Redefining the Ultimate Pit: Improving NPV by Factoring Scheduling into Design

"The selection of the ultimate pit shell has a major impact on the overall value of a mining project. The size and shape of this pit drives the selection of pushbacks, equipment, and project strategy, each of which are significant in their own right. Optimization of the ultimate pit shape is typically done using the Lerchs-Grossman algorithm with inputs of production costs, commodity prices, and pit slope constraints. This method ensures that every tonne mined is profitable but does not take into consideration the timing of material release. This timing is essential when calculating the Net Present Value (NPV) of the project, which is one of the most popular metrics for valuing deposits. Often, when the mining schedule and discounting are applied, material that was considered profitable before discounting becomes sterilized. The objective of this paper is to show the methodology for improving ultimate pit selection by considering the production schedule. Application of this technique will generally produce a smaller and higher-value pit than using the Lerchs-Grossman algorithm alone. INTRODUCTION The Lerchs-Grossman Algorithm was developed in the 1960s and exists to produce a mathematically optimum shape for open pit mines (1). This algorithm is now an industry leading technique for producing the theoretical optimum shape for open pits and is used in many popular pit optimization and strategic planning software packages, such as GEOVIA’s Whittle. The Lerchs-Grossman (LG) Algorithm is based on graph theory and optimizes on the assumption of non-discounted cash flows. This produces a mathematically optimum shape, but does not consider the timing with which the material will be removed from the ground. This is an important consideration, given that one of the most popular metrics for evaluating mining projects is Net Present Value (NPV) (2), which relies on the timing of cash flows as a major differentiator between options. This paper will discuss issues inherent in the use of ultimate pit selection based on undiscounted economic factors and illustrate a simple technique in Whittle, a leading software package, which can be used to improve the NPV of projects."