By Scott Whitbread
Integrated mine planning consumes tremendous amounts of organizational resources and management attention. Yet the resulting plans often fail to provide complete confidence that the ore body is being extracted optimally. As market conditions evolve, and operating circumstances change, mine plans become outdated, but who’s to say whether a complete, bottoms-up overhaul of the plan is required? Or whether a quick re-examination will do just as well for only a fraction of the effort?
One of the challenges to making this determination is the lack of a simple, meaningful way to compare alternative mine plan options. The visual tool described here, called a “Mine Plan Radar” (or MPR), allows stakeholders to easily align on the mine plan alternative which creates the most value, to discard the rest, and to see how changes in metal price, reserves and production costs will affect this picture. Like all models, it is a simplification of a very complex reality, and is intended to facilitate more effective decision making, not to supplant any of the mine planning work itself.
You can create a Mine Plan Radar for your operation with the following steps.
Step 1: Plot the Base Case Life-of-Mine Plan: Take the base case life-of-mine plan for your operation and plot its position on two axes: cost per unit of production (CNow) on a horizontal axis scaling from left to right, and the reserves remaining (RNow) on a vertical axis scaling from top to bottom. Then plot the current metal price (PNow) as a vertical line to the horizontal (cost-price) axis.
The shaded area demarcated by these data points represents the NPV we should expect to generate by producing the remaining reserves, at the current production cost, for the current metal price. (The time value of money can be accounted for by “discounting” future years’ reserves according to the organization’s discount rate. We may also elect to include items such as major capital expenditures and remediation in the cost of production, expressed as time-normalized, per unit values, in order to make the cost figure fully representative.)
Step 2: Draw the Equivalency Curve for the Base Case Life-of-Mine Plan: The “equivalency curve” for the base case life-of-mine plan represents all potential mine plan alternatives that would produce the exact same NPV through the life of the mine (i.e. they are “equivalent” to it). For example, imagine that by high-grading the mine plan you could lower costs and achieve a 10% increase in the margin per unit of production, in exchange for a 10% reduction in the remaining reserves. Such a mine plan would have exactly the same NPV as the base case (the two 10% differences precisely offsetting each other) and so would represent another point on the base case’s equivalency curve.
Keep in mind that the equivalency curve doesn’t represent real mine plan alternatives, just theoretical ones that are equivalent to the base case in terms of their NPV. As such, any real alternative mine plan that falls “inside” the equivalency curve (i.e. between the curve and the lower-left origin of the axes) has a greater NPV than the base case; it is superior to it. Alternatively, any alternative mine plan that falls “outside” the curve has a lower NPV and is inferior. The equivalency curve acts as a threshold for comparison and provides the impression of a “radar screen” where the objective is always to be closer to the origin (i.e. more reserves and lower costs).
Step 3: Plot Any Alternative Life-of-Mine Plans on the Mine Plan Radar (MPR): Next, plot all other mine plan alternatives on the axes. These could include mining a different combination of reserves, mining the reserves in a different order or at a different rate, mining them to a different cutoff grade, as well as other improvements in mining cost and performance. These alternative plans will fall into one of four quadrants as shown in the figure below:
- Fundamental Improvements (lower left quadrant): Mine plans with more reserves AND a lower cost per unit of production – always preferable to the base case plan, regardless of the price environment.
- Fundamental Deteriorations (upper right quadrant): Mine plans with fewer reserves AND a higher cost per unit of production – the base case is always superior to these, in any price environment.
- High-grading Alternatives (upper left quadrant): Mine plans with fewer reserves and a lower cost per unit of production. In this quadrant, alternatives that land inside the equivalency curve will create value over the base case, while those that fall outside the equivalency curve would destroy value.
- Reserve-expansion Alternatives (lower right quadrant): Mine plans with more reserves and a higher cost per unit than the base case. As with the upper left quadrant, alternatives that land inside the equivalency curve will create value over the base case, while those that fall outside the equivalency curve would destroy value.
The process is then to adopt any alternative that represents a fundamental improvement (lower left quadrant) and ignore any that represent a fundamental deterioration (upper right quadrant). If there are only high-grading and reserve-expansion alternatives to consider (upper left and lower right quadrants) then it depends on whether they fall inside or outside the equivalency curve and by how far.
For a given metal price (i.e. PNow) this will be obvious. However, as the presumed future metal price changes, so does the equivalency curve - which brings us to step 4.
Step 4: Plot a Series of Equivalency Curves for a Range of Future Price Environments: The potential for metal prices to change in the future creates much contention over which is the best mine plan to pursue now. To account for this the Mine Plan Radar must be plotted for a range of future metal prices. Should the metal price increase from where it is today, then the equivalency curve will become flatter, favoring reserve-expansion alternatives and making it harder for high-grading opportunities to be value creating. Should the metal price decline from where it is today, then the equivalency curve will become steeper, favoring high-grading rather than reserve-expansion.
By comparing the mine plan alternatives with the equivalency curves for various metal prices, “trigger prices” can be identified at which one of the alternative plans becomes preferable to the base case plan. For example, an alternative mine plan to expand reserves might fall outside the equivalency curve at the current metal price. But at some higher metal price it will eventually become equivalent to the base case as the equivalency curve flattens. Beyond this trigger price it will overtake the base case as a more valuable option (i.e. it will be inside the equivalency curve). The business can then use these trigger prices, along with their prediction of what the future metal price will be, to reach rapid alignment on when and how to move between mine plan alternatives.
For example, if the trigger price for a reserve-expansion alternative is unrealistically high, it may make sense to begin excluding it from mine planning discussions. Conversely, if the trigger price is only slightly above the current metal price then the business may elect to begin pursuing the alternative plan immediately, making a small investment of lost value now for the promise of a windfall if the price substantially rises.
By creating a Mine Plan Radar for your operation you will have a clear, visual representation of the alternatives in front of you, allowing you to simplify a complex reality and provide confidence in your operational plans and allocation of capital.
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