Integrating flexibility in open pit mine planning to survive commodity price decline

Lawrence Madziwa, Mallikarjun Pillalamarry and Snehamoy Chatterjee

Resources Policy, 2023, vol. 81, issue C

Abstract: Historically the mining industry grew substantially across the globe, acquiring new licenses, investing in exploration activities, and opening new mines along with the boom in commodity prices. However, the steady decline in mineral commodities prices significantly affects mineral industry as well as commodity producing nations. Mining risk management is undertaken to mitigate the adverse effects of uncertainties such as price fluctuations using Net Present Value (NPV). In this article risk management of commodity price decline was undertaken by integrating a recourse action with mine planning. The framework was presented in four distinct phases namely commodity price simulation using autoregressive distributed lag forecasting method; formulation of the mathematical stochastic phase design structure of the stochastic graph framework, and parametric solution of the graph problem; estimation and analysis of risk by Value at Risk (Var) and Weibull exceedance of losses concepts respectively, and minimizing the risk by optimizing operating level using the Lagrange model on Cobb-Douglass model. The proposed methodology was applied on an anonymous gold mine and the analysis of potential losses using Gumbel exceedance shows that mine could incur an annual loss of $20 million with a recurrence period of 1 in 1.38 years with a probability of 0.72. The recourse action was identified using the Lagrange model on the Cobb-Douglass model which reduced the cost by about 50% and subsequently the production level. The NPVs for the stochastic minimum cut models after application of the recourse action was 54% of the NPV at full production showing that there is an increase in the value of the project.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jrpoli:v:81:y:2023:i:c:s0301420723001368

DOI: 10.1016/j.resourpol.2023.103428

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