figure 13) that clearly has five smaller curves
combined with a skewed cumulative S curve. To highlight the underlying
S curve, the data was smoothed by extracting the mid-point of each
subcurve and fitting a curve to the result (see Figure 14).
Cumulative Prob
5x5x5 Data set
1.00
95.875%
81.850%
0.80
0.60
Probability
53.200%
0.40
0.20
18.600%
3.950%
0.00
- 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000
NPV
Figure 13: Cumulative Probability for More Complicated 5x5x5 Data Set
(125 Data Points)
C um ulative P ro bability S m o oth ed

5x5x5 D ata set
1 1
0.95875
0.9
0.8185
0.8
0.7
0.6
Probability
0.532
0.5
0.4
0.3
0.2 0.186
0.1
0.0395
0 0
0 5000000 10000000 15000000 20000000 25000000
NPV
Figure 14: Smoothed Cumulative Probability of 5x5x5 Data Set
Once a curve like the one presented in Figure 12 has been plotted, rough
estimates as to the risk involved in the project may be made. Our sample
shows a mode of approximately $9m, with NPV values 25% either side of
the mode of $6m and $13m.
Such a range is much more useful than a spot estimate when evaluating
projects.
Strategies for Dealing with the Uncertainty
Once you have determined the impact of uncertain inputs on the project
value, you can determine a strategy to deal with it. The alternatives are:
• Take steps to reduce the uncertainty.
• Design in such a way as to reduce the impact of the uncertainty.
• Tolerate the uncertainty and accept the associated risks.
These are discussed below.
Taking Steps to Reduce the Uncertainty

Figure 15 shows a model of the relationship between the uncertain inputs,
the economic outcomes, and the decisions/investments that can be made to
reduce input uncertainty.
Details of the model are as follows:
• Ellipses represent uncertain inputs to the design process. For example,

the geological model is a statistical estimate of the real mineralization,
based on sample data.
• Rectangles represent decisions or investments that can be made in

order to reduce the uncertainty associated with the inputs to the design
process. For example, the uncertainty of the geological model can be
reduced by investing in more drilling (geological research).
• The round-edged rectangles are intermediate and ultimate results of

the various elements in the model. For example, an increase in
geological research (drilling) will increase design costs.
Figure 15: Influence diagram showing uncertain values (ellipses) and

decisions (rectangles) which influence the uncertain values and lead to
outcomes (rounded rectangles). It indicates, for example, that the
uncertainly of the geological model can be reduced by increasing
expenditure on geological research.
Four categories of uncertain inputs have been chosen for the model:
• Geological
• Geotechnical
• Operational, and
• Product Price.
Apart from being generally useful categories, they also happen to map
well to the design process inherent in the Whittle package. This
relationship is represented in Figure 16 and Figure 17.
Figure 16: Mapping of the uncertain inputs of the design process to the
artefacts of the planning process
Figure 17: The planning process artefacts as they are represented in the
Whittle
With the exception of product price, the uncertainty of all of the inputs can
be influenced by the degree of research into the field. Taken to its logical
extreme, it is possible to virtually eliminate the uncertainly of all inputs,
except price, by investing more money in the appropriate research. Price
is the exception, because it is something that does not yet exist. No matter
how much money is invested into research of future prices, a great deal of
its uncertainty will remain with you.
With this model in mind, it is possible to test cases in Whittle whereby the
impact of an uncertainty-reducing strategy can be tested.
For example, you could create a hypothetical drilling campaign model.

The key elements of the model for the purpose of the analysis are the cost
of the campaign, and an understanding of what the campaign will achieve
in terms of reducing the uncertainty of the geological model. By building
the hypothetical drilling campaign into the Whittle model, it is possible to
evaluate the costs and benefits of the strategy.
Design to Reduce the Impact of the Uncertainty

Design strategies can be used to reduce the impact of uncertainty.
Examples are:
• The use of strategic pushbacks 15. In designing pushbacks, there are

three general areas of consideration: operational, tactical and strategic.
Strategic considerations include the establishment of options in the
future. For example, it may be that the most efficient way to mine
from an operational point of view is to bench-mine out to the ultimate
pit. However, for strategic reasons, it may well be wise to build in
pushbacks that, when completed, give the mine designer the option of
redesigning the ultimate pit, with the benefit of more up-to-date
information.
• The use of contract mining. If mining is conducted directly by the

mine owner, then the company itself will be subject to all the
uncertainties and risks associated with fleet ownership and
management and employment issues. Contract mining externalizes
these factors and potentially reduces the uncertainty associated with
future costs (depending on the structure of the contract).
• The use of hedging. Hedging can be used to reduce the uncertainty

associated with the price that will be obtained for the product of the
mine.
In all cases, it is possible to simulate these scenarios using Whittle

package and measure the impact on project value and risk. This is
achieved using the scenario branching capabilities of Whittle.
Tolerate the Uncertainty and Accept the Associated Risks

It should not be assumed that the elimination of risk (at the expense of
project value) is the ultimate goal. The degree of risk the company is
prepared to expose itself to will depend to a large extent on the decision-
making behavior (Whittle 1997).
Having measured the project risk using sensitivity analysis, and having
determined the costs of reducing that risk, it may well be that the best
strategy is to tolerate the risk.
15
Alternatively, this can be thought of as the consideration of strategic issues when
choosing pushbacks.
Introduction to Optimization
What is Meant by Optimization?

“Optimization” is a process in which something is made as effective,
perfect or useful as possible. The term can be used in a general sense to
mean a process through which an outcome is “optimized” through the
adjustment of inputs, structures or methods. You will hear the term used in
the mining domain often. For example, an optimization can be performed
on a Cyclone: In such a process, the investigator seeks to determine how
the Cyclone can be operated in order to facilitate best possible separation
of materials, at minimum cost.
Think of “Optimization” generally as a process to “make something
better”.
The term also has a mathematical definition: which means to find the
optimal value of a function, often subject to constraints.
“Optimal” in mathematical terms means one of the following:
Minimal – The lowest possible value. If you were to optimize total cost,
you would be seeking to minimize it.
Maximal – The highest possible value. If you were to optimize total profit,
you would be seeking to maximize it.
Models for Optimization

A mathematical model for optimization has the following components:
1. An Objective Function – The objective function is a mathematical
expression, or some other kind of mathematical model which
calculates that thing which is to be optimized. If the objective function
calculates profit then the optimization process will find the maximum
profit through the objective function. There is only one objective
function in an optimization problem.
2. Decision Variables – To optimize the objective function, an

optimization process must find the appropriate settings for one or more
decision variables. In algebra terms, the decision variables are
independent, the objective is a dependent variable. There may be one
or many decision variables in an optimization problem.
3. Constraints – The settings of the decision variables are subject to

constraints, both on the decision variables themselves, and on
functions of the decision variables.
That’s a general description, which might seem a little esoteric. Below is

simple example which will be used to illustrate the concepts.
Simple Optimization Example

Many optimization problems are extremely complex. Pit optimization and
schedule optimization employ advanced techniques and complex models
to achieve a result. However, all optimization problems have some

characteristics in common. To illustrate these characteristics, it is useful to
work through a simple example. The example set out below uses only
high-school algebra to find a solution.
Consider that you are a manufacturer of something (for example,
vegetable peelers), which you sell to wholesalers. The quantity you sell is
dependent on the price you set. If your price goes up, the quantity you can
sell will go down. At a price of $0.20 you can sell 13,000 units per week.
At a price of $0.50 cents you can sell only 4,000 units per week. Let us
presume that this relationship between price and volume is linear, so you
can calculate the units sold with the equation Units = 19,000-
Price*30,000 16.
Your costs are $0.01 per unit plus $1,000 per week.
C(cost) = 1,000+0.01*U(units).
R(revenue) = P(price)*U
Pr(profit) = R–C
U = 19000-30000*P
The question is: What price should you set, in order to maximize weekly
profit?
The objective function to maximize is:
Pr = R – C
→ Pr = PU – (1000+0.01*U)
→ Pr = P*(19000-30000P) – (1,000+0.01*(19000-30000P))
→ Pr = -30000P2+19300P-1190
The Profit (Pr) is the thing that is to be optimized (maximized in this case).
The decision variable (only one in this case) is Price (P).
Constraints include such things as the fact that one cannot set a negative
price, nor can you produce a negative quantity, though in this simple case,
such constraints are superfluous.
You may recognize the structure of the objective function as a quadratic
trinomial. That is a coincidence, it happens to describe to relationship
between the decision variable and the objective function in this case.
Optimization problems can take many forms, but they all have an
objective function, decision variables and constraints.
Now, let us solve this simple optimization problem. This one is so simple,
we can enumerate to work out an approximate answer. Enumeration
means to try all possible values of the decision variable(s), and find the
one(s) that yield the optimal result.
Reading from Table 4, you can see that a price of approximately 0.30
yields the highest profit.
Table 4: Enumeration of the Profit Maximization problem
Price Units Revenue Cost Profit

0.00 19000 0 1190 -1190
16
You can calculate this using simultaneous equations and the linear expression form
Y=aX+c, where Y is the number of units sold and X is the Price.
0.05 17500 875 1175 -300

0.10 16000 1600 1160 440
0.15 14500 2175 1145 1030
0.20 13000 2600 1130 1470
0.25 11500 2875 1115 1760
0.30 10000 3000 1100 1900
0.35 8500 2975 1085 1890
0.40 7000 2800 1070 1730
0.45 5500 2475 1055 1420
0.50 4000 2000 1040 960
0.55 2500 1375 1025 350
0.60 1000 600 1010 -410
0.65 -500 -325 995 -1320
Profit
2500
2000
1500
1000
500 Profit
0
0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70
-500
-1000
-1500
Figure 18: Profit charted against Price.
There can be more than one way to finds an optimal solution. In this
simple case, we can apply some algebra to solve it, by finding the value of
P at which the derivative of the objective function is equal to zero. That
yields a precise answer of 0.32617.
0 = -2*30000P+19300
→ P = 0.32617
The Profit (Pr) for P = 0.32617 is:
Pr = -30000*(0.32617)2+19300*0.32617-1190
→ Pr = 1913.47
We could also apply a step and stride routine, to try different values of P,
in order to find the peak of the graph, which corresponds to the highest
value of Pr.
Some further observations based in part on this optimization example:
1. We made some assumptions about the behavior of sales volume
(Units) with respect to price. In reality, we could probably not expect
such highly predictable market behavior. The expression [U = 19000-
30000*P] is simply a model that approximates reality.
Would you really expect to sell exactly 19000 units if you set the price
to zero?
Would sales volume become zero at a price of exactly 0.6333?
It can be said for all models – that they are simplified representations
of reality. We can’t expect reality to behave exactly like a model
especially when you get to extreme values. We can use models like
this to our benefit, but should be ever mindful of their limitations.
2. In this example, there is only one correct answer: 0.32617. There is no

other setting of P what will yield the maximum profit of 1913.47. As
you can probably intuit, if you were to set the price any lower or
higher than the range shown in Table 4, the profits would fall. Refer to
Figure 18 which illustrates this well. In the strategic mine planning
domain, pit optimization, using the Lerchs Grossmann method, is an
example of an optimization problem for which there can only one
correct answer.
For other types of optimization problems there may be more than one
optimal solution. That is, two or more settings of decision variables,
that yield exactly the same optimal objective function. In the strategic
mine planning domain, blend optimization is an example of an
optimization problem for which it is possible for two or more settings
of decision variables to yield exactly the same optimal objective
function.
3. Once we have an objective function defined, we may be able to apply

more than one method for finding an optimal solution. We provided
examples of enumeration, utilizing a derivative and we discussed
briefly step and stride. These are some of the many approaches to
optimization that may be applicable to different types of optimization
problems.
Conclusions
We worked through a very simple optimization problem. We will consider
much more complex cases in the following sections, but they will share in
common the following:
1. An objective function, which calculates the variable which is to be
optimized (minimized or maximized).
2. Decision variables – which are variables that influence the objective

function, or to put it another way, the objective is a function of the
decision variable.
3. Constraints – Decision variables and functions of decision variables

can generally only work within certain ranges. For example, you
shouldn’t have negative prices and you can’t manufacture negative
quantities of goods.
In this case, the problem is simple and we can apply some simple
techniques to find the optimal solution:
1. Enumeration
2. By solving for P when the derivative is zero
3. By a step and stride routine.
We will discuss other approaches to optimization in the following sections

of this book.
Open Pit Optimization

What is Meant by Open Pit Optimization?

Let us now look in more detail at the problem of pit outline optimization.
A definition of the problem is as follows:
Objective Function – maximization of the profit yielded by the pit,
calculated as the cumulative value of all the material (ore and waste)
which is inside the pit.
Decision Variables – the inclusion or exclusion of material in the pit (and
consequently, the outline of the pit).
Constraints – pit slopes must be obeyed.
Those definitions are not mathematically precise, and they must become
so before they can be used to formulate a mathematical solution. However,
for the moment, these general definitions will do. Please bear them in
mind as you read the following sections.
Definition of the Optimal Outline
Consider Figure 19.
Figure 19: Typical Ore Body
For any orebody model there are many feasible pit outlines. In fact the
number of technically feasible outlines is usually very large.
Any feasible outline has a Dollar Value.
In this context “feasible” means that it obeys safe slope requirements.
(We will discuss haul roads later.)
Dollar Value = Revenues - Costs
Revenues can be calculated from ore tonnages, grades, recoveries and
product price. Price is often the main unknown factor but, in order to
design at all, some price must be assumed.
Costs are much more complicated, and we shall spend more time on them
later. For the moment, we will assume that the costs of mining and
processing are known.
The dollar value of any feasible outline can, in theory, be calculated by

totalling revenues less costs for every cubic meter, or every block, within
the outline.
Note that, as well as the whole outline having a value, any portion of the
pit has a value.
The optimal outline is defined as the one with the highest dollar value.
Nothing can be added to an optimal outline which will increase the value
without breaking the slope constraints. Nothing can be removed from an
optimal outline which will increase the value without breaking the slope
constraints.
In other words, we mine everything which is “worth mining”.
What Affects the Optimal Outline for a Given Ore Body ?
Prices and costs

In general - if the product price goes up, the optimal pit gets bigger.
In general - if costs go up, the optimal pit gets smaller.
Slopes
In general - if we use steeper slopes, the optimal pit gets deeper.
Once The Above Factors Are Fixed - So is The Optimal Pit
We may not know the outline, but it is fixed, and, if we exclude pit
extensions of exactly zero value, there is only one optimal outline.
To prove this, let us postulate that there are two optimal outlines for the
same ore body. That is, there are two different outlines which satisfy the
slope constraints and which both have the same total value, which is the
maximum possible total value. If we can prove that this is an
impossibility, then we have proven that there is only one optimal outline.
There are two possible cases.
Figure 20: Disjoint pits
Figure 20 represents the first case. Here the two pits are disjoint, that is,
they do not intersect. This is clearly a nonsense because, if we mine both
pits, we get twice the value of either one, so that neither one could have
been of maximum value (i.e. optimal).
Figure 21: Overlapping pits
In the second case, where the two pits overlap as in Figure 21, we note
that each of the three regions A, B and C have a value, and the value of the
combined pit is
A+B+C
If the two pits are of the same value, then
A+B=B+C
or A+B+C=B+C+C
But C must be positive, otherwise it would not be included in any optimal
pit, so the combined pit has a value greater than B + C. Consequently, the
supposition that two different optimal pits can have the same value is
false.
A Simple Pit Optimization Example

Let us consider a very simple ore body which is rectangular, of constant
grade, and sits beneath a horizontal topography. Let us further assume
that it is of infinite length, so that we do not have to allow for end effects,
and need only consider one section.
Figure 22 shows such an ore body.
surface
1
2
3
4
5
bench level
100 tonnes waste 6
7
8
500 tonnes ore
Figure 22: Simple ore body
Using the quantities indicated in the diagram, we can calculate the

tonnages for the eight possible pit outlines, and the following table shows
these.
Tonnages for possible outlines

Pit 1 2 3 4 5 6 7 8
Ore 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
Waste 100 400 900 1,600 2,500 3,600 4,900 6,400
Total 600 1,400 2,400 3,600 5,000 6,600 8,400 10,400
Note that, although the ore tonnage increases linearly with pit number, the
waste tonnage increases as the square of the pit number.
If we assume that ore is worth $2.00 per tonne and that waste costs $1.00
per tonne to mine and remove, then the following table shows the value of
each pit.
Pit values for ore at $2.00/T and waste at -$1.00/T

Pit 1 2 3 4 5 6 7 8
Value 900 1,600 2,100 2,400 2,500 2,400 2,100 1,600
Clearly, pit 5 has the highest value, but note also that the values of pits 4
and 6 differ only by a small amount from that of pit 5. This is very
important to realise, and is shown graphically in Figure 23.
Figure 23: Pit value against pit size
Note that the graph goes through a smooth maximum. Although this is an
artificial example, such a smooth maximum is normal for real ore bodies.
In my experience, a range of ten per cent in pit tonnage usually involves a
range of less than two per cent in pit value. This has a profound effect on
the process of designing pits.
value
B
A
tonnes
Figure 24: The small effect of design changes near the maximum
As you can see from Figure 24, small deviations from a design which is
not optimal (A) can have significant effects on the pit value. Thus
generations of mining engineers have experimented with small changes to
try to improve their designs. This is quite unnecessary if you start from an
optimal outline (B) where small deviations have only a second order effect
on the value of the pit.
Whatever value you aim to maximize, if you work near the maximum, the
value you achieve becomes insensitive to the pit outline.
This fact is one of the most important in the area of pit design.
What Pit Outline Optimization Methods Are Available?

All currently available methods attempt to find the optimal outline in
terms of a block model consisting of a regular matrix of blocks in three
dimensions. The different methods try to find the list of blocks which has
the maximum possible total value, while still obeying the slope
constraints.
The enormity of this problem is seldom appreciated.
Enumeration
Consider a trivial model with only one section and ten benches of ten
blocks, as is shown in Figure 25.
10
10
100 Blocks
Figure 25: A trivial model
If we take a very simple-minded approach, there are 100 blocks and each
can either be mined or not mined. This gives 2100 or 1030 alternatives!
Even if a computer could check out an alternative every microsecond, it
would still take three million times the age of the universe to check them
all! If we start in any position at one end and then go up one, down one,
or stay at the same level, then there are about 10x39, or 200,000,
alternatives. Actually it is 156,629 as the table below shows. This is
because the number of alternatives at the top and bottom is not 3.
Number of different ways of reaching a particular depth in each column

Depth 1 2 3 4 5 6 7 8 9 10
0 1 2 5 13 35 96 267 750 2123 6046
1 1 3 8 22 61 171 483 1373 3923 11257
2 1 3 9 26 75 216 623 1800 5211 15114
3 1 3 9 27 80 236 694 2038 5980 17540
4 1 3 9 27 81 242 721 2142 6349 18782
5 1 3 9 27 81 243 727 2169 6453 19151
6 1 3 9 27 81 242 721 2142 6349 18782
7 1 3 9 27 80 236 694 2038 5980 17540
8 1 3 9 26 75 216 623 1800 5211 15114
9 1 3 8 22 61 171 483 1373 3923 11257
10 1 2 5 13 35 96 267 750 2123 6046
Total: 156629
156,629 can be handled by a computer - but if we extend the model to 10
sections, as in Figure 26, then we have about 10x299 or 1030 alternatives
and three million times the age of the universe again, and this is still a very
small model of only one thousand blocks.
10
10
10
1000 Blocks
Figure 26: A very small model
Conclusion - Enumeration is useless.
Floating Cone
This is a step up from pure enumeration - a “heuristic” best described as a

guided trial and error.
Floating cone works by repeatedly searching for ore blocks and then
checking if the blocks in the inverted slope cone which sits on the ore
block has a total value which is positive. If it is positive, the cone is
“mined” and the search continues. When no more positive cones can be
found, the blocks “mined” constitute the optimal pit. Unfortunately,
programs that use this approach can encounter problems.
Ignoring co-operation - mining too little.
Figure 27: Ore bodies and extraction cones
With the ore and waste values shown in Figure 27, a floating cone
program would examine the left-hand ore and decide that the value of the
cone was 100-80-30=-10. It would decide not to mine the ore. It would
then make a similar decision for the right-hand ore body and would
conclude that there was nothing to mine. In fact, we can see that, if we
mine both ore bodies, the mine has a total value of +10. Although all sorts
of tricks are resorted to, floating cone programs cannot really get around
this problem without using enumeration, and we know that that is useless.
Now, totally disjoint ore bodies are not common. However, co-operation
of this sort between different protuberances of an ore body will frequently
make a significant difference to the outline and value of a pit.
Mining too much - pulling up the waste.
Figure 28: Ore bodies and extraction cones
With the ore bodies shown in Figure 28, a floating cone program will first
examine the +40 ore body and decide that it is not worth mining. It will
then examine the +200 ore body and will decide that it is very well worth
mining (200-80-30=+90). It will remove it from the model, together with
the waste which must be removed to expose it.
The situation is then as shown in Figure 29.
Figure 29: Situation after first ore body is removed
If the program goes back to the top of the model and starts searching for
ore again, then the final result will be that the +40 and +200 ore bodies
will be mined and the +60 ore body will not. This would be correct.
However, in computational terms, it can be very expensive to go back to
the top of the model each time any ore is removed and some floating cone
programs continue downwards in their search in order to save time.
In this case the next ore body examined is the +60 one. The current
contents of its cone are 60-70+40-20=+10, so the program mines out this
cone, which is wrong. The +60 ore body should never be mined because -
70 of waste has to be removed to uncover it.
The main advantage of the floating cone method is that it is easy to
understand. However, it can overlook co-operation and can use the value
of ore to pay for the mining of waste below that ore.
Two-dimensional Lerchs-Grossmann
Lerchs and Grossmann published two algorithms for open pit

optimization. One was a very simple method for optimizing a single
section.
It has two main limitations, and they are fatal.
The first is that it can only handle slopes which can be produced by
repeatedly moving one block up and one block across. Thus, to change
the slopes, you have to change the block dimensions. In the original
publication, the slopes had to be the same in both directions. Although a
variant has since been published which allows one up and two across on
one side, the slope modelling is still very poor, even if you have control
over the block proportions.
The second restriction is that the optimization works on each section
independently and adjacent sections usually do not join up. This leads to
considerable manual adjustment when doing a detailed design. In no
sense does it arrive at an over-all optimal outline.
Two-and-a-half Dimensional Lerchs-Grossmann
Many people have extended the two-dimensional method by running it

North-South and East-West and trying to join the sections up that way.
This has been only partially successful. It still does not arrive at an
optimal solution, and the slope modelling suffers from the same
restrictions as does the original two-dimensional method.
In addition, slopes are always too steep in the NW-SE and NE-SW
directions. As can be seen below, one block up and one across in the
North, South, East and West directions from a single valuable block
produces a diamond shaped pit rather than a circular pit. If the slopes E-
W and N-S are 45 degrees, then the slopes NW-SE and NE-SW are about
55 degrees. This illustrated in Figure 30.
Figure 30: This diagram shows the outline of a pit generated by stepping one up
and one across, starting from a single ore block and going up five
benches. The numbers show the levels at which each step-out occurs.
Ernest Koenigsberg - 17th APCOM
This method is similar to the two-and-a-half dimensional Lerchs-

Grossmann method, but it works on both axes simultaneously and
achieves better joins between the sections.
It suffers from exactly the same slope constraints as the two-and-a-half
dimensional method.
Three-dimensional Lerchs-Grossmann and network flow
In the 1960s Lerchs and Grossmann published a graph theory method, and
T.B. Johnson published a network flow method for true three-dimensional
optimization.
Both methods guarantee to find the optimal pit in three dimensions. Both
- naturally - give the same results. Both select a sub-set of blocks which
gives the absolute maximum total value whilst obeying the slope
requirements. Both are difficult to program for a production environment,
where there are large numbers of blocks and variable slopes.
The Lerchs-Grossmann method is the one most used, and it has been
programmed commercially by about four different groups. The programs
they produced differ in their ability to handle slope variations and differ in
the machines on which they will run.
Despite being difficult to program, the Lerchs-Grossmann method is
relatively easy to explain and demonstrate, at least in general terms.
The method works with only two types of information. These are the
block values and what Lerchs and Grossmann call “arcs”.
An arc is a relationship between two blocks. An arc from block A to
block B indicates that, if A is to be mined, then B must be mined to expose
A. The reverse is not true. If B is to be mined, block A may or may not
be mined. See Figure 31.
B
Arc from A to B
A
Figure 31: An arc
In most optimization packages, all the slope requirements are translated

into a (large) number of block relationships in the form of arcs. It might
appear that we require an arc from each block to every block which is
“above” it in a mining sense, but there is no need to have so many,
because arcs can “chain”. That is, an arc from A to B and an arc from B to
C ensure that C is mined if A is mined, despite there being no arc from A
to C, as is shown in Figure 32.
A
Figure 32: Chaining of arcs
In Figure 33, three arcs used repeatedly can ensure the mining of all
required blocks for the slope indicated when the bottom left-hand block is
mined.
Figure 33: Required arcs for a desired slope
When this idea is extended to both sides, and to three dimensions, we

typically need of the order of 50 arcs for each block, to ensure a slope
accuracy of about one degree. Exact slope accuracy can never be
achieved, because optimization cannot “mine” part of a block.
The Lerchs-Grossmann three-dimensional optimization method achieves
its aim by manipulating the block values and the arcs. It uses no other
information. In other words, except for the information given by the arcs,
it “knows” nothing about the positions of the blocks - nor indeed about
mining.
Therefore, in order to demonstrate how the method works, it is merely
necessary to work with a list of blocks and a list of arcs. Whether these
are laid out in one, two or three dimensions, and how many arcs per block
are used, is immaterial.
In order to demonstrate how the Lerchs-Grossmann three-dimensional
method works, we will choose to work in two dimensions, because that is
much easier on paper. Also for simplicity, we will use square blocks and
slopes of 45 degrees, although this is not a requirement for
Lerchs-Grossmann, as was shown by the previous diagram. This allows
us to work with only three arcs per block, as shown in Figure 34.
Figure 34: The effect of chaining with three arcs per block
The Lerchs-Grossmann method flags each block that we currently intend

to mine. During the optimization process, these flags can be turned on and
off many times. A block is flagged to be mined if it currently belongs to a
linked group of blocks that have a total value that is positive. These
groups are called “branches”.
The method repeatedly scans through the blocks looking for blocks that
are flagged to be mined and that have an arc pointing to a block that is not
flagged to be mined. Clearly, this is not a viable situation. The way it
resolves these situations forms the core of the Lerchs-Grossmann method.
The following diagrams take you through such a search.
We start with a two-dimensional model, 17 blocks long and 5 blocks high.

Only three blocks contain potential ore, and they have the values shown.
All other blocks are waste and have the value -1.0.
Step 1: The first arc from a “flagged” block that we find is to a block which is not flagged.
23.9 6.9 23.9
22.9
Step 2: To resolve this, we link the two blocks together.
The total value of the two-block branch is 22.9.
Step 3: 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.
Step 4: We continue in the same way along the bottom bench,and then along the next bench.
(Note that even waste blocks are flagged if they belong to a positive branch.)
Step 5: The next flagged block has an arc to a block which is also flagged.
We don’t create a link for this arc or for the vertical one from
the same block, because nothing has to be resolved.
Step 6: The next arc from a flagged to another flagged block is between two branches.
The procedure is unchanged - we do not insert a link.
Step 7: We continue adding links until we reach the one shown. When we add this link, the branch
total will become -0.1. Because of this ALL the blocks in the branch have their flags turned off.
Step 8: The next arc of interest is from a flagged block to a block which is part of a branch
which is not flagged. Effectively the centre and the right-hand branches
can co-operate in paying for the mining of the common
waste block, which is circled.
23.9 6.9 23.9
15.9 20.8
Step 9: The Lerchs-Grossmann method 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.)
Step 10: The next arc of interest is from a flagged block to a waste block.
Lerchs-Grossmann detects that this 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.
Step 11: Lerchs-Grossmann includes a procedure for breaking the single branch
into two branches by REMOVING a link.
23.9 6.9 23.9
-0.1 -0.1 8.9

Step 12: We 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 a negative branch.
Step 13: This is dealt with in the same way as before, and the left and right-hand
branches are combined into one, with one total value.
Step 14: We continue adding arcs until we reach the situation shown above. The program
would then do another scan for arcs from blocks which are flagged to blocks which
are not flagged. We can see that it will find none, and the optimization is complete.
Lerchs and Grossmann proved that, when no further arcs can be found that
are from a flagged block to a block that is not flagged, then the flagged
blocks constitute the optimal pit. In a real optimization, we would start
the scan again, but visual inspection shows us that this is unnecessary
because it is clear that there can be no flagged blocks with arcs to blocks
which are not flagged.
In this case we have a W shaped pit that contains two ore blocks with a
total value of 47.8 and 47 waste blocks with a total cost of 47. The pit is
thus worth 0.8, and we can see that this is indeed the pit with the
maximum possible value. Note that there are 7 extra blocks which would
have to be removed to uncover the centre ore block which has a value of
only 6.9. It is thus not worth mining.
In real three-dimensional optimizations, there will usually be many scans
of the blocks checking for arcs that have to be resolved. These continue
until a scan occurs in which none have to be resolved, and we know that
the optimization is complete.
Since 1965, when the Lerchs and Grossmann paper was published, other
algorithms have been published which achieve the same result. In general,
they require a smaller number of steps to obtain the optimal outline, but
the steps are more complicated.
Using the Lerchs-Grossmann method with modern PCs and software, the
time taken to do an optimization will frequently be as little as a minute,
and should never be more than an hour or two.
Economic Model for Pit Optimization

Cash Objective
If your objective is to maximize undiscounted cash-flows over the life of
the mine, then the application of Lerchs-Grossmann pit optimization is
perfect – it achieves the maximization of undiscounted cash-flows.
Maximization if undiscounted cash-flows is relatively simple, since the
exercise is completely independent of the mining schedule and mine life.
Cash Pit
This is the pit outline which will yield the highest undiscounted cash
value. The outcome is independent of the mining schedule.
NPV Pit
The pit outline which, combined with a specific schedule, will yield the
maximum NPV.
Optimizing a Pit for NPV Maximization

If you objective is to maximize discounted cash-flows, the you can be said
to have an NPV Objective. Optimizing pit design for an NPV objective is
much more complicated than optimizing for a Cash Objective.
The Lerchs-Grossmann method determines the pit outline which
maximizes undiscounted value. In order to optimize for NPV one must
determine not only the pit outline but also the mining schedule.
This gives rise to what is known as the Circular Problem:
1. In order to optimize the pit outline for an NPV objective, you need to
know the NPV of the individual blocks.
2. In order to know the NPV’s of the individual blocks, you need to know
which ones are included in the pit outline and when they will be mined
and processed (i.e. you need a mining schedule). You cannot produce
a mining schedule without first having the pit outline. See step 1.
Discounted Pit Techniques

This is a class of optimization techniques which seek to overcome the
Circular Problem. It includes the DPS, DBD and NPVS techniques. Each
seeks to modify the Conventional Pit Optimization Technique in order to
seek an NPV Objective. They do this (essentially) by providing
approximations / estimates of block NPV’s.
DBD Technique
The Discounting by Depth (DBD) approach is based on the premise that

material at depth takes longer to reach, and discounting is based on the
vertical position of material in the model. The options are:
1. Discounting applied on a bench-by-bench basis to the block model,
assuming a fixed rate of vertical advance. Note that fixed rate of
vertical advance is an extremely crude approximation of reality, as it
the presumption that all block on a bench will be dealt with in the
same period.
2. Discounting applied on a bench-by-bench basis, assuming a variable

rate of vertical advance. This is an improvement on the fixed rate of
vertical advance method, but still relies on the presumption that all
blocks in a bench are dealt with in the same period.
It is certainly possible to devise simple mathematical methods to calculate

a vertical rate of advance, but the evidence is that in industry, the rate is
determined experimentally, by trying a range of different values, and
seeing which ones yield the best NPV results.
The DBD technique is available in the Whittle software.
NPVS Technique
This is the technique applied in Earthworks NPV Scheduler. The

following information has been interpreted from the help files of NPV
Scheduler. The steps are:
1. Apply conventional pit optimization technique. The pit so produced
provides an outer bound for the final solution.
2. Within the conventional pit and based on a user-defined mining

throughput limit, calculate look-ahead values for every block.
3. Produce a block by block schedule which “mines” each block in turn,

in the descending order of look-ahead value. The block by block
schedule is in fact a series of nested pit, each incrementally bigger pit
differing only by the addition of one block.
4. Evaluate that sequence to calculate the NPV of each nested pit.
5. Choose the pit which maximizes NPV.
This technique will produce a set of nested pits, equal in number to the
number of blocks in the ultimate pit.
The approach is complicated and there are some apparent pitfalls:
1. The calculation of NPV is done on an assumed average mining rate.

This is rarely the controlling factor in an open cut mine.
2. It does not in any way guarantee that the NPV values used to evaluate
the blocks in the generation of the sequence (and consequently in the
generation of the shape of the ultimate pit) bear relation to the actual
NPV values that the blocks have once practical scheduling constraints
have been applied. As a consequence, it could be that the pit produced
by this method is OK if your final schedule tends towards Best Case in
nature, but is inappropriate should your final schedule tend towards
Worst Case in nature.
DPS Technique
The Discounted Pit Shells technique has been developed by Whittle. The
process involves:
1. Apply the Conventional Whittle Technique (see below), thus
producing a realistic mining schedule.
2. Use the mining schedule to determine mining periods for each block in
the model.
3. Based in the mining period, modify the original block model so that it
contains estimates of block NPV.
4. Rerun the Conventional Whittle Technique again to generate a new set

of pitshells.
Note that the block NPV values calculated in step 3 are only used in the
pit optimization stage. Normal discounting procedures are applies during
the simulation and scheduling stage of the Whittle Technique.
The DPS technique should lead to the generation of block NPV estimates
that are far more accurate than those generated by the DBD technique, or
the NPVS technique, as it takes into account the actual style of scheduling
that is applicable to the mine (as applied by the software operator) rather
than a hypothetical one.
The DPS technique is available in the Whittle software.
Conventional Whittle Technique to Seek NPV Objective

A technique has been developed in Whittle software over many years
which has been shown to deliver good results. It applies Lerchs-
Grossmann pit optimization in a modified framework:
1. Conventional Pit Optimization is combined with a pit parameterization

technique (Revenue Factors) to produce a range of pits with different
cost/price ratios. The pits nest, and are useful upon which to base push
back designs, and for sensitivity analysis. Although the pit
parameterization process modifies the block values, the calculation is
based on undiscounted cash values.
2. Simulation and DCF Analysis are performed on a large range of

benchmark and user defined schedules. There are often hundreds of
different schedules performed in a single run, each with a different
final pit, and a different scheduling method. From this it is easy to
determine which pit out of the database provides the highest NPV for
any given scheduling method.
This technique effectively deals with the issue of an NPV Pit being a
different size to a Cash Pit. It does so, by providing NPV evaluations of a
range of Cash Pits, each one optimal for a different cost-price ratio and
each with a different tonnage. The user is able to choose the pit which
yields the highest NPV, for the scheduling method of choice.
The technique does not deal with the issue of any difference in shape
between the NPV Pit and the Cash Pit.
Generation of Nested Pit Shells

Revenue Factor Pit Parameterization

A series of value models can be prepared for a range of product prices.
The outlines obtained by putting these through a pit optimizer would form
a set of nested pits.
In Whittle software we optimize first for infinite price. This can usually
be done in one pass of the structure arcs with special program code, and
thereafter we can exclude all the blocks outside this pit from further
consideration. Next we optimize for the lowest price specified, which
gives us the smallest pit and allows us to exclude all the blocks within it
from further consideration.
After these two initial optimizations, we repeatedly optimize for the price
which is in the middle of the list of prices for the largest number of
undivided blocks. We do this until all prices have been dealt with. For
each optimization we consider only those blocks which lie between the
shells for the nearest prices above and below the target price for which
shells exist. We adjust the values of these blocks to allow for the new
price and then do scans through the arcs which apply to these blocks until
there is no further change.
Figure 35 illustrates this sequence.
1 3 4
2
Figure 35: Sequence of optimization of pit shells
With this approach, each optimization is on successively fewer blocks and

involves less and less adjustment to the Lerchs-Grossmann tree. Note also
that, since no link in the tree crosses an existing pit shell, the links tend to
become more and more parallel to the nearby shells and thus easier and
easier to optimize.
The combination of these effects make successive optimizations faster and
faster. In practice 100 pit shells can be generated in about the time it
would take to do about five simple optimizations.
Note that, since we are dealing with blocks of finite size, it is entirely
possible for one or more adjacent prices to produce exactly the same pit
outline. In fact this frequently happens and the result is that fewer pit
shells are generated than the list of prices supplied would suggest.
In Whittle we have to deal with more than one product and thus more than
one price, so we work with what we call Revenue Factors. We generate
pit shells for a range of Revenue Factors which all prices are multiplied
by.
Mining Phases
The mining phases technique applies vertical bounding to provide a set of
nested pits. The technique is available in the Whittle Pit Shells node and is
described fully in the help files.
Mining Direction
The mining direction technique has been developed by Whittle and
generates a nested set of pit shells while imposing a horizontal mining
direction. In many circumstances the nested pit shells produced by the
technique are far more practical that those produced by other techniques.
This technique is based on the use of user-defined expressions, to drive Pit
Parameterization in a different way. Rather than generating pits on the
basis of a changing price/cost ratio (the normal Revenue Factor approach),
this technique includes increasingly more ore blocks in the optimization
for each increment of a factor that relates to the distance from the block to
an origin position. Figure 36 shows the effect of applying this technique.
Figure 36: Effect of applying the mining direction technique. The mining
direction was set to emanate radially from the South East.
The steps include the following:

1. Choose the final Using conventional techniques, choose a shell that
pit that you want you want to use as your final pit. Adjust the
to use economics in your Pit Shells node so that the
desired final pit corresponds to a Revenue Factor of
1.00.
Copy and paste this Pit Shells node back onto the
parent Pit Slopes node. This new node will be the
one in which you create the Mining Direction
technique. Make sure you are in Cash Flow Mode.
The technique won't work if you are in Cut-off
Mode.
2. Define a User In the Expressions Tab, create an expression called
defined "DST":
Expression
D(X,0,0,0,0,0)/MX
This expression will drive development straight out

from the West side of the model.
There are lots of different expressions that you can

use to drive the direction. For example
"D(X,Y,0,(0.5*MX),MY,0)/D((0.5*MX),MY,0,0,0,0)"
drives development radially out from the centre of
the North side of the model.
3. Add In the Selling Tab, enter in-line function expressions
Expressions to the for each of the Prices as follows:
Prices and Selling
Costs [price]*IF(REVFAC>=DST,1,0)/REVFAC
Here, the [price] is the numerical (dollar) value

given to each mineral.
4. Set the Revenue You should use:

Factors Start Factor: 0.01
End Factor: 1.00
Step Size: 0.01
5. Compare the You should compare the results from this technique
results with the standard pit shells technique:
(a) Is the new set of pit shells more practical to
mine?
(b) How much does this change the NPV?
(c) Do different mining directions yield different
practicality/NPV results?
Why is this better than manually designing pushbacks with mining

direction?
The first advantage of this technique is that it is still strongly influenced

by the economics and ore distribution of the model. That means that while
you are introducing a propensity for practical development, the results are
also influenced towards shapes that yield high NPV's.
The second advantage - you can generate and analyze a range of different
mining directions very quickly, and benchmark them against the high
NPV "onion skin" pits.
Further information about this technique is included in the section
“Producing a Practical Pit from an Optimal Outline”.
Calculating Block Values

This section deals exclusively with the calculation of undiscounted block

values.
Before we do a pit outline optimization we must first calculate the block
values, and there are three basic rules to follow.
The First Rule
The block value must be calculated on the assumption that the block has
already been uncovered. In other words, no allowance should be made for
the cost of the stripping required to gain access to the block, because that
is precisely what the optimizer calculates. In particular, any cut-off used
to define ore should reflect the cost of processing and any extra cost of
mining the block as ore rather than waste, but not the cost of stripping. If
an allowance for stripping is included in the costs, the stripping will be
paid for twice!
The Second Rule
The block value must be calculated on the assumption that the block will
be mined. So, if the block contains some ore that could profitably be
processed as well as some waste, the value of the ore should be added in,
even if the resulting total value of the block is still negative. The
optimizer will not choose to mine such a block, but if it has to mine it to
get at something more valuable, the ore will help to pay for the stripping,
as it would in practice.
The Third Rule
Any expenditure that would stop if mining stopped must be included in the
cost of mining, processing or selling. Conversely, any expenditure that
would not stop if mining stopped must be excluded. This is discussed in
more detail below.
A Formula for a Block Value

There are a number of ways of writing an expression for the value of a
block.
The one we use is as follows:
VALUE = (METAL*RECOVERY*PRICE - ORE*COSTP) - ROCK*COSTM
where the part in parentheses is repeated for each separately minable ore
parcel in the block, and where:
METAL = Units of product in the ore parcel i.e. ore tonnes times
grade.
RECOVERY = The proportion of product recovered by processing
the ore.
PRICE = The price obtainable per unit of product sold.

ORE = Tonnes of ore in the ore parcel.
COSTP = The EXTRA cost per tonne of mining the material as
ore and processing it, rather than treating it as waste.
ROCK = The total amount of rock (ore and waste) in the block.
COSTM = The cost of mining a tonne of waste.
An “ore parcel” is a region within the block of a defined rock-type,

tonnage and metal content, which could be mined selectively. Its position
within the block is not defined. Some generalized mining packages treat a
block as a homogeneous entity. In this case, there is only one parcel per
block.
Note that air blocks must also be given a value so that the optimization
program can differentiate them from waste. Air blocks have a value of
zero. Blocks which are partially air have their block values reduced on a
pro-rata basis.
Calculating Costs
When preparing for a pit outline optimization, you have to calculate the
expected mining, processing, rehabilitation and selling costs. However,
pit outline optimization has very specific requirements with regard to the
calculation of these costs, and it is important that these be fully
understood.
All costs must be expressed as mining cost per tonne, as processing cost
per tonne, as rehabilitation cost per tonne, or as selling cost per unit of
product produced.
To reduce time costs to a per tonne or a per unit basis, you have to make
assumptions about the production rate. If the size of the pit produced by
the optimization makes these assumptions inappropriate, then the costs
should be re-calculated and the optimization done again. Many people set
up all their cost calculations in a computer spreadsheet. This makes re-
calculation much easier, and a sample is given later.
What Costs to Include
Incremental costs such as wages and fuel costs must obviously be included
in the calculation of the cost of the activity with which they are associated.
Expenditures that are related to time rather than to tonnage or production
require careful thought, but, as mentioned earlier, there is a clear rule that
allows you to decide which should be included:
“Any expenditure that would stop if mining stopped must be included in
the cost of mining, processing or selling. Conversely, any cost that would
not stop if mining stopped must be excluded.”
The reasoning behind this is that, when the optimizer adds a block to the
pit outline, it may effectively extend the life of the mine. If it does, the
extra costs that would occur as a result of this extended life must be paid
for. Otherwise the optimizer may add blocks to the pit that reduce, rather
than increase, its real value.
Since the optimizer can only take note of costs expressed through the
block values, it is necessary to share these time-related costs between the
blocks in some way. How they should be shared depends on whether
production is limited by mining, by processing or by the market. Usually
it is limited by processing, and, in this case, only the mining of an ore
block extends the life of the mine. The ore block values should therefore
include an allowance for time costs. This is done by adding an appropriate
amount to the processing cost per tonne. If production is limited by
mining, as in some heap leach operations, every block that is mined
extends the life of the mine, so that time costs should be added to the
mining cost. A market limit means that time costs should be added to the
selling cost. In each case, the amount added is the total of all the time
costs per year divided by the throughput limit per year.
Examples
Some examples of the handling of various costs may be helpful.
Processing mill
Consider a processing mill that costs $6m to build and commission.
If the mine were to be shut down, for whatever reason, on day 2 of

operation, the mill would have a certain salvage value, say $4m. In this
case $2m has gone for ever. It is an “up-front” or “sunk” cost that must be
subtracted from any optimized value of the pit itself. It is not a cost for pit
outline optimization purposes.
We can deal with the remaining $4m in one of two ways.
If we assume that there will be an ongoing program of maintenance and
capital replacement that will keep the salvage value of the mill close to
$4m in today's dollars, then the $4m is theoretically recoverable when the
mine is closed, and so is not a cost. However the maintenance and
periodic capital replacement expenses are costs for these purposes,
because they would stop if mining stopped. They should be averaged and
treated as a time cost.
Alternatively, we can assume that only essential maintenance will be done,
and that the salvage value of the mill will become progressively less, as is
shown in Figure 37. In this case, the expected rate of this reduction should
be treated as a time cost. Note that the rate of reduction is not necessarily
the same as the depreciation rate that is used by accountants. In most
cases the depreciation rate is set by taxation considerations, and may
reduce the book value to zero when the salvage value is clearly not zero.
Note that the life of the mill (10 years in this example) is not necessarily
the same as the life of the mine.
Re-sale value (Millions)

5 Sunk Cost
4
3
$0.4M/Y
2
0
0 2 4 Year 6 8 10
Figure 37: Calculation of rate of reduction of re-sale value
We discuss the interest on the salvage value below.

Note that, if the mine is mining capacity limited, even time costs
associated with the mill must be factored into the mining cost.
Trucks
If the expected life of the mine is shorter than the operating life of a truck,
then truck purchases can be treated in the same way as the cost of the mill.
If the life of the mine is much longer than the life of a truck, then trucks
will have to be purchased progressively to maintain the fleet, and such
purchases will stop if mining is stopped. Consequently the cost of
purchasing trucks should be averaged out over the life of the mine and
treated as a time cost.
Unless the life of the mine is expected to be very long, some compromise
between the above two approaches is usually required.
Contract mining companies must take these factors into account when
quoting for a job, and it is sometimes useful to think as they do when you
are working out the costs for your own fleet. You should include
everything that they do, except for their allowance for profit.
Administration costs
On-site administration costs will usually stop if mining is stopped. They
must therefore be treated as a time cost.
Head office administration costs may, or may not, stop if mining stops at
this particular mine, and thus may, or may not, be included.
Bank loans for initial costs

Repayment (principal and interest) of a bank loan taken out to cover initial
set-up costs will have to continue whether mining continues or not. It
should therefore not be included in the costs used when calculating block
values.
Of course, these repayments will have to come from the cash flow of the
mine. If the mine is not going to produce enough cash flow to cover them,
the project should not proceed. You should not introduce these
repayments as costs in an attempt to “improve” the optimization. The
result will be quite the opposite. You will get a smaller pit with a smaller
total cash flow, and we will expand on this later.
Although the bank loan repayments themselves are not included, some of
the items that the loan was used to pay for may be included, as you will
see below.
Bank loans for recoverable costs

If you borrow money from the bank for day-to-day working capital or for
items, such as the $4m salvage value discussed in the mill example above,
then you can reasonably expect to repay the loan if mining stops.
Consequently the interest paid on such a loan is a cost that stops if mining
stops. It should therefore be treated as a time cost. Note that we work
throughout in today’s currency, so the interest rate used should be the
“real” interest rate and should not include an allowance for inflation.
Grade control costs

It is often necessary to do grade control work on some waste as well as
ore. In this case, grade control costs apply to waste costs too. If only
some of the waste is grade controlled, then the correct way to handle it is
to load the cost of those particular waste blocks. However, many users
make an estimate of the tonnes of such waste per tonne of ore, and load
the cost of mining ore.
Support – cable bolts

If the permitted pit wall slope is to be increased by the use of cable bolts,
the cost per tonne is related to pit size, which has to be estimated. Then a
cost per square meter of wall can be transformed into a cost per tonne of
waste. This is an iterative estimate, but fortunately costs per tonne are
usually low.
These examples do not cover all possible costs, but should indicate how to
treat most costs.
Sample cost calculation
The spreadsheet in Figure 38 shows how time costs would be handled in

the two different cases of an operation that could be milling or mining
limited.
Time cost calculations:

Time costs per year 980000
Expected yearly mill throughput 1000000
Time cost per tonne milled 0.98
Expected yearly mining capacity 4000000
Time cost per tonne mined 0.24
Incremental costs per tonne:

Extra for
Mining Mining Mining Milling
Bench W aste Ore Ore Ore
5 1.05 1.87 0.82 8.25

4 1.17 2.15 0.98 8.25
3 1.29 2.47 1.18 8.25
2 1.41 2.84 1.43 8.25
1 1.53 3.26 1.73 8.25
With throughput limit on milling:

Extra for Milling
Mining Milling Mining Time cost for
Bench W aste Ore Ore costs Opt.
5 1.05 8.25 0.82 0.98 10.05

4 1.17 8.25 0.98 0.98 10.21
3 1.29 8.25 1.18 0.98 10.41
2 1.41 8.25 1.43 0.98 10.66
1 1.53 8.25 1.73 0.98 10.96
With throughput limit on mining:

Mining Extra for Milling
Mining Time cost for Milling Mining cost for
Bench W aste costs Opt. ore Ore Opt.
5 1.05 0.24 1.29 8.25 0.82 9.07

4 1.17 0.24 1.41 8.25 0.98 9.23
3 1.29 0.24 1.53 8.25 1.18 9.43
2 1.41 0.24 1.65 8.25 1.43 9.68
1 1.53 0.24 1.77 8.25 1.73 9.98
Figure 38: Cost calculation spreadsheet

Producing a Practical Pit Design

from an Optimal Outline
Introduction
In this section we will consider the following issues:
1. Block model artifacts – Since an optimizer uses a block model and
mines each block completely or not at all, the optimal outline is
presented initially as a jagged line defined by block edges. However,
it is important to remember that the blocks themselves are artifacts.
The ore body itself does not consist of neat rectangular blocks. It is
therefore not relevant to try to follow the jagged outline in detail, or to
mine the individual blocks as though they were significant entities.
2. Choosing pit shells upon which to base Pushback designs
3. Mining width considerations – Depending on the type of equipment

selected for mining, a greater or lesser amount of working space is
required. The conventional term for this working space is “mining
width”. Lerchs-Grossmann does not have a direct mechanism for
allowing for mining width constraints, nor does pit parameterization.
In both cases, the blocks in the block model are the only representation
of minimum selectable mining units. The effects of mining width
manifest themselves principally in the following areas:
a. At the base of the final pit.
b. At the bases of pushbacks.
c. In the horizontal separation between one pushback and the

next.
4. Mining Direction – In addition to the techniques for modifying

pushbacks to allow for mining width, it is possible to employ a special
pit parameterization technique which generates pushbacks which have
a higher propensity for being practical to mine.
5. Working slopes – In some mines, while working pushbacks, shallow

slopes will be used in intermediate phases, and steeper slopes will be
used for final pit walls. The reason is as follows:
a. Shallower pit slopes are easier to dress, and safer. Therefore it

makes sense to use shallower pit slopes as working slopes.
b. Steeper pit slopes are more difficult to dress (in order to

maintain safety), but contribute to a lower stripping ratio.
Therefore it makes sense to use steeper slopes for final pit
walls.
6. Haul Roads and Safety Berms – Haul roads and Safety Berms have
the effect of flattening the overall slope angle.
Getting rid of the block model artifacts

The precise method by which you do this depends on the tools that are
available to you in your Generalized Mining Package (GMP). You may
do it entirely by hand, or with varying degrees of computer assistance.
Figure 39: Putting in a smooth curve in plan
In plan, it is only necessary to draw a smooth line through the zigzag, as is

shown in Figure 39.
Figure 40: Joining the centre points of the bottoms

of each column of blocks in the pit
In section, the simplest method is to join the centre points of the bottom of
each column of blocks that is to be mined, as is shown in Figure 40.
Choosing Pitshells Upon Which to Base Pushback Designs

The principal economic reason for performing pushbacks is to maximize
NPV. Elsewhere in these notes, two benchmark schedules are defined:
Best Case, and Worst Case. The Best Case schedule has a great many
pushbacks, and has a higher NPV. The trade-off is practicality.
Specifically, too many pushbacks will or may lead to the following:
1. Excessive expense maintaining multiple working slopes.
2. Vertical advance rates in each pushback which are difficult or

impossible to achieve.
3. Operational problems associated with moving quipiment around

multiple working faces.
4. Lack of adequate mining width.
5. Extra cost associated with re-working haul roads.
If you experience these problems with a design that has a great many
pushbacks, it could be that the NPV calculated for that particular scenario
is unachievable. On the other hand, if you were to eliminate all pushbacks,
you could be assured practicality, but may sacrifice NPV.
The question arises as to how to reach a compromise between practicality
and NPV Maximization. The answer to the question depends very much
on the details of the case. A significant factor is the degree of
dissemination of the ore body. Disseminated ore bodies with little
stripping required, will not benefit from a very large number of pushbacks.
In extreme cases, the introduction of pushbacks will make no difference to
the NPV. Deposits in which target minerals are concentrated in smaller
areas such as seams, will benefit more from the addition of pushbacks.
The recommended method for determining the number of pushbacks is to
try different options and compare the practicality and the NPV of those
different options. The most efficient way to try different options is to
utilize the Whittle Pushback chooser, which, given a number of pushbacks
required, can choose shells to use as those pushbacks, which maximize
NPV.
Ensuring the required mining width constraints are met

There are two phases to allowing for minimum mining width:
1. Selection of pit-shells – In selecting pit shells to use as the basis of
pushback and final pit design, consideration should be given to the
Mining Width requirements as to the horizontal separation between
one pushback and the next. It is common to only be able to
approximately satisfy this constraint through the selection of pit shells.
Final adjustments are made during the second phase (below).
2. Whittle Mining Width module – This module allows the application of

mining width constraints in the base of the final pit and the pushbacks,
and also applies the constraints as to the horizontal separation between
one pushback and the next.
Mining Direction
Introduction
This technique is based on the use of user-defined expressions in Whittle,

to drive Revenue Factor Pit Parameterization in a different way. Rather
than generating pits on the basis of a changing price/cost ratio (the normal
Revenue Factor approach), this technique includes increasingly more ore
blocks in the optimization for each increment of a factor that relates to the
distance from the block to an origin position.
Example
An example project has been created to:

a. Illustrate the technique.
b. Test the expressions.
It is based on the demonstration model called Marvin, but includes only

the top 9 benches, leading to a broad, flat deposit. The economics and
recoveries have been modified to achieve a broad pit at revenue factor 1.0,
in order to illustrate this technique.
Figure 41: Overview of the example project, showing the expression

validation nodes, and some example pit shells nodes.
Figure 42: Standard pit optimization showing "onion skin" type shells
(reduced number of pushbacks)
Figure 43: Same final pit, but with a Mining Direction applied (From South
East Radial)
Figure 44: Shown with Mining Direction (From West Straight)
Economic and Practical Effects of the Technique
From examination of Figure 42 to Figure 44, you will see that there is
quite a difference in the manner in which pits are generated, though the
final pit is exactly the same in each case. The original pit shells (onion
skins) should always yield the highest NPV, but with poor practicality.
Introducing a mining direction increases the practicality, but sacrifices
NPV.
Many people complain about the onion skin pits as being “un-mine-able”.
“Un-mine-able” means that the reported NPV is unachievable.
Table 1 includes a comparison of NPVs for a range of different mining
directions, as compared to the standard shells.
Table 5: Comparison of different mining directions to the standard pit

shells
Direction Number of NPV Change

shells
Standard (onion skins) 39 1,091m -
17
From South East Radial 36 966m -11%

(SER)
From North East Radial 42 955m -12%
(NER)
From West Straight (WS) 42 996m -9%
How to Apply the Technique
The normal pit parameterization technique produces progressively larger

shells for each incremental increase in the Revenue Factor. This is effected
through the use of multiplying the Revenue Factor by the net price for
each successive pit.
DST Expression
In the Expressions tab, you must define an expression called DST. The
formulation of the expression depends on the mining direction you wish to
take. The twelve examples used in the example project are shown in Table
6.
17
Note that the number of pit shells is an artifact of the process. More pit shells will
generally lead to a higher Best Case NPV. In order to attempt to negate that effect, the
revenue factors for the standard pit shells were changed so as to produce roughly the
same number of shells as the mining direction cases.
Table 6: Example Mining Direction Expressions
Name Description Expression

Radiating from the
From South South East Corner
D(X,Y,0,MX,0,0)/D(MX,0,0,0,MY,0)
East to the North West
Corner
Radiating from the
From North North East Corner
D(X,Y,0,MX,MY,0)/D(MX,MY,0,0,0,0)
East to the South West
Corner
Radiating from the
From South South West
D(X,Y,0,0,0,0)/D(0,0,0,MX,MY,0)
West Corner to the
North East Corner
Radiating from the
From North North West Corner
D(X,Y,0,0,MY,0)/D(0,MY,0,MX,0,0)
West to the South East
Corner
Radiating from the
From North D(X,Y,0,(0.5*MX),MY,0)/D((0.5*MX),MY,
centre of the North
Radial 0,0,0,0)
side
From North From North to
D(0,Y,0,0,MY,0)/MY
Straight South
Radiating from the
From East D(X,Y,0,MX,(0.5*MY),0)/D(MX,(0.5*MY),
centre of the East
Radial 0,0,0,0)
side
From East
From East to West D(X,0,0,MX,0,0)/MX
Straight
Radiating from the
From South D(X,Y,0,(0.5*MX),0,0)/D((0.5*MX),0,0,0,
centre of the
Radial MY,0)
South side
From South From South to
D(0,Y,0,0,0,0)/MY
Straight North
Radiating from the
From West D(X,Y,0,0,(0.5*MY),0)/D(0,(0.5*MY),0,M
centre of the West
Radial X,0,0)
side
From West
From West to East D(X,0,0,0,0,0)/MX
Straight
Price Expressions
To apply the sterilization/desterilization process of the mining direction

technique, we must exploit the Revenue Factor, but at the same time, stop
it from changing the effective price. We do this by dividing the price by
the variable REVFAC. In other words:
REVFAC*PRICE/REVFAC=PRICE
We then use the REVFAC to compare to a DST value which calculates the
standardized distance of a block to an origin position on the model. If the
REVFAC is greater than or equal to the DST value, then we multiply the
price by 1. If the REVFAC is less than the DST value, then we multiply
the price by 0.
The actual price function is as follows:
[price]*IF(REVFAC>=DST,1,0)/REVFAC
Note that these expressions are only ever applied to the Pit Shells node,
never to a Scenario node.
Revenue Factors
The examples in this document are calibrated to work with a maximum

Revenue Factor of 1.0.
You should use:
Start Factor: 0.01
End Factor: 1.00
Step Size: 0.01
Note about the Technique
1. You should look to the original set of shells to see if there is any
apparent “natural” direction that you can exploit. For example, if
smaller pits tend to be in the west, then a mining direction working
from the West will likely achieve pleasing results.
2. You should try different mining directions, and make a comparison of

their NPV’s.
3. You must run in Cash Flow mode in the Pit Shells Node. The
technique will not work if you have the Cut-Off mode selected in the
pit shells node.
4. These expressions are only applied for the purposes of pit

optimization. You must not use any of these expressions in an
Economic Scenario node.
5. These expressions are generalised. They should work with any model.
6. The technique provides a final pit as being the revenue factor 1.00 pit
for the specified economic conditions. If you wish to use a pit other
than the revenue factor 1.0 pit, then you should do the following:
a. Multiply the DST expression by the revenue factor you wish to

use. For example, if you wanted to run "From South East” and a
revenue factor of 0.95, you would specify the DST expression as
“D(X,Y,0,MX,0,0)/D(MX,0,0,0,MY,0*0.95”
b. Change the End Factor for the Revenue Factor to the desired
value. 18
Allowing for Working Slopes

The process involves:
1. Determining the shape of the final pit outline with the application of
ultimate pit slope constraints.
2. Converting the final pit shape into a new model bounded by the new
pit shape.
3. Re-optimizing the new model with working slope constraints while

applying one of the pit parameterization techniques.
Figure 45: An ore body, with the final pit shown. The shape of the final pit
outline is determined with the application of ultimate pit slope constraints.
Figure 46: The final pit shape converted into a new model bounded by the
new pit shape. All ore and waste has been stripped out of the model
beneath the pit.
18
Note that I have not tested this aspect of the technique.
Figure 47: Re-optimizing the new model with working slope constraints
by applying one of the pit parameterization techniques. The working
slopes are shallower that the ultimate pit slopes.
Allowing for Haul Roads and Safety Berms

If haul roads and safety berms are to be incorporated correctly, it is
essential that the slopes used during pit outline optimization be laid back
to allow for them. Given this, there should be no particular difficulty, as is
illustrated in Figure 48.
Figure 48: Allowing for haul roads and safety berms in the average slope y°
We want to work out angle y°, which is the average slope angle for use in
pit optimization.
Input Variables
x° is the inter-ramp slope angle.
D is the width of the haul road. In this example, the one haul road
intersects the wall. If two or more haul roads intersect the wall, then D is
the combined width of the haul roads.
C is the depth of the pit (this is an approximation – the actual value is
dependent in part on the pit slopes, which of course will change as we
adjust for the haul road).
Derived Variables
y° = Arctan(C/(B+D))
B=(C/Tan(x))
Substitute B
y° = Arctan(C/((C/Tan(x))+D))
The Effects of Underground Mining

Overview
If it is economically viable to mine ore by either underground or open cut
method, then pit optimization software can be used to determine which is
the better alternative.
For the purpose of pit optimization, the value attributed to blocks should
be the value to the company of mining by the open pit method. If a block
is worth, say, $1000 if mined by open pit method, and $800 if mined by
underground method, then the value used for the purposes of pit
optimization should be $200.
When implementing this using Whittle, the user must specify an
underground processing method, including all the costs associated with
mining and processing by the underground method. The software
calculates the value of the block if mined by underground method and
subtracts this from its normal open pit value.
The result of implementing this method is very often a smaller pit, with a
lower value, but the combined value of the open pit and the underground
mine will be maximized.
Which Ore should be Mined by Open Cut?

Consider this existing underground mine in Figure 49. Development is
represented by a vertical line (shaft) and horizontal lines (drive). Stoping
is represented by oblique lines. The development and stoping shown have
already been performed.
Figure 49: Existing underground mine
Further underground development is planned. This is shown as thinner

lines to the East of the shaft in Figure 50. It would not be possible to mine
the ore by open pit method, and this underground development will occur
whether or not an open pit mine eventuates.
Figure 50: Existing mine with planned development shown
Additional ore bodies have been identified in the East as shown in Figure
51.
It would be feasible to mine the A ore body by underground method, but
not the B ore body. This possible underground development is shown as
dotted lines.
Assume that all the ore above Drive-1 is included in Stope-1; that all the
ore between Drive-2 and Drive-1 is included in Stope-2, etc. To mine
each stope, the only development necessary is the digging of its associated
drive. Provided that the revenue generated from mining and processing
the ore in each stope is greater than the cost of the associated drive, then it
is economic to mine it.
Figure 51: Newly discovered ore bodies and possible underground

development.
If only the open pit method is considered, then, in this example, the pit
optimizer may yield the results shown in Figure 52.
Figure 52: This pit is optimal if only open cut methods are possible.
Parts of ore body A could be mined either by open pit, or underground

method. If it is not mined by open pit method, then it will be mined by
underground method.
Consider any one block within the region covered by the pit and
underground stopes. It will be mined, one way or another. There are
therefore two possible economic results:
If it is mined by open pit method:

Net Value = (block revenue) - (cost to mine & process by
open pit method)
Let’s say in this case the net value for the block is $1000.
If it is not mined by open pit method:
Net Value = (block revenue) - (cost to mine & process by
underground method)
Let’s say in this case the net revenue for the block is $800.
If the block is included in the pit outline, it will be worth $1000, and if it is
not included in the pit outline it will be worth $800. Therefore, the value
to the company of including it in the pit is $200.
Pit optimizers such as Whittle can calculate the value to the company, by
deducting the underground value from the open pit value. Using this
system of block valuation in this example, a pit optimization is run and
produces the pit shown in Figure 53.
Figure 53: The pit is smaller if the underground value of blocks is deducted
from their open cut value.
Note that the pit in Figure 53 takes in part of Stope-1. Stope-1 is only
economically viable by the underground method if all of Stope-1 is mined.
If the pit takes part of Stope-1, it will not be economic to mine the
remainder by underground method.
A new optimization should be run, which excludes the ore available to
Stope-1 from consideration for underground mining. The results are
shown in Figure 54.
Figure 54: Stope-1 is no longer made available for underground

mining, so the final pit is larger.
The pit now takes in more of Stope-1 as expected. Stope-2 and Stope-3
remain undisturbed and should be mined by the underground method.
When the Pit Contributes to the Underground Development

In some cases, the open pit mine precedes the underground mine and it is
possible to commence the underground development from the base of the
pit. In this case, a deeper pit can lead to a reduction in the expense
associated with underground development and it is possible to build this
benefit into the block model. The method outlined below should be
applied in conjunction with the method show above in the section -
“Which ore should be mined by open cut method?”.
Step 1- Identify underground development costs

You need to establish the cost per metre of vertical development in the
absence of the pit. Multiply this by the height of your blocks in order to
get a per-block benefit value.
For example, if the cost per vertical metre of underground development is
$2,000 and blocks in your block model are 10 metres high, then the per-
block benefit would be $20,000.
Step 2 - Modify the Block Model

Run an optimization with a normal block model.
Identify a set of blocks, one per bench to which you will attribute the per-
block benefit. You want to influence the depth of the pit, not the
horizontal position of the base.
In the case of Whittle, the set of blocks should follow the bases of the
shells generated for different Revenue factors. These will naturally follow
the centre of the ore body or the footwall.
Edit the block model, to add the per-block benefit to your chosen set of
blocks.
In the case of Whittle (single element) you need to create a parcel
containing a quantity of metal, which, at the reference price, would yield
revenue equal to your per-block benefit. For example, if the per-block
benefit was $20,000, the product were Gold and the price was $10 per
gram, you would create a parcel containing 2,000 grams of Gold 19. The
parcel tonnage should be kept to a nominally low figure in order to reduce
other biases. The rock-type should be a specially created one so that the
effect of these parcels can be tracked in reports.
19
If you are using a package such as Whittle (multi-element) you can define a new
element called “DOLL” for “dollars”. The price of a DOLL is always $1. This
simplifies many of the calculations.
For example:
Assume that block 15 ,7, 23 originally contained one parcel. To add
another parcel, you must increment the number-of-parcels value in the
header line, and append the new parcel line.
Column numbers:
0 1 2 3 4
123456789012345678901234567890123456789012345678
Original block record:

15 7 23 1 1.000 1.000 1000
15 7 23 OXID 500 1000
Modified block record:

15 7 23 2 1.000 1.000 1000
15 7 23 OXID 500 1000
15 7 23 UGDV 1 2000
Step 3 – Add a Special Processing Method

On importation of the modifiled model, set up rock-type UGDV
(UnderGround DeVelopment) with the following parameters:
Rock-type mining CAF = 1.000
Rehab. cost ratio = 0.000
Processing throughput factor = 1.000
Add a processing method which is exclusively used for the UGDV rock,
called DVPR (DeVelopment PRocess). Set the parameters as follows:
Method Code = DVPR
Rock-type Code = UGDV
Processing Cost $0.01
Processing recovery fraction = 1.000
Processing Recovery Threshold = (blank)
Minimum cut-off = (blank)
Maximum cut-off = (blank)
Step 4 - Optimization
Re-optimize with the new Model file and additional Processing Method.
You should find that for the same Revenue factors, that the new pits are
greater than or equal to the pits generated from the original model.
Multiple Mines
Hall, G, 2004, Multi-mine Better than Multiple Mines, in Orebody

Modelling and Strategic Mine Planning Symposium (Perth)
Abstract
It is not uncommon for a number of open cut mines to share infrastructure
in the mining value chain. This sharing offers economies of scale, and
presents additional scheduling options, but also increases the complexity
of design and scheduling. How do you best investigate and optimize this
type of scenario in order to yield maximum economic benefit?
As a senior developer in the Whittle team, the author has been involved in
the creation of a modelling and optimization system which caters for
multiple integrated mines. The objectives of the system design were:
• To provide a process, supported by effective tools, which enables mine

planners to maximize the economic benefit of multi-mine operations.
• To provide a modelling and optimization environment that allows

multiple integrated mines to be planned and scheduled effectively,
including adaptation of optimization engines to the multi-mine
situation.
This paper describes the benefit the Whittle Multi-mine option can bring
to such a complex operation and the features that enable that benefit.
Introduction
It is not uncommon for a number of open cut mines to share infrastructure
in the mining value chain. This sharing presents scale economies, and
presents additional scheduling options, but also increases the complexity
of design and scheduling. How do you best investigate and optimize this
type of scenario in order to yield maximum economic benefit?
Multiple mines could be treated in Whittle, to a certain extent, before the
Whittle Multi-mine option was introduced. The simplest approach was to
model each mine in isolation and then produce a schedule manually.
Several people, Tom Tulp (Tulp, 1997), David Whittle (Whittle, 2001)
and Chris Desoe from AMDAD developed techniques that removed some
of the restrictions associated with treating multiple mines as a single
model within the Whittle environment. None of these processes could
entirely remove the restrictions and they all required complex setup
procedures. Within their limits, however, they worked and they all
enjoyed success in a restricted number of situations.
The Multi-mine option allows the flexibility of choice of optimal pit and
pushbacks for each mine independent of the other mines in the model,
while still producing a schedule automatically across all mines.
Multiple mines - The background

A multiple mine operation has more than one mine sufficiently close
together that they share infrastructure and are planned as a single study.
The past approaches to modeling this situation identified in the
introduction either fail to address the benefits of producing a joint
schedule, or limit the definition of the individual mines so that they do not
use their optimal pit or pushbacks tailored to that mine.
Planning the mining schedule of a single mine is reasonably well
understood. While the process is complex, tools exist to assist the user in
creating an optimal open pit shape from a model of an ore body. Tools
also exist to assist in planning a mining schedule from the chosen pit. The
difficulty in the multiple mine situation in particular, is in defining the best
pushbacks and finding the best mining schedule.
The Whittle product uses the Net Present Value (NPV) of a mine to drive
both the identification of the optimal pit and the creation of the mining
schedule.
The optimal pit is found using the Lerchs-Grossmann (LG) algorithm
(Lerchs & Grossmann, 1965). The method for determining the optimal pits
is the same for a single mine or a set of mines. This, however, is just the
start of the solution. The material to be removed from each mine can be
extracted in any one of a number of ways, all of which can result in
dramatically different NPVs for the mine.
The creation of a mining sequence involves defining some useful
pushbacks for those mines then mining those pushbacks in such a way that
maximises the potential value of an operation.
The Whittle Multi-mine solution

The model file of the Multi-mine option uses a single block model
definition which identifies each mine in the block model separately. You
are able to define the pushbacks and choose the optimum pit for each mine
separately, then create a schedule that considers all of the mines together.
This technique allows each mine to be designed to its full potential
because its optimum pit is independent of any other mine. During the
scheduling process, however, there are benefits from considering the
mines as multiple sources of ore. The scheduler is able to decide when to
choose material from the mines such that the value of the operation is
maximised.
The key benefits of the Multi-mine option are that it gives you
independence between mines:
• pushbacks can be determined that are ideal for an individual mine,
• the final pit for each mine is separate,
• the order of processing of the mines can be changed easily, and
• mining limits can be tailored for individual mines.
In addition, the material movements in each mine can be tracked

separately and extra controls have been added to allow per-mine
constraints.
By using Whittle to find the theoretical maximum value of the operation,

it is possible to cost the decisions that are made along the way as progress
is made to a final design for the operation. Sometimes, this means that
Whittle presents information that justifies a change in approach because of
the increased value that is realisable when that change is implemented.
Example case study
Example data
The data comes from the “BlueSky” project which was originally
developed as a multi-mine example by Chris Wharton and is based on the
“Marvin” data developed by Norm Hanson for his students at RMIT
University and used in the “Whittle Challenge”, a one day add-on to the
“Optimizing With Whittle” conference in 1999. It has two mines, called
NorthPark (mine 1) and SouthBorder (mine 2). SouthBorder is the
standard Marvin mine with three rock-types: OX (a surface oxide), MX (a
mixed ore) and PM (the primary ore). NorthPark has been modified from
the original Marvin with the OX and PM rock-type tonnages being
summed together (called SL) and MX being renamed to RF. The
SouthBorder rock-types have their rock-type Cost Adjustment Factor
(CAF) greater than one to indicate a harder rock than in the original
Marvin. The slopes of both mines have been modified from the original
Marvin and also made different from each other. All rock-types have gold
and copper elements.
Treat as single mine
Optimal Pit
The creation of the optimal pit for each mine proceeds as in the single
mine case because the LG algorithm (in a single model file) will treat the
mines as independent entities (provided the resultant pits do not touch).
Pushbacks and Mine schedule

Before we explore designs for a practical and realistic mine design and
schedule, it is useful to look at the operation as a single mine case to
provide some indicator values. The initial run introduces the period
tonnages involved and forms a framework for developing further
refinements. Key aspects of this run are:
• liberal mining rate (chosen to ensure mining limit is never, or rarely a

limiting factor. In this example 80 million tonnes (mt) per annum (pa))
• conservative processing throughput (chosen to ensure this is the

limiting factor and reflects “reasonable” mine life - 20 mt pa)
With the above limits and reasonable estimates of the costs required to
support the above rates, the Pit by Pit Graph node indicates that the
maximum best case NPV that can be achieved is $272m. This is the pit
containing 693m tonnes total with a mine life of 24 years (Table 1, line 1).
We have arbitrarily chosen to develop four pushbacks. This is a decision
that can be explored further when there are definite costs of starting a new
pushback. The more pushbacks you have, the closer you can get to the
Whittle “Best case” scenario. When the costs of a pushback are included
in the analysis, you can very quickly see when the cost of adding a
pushback outweighs the return. When we add four pushbacks (letting the
Pushback Chooser (Whittle 2004a) decide them for us), the optimal pit is
488mt with a value of $186m over a nearly 19 year mine life (Table 1, line
2).
Table 7 : Summary of results

Three asides
1. The use of geometric values 20 in defining the revenue factor range
generates a good range of pits, giving good starting pits and still keeps the
overall number of pits to consider to a minimum.
2. By including the actual cost of establishing pushbacks in an operation,

one can determine whether using more pushbacks would improve the
value of the operation.
3. The slopes of each mine in an operation could be quite different. Since

Whittle has the capability to model these without the use of the Multi-
mine option, they will not be discussed further in this paper.
Treat as multi-mine
Without the Multi-mine option above, the chosen pushbacks are the same
for every mine. The optimal pit is chosen by its pit number and that is also
the same for every mine.
Each mine is different, therefore one would expect the ideal pushbacks for
each mine to be different. Using the Multi-mine model we can run the
Pushback Chooser separately for each mine. This approach can be used
because the Pushback Chooser only uses the relative differences between
NPVs in deciding where to put the pushback boundaries.
Once we have the pushbacks for each mine, we can explore schedules
using input from both mines (each with its own pushbacks) and costings
and limits that can be a combination of global and per mine attributes.
Note that individual mine constraints are only available with the Multi-
mine option.
The user can now explore the opportunities available to vary the schedule
based on the order in which the mines are considered as well as the
previous variables associated with pushbacks in a single mine.
At this point it useful to note which mines are the biggest contributors.
This will help drive the decision as to the order in which we should mine
the mines. In this example, the significantly bigger contribution comes
from the NorthPark mine, so we will consider it first in the order (Fig 1).
Using the Milawa algorithm will improve the NPV if an inappropriate
ordering of mines is chosen, but it cannot necessarily find the best NPV.
20
“Geometric values” is a technique for defining revenue factors that produces a greater number of pits at the
smaller pit end of the range than at the larger pit end (Whittle 2004b). It is useful for defining the starter pit and
early pushbacks.
Figure 55 : Cash flow contribution from each mine
With each mine having its own (four independent) pushbacks and
considering NorthPark first, we end up with a schedule (Fig 2) developing
an NPV of $197m from a combined tonnage of 569 mt (Table 1, line 3).
This is an increase of $11m with addition of 81 mt over the previous result
which is a direct result of being able to start with individually optimized
mines.
The following steps are not specific to the Multi-mine option when only
global limits are applied, but significant gains in NPV may be available by
exploring variations in the processing and mining limits.
Modifying constraints
When analysing the effects of constraints, you should ensure that

constraints further back in the process are not making an adverse impact
on downstream processes. For the illustrative purposes of this paper,
selling limits are ignored (the last step in the Whittle limits) and we’ll deal
with the two main limits back up the process stream: the processing
capacity, then the mining capacity.
Processing capacity
We have started with a generous mining limit, so the impact of extending
the processing capacity can be considered without a tight mining limit
confusing the results.
We consider the situation whereby spending an extra $55m we can add 10

mt pa to the processing capacity, increasing it to 30 mt pa. 21
The result of this analysis is that we can increase the NPV from the
previous analysis to $280m with the same tonnage (Table 1, Line 4). The
change is that the mine life is now less than 14 years as compared to over
20 years previously. The increase in NPV is due to being able to earn the
money sooner. Note that at this point, mining limits have not been touched
and so the mining cost (quoted per tonne) is unchanged.
Mining capacity
From Fig 2 we can see that there are some periods that have mined
considerably more material than is required in that period. The pattern is
similar after the processing capacity is increased.
Figure 56 : Two mines, independent pushbacks
Let us consider what would happen if we reduced our mining capacity to

60 mt which allows us to save $30m. 22
We see that we can add $26m to the value of the mine, increasing the NPV
to $306m (Table 1, Line 5) even though we don’t fill the mill in periods 5
and 12 (by a small amount). (Fig 3)
21
In a real study, several scenarios would be considered to explore the benefits of increasing production. Some
questions that would need answers are, “Should we increase production?” “If we do, by how much?” “What are the
risks involved?” This example is chosen to illustrate one such scenario.
22
As with the processing capacity, this is an example of a single variation, which in practice would be one of several
variations studied.
Figure 57: Increased processing, decreased mining
Milawa algorithm
The study up until now has only used fixed lead. This has been for a
couple of reasons. The fixed lead approach gives results very quickly
which allows us to explore many possible “what if” scenarios and gives a
good feel for the performance of the mine under differing conditions. As
we get closer to what we think might be a final solution, we use the
Milawa algorithm 23 to see what extra benefits we can realise out of this
mining operation.
The result using Milawa NPV raises the value another $30m to $336m
(Table 1, Line 6). Now the mill is kept full (until the end of the mine).
Milawa is now changing the order of processing in the mines to achieve a
greater NPV. This becomes more obvious when the mining limit is
reduced even further to 50 mt pa (Fig 4).
23
The Milawa algorithm is a proprietary algorithm that modifies the selection of material available from every open
pushback to produce a schedule that improves the NPV. “Milawa NPV” focuses on improving NPV, “Milawa
Balanced” focuses on keeping the mining rate balanced.
Figure 58 : Milawa NPV
The next result, from a Milawa Balanced run, shows that we can balance
our mining (and keep the mill filled) at a cost of dropping the value of the
operation to $246m (Table 1, Line 7; Fig 5).
Figure 59 : Milawa Balanced
From Figs 4 and 5, by inspection, it looks like the increased mining in the
early years of the Milawa Balanced solution is contributing to some early
costs of mining which do not occur in the Milawa NPV solution.
We can now consider “tuning” the mining capacity to improve the Milawa
Balanced result. In this example we can achieve a Milawa Balanced
schedule (Fig 6) that is a significant improvement over the “un-tuned”

result yielding a value of $328m (Table 1, Line 8).
Figure 60 : “Tuned” Milawa Balanced
Conclusions
The optimal pits for individual mines can be determined without the
Multi-mine option in Whittle. The LG algorithm will develop each mine
independently.
The basic approach to a multi-mine study is similar to a single mine study
with all the single mine features being available in the multi-mine
situation.
The differences arise when the key benefits of the Multi-mine option are
used:
• • pushbacks can be determined that are ideal for an individual mine,
• • the final pit for each mine is separate,
• • the order of processing of the mines can be changed easily, and
• • mining limits can be tailored for individual mines.
The Multi-mine option can add significant value to a multiple mine

operation.
The Effects of
Sequencing & Scheduling
The Effects of Sequencing and Scheduling

A mining “sequence” is the order in which different parts of the pit are
mined. A mining “schedule”, which tells us when things occur, can be
constructed by applying the production constraints to the mining sequence.
As well as determining when different parts of the pit are mined, a
schedule determines when the cash flows associated with mining are
produced. This is important because all dollars are not equal.
The effect of time on the value of money
We discussed this earlier, but now we will look at it in more detail.

A dollar that we receive today is more valuable to us than a
dollar that we might receive in a year’s time.
There are various reasons for this:

• Inflation may reduce the value of next year’s dollar.
• If we have the money now, there is no risk of something going wrong

and our not getting it.
• If we haven’t got the money, we can’t get interest on it, or we may

have to borrow money to replace it.
The standard way to allow for this is to “discount” next year’s dollar by a
certain amount and to apply that idea cumulatively into the future.
Thus we discount future revenues and costs by a particular discount rate
and reduce them all to a “Net Present Value” or NPV.
The effect of mining sequence on the optimal pit outline
Let us review a very simple example shown in Figure 61.

surface
1
2
3
4
5
bench level
100 tonnes waste 6
7
8
500 tonnes ore
Figure 61: A simple ore body
Worst case mining

The simplest way to mine a pit is to mine the whole of the top bench, then
the whole of the next bench etc. We call this “worst case mining” because
it produces the lowest NPV. However, it has the advantage of almost
always being practical.
If we consider the simple example again, waste at the top of the outer
shells is mined early, and the cost is discounted less than the revenue from
the corresponding ore, which is mined much later.
The optimal pit for worst case mining is thus generally smaller than is
indicated by simple pit outline optimization using today’s costs and
revenues.
Best case mining

Each shell is mined in turn and thus the related ore and waste is mined in
approximately the same time period. We call this “best case mining”
because it produces the highest NPV. It is almost never practical, but sets
an NPV target that we can aim for.
The interaction between production rates and mining sequence
Table 8: Pit values for different mining sequences and production rates
Pit 1 2 3 4 5 6 7 8
Worst Mill <500 900 1,530 1,917 2,085 2,057 1,851 1,486 978
Best Mill <500 900 1,530 1,935 2,154 2,220 2,161 2,002 1,763
Worst Mine 900 1,520 1,868 2,011 1,956 1,552 1,049 449
<1,000
Best Mine 900 1,520 1,898 2,068 2,105 1,993 1,790 1,540
<1,000
This table, which was derived by sequencing the mining of this very
simple model by worst and best case mining, has been scheduled with a
mill limit and with a mining limit. In both cases, a discount rate of 10%
has been applied.
Figure 62 and Figure 63 show the above data in graphical form.
Mill<500
2500
2000
1500
NPV
1000
500
0
1 2 3 4 5 6 7 8
Ultimate Pit
Best case Worst case
Figure 62: Milling limited case
Mine<1000
2500
2000
1500
NPV
1000
500
0
1 2 3 4 5 6 7 8
Ultim ate Pit
Best case Worst case
Figure 63: Mining limited case
In both cases it can be seen that not only is the maximum NPV smaller for
the worst case, but the pit with the highest value is smaller for worst case
mining.
In this very simple case, the pit shells are easy to construct by hand.
However, in real cases where both the ore body shape and the grade
distribution are irregular, we can still construct nested pits by doing a
series of optimizations through the use of a pit parameterization technique.
In the simple case above, the inner pit shells indicate mining with the
lowest stripping ratio, because the grade is constant. In real cases, the
inner shells indicate the region with a good combination of grade and
stripping ratio.
Real pit shells, together with the benches, can therefore be used in the
design of mining phases or pushbacks which will yield the highest early
cash flow and thus the best NPV for the pit.
Using the Nested Pit-Shells for Mining Simulation

The Figure 64 is a schematic of a small set of pit shells and benches. In
practice, it is usual to produce fifty to one hundred shells, so that they are
much closer than indicated here. Nevertheless, the same principles apply.
The sequences in which any of the eight pits can be mined without
breaking the slope constraints are clearly defined by the pit shells. For
example, we must mine “a” before mining “f”. We must mine “a”, “f”,
“b”, and “g” before mining “k”.
Figure 64: A small set of pit shells and benches
Since we know all the details of the actual blocks which are in each
bench/shell intersection, we can apply cut-offs and can calculate tonnes,
grades and cash flows for each such intersection. Therefore, if we specify
a particular sequence in which we are going to mine the intersections, the
program can calculate a life-of-mine schedule with full tonnes, grades,
cash flows, and discounted cash flows according to throughput limits
specified by the user. We refer to this as life-of-mine simulation.
Economic Model for Schedule Optimization

Introduction
Schedule optimization and simulation, operate in a DCF analysis
environment, which is richer, more complex and more flexible that the
economic modeling environment for pit optimization. The latter is never
the less the foundation for the former. Accordingly, the Economic Model
for Schedule Optimization is described by explaining the difference
between it at the Economic Model for Pit Optimization. The main
differences are:
1. Inclusion of Initial Capital Expenditure in the model.
2. The inclusion of time-based expenditure.
3. The ability to change costs and prices over time.
Inclusion of Initial Capital Expenditure
In the pit optimization economic model there was no place for an initial
capital expenditure. In the DCF modeling environment for scheduling,
initial capital expenditure can be provided and should be provided in order
to calculate NPV and IRR correctly.
Time-Based Expenditure
In the section “Economic Model for Pit Optimization” the method for
including time-costs as a cost per tonne of waste, or per tonne of ore, or
per unit of product was described. This treatment of time-costs is referred
to as “implicit time costs” to contrast it to the explicit manner in which
time costs are handled in the DCF modeling environment. The details as
to how to deal with implicit and explicit time costs in Whittle is described
in the Whittle Help Files.
Changing Prices and Costs over time
In the pit optimization economic model there is no provision for the

changing of costs or prices over time. In the DCF analysis environment
costs and prices can be changed in each time period of the simulation.
Details of Cost Modeling for DCF Analysis
Refer to the section Cost Models for Different Purposes for detailed
discussion as to the rules for cost allocation in DCF Analysis.
Schedule Optimization
Definition of a Schedule Optimization Problem

So far in these notes we have covered the basics of optimization
(Introduction to Optimization), and discussed Pit Optimization in detail.
Now we will introduce another optimization problem, that of optimizing
the scheduling of a mine, so as to maximize NPV.
Before commencing schedule optimization, we have to establish what the
model is. The process of Long Term Scheduling occurs after Ultimate Pit
Design (refer to the section Overview of Open Pit Planning Process). So
at the very least, we have available a block model with a defined ultimate
pit. Also required is a set of intermediate pit designs called “pushbacks”.
Objective Function: Maximize NPV for the project.
Decision Variables: The material that is mined from each pushback of the
mine in each period. You will recall from the section “Discounting” that
the order in which cash-flows occur, affects the NPV. Determining what
material is mined from each pushback in each period affects the order of
the cashflows and this is how the objective function varies with the
decision variables in this case. The number of decision variables depends
on the number of pushbacks in the model, the number of time periods in
the mine life and the number of benches in the pit.
Constraints:
1. The depth of mining of a pushback must not be greater than the depth
of the preceding pushback.
2. Production limits (mining; processing; selling) must not be exceeded.
Additional Constraints: Additional constraints can be added and will vary

from case to case.
The Milawa Algorithm for Schedule Optimization

The Milawa algorithm is part of Whittle. It can operate in either NPV
mode where it will seek to maximize NPV or balancing mode where it
will seek to maximize the use of production facilities early in the life of
the mine. The latter is an unusual optimization, beyond the scope of this
document. We will focus on NPV mode from hereon.
The Milawa algorithm utilizes three routines. The first routine takes a set
of decision variables and generates a feasible schedule from them. The
number of variables required depends on the number of:
benches in the ultimate pit,
pushbacks, and
time periods in the life of the mine.

The second routine is an evaluation routine which calculates the NPV for
an individual schedule.
The third routine searches the domain of feasible schedules for the one
which has the highest NPV. The routine also has logic built in to decide
when to stop searching. This third routine is a form of step and stride
routine.
The Milawa algorithm does not generate and evaluate all feasible
schedules (i.e. it does not enumerate the problem), as the number of
feasible schedules in any analysis is extremely large. Rather it
strategically samples the feasible domain and gradually focuses the search
(without necessarily narrowing it) until it converges on its solution.
The number of evaluations required to converge on a solution varies, but
5,000 is typical, and this usually takes less than a minute.
The feasible domain can be viewed as a multi-dimensional volume, where
each point in the volume has a corresponding NPV. The optimum
solution is the point which has the highest NPV, but it is possible for there
to be more than one point with the maximum NPV. It is also possible for
there to be a range of other solutions which have NPVs that are very close
to the maximum. Milawa cannot guarantee to find a schedule with the
absolute maximum NPV, particularly if the highest happens to occur on a
very sharp peak. However, experience has shown that it will find a
solution with a very high NPV.
Appropriate Cost Models for Schedule Optimization

Apart from obeying the rules established for determining cost models for
DCF Analysis (refer to the section Cost Models For Different Purposes),
there are subtleties in modeling for schedule optimization which are
worthy of discussion.
Milawa will sometimes produce schedules that don't use all the mining
and/or processing capacity. It may be that the optimizer is doing exactly
what is should do with the cost model you have provided but the results
are counterintuitive and unrealistic. The problem is likely to be in the
manner in which the cost model has been constructed. The solution is to
build a more appropriate cost model which leads to more realistic NPV
estimates and schedules.
Whittle users will have been faced with situations at times where the
Milawa NPV schedule doesn't look quite right. Some typical issues:
1. There are periods in which the mining capacity is not fully used.
2. There are periods in which the processing capacity is not fully used.
The most frustrating case is the one in which condition 1 occurs, followed
five years later by condition 2.
Here is what many people think:
1. The spare mining capacity could be used to do some pre-stripping,
thus avoiding the later ore shortfall, but Milawa NPV doesn't do it.
2. If spare mining capacity is sitting around doing nothing, it is going to

cost you money, and that isn't reflected in the optimization. Likewise
for spare processing capacity.
This represents a cost modeling problem. The optimization system is

doing exactly what it should do, given the input data it has been provided.
Lets focus on mining for the moment and use an example.
Let's say you have set the mining capacity to 5mT and the mining cost to
$1.10 per tonne. Milawa uses this data as follows:
The total period mining cost is exactly proportional to the actual
tonnes mined, at a rate of $1.10 per tonne.
The maximum tonnage mineable in a period is 5mT.
That leads to a total period mining cost of $5.5m, if the mining rate is
indeed 5mT.
Now, lets say you only mine 3mT in a year, 60% of the maximum. Whittle
would calculate the total mining cost for the period as being 60% of
$5.5m.
Is that realistic? Probably not.
Dropping the mining rate to 3mT for 12 months probably saves fuel oil
costs and some maintenance costs, but that's about all. You will probably
not want to lay off drivers and rehire in 12 months, so you will likely not
save very much in wages. You probably won't save much money in
management, security or dust suppression either. It might be, for example,
that to mine 3mT, costs you $4.5m per year - a saving of only $1m.
But, that is not the information you have provided Milawa. Milawa thinks
that the mining cost is $1.10 per tonne, no matter what the rate of mining.
This provides bias, which contributes to the Problem detailed above.
Solution-1 (using simultaneous equations)
This version of the solution will appeal to the mathematically minded. If

that isn't you, just skip through this section to "Solution-2" which is a little
more intuitive.
You can model mining costs which vary with throughput rate. It is simpler
than you might think. If you consider the above example we are saying:
At 5mT per year, the total period mining cost is $5.5m
At 3mT per year, the total period mining cost is $4.5m
If we presume a linear relationship, we can model this easily in the form:

MC = ax + c
Where:
MC is the total period mining cost ($m)
x is the actual mining rate (mT)
a and c are factor and constant to define the mining cost function. The
units are as follows:
a ($)
c ($m)
If you work out the values of a and c using simultaneous equations, you
get:
a = 0.5
c = 3.0
The full calculation using simultaneous equations is set out below in the
section Simultaneous Equations.
The way to use these two parameters is as follows:
Use $0.50 as the mining cost per tonne.
Add $3m to the Time Cost Per Period. Refer to the help files for
information on how to correctly deal with time costs.
That looks a lot different to a mining cost of $1.10, but will be modeled
correctly at 5mT and at 3mT.
Solution-2 (using a standing cost rationale)
Solution 1 really worked back from some empirical data to what is, in
effect, a standing cost for the mining fleet, and a marginal cost of mining:
Standing cost: $3m per period (Add $3m to the Time Cost Per Period.).
Refer to the help files for information on how to correctly deal with time
costs, or consult with your Whittle Service Provider.
Marginal cost of mining an extra tonne: $0.50 (Use $0.50 as the mining
cost per tonne.)
Same solution, different way of thinking about it.
Notes
This modeling method can be applied to processing cost in exactly the

same way.
You only apply this cost model in the Operational Scenario in Whittle.
You don't apply it in the Pit Shells node.
This modeling method is really designed for handling short term (1-2
year) fluctuations in mining (or processing) rate. It is presumed that if
there is a sustained period in which mining rate was reduced, that you
would be able to adjust your fleet and manage your costs in a different
way.
This modeling method relates to the way in which time costs are dealt
with. You should examine this method in the context of your overall time
cost approach, and make sure you are not double-counting time costs.
Effect of Applying the Solution
Since the per tonne mining rate is now lower, Milawa will have a lower
propensity to avoid pre-stripping.
Since the time cost is increased, Milawa will have a higher propensity to
pre-strip, if this avoids later ore shortfalls (ore short falls extend the mine
life, thus increasing total time costs).
The NPV reported by Milawa will most likely be lower than that reported
pre-solution, but the pre-solution NPV was not realistic.
Simultaneous Equations
We can work out what a and c are using simultaneous equations:
(1) 5.5 = a*5 + c
> c = 5.5 - 5*a
(2) 4.5 = a*3 + c
substitute for c
> 4.5 = 3*a + 5.5 - 5*a
> 4.5 - 5.5 = 3*a - 5*a
> -1 = - 2*a
> a = 0.5
substitute a into (1)
> 5.5 = 0.5*5 + c
> c = 5.5 - 2.5
> c = 3.0
Stockpiles
The following definitions rnelate to the purpose of the stockpile and are
represented as three different types. Whilst any given stockpile is usually
of a single type, it is certainly possible for a single stockpile to serve more
than one purpose.
Grade Stockpile
A grade stockpile is a stockpile maintained for the purpose of deferring the

processing of low grade material till later in the mine life. This is done
principally in order to increase project NPV, through the application of
Lane theory of ore/waste discrimination. Refer to the section on Cut-offs
below.
Where grade stockpiles are used, there may be one of a few of them, with
each of them being of significant size (on the scale of years of production)
The deposition and reclamation of material happens over many years.
They are modeled with WAG usually, but in some cases, actual
deposition/reclamation might follow a LIFO pattern.
These stockpiles may be maintained for long periods, often for a
significant proportion of the life of the mine. The planning for grade
stockpiles is accommodated in Whittle’s Stockpile & Cut-offs module,
applicable to both open cut and underground operations.
Grade stockpiles are usually associated with precious metals and base
metals mines. They are rarely if ever associated with bulk products (e.g.
coal, iron ore, bauxite) or industrial minerals (e.g. limestone; mineral
sands; phosphates).
Blending Stockpile
A blending stockpile is a stockpile maintained for the purpose of storing

material with particular grade characteristics, until such time as it can be
blended with other material (either from stockpiles or ROM) so as to
achieve a desired blended characteristic. There are two sub-classes of
blending processes that blending stockpiles serve.
Extractive Blending – When ROM and stockpiled material is blended in
order to produce a suitable input to an extractive process (such as for
many precious metals and base metals). The objective in controlling the
blend is to present material to the process which has grade characteristics
which are conducive to high extraction efficiency.
Bulk Blending – When ROM and stockpiled material is blended in order

to produce a salable product, such as metallurgical coal; energy coal and
iron ore.
There are also “types” of blend planning/optimization, relating to the time
period, model and decision variables of optimization. Refer to the
Blending section.
Buffer Stockpiles
Buffer stockpiles are designed to deal with short-term mismatches

between the output of one process, and the input to another.
Stockpile Planning
Stockpile Design
Economic Design – Determining the function, entry/exit criteria and

overall size. This is done in the strategic planning domain (Whittle) for
Grade Stockpiles, and medium/long-term Blend and Buffer Stockpiles.
Economic design is done in the continuous process optimization domain
(such as application of theory of constraints) for short term buffer
stockpiles.
Engineering Design – Determines the exact nature of
deposition/reclamation to achieve structural integrity and grade
management (LIFO, FIFO, WAG). Also strongly related - equipment
selection for deposition/reclamation to achieve desired blending (or to
avoid blending).
Engineering design is achieved in Mine Planning process, associated with,
but not directy supported with the application of Whittle.
Stockpile Operation
Subject to the economic and engineering design, stockpile operation is the

planning of actual deposition and reclamation, as well as the tracking of
stockpile actual movements and tonnages or volumes.
Stockpile operations planning is achieved as a part of overall operational
scheduling. This is outside the scope of Strategic Mine Planning.
Blending
Introduction
We define four types of blending here. Only two of these four defined
blending types are directly relevant to the field of Strategic Mine Planning,
but the full set of definitions is provided in the interests of completeness.
Examples of the application of Type-1 and Type-2 Blending are given for
a talc mining operation in Noble & Sier (1996).
Type 1 Blending (Single order blending)
The model consists of existing stockpiles and definitions of material types

available as ROM. There are a few variants on this model, depending
mainly on the manner in which ROM material is modeled. The simplest
model merely defines material types available. The more complex types
defines ROM material by material type and tonnage, with sequential
availability where applicable. The objective function is to satisfy a single
order for blended material by using stockpiled material and ordering ROM
material from the mine.
Type 1 blending is usually achieved using some sort of LP engine
(available in Excel, Lindo, CPLEX). Type 1 blending may also be
available/achievable in production scheduling software such as GEMS
Production Scheduler.
There can be multiple blending points (sequential blending) to consider.
For example:
1. As ROM material is fed into the hopper of a breaker or crusher.
2. As material is beneficiated (such as washing; separation).
3. As material is loaded onto trains.
4. As material is unloaded from trains.
6. As material is stockpiled on a port.
7. As material is reclaimed from the stockpile.
Type 2 Blending (Multiple order blending)
Similar to type 1 blending, but where a sequence of orders is presented.

The objective function is to satisfy the sequence of orders for blended
material by using stockpiled material and ordering ROM material from the
mine.
Type 2 blending is usually achieved using some sort of LP engine, but is
usually too complex to be able to apply a spreadsheet based solution, so
would usually be dealt with through the application of specialized LP
systems (e.g. Lindo, CPLEX). Type 2 may also be available/achievable in
production scheduling software such as GEMS Production Scheduler.
Type 3 Blending (LOM Schedule blending)
The objective function is to maximize financial performance (net

cashflows or NPV) while satisfying the blended product requirements.
Type 3 blending for open cut mines is catered for in Whittle.
In Type 3 blending, blending is considered as a single stage operation (i.e.
sequential blending must be modeled as a single stage).
Figure 65: Bulk blend schematic
Figure 66: Extractive blend schematic
Type 4 Blending (Combined pit and blend optimization)
The objective function is to determine the pit shape and optimal blend
which maximizes the economic performance of the operation over its
entire life.
Type 4 Blending can be applied in Whittle as an advanced technique. A

number of the advances in the Whittle tools over the last couple of years
have made this advanced technique more easily achievable.
In Type 4 blending, blending is considered as a single stage operation (i.e.
sequential blending must be modeled as a single stage).
Refer to Srinivasan & Whittle (1996).
Type 4 Blending: Combined Pit and Blend Optimization

Srinivasan, S., Whittle, D., 1996, Combined Pit and Blend Optimization,
in SME Annual Meeting Phoenix, AZ., Society for Mining Metallurgy and
Exploration, Inc. Reprint No. 96-69.
Abstract
Traditional pit optimization techniques cannot take account of the

requirement to blend ore in order to produce a saleable product, as is the
case for iron ore, coal, limestone and other industrial minerals. Various
techniques are proposed to overcome the deficiencies, many of which
have been tested. The techniques in general involve the combined
application of pit optimization and blend optimization techniques.
Introduction
Pit optimization techniques are often applied to gold, copper, diamond and
other mines, but rarely to iron ore, coal, limestone and some other
industrial minerals. One of the reasons is that, to miners of the latter
group of minerals, the problem of sequencing a mine in order to achieve a
desired blend of ores, is more pressing than optimizing the shape and size
of the mine itself.
Pit optimization techniques could perhaps be used if a nest of pits were
used to guide long term mine planning, and where each phase so defined
contained a mix of ore types that can be blended efficiently. However, pit
optimization techniques have no way of dealing with the blending issues
explicitly and the solution of this problem is the focus of this paper.
Mol and Gillies (1984) suggested using the grade tonnage curves and
curves for cutoff iron versus average iron, alumina and silica, to determine
the cutoff iron grade which leaves the average iron content, alumina
content and silica content in the deposit in accordance with the blend
requirement. Iron ore mines still employ a similar approach for
determining ore and waste. The disadvantage of this approach is that it
doesn’t allow for the optimization of the pit design (an optimized pit
would define a subset of the original deposit, therefor upsetting the
average grades). The technique also leads to the abandoning of some low
grade blocks, which might otherwise be included in the blend, because of,
say, their low impurity content.
The solution to the problem of how to generate an optimal pit which
contains an optimal mix of ores, seems to lie in the combined operation of
pit and blend optimizers.
Assumptions
General
We are dealing with a finite resource consisting of various ore-types
which must be blended to produce a marketable product. Ore-types are
assigned on the basis of primary grade and radicals or contaminants. All
examples of a particular ore-type will have the same primary grade and
radicals characteristics. There is no limit to the number of ore-types that
might be defined in order to effectively describe an ore-body.
The price obtained for blended ore is constant. It is not the purpose of this
paper to look at the demand side of the blended ore market.
For the discussion of techniques for combining pit and blend optimization,
no account is made of time, sequencing or stockpiling. The aim is to
produce a pit (or pits) which will yield the different ore-types in such
quantities so as to maximise the sum of the profits of the mining and
blending operation.
Pit Optimization
A pit optimizer designs a pit which has the following characteristics:
• Pit slope constraints are obeyed.
• The total value of the pit is maximised.
To achieve this, the pit optimization program must be given:
• Pit slope constraint information.
• The cost of mining per unit of waste.
• The value of a unit of ore.
• A model which describes the position of the ore and waste in three
dimensional space.
If there are different ore-types, the value of the ore may be different for
each ore-types.
Blend Optimization
There are a number of different ways of defining the objective function of
blend optimization. Some examples are as follows:
• Maximise the tonnage of blended ore by determining which stockpiled
ores to blend, while satisfying grade constraints.
• Minimise the cost of producing a unit of blended ore by determining

the ratio in which ore-types should be used, given a unit cost for each
ore-type, while satisfying grade constraints.
In each case discussed below, the objective function of the blend optimizer
will be specified.
Techniques for combining pit and blend optimization
Heuristic Method
The basic heuristic method in four variants was developed and tested on
an iron ore model. The model was from an iron ore deposit in eastern
India, with reserves of about 290 million tonnes of Haematite with an
average analysis of 63.5% iron, 4.0% Alumina and 2.405% Silica. Blocks
of 25m x 25m x 12m were estimated with variogram modelling and
krigging using Surpac mine planning software. The model contains
blocks each of which are defined as air, waste or potential ore and the
grade characteristics of the potential ore is included in the model.
Surpac was also used to manipulate the model and to interface with
Whittle Three-D, which is an implementation of the Lerchs-Grossmann pit
optimization algorithm. The blend optimizer was created using the linear
programming package ORSYS of ESP inc. with an objective function to
maximise the tonnage of the blend under the constraints that the blend
must not violate the grade targets set out for the blend. Some block model
manipulation and interface between the linear programming package and
Surpac was done using software written by Srinivasan in Pascal.
Flow Chart
Heuristic Type 1
The numbers in brackets in the discussion below refer to the flow chart
above.
The blend-optimization-targets are initially set (1) as being equal to the
real grade constraints. A blend optimization (2) is performed on the
original block model in order to find the maximum subset of potential ore
blocks which can be included in a blend that will satisfy the grade
constraints. The potential ore in the optimal-blend-subset is flagged as
ore. A pit optimization (3) is then performed, which defines an optimal-
pit-subset of the original model (consists of everything which is within the
ultimate pit outline). The same values are attributed to the different ore
types, being equal to the value of ore that just meets the real grade criteria.
The pit value is re-calculated (4) as if all the potential ore in the optimal-
pit-subset were in fact ore. A comparison is done (5) to see, if all the
potential ore in the optimal-pit-sub-set is blended, whether it will meet the
real grade constraint. If not, the blend optimization targets are adjusted,
and the process repeated until an iteration is performed in which the
comparison test (5) is passed.
Heuristic Type 2
In most respects this is the same as Heuristic Type 1, except for the
following:
When the pit value is recalculated (4), only flagged ore (potential ore in
the optimal-blend-subset) is included in the calculation.
The comparison (5) is performed to determine, if all the flagged ore in the
optimal-pit-subset is blended, whether the resulting grade will meet the
real grade constraint.
Heuristic Type 3
following:
A second blend optimization (6) is performed in each iteration on all
potential ore blocks on the optimal-pit-subset and then the pit value is
recalculated (7).
Heuristic Type 4
following:
For the purposes of pit optimization (3), different prices are applied to the
flagged ores, depending on the grade characteristics of the ore. In general,
low grade ore has a lower price, high grade ore a higher price. The effect
of this is to cause the pit optimizer to favour mining of high grade ore.
Results of Heuristic Trials

Ore
250
200
mill. tons
150
100
50
0
Type 1 Type 2 Type 3 Type 4
Waste
40
35
30
mill. tons
25
20
15
10
5
0
Pit Value
9500
9000
mill. rupees
8500
8000
7500
7000
6500
All heuristic methods were able to produce a pit with the desired grade
characteristics, with only a few iterations, although the tonnages and pit
values varied considerably. The best value pit was achieved with the
heuristic type 4, where the values assigned to the blocks is related to its
grade. The problem with using constant value regardless of grade as is the
case for heuristic types 1-3, is that, the pit optimizer treats each block with
equal priority. But when a subset of the total blocks need to be selected,
based on the slope constraints, to maximise the value, we would rather
have richer blocks included in the pit than the poorer ones. This
distinction could be achieved only by linking the value of the block to its
grade content.
The heuristic type 1 result is of interest, even though the value of the pit
was low. It produced a small pit with a very low stripping ratio. This
could provide a suitable starting point for opening a deposit when
minimising waste excavation is one of the priorities.
Transfer Pricing Model and Method

A model and method is proposed which will preserve the optimality of the
results produced by pit and blend optimizers. In effect, it allows the
constraints and decision variable of the two optimizers to be combined in
order to achieve the single objective function of maximizing profit.
The term ‘transfer pricing’ is used to represent the prices applied to
different ore-types transferred between the mining operation and the blend
operation, which in this model are assumed to be totally separate entities
or profit centres.
You may wish to think of this model as trying to replicate a market
mechanism, where each ore-type supplied by the mine is supplied at a
price as if by sellers in the market, and the ore-types are demanded by the
blending operation as if by buyers in the market. An increase in the
market price will tend to increase the suppliers desire to produce it, but
decrease the buyers desire to procure it. A price must exist at which the
amount supplied equals the amount demanded. Adam Smith (1776-78)
produced perhaps the most famous crystallisation of market theory, with
his concepts of ‘negatively sloping demand curve’ and the ‘invisible hand’
and in doing so, showed how a market led to high efficiency.
There are three components to the model, the supply function, the pricing
function (the market) and the demand function. The supply function in
our model is taken by the pit optimizer, while the demand function is
handled by the blend optimizer. A pricing function must be created that
will act like a market, by increasing prices when there is excess demand
and decreasing prices when there is excess supply. We are seeking the
long term stable prices for the different ore types and a series of trials has
to be performed to try to establish what these are. The test for whether a
complete set of long term stable prices has been found, is that the ratios of
ores yielded by the mine will equal the ratio demanded by the blend
operation. It can be shown that conditions of optimality for both blend
and pit optimization are not jeopardised provided this test is passed.
Transfer Pricing - Fixed Blend Ratio

In order to explain how transfer pricing may be used in relation to
dynamic blend ratios (ratios that change with changes in unit cost for the
different ore-types), it is useful to first consider the simple case, in which
blend ratios do not change and where only need to be concerned about one
grade criteria, in this case Silica content.
Imagine you are designing a mine using pit optimization software for a
small iron deposit. The deposit contains two iron bearing ore-types and
waste. The iron bearing ores are scattered and intermingled. Both ore-
types have an iron grade of 65%, which happens to correspond exactly
with your buyer’s requirements. One type has a high-silica content, the
other has a low-silica content.
The buyer is prepared to pay $10 per unit of ore. The low-silica ore easily
meets your buyers requirement, the high-silica ore does not. As the high-
silica ore is not merchantable, you decide to set it’s value to zero for the
purpose of pit optimization. The software does it’s work and in doing so,
yields 1,000 units of low-silica ore, 1,000 units of high-silica ore and some
waste. If you were to sell the 1,000 units of low-silica ore, you would
generate revenue of $10,000. This corresponds exactly with the revenue
calculated by the pit optimization software. The high-silica ore would be
sent to the waste dump.
It is brought to your attention that it would be possible to mix high-silica
and low-silica ore in a ratio of 1:2 and the blended ore would just meet
your buyers requirement. In doing so, you are able to sell 1,500 units of
blended ore at $10 per unit, so increasing your revenue to $15,000. You
have earned $5,000 more from the ore yielded than your pit optimizer
calculated. The problem is that by giving the optimizer a high-silica price
of $0, you have indicated that the ore has no value, yet clearly it does have
some value because it can be sold for $10, provided it is blended with
some low-silica ore. It is extremely likely that the pit optimizer will have
achieved a sub-optimal result, because you have not given it appropriate
values for the ore.
You perform a number of trials to try to get the design revenue and real
revenue the same. Firstly you set the price for high-silica ore to $10. The
pit optimizer does it’s work and now yields 1,200 units of low-silica ore
and 2,000 units of high-silica ore. The optimizer calculates the revenue to
be 1,200 * $10 + 2,000 * $10 = $32,000. However, you can still only
blend high and low-silica ore in a ratio of 1:2, so the amount of ore you
can sell is limited to (600+1,200)=1,800. Your real revenue is only
$18,000, well short of the figure calculated by your pit optimizer. The
optimizer has counted $20,000 revenue for the high-silica ore, whereas
you only realised $6,000 through the use of some of the ore. Again the
result is sub-optimal, but this time the pit is optimistic rather than
pessimistic. The pit optimizer has treated some ore as being valuable
when in fact it is worthless.
You consider applying the $10 price to only some of the high-silica ore,
but realise that by doing so, you would be steering the optimizer towards
the high-silica ore that you favour, rather than allowing the software to
make a proper economic decision.
Numerous subsequent trials are performed and it becomes apparent that
you cannot make the design revenue equal to the real revenue by
modifying the high-silica price alone, you must change both prices. In
fact the rules that you must follow are:
1. The sum of the ore-type unit prices (transfer prices) multiplied by
their yield ratios, must equal the unit price for the final blended ore.
2. The ore-type ratios yielded by the pit must equal the ratios
demanded in the blend, in this case (high-silica : low-silica)=(1:2). There
is one exception to this rule. It is possible for an ore-type to have a
transfer price of $0, in which case, it is acceptable for the pit optimizer to
yield a greater quantity of the ore than can be used in the blend.
The rules stated above hold for any number of ore-types. Simple
arithmetic can be used to determine a set of transfer prices that complies
with the first condition, but only by running the pit optimizer with that set
of transfer prices, can it be determined whether or not the second
condition is met. It is therefore necessary to perform multiple pit
optimizations, diligently altering the set of transfer prices (this is the
transfer pricing mechanism in action) between each run, in order to find a
set which satisfies both conditions.
Transfer Pricing - Dynamic Blend Ratio

If a large number of ore-types are available and/or there is more than one
grade criteria (e.g. iron, silica and alumina), then it may become possible
to blend the ores in a variety of different ways to achieve the target grade.
Clearly, if different costs are associated with different ore-types, then
some blends will be more economically attractive than others. A blend
optimizer will look at the unit cost of each ore-type and determine which
blend produces a unit of blended target-grade ore at minimum cost (the
objective function).
In the section above, a methodology is outlined which involves the

running of a pit optimizer in order to determine the ratios in which ores are
yielded. If a blend optimizer is being used, then the blend ratio becomes
variable and is dependent on the values of the transfer prices. Because of
this, the blend optimizer must be run at the same time as the pit optimizer
in order to determine the demand ratio, to which the pit optimizer’s yield
ratio must match.
Mathematical Model
Below is the mathematical definition of the problem. The Pit function and
Blend function shown below, represent the operations of a pit optimizer
and a blend optimizer, however in this model, they serve the purpose of
providing constraints for the pricing optimization. The objective function
is to make the supply ratios equal the demand ratios, by manipulating the
transfer prices (the decision variables), subject to various constraints.
m = f ⎛⎜ p ,..., p ⎞⎟
i mi ⎝ 1 n⎠
(Pit function of ore-type prices which determines ratio of ore-types i

mined)
bi = f bi ⎛⎜ p 1 ,..., p n ⎞⎟
⎝ ⎠
(Blend function of ore-type prices which determines ratio of ore-types i

demanded for blending)
Minimise:
⎛ ⎞
x = f ⎜⎜ p ,..., p ⎟⎟
0 p⎝ 1 n⎠
(find the set of values for pi which will minimise xo)
Where:
⎛ ⎞ n
f ⎜⎜ p ,..., p ⎟⎟ = ∑ ⎛⎜ m i − b i ⎞⎟
p⎝ 1 n⎠ i =1 ⎝ ⎠
(the function returns the sum of the absolute differences between the
supply and demand of all ore-types)
Subject to:
n n
∑ m i = 1 and ∑ b i = 1
i =1 i =1
(sum of ratios should equal 1)
p ≥ 0, m ≥ 0, b ≥ 0, i = 1,..., n
i i i
(ratios should not be negative)
Method
Set variables pi to initial values
Do until x0 = 0
single pit optimization run

m = f ⎛⎜ p ,..., p ⎞⎟ , i = 1,..., n
i mi ⎝ 1 n⎠
single blend optimization run
b = f bi ⎛⎜ p 1 ,..., p n ⎞⎟ , i = 1,..., n
i ⎝ ⎠
Do for all values of i
price adjusting mechanism
If m > b , then decrease p , else

i i i
if m < b then increase p

i i i
Scheduling
Successfully combining pit and blend optimization does not immediately

produce any practical benefits, because the blending issues faced by a
miner depend on and are influenced by the sequence in which the ore is
extracted. The pit/blend optimization must be done, not just for the life of
the mine, but for medium term operational periods. There are a large
number of variations of basic pit optimization which lead to a very good,
if not truly optimal extraction sequence. Practical commercial examples
of this include Whittle (1988). Whittle’s Four-D generates a nest of pits,
which are used to guide long term mine sequencing. Tolwinski &
Underwood (1992) and Halatchev (1993) have proposed schemes, which,
beginning from a nest of pits produce more detailed sequences which take
into account minimum mining widths, smooth out variations in mining
and production rates as well as having other objectives. It would be
possible to generate a nest of pits, where each shell had the optimal
pit/blend characteristics. It should then be possible to feed this into the
technology being developed by J. Whittle, Halatchev, Tolwinski and
Underwood, in order to provide an extremely useful optimization tool.
Conclusion
The heuristic methods outlined should be of interest to miners because for

the most part they utilize readily available tools and can produce useful
results with just a few iterations. It may be possible to extend the methods
by manipulating the cost price ratios to effectively mine a deposit out a bit
at a time, with each bit obeying the grade constraints.
The transfer pricing method promises to produce results which are
consistently better than the heuristic methods, however the
implementation will be more difficult and, the authors suspect, the
processing time to produce a single pit will be far greater.
Cost Models for Different Purposes

Introduction
In the section Economic Analysis, Projected Accrual Accounts was
presented as an alternative economic analysis technique for strategic mine
planning, with the advantage of being good for projected future tax
liabilities, but with little else in the way of advantages. It is never the less,
the dominant financial modeling system in all businesses but for reporting
of past financial performance and current financial position. Never the less
as a dominant model, the rules associated with it are better known to many
that the rules that apply to simple cash flow analysis and DCF analysis,
and there are times at which the rules of the former, get mixed up with the
rules of the latter. It is for this reason, that some space is dedicated here to
compare and contrast the rules, so that the Strategic Mine Planner can
more fully appreciate the issues and successfully avoid confusing the
rules.
Accrual accounting is universally used as the basic business financial
reporting system. The idea behind the system is to match costs with
revenues for particular activities, so that a true picture of the profitability
of the activities can be obtained. The results of accrual accounting
manifest themselves as the Balance Sheet, the Profit/Loss Statement and a
variety of other historical business reports. The cost and revenue
information required to perform pit optimization is different to that
required for accrual accounting and the requirement for DCF Analysis is
different again. Here, we seek to illuminate the difference, with particular
reference to an Australian Accounting Standard for the extractives
industry.
The Pervasiveness of Accounting Concepts

The historical cost-based double entry accounting system was developed
in Italy in the 12th and 13th centuries. The system, sometimes referred to
as the 'System of Venice', spread with Italian merchants to the rest of
Europe and to England and by the end of the 15th century, its use was very
widespread. Records from the time showed practices including deferrals
and accruals, specialized journals and subsidiary ledgers, little different to
what accountants do today. Although there have been changes in the
system since the 15th century, the changes have been in the detail rather
than in principle. Accrual accounting has become the dominant variant of
the system. 24
Accrual accounting is now so dominant in every day commercial life that
some of the rules and conventions have assumed the status of self-evident
truths, most particularly amongst those who are not fully trained in
accounting concepts.
24
Refer to the Glossary of Accrual Accounting Terms section for explanation of these
terms.
Misapplication of Accounting Concepts - An Example

Refer to Figure 67, which is reproduced from the 1990 edition of “Surface
Mining” published by SMME (Society of Mining, Metallurgy, and
Exploration). Armstrong, D., (1990) argues that depreciation should be
counted and that by doing so the size of the pit would decrease. He goes
onto say that increment C becomes worth mining once the plant has been
fully depreciated.
Figure 67: Misapplication of accrual accounting concepts in the

determination of the ultimate pit.
The underlying assumption is that the plant is still operating, whilst all of
its original cost has been brought to account as an expense. This changes
the cost of mining under accrual accounting rules and it then appears to
become profitable to mine C, when previously it appeared not to be
profitable. However, the real contribution C makes to the value of the pit
depends only on the cash costs and revenues that it generates. The issue
of whether or not the cost of the plant has been fully depreciated is
irrelevant.
The correct approach to this particular problem is to determine which pit
yields the highest value, not counting in any way the capital cost of the
processing plant. Once you have determined the highest value pit,
subtract the capital cost of the processing plant to get the correct project
value.
This sort of confusion is common according to Whittle's software support
records, even seasoned consultants with international reputations get it
wrong. We believe that most or all of the confusion can be cleared by
examining the basic principles of accrual accounting, DCF Analysis and
pit optimization.
Principals and Assumptions for Accounting, Pit Optimization and DCF

Analysis
Accrual Accounting is an historical accounting method. In contrast, DCF
Analysis and pit optimization are both planning tools. Some basic
characteristics of the methods are set out in Table 9.
Table 9: Characteristics of the different methods

The Australian Accounting Standard v. Requirements for Pit Optimization

and DCF Analysis
The Australian Accounting Standard - AAS 7 (11/89), which is

documented in AARF (1989), sets out the manner in which accrual
accounting should be applied in relation to a mining operation. It is
similar to other extractive industry accounting standards that apply around
the world and is used here as an example.
The objective is to achieve proper matching of revenues and expenses
using the “area of interest method” and from an historic perspective.
Expenses can be written off, carried forward and/or amortized on a
production or time basis. In the case of anticipated cash flows, for
example, the cost of restoring an area on cessation of mining, the cash
flow can be provided for at the time that the expense is said to have been
incurred.
The rules which govern which costs should be included in pit
optimization, and how they should be included are quite different. Refer
to the sections Calculating Block Values; A Formula for a Block Value
and Calculating Costs for a discussion of the rules.
The rules which govern which costs should be included in DCF analysis
are similar to those for pit optimization, with the exception that:
1. Time costs can be dealt with explicitly.
2. Discounting is applied to cashflows in DCF analysis on the basis of the

time period in which the cashflows occur.
Below is a summary of the cost categories and their preferred treatment

under AAS 7, along with the preferred treatment for Pit Optimization and
DCF Analysis.
Exploration and evaluation costs where no discovery is made.
AAS 7 Accounting
Write off.
Pit Optimization
Not Applicable - It does not vary in accordance
with the amount of waste or ore that is removed or
processed.
DCF Analysis
Not Applicable - It is committed and irreversible.
Exploration and evaluation costs, where it is unclear at the end of the reporting
period as to whether or not a mine will be developed.
AAS 7 Accounting
Carry forward.
Pit Optimization
Same treatment as for exploration and evaluation
costs where no discovery is made.
DCF Analysis
Exploration costs where it has become apparent that mining will proceed.
AAS 7 Accounting
Carry forward / amortize 25.
Pit Optimization
DCF Analysis
25
Under AAS 7 amortization should be done on a production output basis (e.g. $/gram of
gold produced), unless, under the circumstances, a time basis is more appropriate.
Amortization charges form part of the cost of production.
Cost of acquiring leases or other rights of tenure.
AAS 7 Accounting
Classify as exploration, evaluation or development
costs depending on the circumstances
Pit Optimization
processed.
DCF Analysis
If the cost is contingent on project start up, then it should be included. If
the cost has already been committed, then the extent to which the cost
should be included will depend on the likely resale value of the lease,
should you decide not to proceed with the mining project. The likely
resale value represents an opportunity cost; if the project proceeds, you
will forego the resale value.
Inclusion of the contingent lease acquisition costs
in the DCF model is important if you are using the
analysis to decide whether or not to proceed with
the project. However, if you are using DCF
Analysis to compare alternative designs and long
term schedules, then the inclusion of the cost in the
model is not important, because it will not affect
the ranking of the alternatives.
Development Costs
AAS 7 Accounting
Carry forward / amortize
Pit Optimization
processed
DCF Analysis
If the cost is committed and irreversible, it should
not be included
Construction Costs - in the nature of depreciable assets
AAS 7 Accounting
Depreciate in accordance with AAS 4.
Pit Optimization
If one of the following conditions prevails, then it can be said that the
cost varies in accordance with the amount of waste or ore which is
removed or processed:
1. The asset will need to be replaced during the life of the mine.
2. The resale value of the asset decreases in relation to time or to

tonnes throughput.
The cost per tonne of waste or per tonne of ore

should be calculated and included in the model.
DCF Analysis
If the cost has been explicitly handled in pit optimization, the cost will be
automatically carried over into the DCF Analysis model, so do not enter
the cost again. The only exception to this rule is that, if you have had to
model time based costs in pit optimization as throughput costs, then for
DCF Analysis you should apply time based costs explicitly and reverse
out the costs built into the pit optimization model.
If the cost has not been included in the pit optimization model, its
inclusion in the DCF Analysis model will depend on the manner in which
the resale value of the asset changes over time.
If the resale value is zero at any time (as would be the case for the
concrete foundations for a processing plant), then the cost should be
included as a single negative cash flow, but only if the expenditure has
not yet been committed.
If the resale value decreases over time, then the

amount by which the value decreases in each
period should be applied in each period.
Construction Costs - not in the nature of depreciable assets
AAS 7 Accounting
Treat in the same way as development costs. That
is, carry forward / amortize
Pit Optimization
Same treatment as for Construction Costs - in the
nature of depreciable assets
DCF Analysis
Same treatment as for Construction Costs - in the
nature of depreciable assets
Continuing Development (the Standard does not discriminate between

development of new resources/reserves and the upgrading of categories of
existing resource/reserves).
AAS 7 Accounting
Amortize
Pit Optimization
If the continuing development relates to potential new resources in the
area of interest, then the cost should be excluded.
If the continuing development relates to upgrading
the categories of existing resources, the cost
should also be excluded, although this issue is far
less clear cut. It could be argued, for example,
that if the pit produced by pit optimization
includes, some Indicated Resources, then extra
costs will be incurred in relation to that ore to
improve the estimate category to Measures
Resource. However, we do not believe that this
would be an appropriate treatment of the
uncertainty associated with Resource and Reserve
estimates and it is beyond the scope of this
document to discuss the issue in detail. Interested
readers should refer to Hanson, N., (1995)
DCF Analysis
As for Pit Optimization
Operation Costs
AAS 7 Accounting
Write off
Pit Optimization
Costs should be categorized as mining, processing or selling costs.
Within those categories, the costs should be categorized as either
throughput based costs or time based costs. Throughput based costs can
be applied directly. Time based costs must be converted to throughput
based costs by dividing the cost by the period throughput which limits the
mine life.
If the limiting factor in the mines production is the
processing throughput, then all time based costs
should be divided by the period processing
throughput limit and assigned as a processing
cost. Similarly, if the limiting factor is the mining
capacity, then all time based costs should be
converted to mining costs. If the limiting factor is
the amount of product that can be sold in each
period, then the time costs should be converted to
selling costs.
DCF Analysis
If the cost has been explicitly handled in pit
optimization, the cost will be automatically carried
over into the DCF Analysis model, so do not enter
the cost again. The only exception to this rule is
that, if you have had to model time based costs in
pit optimization as throughput costs, then for DCF
Analysis you should apply time based costs
explicitly and reverse out the costs built into the pit
optimization model.
General and Administrative Costs
AAS 7 Accounting
Allocate only to the extent that the costs can be
related to operational activities in the area.
Pit Optimization
If the costs are not dependent on the project commencement or cessation,
then they should not be included.
General and Administrative costs that stop if
mining, processing or selling stop, should be
converted to throughput based mining, processing
or selling costs. If the costs are not dependent on
the project commencement or cessation, then they
should not be included.
DCF Analysis
If the costs are not dependent on the project commencement or cessation,
then they should not be included.
General and Administrative costs are generally
time based rather than throughput based. If you
have had to model time based costs in pit
optimization as throughput costs, then for DCF
Analysis you should re-enter the time based costs
optimization model.
Amounts received and subsidies in relation to exploration, evaluation,

development or production
AAS 7 Accounting
Offset against the expense to which the payments
or subsidies apply.
Pit Optimization
or subsidies apply.
DCF Analysis
or subsidies apply.
Restoration Costs
AAS 7 Accounting
Shall be provided for at the time of the activities to
which the restoration is related and shall form
part of the cost of the respective phase of
operation.
Pit Optimization
As with AAS 7, restoration costs should be
attributed to exploration, evaluation, development,
construction or operation. If attributed to
exploration, evaluation, construction or
development (outside the pit) they should be
treated as shown above for these categories. If the
costs relate to operation, and the cost is related to
the throughput of waste or ore, then the cost
should be included on a throughput basis.
DCF Analysis
If the cost has been explicitly handled in pit
optimization, the cost will be automatically carried
over into the DCF Analysis model, so do not enter
the cost again. The only exception to this rule is
that, if you have had to model time based costs in
pit optimization as throughput costs, then for DCF
Analysis you should apply time based costs
optimization model.
Glossary of Accrual Accounting Terms

There are countless books available which contain excellent explanations
of accrual accounting and accounting terms, ranging from High School
and University text books, to Encyclopedias. However, on the assumption
that many of the readers of this book would not have ready access to such
texts, we have included our own brief explanation.
Accounts
The accounts of a business are a record of the past financial performance

and present financial position of the company. The words Accounts or
Accounting are often prefixed by the words Historical, Accrual, Double-
Entry and Cost-Based. These are not representative of mutually exclusive
accounting methods. Each term describes an aspect of accounting which
needs to be highlighted depending on the context in which the term is
used. The vast majority of businesses in first-world countries use
historical accounting systems which employ Accrual, Double-Entry and
Cost-Based Accounting methods.
Balance Sheet
The Balance Sheet is a report that shows the financial position of a

business at a given point in time. The report lists the totals of all the
Asset, Liability and Capital Accounts and must demonstrate that the basic
equation, Assets = Liabilities + Capital, is obeyed.
Cost-Based Accounts
The value of items is based on the cost of the items. For example, a shop
may buy stock worth $100 that it expects to eventually sell for $150. The
stock is recorded in the accounts as having a value of $100, being the cost,
rather than the expected sales value of $150. Not until the item is actually
sold is the value of $150 taken up in the accounts, being attributable as
$100 for the cost of goods sold, and $50 profit.
Depreciation and Amortization
Depreciation is one of the tools available to the accountant to accrue costs.

If a fixed asset, lets say a truck with a working life of 5 years, is purchased
by a company, the purchase is first brought to account as an asset. Then,
every year, an accounting entry is made to reduce the value of the asset
and allocate the reduction as a depreciation expense. By this method, the
cost of the asset is distributed over the working life of the asset and at any
point in time, the Balance Sheet shows the book value of the asset. The
book value of an asset is really defined by the method by which it is

calculated and it would not be correct to say that it represents the resale
value of the asset. A useful analogy is given in Colditz, Bernard T.,
Gibbins, Ronald, W., et. al, (1976, P.407):
“It is convenient to think of a fixed asset as a bundle of services to be
received by the owner over a period of years. Ownership of a delivery
truck, for example, may provide about 100 000 kilometers of transport.
The cost of the delivery truck is customarily entered in a fixed asset
account entitled Delivery Truck or Delivery Vehicles which, in essence,
represents payments in advance for several years of transport services…
As the years go by, these services are used by the business and the cost of
the fixed asset is gradually transferred into depreciation expense.”
Amortization is similar to depreciation, but generally it is applied to
intangible assets such as good will, or to prepaid expenses. An example of
a prepaid expense would be the cost of building a haul road. The expense
of building the haul road is incurred in early years, but the utility of the
road is enjoyed throughout the life of the mine. However, building of the
haul road would generally not be regarded as an asset in the same way as a
truck is regarded as an asset. The cost of building the haul road is brought
to account as a special type of asset, and every year an account entry is
made to reduce the amount of prepaid expense remaining and to allocate it
to the amortization expense account in that period.
The ‘ongoing business’ concept has important implication in relation to
depreciation and amortization. That is, that the period over which
depreciation and amortization is charged over, can be set independently of
the life of the business. The ‘conservative’ concept also has implications.
Nobody can be sure of the exact working life of a piece of equipment. If
for example, the expected working life of a piece of equipment ranged
between 5 - 8 years, most accountants would be inclined to depreciate
over 5 years. This means that the business will expense the item over five
years. If the life of the item turns out to be longer than 5 years, then the
accountant will have overestimated the cost in the first 5 years. However,
this is consistent with the conservatism concept of accounting.
Double Entry Accounting / Bookkeeping
The double entry accounting system is based on the following basic

principals:
1. The accounts are kept from the point of view of the business as an
entity separate from the owners of the business.
2. The net worth of the business equals the assets of the company, less
the liabilities of the company, and the net worth is equal to the capital
of the owners. The basic equation is Assets = Liabilities + Capital.
In order to maintain the basic equation, an increase in Assets must be

associated with an equal increase in Liabilities or in Capital, and a
decrease in Assets must be associated with an equal decrease in Liabilities

or Capital. By convention, the equation is maintained by the use of two
columns for every account, the left one being labeled Debit or Dr. (from
the Latin ‘he owes’) and the right one being labeled Credit or Cr. (from
the Latin ‘he trusts’). If ever an entry is made in a Debit column of an
account, there must also be an entry made in the Credit column of another
account. For example, cash at bank is an asset, whereby the bank owes
money to the business. If a Debit entry is made to the Asset account
called cash at bank, this indicates that there has been an increase in the
amount that the bank owes the business; an increase in the asset of the
business 26. A corresponding Credit entry must be made to another account
to maintain the basic equation. The account this Credit entry is made to
will depend on the nature of the transaction. Some simple examples are
given below:
1. Money was received as seed capital from the owner of the business.
Dr. Assets (Cash at Bank)

Cr. Capital
2. Money was borrowed from a friend to finance the business and
deposited in the bank account.

Cr. Liabilities (Loan from Friend)
3. A truck is sold (at its book value) and the proceeds of the sale are
deposited in the bank account.

Cr. Assets (Trucks)
The accounts discussed so far are all present in the Balance Sheet, which
is a report that represents the financial position of the business at a given
point in time. However, the Balance Sheet says nothing about how the
business got to where it is. For that, a different report and some more
accounts are required. The Profit and Loss Statement summarizes two
other types of accounts; Revenue and Expenses. It may be useful to think
of Revenue and Expense Accounts as subsidiary to the Capital account,
because at the end of each financial period, they are totaled up to
determine the profit or loss for the period and allocated to the Capital
account. Earning income corresponds to an increase in Capital, so income
is represented in the accounts with a Credit entry to the Revenue Account.
Incurring a cost corresponds to a decrease in Capital, so a cost would be
represented in the accounts by a Debit entry to the Expense Account.
26
Please note that when a business receives an account statement from the Bank, the
Bank is presenting the state of the account from the Bank’s point of view, so if the
account is in Credit, from the Banks point of view, this indicates that he trusts (he being
the Business) the Bank with the money. If the accounts are in Debit, this indicates that he
owes the money to the Bank. When the money is viewed from the point of view of the
Business, the Debits and Credits are reversed.
In practice, a business may maintain hundreds of accounts in its General

Ledger, each one allocated for particular types of transactions. However,
each and every account will fall into one of the categories: Assets,
Liabilities, Capital, Revenue or Expenses. Its position in the General
Ledger, and its position in the Balance Sheet or Profit and Loss Statement,
will be determined accordingly.
Historical Accounts
Records which show the historical performance of a business and its

financial position at given points in time.
Profit and Loss Statement
The Profit and Loss Statement lists and totals all Revenue and Expense
Accounts. The difference between Revenue and Expenses is the Profit (or
Loss) which is allocated to the Capital account.
Cut-Offs
Marginal Cut-offs
Cut-offs are grades above which we do one thing and below which we do
another.
Material may be sent to the mill or the waste dump depending on whether
its is at or above a particular grade or not.
Similarly, a cut-off may be used to decide whether material is sent to the
mill or sent for heap leaching.
There is a long tradition in the mining industry of setting cut-offs at the
grade where the cash flow produced per tonne is the same, whichever
decision you take. We call these marginal cut-offs. They should not be
confused with “break even” cut-offs, which include an allowance for the
cost of stripping.
The Normal Case
If only one processing method is applicable to a particular rock-type, the

cut-off used to decide whether to process material or not is that grade at
which the metal recovered just pays for the processing of the material
(plus any extra mining and hauling cost for ore).
That is:
Cut-off x Recovery x Price = Cost of processing
or:
Cut-off = Cost of processing / (Recovery x Price)

This is shown graphically in Figure 68. We refer to the thick line as the
processing line. If the processing recovery for the price increases, the line
gets steeper and the cut-off grade decreases.
Revenue
per tonne
ice
Pr
yx
er
cov
Re
t =
ien
ad
Gr
0 Grade
Cut-off
Cost of
“processing”
Figure 68: Graph of revenue against grade

We assume that the decision to process or not to process is made while the
material is still in the ground. Thus material that is not processed incurs
only the cost of mining it as waste. Material that is to be processed will
often be handled with different equipment at a greater cost, and this extra
cost should be added to the cost of processing.
Non-linear processing recovery
Recovery fraction is not always independent of the grade of the material

processed. Whittle has a facility whereby you can simulate non-linear
recovery by subtracting a “threshold” grade from the actual grade of the
material before applying the recovery fraction.
The sort of effective recovery fraction curves that result from this are
illustrated in Figure 69.
Figure 69: Graphs of recovery against grade with different thresholds
If a processing mill has a constant tailings grade regardless of head grade,

and all the other product is recovered, this is easily simulated by setting
the recovery threshold to the expected tailings grade and the recovery to
100%.
The effect a recovery threshold has on the graph of revenue against grade
can be seen below.
Revenue
per tonne
ice
x Pr
y
er
cov
Re
t=
dien
a
Gr
0 Grade
Cut-off
Cost of
"processing"
Threshold
0 grade
Figure 70: Graph of revenue against grade with a threshold
Whittle also allows you to use an algebraic expression based on grade,

which is more general.
Rehabilitation Cost
If there are rehabilitation costs incurred when a particular type of rock is

mined as waste and dumped, it can be more economic to process some
material at a loss rather than mining it as waste. It is, in effect, more
economic to clean the material up by processing it than to mine it as waste
and have to rehabilitate it.
This has the effect of reducing the calculated cut-off, as can be seen in
Figure 71. In the extreme case where the rehabilitation cost is greater than
the processing cost, the cut-off will fall to zero and all material will be
processed.
Revenue
per tonne
ice
x Pr
ry
o ve
c
Re
t =
ien
rad
G
0 Grade
Rehabilitation cost
Cost of
"processing"
Cut-off
0
Figure 71: Calculation of cut-off when there is a rehabilitation cost
Multiple Processing Methods
If more than one processing method is applicable to a particular rock-type,

it is normal to choose the method at each grade that will produce the
highest revenue. Graphically, the “processing lines” are laid on top of
each other and the highest at each point is used. Where this process leads
to a grade at which we change from one processing method to another, we
refer to this grade as a cut-over rather than a cut-off.
Figure 72 shows the effect for a mill and heap leach operation, where it is
cheaper to heap leach material, but the recovery fraction is less. With this
arrangement, we put material that is above the cut-over through the mill.
We heap leach material that is between the cut-over and the cut-off, and
we will mine material that is below the cut-off as waste. The thick
combined processing line reflects this.
A common mistake is to work out mill and heap leach cut-offs
independently of each other and then to use the mill cut-off as a cut-over.
This does not maximize cash flow per tonne.
Figure 72: Cut-off line with two processing methods
Balancing Mining and Milling

Up to this point we have taken the Whittle approach to dealing with time
costs. That is, we have factored the time costs into the activity which
limits the throughput of the mine.
However, when we come to consider the balancing of mining and milling
throughput, this is no longer possible, because we do not know which
activity is going to be limiting. We therefore have to handle the
incremental costs of milling and mining separately from the time costs.
Consider a simple 1MT mining increment with a flat grade distribution
from 0.0 to 1.0. Assume that we are to mine it under the following
economic conditions:
Mining cost/T $1.00

Processing cost/T $18.00
Recovery fraction 0.90
Price $100.00
Processing limit/Y 500,000T
Mining limit/Y 1,000,000T
Time costs/Y $15,000,000
If the cut-off is “C”, we can calculate the cash flows for mining the whole
increment as follows:
Revenue: 1M*(1-C)*((1+C)/2)*0.9*100
Mining cost: 1M*1.0
Milling cost: 1M*(1-C)*18
Mining limited total time costs: (1M/1M)*15M
Milling limited total time costs: ((1M*(1-C))/0.5M)*15M
Note that, when we are mining limited, the total time costs do not depend
on cut-off. Conversely, the time costs per year have no influence on the
cut-off we choose.
If we plot curves of total cash flow for the two cases, we get Figure 73.
Total cash flow (Millions)
14
12
10
8
6
4
2
0
0.00 0.20 0.40 0.60 0.80 1.00
Cut-off
Processor limited Mining limited Maximum feasible
Figure 73: Total cash flow against cut-off for processor

and mining limited operations
Consider the left-hand curve in Figure 73, which shows the total cash flow
from mining and processing the 1MT if the mine is entirely mining
limited. It has its maximum at a cut-off of 0.20, which is precisely the
marginal cut-off we would calculate by equating the revenue and
processing cost (18.00/(100.00*0.90) = 0.20). The time costs have no
effect on the best cut-off in this case because, with our previous approach,
the time costs would be factored into the mining cost (1.00 + 15M/1M)
rather than the processing cost.
The curve which shows the cash flow per year if the mine is entirely
processor limited peaks at 0.53, which is what the marginal cut-off would
be if the time costs were factored into the processing cost.
(18.00+15M/0.5M)/(100.0*0.90) = 0.53
Since both the mining and milling throughput limits must be honoured, we
can only operate on or below both curves, so that we are limited by the
“maximum feasible” curve. In this case the cut-off which gives the
highest point on this curve (0.50) is also the point at which mining and
milling rates are both at their limits. However, with different economic
values this is not always the case.
If we halve the time costs to $7.5M per year, we get Figure 74. Now the
best cut-off is 0.37.
Total cash flow (Millions) 25
20
15
10
0
0.00 0.20 0.40 0.60 0.80 1.00
Cut-off
Processor limited Mining limited Maximum feasible
Figure 74: Processor and mining limited cash flows with lower time costs
The difference between the two total cash flow graphs clearly
demonstrates that time costs can affect the optimal cut-off.
Note that, if there are no time costs, the two curves in a total cash flow
graph will coincide.
An important aspect of the interaction between the cut-off and the
operation of the mine is that the time taken to mine the million tonnes also
changes when we change the cut-off, as is shown in Figure 75. Below
0.50, the mine is limited by processing capacity. Since the cut-off controls
the proportion of the material which is put through the mill, the time varies
with the cut-off. Above 0.50, the mine is limited by the mining capacity,
and, since everything is mined, the time taken does not change with the
cut-off.
2.5
Time to mine in years

2.0
1.5
1.0
0.5
0.0
0.00 0.20 0.40 0.60 0.80 1.00
Cut-off
Figure 75: Time to mine an increment for different cut-offs
Cut-offs with Multiple Products

If there are two products in our ore, say PR1 and PR2, then we may have a
lot of PR1 and little PR2 in some ore and the opposite in other ore. We
have to have some way of applying cut-offs which takes account of this.
In order to recover the processing costs we need:
GRADE1*REC1*PRICE1 + GRADE2*REC2*PRICE2 >= PRCOST
However, if the processing cost is either:
independent of the grades of PR1 and PR2, or
varies linearly with the grades
and the recovery fraction of each is independent of grade, then an

“equivalent metal” approach can be used.
We multiply the grade of PR2 by a factor to make its value comparable

with PR1 and add the value to the grade of PR1. When mining, we apply
the PR1 cut-off to the combined “equivalent metal”.
We can either calculate an equivalent grade of PR1 or of PR2.
Equivalent GRADE1 = GRADE1 + K2*GRADE2

where K2=(REC2*PRICE2)/(REC1*PRICE1)
Equivalent GRADE2 = GRADE2 + K1*GRADE1

where K1 = (REC1*PRICE1)/(REC2*PRICE2)
Alternatively, we can work out the factor to apply by first working out the
cut-offs which would apply to each product in isolation and then dividing
CUTOFF1 by CUTOFF2.
Therefore, the formula for an equivalent PR1 metal is:
GRADE1 + GRADE2x(CUTOFF1/CUTOFF2)
Another way of looking at it is to divide each grade by the corresponding
cut-off and add the resultant values together. You then apply a cut-off of
1.0 to the sum. This is shown graphically in Figure 76. Material to the
right of the sloping line is processed, material to the left is not.
Figure 76: Graphical illustration of cut-off using

equivalent metal approach
If the processing cost is not linear with grade, or the recovery fraction is
not independent of grade, then, strictly, you should not use an equivalent
metal. You should calculate the revenue and processing cost of each
sample, and only process if the revenue is higher than the cost.
Nevertheless, equivalent grades are often used in these circumstances for
operational convenience.
Changing the Cut-offs with Time

Consider a mining sequence which consists of ten 1MT increments like
our earlier example, but, for simplicity, with no time costs and no mining
limit, so that the marginal cut-off is 0.2. This gives a total cash flow of
$27.8M and a time of 1.6 years for each increment.
If we now vary the cut-off, for the first increment only, what happens to
the NPV of the whole project?
The effect can be seen in Figure 77. Why is the best cut-off for the first
increment now more than 0.5, whereas we know that 0.2 gives the highest
cash flow?
134
132
130
NPV (Millions)
128
126
124
122
120
0.00 0.20 0.40 0.60 0.80 1.00
Cut-off for Increment 1
Figure 77: The effect of varying the cut-off used for the first increment
Cut-off Optimization
Lane Theory of Cut-off Optimization

Kenneth F. Lane explained that, in addition to the normal cash costs which
must be considered in the processing cost when calculating cut-offs, there
are two pseudo costs which are also important. We refer to these as the
“delay cost” and the “change cost”.
Both of these costs take account of the fact that any mining or processing
activity takes time, and therefore delays the exploitation of the rest of the
project.
For example, consider the ten million tonne scenario mentioned earlier,
with the cut-off that we will use to exploit the last nine million tonnes
fixed at 0.20. As a consequence the cash flows for the last nine million
tonnes in today's dollars is fixed. Let us now look at the effects of using
three different cut-offs for the first million tonnes.
Cut-off Time for first Cash flow for NPV of first

for first 1mT 1mT first 1mT 1mT
0.20 1.6Y $27.8M $25.4M
0.45 1.1Y $25.0M $23.5M
0.70 0.6Y $16.6M $16.0M
As the cut-off is increased, the cash flow for the first million tonnes
decreases, as we would expect, since we know that the marginal cut-off of
0.20 maximizes the cash flow. The NPV of the first million tonnes also
decreases, but not quite so rapidly because the discounting is reduced due
to the reduced elapsed time.
However, the NPV of the remaining nine million tonnes increases because
its exploitation is started sooner and all its cash flows arrive earlier.
Cut-off Time NPV Total NPV
for first 1mT for first 1mT of last 9mT of project
0.20 1.6Y $102.9M $128.3M
0.45 1.1Y $108.9M $132.4M
0.70 0.6Y $115.2M $131.2M
The NPV of the last 9mT changes by about 6 per cent with each step in
cut-off, which is what you would expect with a twelve per cent discount
rate, if the start time changes by half a year.
Clearly, of the three cut-offs we have tried, 0.45 gives the best total NPV,
and this ties in with the graph we saw earlier. Can we calculate the cut-off
which maximizes the total NPV?
Since the NPV of the last 9mT varies with the time taken to exploit the
first 1mT, we can treat it as a time cost, here called the delay cost. The
difference between starting after 0.6Y and after 1.6Y is $12.3M. If we
divide this by the processing capacity, we get a delay cost of $24.6/T. It is
then easy to work out the best cut-off.
(18.00+24.6)/(100.00*0.90) = 0.47
This does not quite tie in with the graph, where the maximum is obviously
greater than 0.5. The reason for this is that this simple formula makes no
allowance for the discounting of the cash flow from the first 1mT.
It is worth making the point here that the discounting schemes normally
used in accounting, where all the cash flows for a particular calendar year
are discounted by the same amount, do not reflect the real value of the
cash flows, since they do not distinguish between an amount received on
January 1st and one received on December 31st.
These schemes were devised as convenient approximations in the days

before computers, and are now thoroughly entrenched.
For cut-off optimization purposes it is essential to discount on a

continuous (i.e. daily) basis. This changes the slope of the cut-off/NPV
curves slightly and moves the maximum. In this case it moves from 0.47
to 0.52. Note that this makes no material difference to the NPV, which is
only 0.09% less with a cut-off of 0.47. This is another example of how
insensitive systems become when they are near to a maximum.
For the record, the discount multiplier to apply to a total of a constant

daily cash flow, starting at time T1 and ending at time T2, can be
calculated as follows:
Discount percentage/Y: P
Discount fraction/Y: F = 100/(100+P)
Discount multiplier: F^T1*(F^(T2-T1)-1)/(Ln(F)*(T2-T1))

Where Ln() is log to the base “e”
We have discussed the delay cost at length, but we mentioned earlier that
there are two pseudo costs.
Everyone knows that cash flows are higher if we exploit our resource
when the price of the product is high, and vice versa. Using the previous
example, if we delay the exploitation of the last nine million tonnes to a
period of lower prices, we reduce the cash flows for the nine million
tonnes, and hence the NPV of this nine million tonnes. Since this effect
will generally get bigger with increasing delay, we again treat it as a type
of time cost, and we call it the “change cost”. It is different from all other
time costs because, if the price of the product increases with time, or the
costs decrease with time, it can be negative.
Note that, if the economic circumstances are constant in today’s dollars,

the change cost is, by definition, zero.
If the project is mill limited, both the delay and the change costs should be
divided by the mill throughput limit and added to the processing cost when
calculating the cut-off. Consequently, the delay cost, which is always
positive, increases the cut-off. The change cost can increase or decrease
the cut-off, depending on whether the economic circumstances are
deteriorating or improving, respectively. However, its general magnitude
is still related to the remaining NPV.
So far we have only discussed the possibility of varying the cut-off for the
first increment. Why should we not vary the cut-offs also for the second
and subsequent increments? We can, of course, but when we do, we
change the NPV of the last 9mT, which, through the delay and change
costs, changes the optimal cut-off for the first 1mT. This leads to a
circular arrangement where we repeatedly go back and re-optimize earlier
cut-offs until the cut-off schedule for the complete exploitation of the
10mT settles down.
As the resource is used up, the NPV of the remainder of the resource tends
to fall, and is zero when no further resource remains. Since both the delay
and the change costs are dependent on the remaining NPV, they too tend
to fall. In general, therefore, optimized cut-offs start high and
progressively decrease throughout the life of the project.
For the case where the economic conditions do not change, and for which,
therefore, the change cost is zero, Lane proposed an approach to
optimization in which you start with an estimate of the total NPV,
optimize each increment using a delay cost derived from the remaining
NPV and then update the remaining NPV. When all of the resource is
exploited in this way, you usually find that the final remaining NPV is not
zero as it should be. You then adjust the estimate for the starting NPV and
try again. This process is repeated until the final remaining NPV is zero.
If we follow this approach with the case we were looking at before, we get
cut-offs as shown in Figure 78, and a total NPV of $144.3M, which is an
improvement of 12.5% on the $128.3M obtained with marginal cut-offs.
0.70
0.60
0.50
Cut-off
0.40
0.30
0.20
0.10
0.00
1 2 3 4 5 6 7 8 9 10
Increment
Figure 78: Cut-off curve for simple increments using Lane method
When change costs have to be considered, Lane proposed starting two

optimization loops like the one above, with the second starting one year
later than the first. The optimizations would be run side by side and the
difference between the two NPVs would be used to estimate the change
cost.
We understand that the program “OGRE”, which was developed by RTZ

uses this algorithm.
So far we have assumed that material below the cut-off was to be

discarded. However, since the cut-offs tend to be high during the early
years, it is often worthwhile stockpiling some of this material for later
processing. We will address this possibility later.
Whittle Method of Cut-off Optimization

When Whittle Programming started to develop a package for cut-off
optimization, we decided that it had to be able to handle multiple rock-
types, multiple processing methods per rock-type, and multiple throughput
limits, like Whittle.
Consequently it had to calculate a number of cut-offs for each increment

or time period. Since the cut-offs would normally interact with each other
through the throughput limits, we had to use a multi-variable optimizing
engine which could cope with a non-linear function. After testing a
proprietary optimizer, which was unequal to the task, we developed our
own.
This allowed us to follow the principles of Lane optimization, in that we

started from an estimated NPV, optimized the cash flow per tonne,
including the pseudo costs for each increment, and then iterated the whole
thing until the final NPV was zero.
This can be expressed as is shown below when there are no change costs.
It is much more complicated when there are.
Set a starting NPV

Iterate until the ending NPV is sufficiently close to zero:
Set the ending NPV to the starting NPV
For each increment:
Find the cut-offs for this increment which maximize
the cash flow per tonne including the delay cost
Calculate the NPV of the increment
Subtract this NPV from the ending NPV
Next increment
If the ending NPV is not close to zero:
Adjust the starting NPV
End If
Next iteration
This worked - mostly.
However, “mostly” was not good enough for a commercial package, and
we changed to the following scheme:
Iterate until the total NPV stabilises:

For each increment:
Find the cut-offs for this increment which maximize
the total NPV while keeping the cut-offs for the
other increments constant
Next increment
Next iteration
This turns out to converge reliably. In particular, it seems to handle the

effects of change costs much better. It always produces an answer, but we
know that with certain very odd data it can be fooled into converging on a
local maximum which is not the global maximum.
Because it evaluates the whole NPV rather than the NPV of a single
increment when optimizing the cut-offs for an increment, it would appear
to do far more computing than the Lane method. In practice, with
judicious use of a store of prior calculations, it only does slightly more.
This approach produces the cut-offs shown in Figure 79.

0.60
0.50
0.40
Cut-off
0.30
0.20
0.10
0.00
1 2 3 4 5 6 7 8 9 10
Increment
Figure 79: Cut-off curve for simple increments using Whittle method
The total NPV is $145.1M, which is an improvement of $0.8M on the

Lane method. What is interesting is that if we use a generalized optimizer
(The Excel Solver) which “knows” nothing about cut-offs or any theory
related to them, we get cut-offs which differ only in the fourth decimal
place and an NPV which differs by only 36 cents.
Note that the cut-off curve is convex upwards rather than downwards, as is
inherent in the Lane method.
Why does the Lane approach produce a result which is not as good?
There are two reasons.
First, Lane uses the NPV at the start of mining the increment to calculate
the delay cost, whereas it is the NPV of the material after the current
increment which is delayed.
Second, Lane maximizes the cash flow for the increment rather than the
discounted cash flow. That is, he doesn’t allow for the fact that lower cut-
offs delay the exploitation of some of the current increment.
When we correct either of these separately, we obtain a lower NPV.

However, when we correct them both we obtain an NPV which is only
0.035% less than the best we have obtained. It is, incidentally the use of
the discounted cash flow which causes the cut-off curve to be convex
upwards.
The DC Model for material classification and NPV

maximization
Overview
The DC Method is an approach to ore waste discrimination which utilizes
a new cash-flow approach. It differs from Lane, which proceeds on the
basis of grade cut-offs, and it differs for existing cash flow methods in that
it can be used in Cut-Off optimization for multiple processes.
Compared to Lane-based approaches:
• Far fewer decision variables need to be optimized - In a simple case

(no stockpiles) Lane has one decision variable per element; per rock-
type; per process, per period. For example, in a two element deposit,
with three rock-types, three processes and 10 periods, there are 180
decision variables. For the same problem, the DC approach only
requires 30 decision variables (one per process; per period).
• Processes need not be ranked – The model is symmetrical – there is

no need to rank processes.
• Process balancing – The DC method provides a very solid structure

for process balancing, something that the Lane-based approaches, with
ranked processes, cannot do.
• Better modeling of complex economics and recoveries - The DC

method operates in cash-flow mode, which is much more flexible than
the Lane approach, which operates in cut-off mode. In cut-off mode
there are severe limitation on precision of selectivity in cases of
complex economics and recoveries. In cashflow mode there are no
known limitations.
• No need to re-run Marginal Cut-off case – The marginal cut-off

case is identical to the marginal cut-off generated in cash-flow mode
by Whittle. There is no need to generate an ore selection by cut-off
equivalent, and consequently no associated reconciliation problems.
• No increase in complexity - The DC method is no more complex that

the Lane approach, if anything, it is simpler, with few decision
variables, and no ore/waste discrimination issues normally associated

with cut-off-based ore/waste discrimination and grade-dependent costs
and recoveries.
Compared to the King Cash Flow Grade model:

Can deal with multiple unranked processes with throughput limits -
The model implemented by Brett King deals only with ranked
processes. He states “An observation from following this approach is
that the Heap Leach throughput rate does not feature in the …
equation. This suggests that potential exists to find a better ranking
system for separating the process feeds. Answering this question is a
topic for further research and investigation.”
I have done a review of subsequent papers, and did not find evidence
that he has published any advances on the above-mentioned topic. The
DC model deals with any number of unranked processes, each with
throughput limits.
Material Allocation by Cashflow

We commence here with “Mill” and “Heap” as the example processes, but
as the logic develops, it will be abstracted to any processes, and any
number of processes.
It is possible to calculate for any parcel of material the profit associated

with assigning it to a process. For each parcel, you can calculate the profit
for every defined process. Against those calculated values, we can apply a
set of Discrimination Controls (DCs) in a structured way to allocate
material to the appropriate location (a process or a waste dump).
Definitions
• Tonnes – used in this document to represent material (ore, waste)

mass. It is less cumbersome than the more generic “mass units”.
Substitute tons, long tons or short tons as required.
• DC Diagram - A DC diagram is defined here to show the values for

two process alternatives on the X and Y axis for a population of
material parcels.
• Increment – A grouping of material that becomes available for

mining. It contains a number of Parcels, each a unit of material which
can be selectively processed.
• Material – rock coming from the mine which may be waste or ore.
• Mining Sequence – made up of a series of Increments. A full mining

sequence represents all the material in a defined mine, in the order in
which it may be accessed.
• Parcel – A distinct package of material, with a tonnage, and various

attributes such as grades, rock-types etc.
Marginal Cut-Offs
The marginal cut-off is the cut-off which maximizes the net undiscounted
cashflows. Refer to Figure 80.
The general rules are:
7. If the value is positive it will be processed.
8. Given 1, then the parcel will be assigned to the process which

provides the highest revenue.
Parcels in areas A and B are assigned to the Mill because there are no
alternatives which will yield higher profits. C and D are assigned to the
Heap because there are no alternatives which yield higher profits.
Marginal Cut-Offs in a DC Diagram
The marginal cut-off is the cut-off which maximizes the net undiscounted
cashflows (as for Whittle ore selection by cashflow. Refer to Figure 80.
The general rules are:
9. If the value is positive it will be processed.
10. Given 1, then the parcel will be assigned to the process which
provides the highest revenue.
The -ve X and -ve Y axes and a diagonal line running between the +ve X
and +ve Y axes provide the delineators for process assignment in the
normal case. The normal case is equivalent to a Whittle ore selection by
cash-flow case, where material is assigned to the process which makes the
most profit, or if no process makes a profit, the material is assigned as
waste.
Parcels in areas A and B are assigned to the Mill because there are no
alternatives which will yield higher profits. C and D are assigned to the
Heap because there are no alternatives which yield higher profits.
Figure 80: Process allocation in cash-flow mode

Figure 81: DC Scatter Diagram for Marvin First Pushback
Changing Material Classification in order to maximize NPV.
The following is based on the general principals established by Lane:
• For a given increment, if you reduce the time taken to process the
increment, then you will increase the NPV of the sum of all
subsequent increments.
• The time taken to process an increment depends on the quantity of

material assigned to processes which have throughput limits
(tonnes/year) limits applied to them.
• By reassigning material that would have been processed by the

constraining processes, to other processes or to waste, the time taken
to process the increment will be reduced, and the increment NPV will
be reduced. The correct or “optimal” reassignment is that which
maximizes the total NPV for all increments.
Two Processes, one with a throughput limit
In the event that one process has a throughput limit on it, then a decrease
in the tonnage of material sent to that process will reduce the length time
required to process the increment. The reduction in time taken to process
this increment, decreases the NPV of the increment, but increases the NPV
of subsequent increments.
Given that it might be desirable to decrease in the tonnage put through the
limiting process, the question is: what type of material should the decrease
be applied to?
The answer: it should be applied to the material which, if reclassified, will
have the lowest impact on the NPV of the increment.
Figure 82: The material that should be reallocated from Mill is that which, if
reclassified, will have the lowest impact on the value of the increment.
It follows that material that should be reallocated is that which has the
lowest profit per tonne, or the lowest difference in profit. Refer to Figure
82.
In Figure 83, a set of red lines has been added. The position of the new red
lines is defined by the original vertical axis, and the variable DCm (Shown
as Dm in the figure) - Discrimination control for Mill.
The reassignment proceeds in a manner which has the least impact on

increment NPV. This means reassigning the material F and G to the next
best alternative:
• E is reassigned to waste. Its value as waste is $0. If it were reassigned
to Heap, its value would be negative, so Waste is the better choice.
• F is reassigned to Heap. Its value assigned to Heap is lower than its

value assigned to Mill, but the Heap value is greater than zero. Its
value as waste is zero, so Heap is the better choice.
Figure 83: Process re-allocation that will reduce the time take for the
increment to be processed (presuming a Mill throughput limit).
Two Processes, both with throughput limits

If a limit is introduced on the Heap process as well, then notionally, a
reduction in the tonnage assigned to Heap, could increase the sum of
NPVs for this and all subsequent increments. As for the reclassification
from Mill, the Heap reclassification should be done in a manner which has
the minimum impact on the NPV of the increment.
Figure 84 shows the result. A new set of blue lines is introduced, defined
by the variables
DCm and DCh (Shown as Dh in the figure) - Discrimination control for

Heap.
• G is reassigned from Heap to Waste.
• H is reassigned to Mill. This is the least cost reallocation (in fact, this
reallocation actually wins back some value).
Figure 84: Process re-allocations that will reduce the time take for the
increment to be processed (presuming a Mill throughput limit and a Heap
throughput limit both apply).
If the Heap constraint is increased (in order to further reduce the

throughput to the heap), from Dh1 to Dh2 (shown in Figure 85) then
material is reassigned again.
Figure 85: If further process allocation from Heap… The two decision
variables DCm and DCh and their implementations (material classification
for DCh1 and DCh2 shown).
Generalized Rule (two processes)
The processes used above are “Mill” and Heap” – familiar to miners, but
unnecessary for the model to work. There is no need for the two processes
to have any ranking of precedence or value. The model is entirely
symmetrical. For the generalized rule we need to only refer to process 1
and process 2.
=If(And((P1-DC1)>0, (P1-DC1)>=(P2-DC2)), "Pa1", If( And((P2-
DC2)>0, (P2-DC2)>=(P1-DC1)), "Pa2", "W"))
Where:
Pa1 = Process 1 assignment
Pa2 = Process 2 assignment
W = Waste assignment
P1 = Profit through Process 1
P2 = Process through Process 2
DC1 = Discrimination control for Process 1
DC2 = Discrimination control for Process 2
Generalized Rule (multiple processes)
For Process n of m processes

=If( And((Pn-DCn)>0, (P1-DC1)>=max((P1-DC1), (P2-DC2), (P3-DC3),
… (Pm-DCm)), ), "Pan",[next test])
The above test is conducted on each parcel for each of m processes.
Material that is not selected for any process, is classified as waste.
Where:
Pan = Process n assignment
Pn = Profit through Process n
DCn = Discrimination control for Process n
There is an order to the tests, but the order is arbitrary, as only one test can
have a positive result, except in the case where the economics of two
processes are identical. In this case, the parcel will be assigned to the first
identical process that returns a positive result.
Generalized Rule (Waste defined as an additional process)
Note that the approach described below has not been tested.
It should be possible to define waste destinations as processes, each with
constraints and economic models set as for regular processes. By this
method, it should be possible to provide an optimal assignment of waste to
one of a range of possible waste dumps. There would be a need for a
default waste process to be defined, with extremely high costs associated
with it to make the mathematics work. With that one qualification in mind
the mathematics actually become a bit simpler.
For Process n of m processes:
=If((P1-DC1)>=max((P1-DC1), (P2-DC2), (P3-DC3), … (Pm-DCm)),
"Pan", [next test] )
The above test is conducted on each parcel for each of m processes.
Material that is not selected for any process, is classified as waste.
Where:
Pan = Process n assignment
Pn = Profit through Process n
DCn = Discrimination control for Process n
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Strategic Mine Planning

Book · January 2005

Underground Mine Plan Optimization View project

The user has requested enhancement of the downloaded file.

© Gemcom Software International Inc. 2005

Strategic Mine Planning

The decision-making model presented here seeks to link business strategy

In order to properly explain the model it is useful to articulate a range of

The fields are organized under the following headings:

 Strategic Business Planning

These sections leading up to the explanation of the model have been

Strategic Business Planning

Cleisthenes became the leader of Athens ~ 500 B.C., and introduced a

1971 - Kenneth Andrews published “Business Strategy”:

• SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats).

1980 - Michael Porter published “Competitive Strategy - Techniques for

• understanding of economic and business environment is key to

Dr Jim Landau - July 1998:

Contemporary Template for Strategic Planning

The Strategic Plan

Either way, provided it is positive an useful differentiation in the eyes

In market theory there is the concept of a Perfect Market. This is a model

Behavior of a Perfect Market

Figure 1: Determination of the long-term stable price in a perfect market

Characteristics of a Perfect Market

• Homogeneous product (product from supplier X is much the same as

• Substitutes are available – If the price of a commodity rises too much,

• Large number of sellers – no individual seller has independent

• Large number of buyers – no individual buyer has independent

Other Market Models

• Monopoly - one dominant seller. In a monopoly, the seller has a

• Duopoly - two dominant sellers. Duopolies, like monopolies, give

• Oligopoly - a few dominant suppliers. Markets tend to operate like

• Monopsony - one dominant buyer. The market power is with this

• Oligopsony - a few dominant buyers. Buyers can cooperate through

Figure 2: The relationship between market concentration and profitability

How “Perfect” is the Copper Market?

Large number of sellers ? 400 operating mines, but much

Large number of buyers 9

Copper is an example of a market that has many characteristics in

How “Perfect” is the Iron Ore Market?

Homogeneous product 9/ 8 Iron is differentiated by its grade,

Substitutes are 9 Aluminum, wood, plastics.

Large number of sellers 8 Production is dominated by Rio

Large number of buyers 9

Iron ore market has characteristics of an oligopoly. Seller power in the

How “Perfect” is the Gold Market?

Large number of sellers 9

What factors drive the price of shares?

• Potential cash flows (realization of capital gains) - Buy shares in the

• Potential unrealized capital gains - Buy shares in the expectation (or

• Exposure / Diversification - Buy shares in many different companies

How ‘perfect’ is the share market?:

Homogeneous product 8 Shares are strongly differentiated.

Substitutes are 9 Because shares are so strongly

Large number of sellers 9

Simple Cash Flow Analysis

Some of the shortcomings of this approach are immediately obvious:

• There is no account made of uncertainty or risk in the predicted

• Simple cash flow analysis is a poor platform for calculating /

Discounted Cash Flow (DCF) Analysis

• Type 2 – risk adjusted discount rate consists of two components: cost

Strategic Business Planning