Determination of Value at Risk for Long-term Production Planning in Open Pit Mines in the Presence of Price Uncertainty

"Mine planning is a multidisciplinary procedure that aims to guarantee the profitability of a mining operation in changing and uncertain conditions. Mine plans are normally classified as long-term, intermediate-term, and short-term plans, and many factors affect the preciseness of these plans and cause deviations in reaching the objectives. Commodity price is the heart of mine planning, but it has a changing and uncertain nature. Therefore, the determination of mine plans in the presence of uncertain mineral price is a challenge. A robust mine plan reduces the risk of early mine closure. A procedure is presented to determine the value at risk (VaR) in any possible mine planning alternative. VaR is considered together with downside risk and upside potential in order to select the most profitable and least risky plan. The model is tested on a small iron ore deposit. IntroductionMining projects are normally evaluated with the objective of maximizing economic value, as measured by the net present value (NPV). The aim of mine planning is to develop a yearly extraction plan that guides the mining operation to the highest NPV (Dagdelen, 2007; Yarmuch and Ortiz, 2011). This plan considers the technical constraints such as blending requirements, block sequencing, and pit slope (Caccetta and Hill 2003). Thus, the mine plan affects the economics and the payback period of mining operations.Mine planning is a procedure based on which the profitability of the mining operation is guaranteed in changing and uncertain conditions (McCarter, 1992). However, conventional mine planning ignores the volatility and uncertainty of future commodity prices and does not allow for managerial flexibility. It is common practice to assume a deterministic and constant commodity price through the mine life. The problem with this approach is that the commodity price is the heart of the mine planning procedure and governs the profitability and feasibility of the operation; thus ignoring price volatility will result in a sub-optimal mine plan."