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WHAT DOES GEOSTATISTICS AND CUT-OFF GRADE OPTIMISATION HAVE TO DO WITH REAL OPTIONS APPLIED TO MINE PROJECT EVALUATION?

The mine evaluation process, composed of the designing, planning and valuation of a mine project, is, among other variables, based on an estimated orebody model. However, as the information from the drill holes is limited, it is impossible to know with certainty the mineral content in each block within the estimated block model. Consequently, uncertainty about the value of metal grades, or other geological attributes, arises because the lack of information at un-sampled locations. This is the reason why, in any mine operation, there will always exist a divergence between estimated and real values.
Cut-off grade optimisation is the process used to determine the operating mining strategy (long term production scheduling) that will maximise the total profit value (NPV) of a mine operation. This is done by defining a dynamic cut-off grade policy which is constrained by the production capacity of the mining, milling and refining processes.
Real options is a type of contract, written on real assets such as mining, oil and other natural resource industries, that gives you the right but not the obligation to exercise the contract. It is based on operational and managerial flexibility, which allow mine decision makers to react to either good or bad operational and economic events in the future.
But, what does geostatistics and cut-off grade optimisation have to do with the application of real options analysis in a mine project evaluation process?
The objective of this paper is to answer the previous question by showing how geostatistics combined with cut-off grade optimisation are key tools for corporate/managerial decision makers, which allow them not only to analyse the mineral resources and reserves of their mine projects, but also to generate operational strategies that can maximise project value by minimising the downside risk, due to ore tonnes and grade uncertainties, while achieving operational and physical constraints such as mining and processing capacities. A real copper grade open pit mine project is used as case study.
Among all these measures of profitability, the Net Present Value (NPV) that is based on the Discounted Cash Flow (DCF) technique – which is based on expected values and a risk adjusted discount rate – is the most widely used in the mining industry..

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