Gestion de Proyectos Mineros

Gestin de Proyectos
Mineros Considerando las

Incertidumbres de la Ley,
Precios y Costos Operativos
Dr. Luis A. Martinez
GM and Principal
REAL OPTIONS
CORPORATE MANAGEMENT
MINING
2013 Copyright ROMPEV Pty Ltd. All rights reserved
RISK ANALYSIS
TRAINING & COACHING
FORECASTING
Thursday, 8 August 2013
ROMPEV is Part of the MCEISA Group
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Improving Project Expectations
The Mining Industry

The mining industry is an activity or business that deals
with mineral production and provides significant
economic and social benefits to the economic growth
and sustainability of a country .
Peru is not an exception as it is a country with an old
mining tradition. This can be seen from the report
submitted by the Ministrio de Energia y Minas
http://www.minem.gob.pe/minem/archivos/file/Mineria/
PUBLICACIONES/VARIABLES/2013/b3.pdf)where it is
noted that the mining industry plays an important role
in the Peruvian economic growth.
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The Mining Industry

Definition
Cummins and Givens
(1973) defined the mining
industry as a type of
business that consists of a
work
process
of
extracting both metallic
and
non-metallic
minerals
from
their
natural environment and
transporting them to the
point of processing.
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The Mining Industry

Hence, mining projects present a considerable challenge to those
involved in associated investment decisions, such as the owners of the
mine and other stakeholders.
Furthermore, the recent downturn has shown that operational
flexibility and strategic adaptability are critical to the long-term success
of many mining companies. The early planning stages of a mine project
(i.e. before completion of the feasibility study) typically provides the
greatest scope to explore alternatives, assess risks and implement
change in order to minimise overall project costs.
Once the ground has been broken, the alternatives available to

engineers and operators diminish exponentially.
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The Mining Industry
Remember, it is not a Software Industry!!!

Despite the general thinking that mine project planning and evaluation
depends on the software to be used, the main objective of this course is not
to teach a mining software, but to provide, in a general fashion (high level),
the process behind open pit mine project evaluation starting from the
information within the geological block model throughout the mine plan
and design to the generation of cash flow and final project value or NPV.
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The Mining Industry

This course seeks to provide the student with the necessary skills to
perform a mine productions financial analysis. Here the student will learn
the techniques used to integrate mine production information within a
cash flow analysis. However, the financial analysis of a production
scheduling is a complex process.
This complexity arises from the large range of variables that need to be
considered in the three interrelated disciplines involving the valuation
process, such as technical / engineering, economic and financial.
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Scope of Work
Base case mine evaluation
Resource estimation Block model
Reserve estimation mine plan and design
Mineral economics DCF and NPV and sensitivity analysis
Quantitative risk analysis - Uncertainty Risk and Potential
Quantifying metal grade uncertainty
Quantifying metal price uncertainty
Quantifying operating costs
NPV and Monte Carlo simulation
Options and strategic decision making

Real options in the mining industry
Option to close and other options
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UNDERSTANDING BLOCK
GRADE MODELING
Block Model Orebody Characteristics
The geological characterisation of a mineral deposit is represented in a

model of the orebody.
The orebody model and surrounding waste material is modelled by
dividing it into blocks of certain size so that the flow and form of
material n the mining process can be representative of reality.
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Drill hole Data Set
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Block Model Based Interpolation
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Block Model Based Interpolation

It is not always possible to sample every location within
an orebody.
Therefore, unknown values must be estimated from data
taken at specific locations (drill-holes) that can be
sampled.
The size, shape, orientation, and spatial arrangement of
the sample locations are termed the support and
influence the capability to predict the unknown samples.
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Estimating the Grade Value z0
Elevation
East
Origen of coordinates
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Estimating the Grade Value z0 : Simple

Average
Simple average?
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But, not too accurate as it assumes

equal influence from all data
point, i.e., does not account for
spatial variability.
15
Principles of Interpolation
Weighted linear combination
The methods differ in the way how they establish the
weights
z can be a transformed variable, if, e.g., certain statistical
properties must be maintained
n
z z0 wi zi
i 1
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Estimating the Grade Value z0 : Inverse

Distance as Weigths
Weighted average (power = ?) ?
In general:
Example when =1:
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Distance as Weights
The weight (influence) of a sampled

data value is inversely proportional
to its distance from the estimated
value
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Distance as Weights
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Using Geostatistics to Estimate the Value of

z0: Regionalised variables
Geostatistics: Statistics applied to earth sciences - The
original purpose of geostatistics centered on estimating
changes in ore grade within an ore deposit.
The principles have been applied to a variety of areas in
geology and other scientific disciplines.
A unique aspect of geostatistics is the concept of
regionalised variables which are variables that fall
between random variables and completely deterministic
variables.
Regionalised variables describe phenomena with
geographical distribution (e.g. elevation of ground
surface).The phenomenon exhibit spatial continuity.
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z0: Regionalised variables
Consider a variable z measured
at location i, we can partition
the total variability in z into
three components, then:
z(i) = f(i) + s(i) +
Structural component
e.g., linear trend
The structural component (e.g., a linear trend)
Spatially correlated
component
blue dots represent the data
The spatially correlated component
Random component
noise
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The random noise component (non-fitted)
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z0: Semivariance
Regionalized variables describe phenomena with
geographical distribution (e.g. elevation of ground
surface).The phenomenon exhibit spatial continuity.
Semivariance is the most
traditional choice to
summarize spatial continuity, in comparison to
correlation function and covariance.
Semivariance expresses the degree of spatial dependence
between point samples on space.
The semivariance is simply half the variance of the
differences between all possible points spaced a constant
distance apart.
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z0: Semivariance
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z0: Semivariance and Variogram
Given a geostatistical model, Z(s), its (semivariance)
variogram g(h) is formally defined as
where h is the distance separating sample locations si

and si+h, N(h) is the number of distinct data pairs. In
some circumstances, it may be desirable to consider
direction in addition to distance. In an isotropic case, h
should be written as a scalar h, representing magnitude.
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The main goal of a variogram analysis is to construct a variogram that best
estimates the autocorrelation structure of the underlying stochastic process. A
typical variogram can be described using three parameters:
Nugget effect represents micro-scale variation or
measurement error. It is estimated from the
empirical variogram at h = 0.
Range is the distance at which the variogram
reaches the plateau, i.e., the distance (if any)
at which data are no longer correlated.
Sill is the variance of the random field V(Z),
disregarding the spatial structure. It is the
plateau the variogram reaches at the range,
g(range).
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Searching for
neighbors
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z0: Kriging
Kriging is a spatial prediction method of nice statistical
properties: BLUE (best linear unbiased estimator). The
method was first developed by G. Matheron in 1963, then
Matheron named the method after the South African mining
engineer, D.G. Krige, who in the 50s developed methods for
determining ore grades, although the specific prediction
method of Matheron has not much to do with Krige (see
Cressie 1990 for the history).
Kriging shares the same weighted linear combination
estimator as those given in the last chapter:
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z0: Kriging
Kriging shares the same weighted linear combination
estimator as those given in the last chapter, i.e., where zi
is the sample value at location i, wi is a weight, n is the
number of samples.
Assume we have a model:

Z(s) = m + e(s), where e(s) is a zero
mean second-order stationary random field with covariogram
function C(h) and variogram g(h). Also 2=C(0).
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z0: Kriging
The weighted linear estimator for location s0 is:

(*)
The estimation error at location s0 is the difference between the predictor and the
random variable modeling the true value at that location:
The bias is:
So, as long as
the weighted linear estimator (*) is unbiased.
However, the unbiasedness tells us nothing about how to determine the weights
wis.
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z0: Kriging
Kriging is such a method that determines the weights so
that the mean squared error (MSE) is minimized:
subject to the unbiasedness constraint
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z0: Kriging
We normally used this information
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But..what about this information?
31
Ore Resource Estimation Ore Tonnes and

Metal Grade Curves
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Metal Grade Curves
Cut-Off Grade
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Metal Grade Curves - Information
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UNDERSTANDING BLOCK
ECONOMIC MODELING
The Economic Value of a Block: Towards a

Block Economic Model
Each block in a block model can be characterised by (after Alaphia, 1990):
Income = I = value of the recoverable and saleable part of the block.

Direct Costs = DC = costs that can be traced directly back to the block; e.g.
drilling, blasting, loading, processing, transportation costs, among others,
some time costs can also be included.
Indirect Costs = IC = overall costs which cannot be allocated to individual
blocks. Such costs are time-dependent; e.g., salaries, depreciation for
machinery, among others.
From these, a block economic value (BEV) can be defined as: BEV = I-DC
Observe that the block economic value is not the same as Profit or Loss (P&L).
Profit or loss may be stated as: P&L = Sum(BEV) IC.
*Waste blocks will usually have negative BEV since income from waste is zero
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Cost to include:
Incremental (or variable) costs
Directly proportional to tonnage or unit of products.
Wages, fuel, explosives, etc.
Costs must be included in the associated activity.
Cost that may or may not be included

Expenses that are related to time NOT production (fixed)
In General:
INCLUDE expenses that would stop if mining activity is stopped.
NOT INCLUDE expenses that would not stop if mining stopped.
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Note that the Economic Value of a Block also includes time
costs which would stop if mining stopped
Site administration
Site infrastructure maintenance
Interest on working capital loan
Capital replacement
Truck and other equipment purchase
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The Economic Value of a Block:

Mining Costs
Some examples of mining costs ($/t Mined) include:
Drilling & Blasting

Loading & Hauling
Mine services
Geological
Grade control
In-pit supervision
Surveying
Dewatering
Day works
Mobilisation / Demobilisation
Site clearing & topsoil
Support (e.g. Geotechnical)
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Processing Costs
Some examples of processing costs ($/t Processed) include:
Ore handling (additional costs)
Grade control
Stock piling management
Crushing and grinding
Conveying
Flotation
Drying
Assaying
Mill services
Power
Tailing disposal
Maintenance; among others
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Refining/Selling Costs
Some examples of selling costs ($/unit of product) include:

Refining and smelting
Bullion/Metal transport
Insurance
Marketing
Shipping to customer
others
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Golden Rules
Rule1. The value must be calculated on the assumption that the block has
already been uncovered. That is, the block value does not need to consider
the cost for mining (upper) previous blocks.
Rule2. The value must be calculated on the assumption that the block will
be mined.
Rule3. Any expenditure that would stop if mining stopped must be

included in the cost of mining, processing or selling. Examples of these
costs are: site administration, site infrastructure maintenance, Interest on
working capital loan, fall in resale value of equipment, capital replacement,
truck purchase (long-term), among others.
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Practical Steps
Given the economic and technical parameter values, the following are the
general process for valuing a single block.
Step 1: Estimate mining costs,
Step 2: Estimate metal recovery,
Step 3: Estimate block revenue,
Step 4: Estimate block value, if milled,
Step 5: Estimate block value as the maximum between sending it to the mill
or to the waste dump
Step 6: Repeat process for each block within the block model
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Practical Steps
Step1: Estimating the mining cost ($/ton of material moved).
This cost is mainly concerned with the drilling, blasting and hauling
activities and the administration of these activities. Although it is a
common practice to use an average mining cost when evaluating a mine
project, in general, this cost will depend on both the location of the block,
i.e., distance from the mill or waste dump and deep position - because the
hauling activity - and the characteristics of the material inside the block
because the drilling and blasting activities.
NOTE: These costs are assumed to be the same irrespective as to weather

the material is classified as ore or waste.
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Practical Steps
Bench #
Mining & Hauling Cost Increment
1
2
3
4
5
6
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Top of Pit
Bottom of
Pit
45

Practical Steps
Step 2: Estimating the metal that can be recovered (units) considering mill
recovery factors.
Step 3: Estimating the block revenue ($)
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Practical Steps
Estimating the processing/concentrating cost ($/ton of material milled).
This cost is mainly concerned with the crushing, grinding, flotation, leaching,
etc., and the administration of these activities. Although it is a common practice
to use an average processing cost when evaluating a mine project, in general,
this cost will depend on the material sent to the mill (ore) and the
characteristics of the material inside the block because the crushing, grinding,
and flotation activities. It also could include hauling cost if ore is trucked
further than waste.
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Practical Steps
Step 4: Estimating the block value if milled ($) here processing cost are
incurred
Step 5: Estimating the block economic value as the maximum between

block value if milled or dumped ($)
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NET SMELTER RETURN

CALCULATION
Net Smelter Return Calculation

In this example, the mill feed is
275,000 tonnes grading 2.32% Cu,
2.55 g/t Au, and 5.69% Zn.
This mill feed can represent three
months or a years production
from the mine, or is the grade of a
sector on which an economical
study is conducted.
Either way, the NSR factors
calculated for this feed can be
applied to every individual
reserve blocks or stopes to
calculate their value.
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From: George McIsaac, 2011
50

Metallurgical Balance
Tonnes
Cu
(%)
(tonnes)
Au
(g/t)
(ounces)
Zn
(%)
(tonnes)
275,000
2.32%
6,380
2.55
22,546
5.69%
15,648
85%
73%
Mill Feed
Grades
Metal Contained
Copper Concentrate
Mill Recovery
Tonnes of ore per tonne of
concentrate
Grades
Metal Contained
Grade x Tonnes
10.65
25,824
21%
5,423
Zinc Concentrate
Mill Recovery
Tonnes of ore per tonne of
concentrate
Grades
Metal Contained
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3. Cu Conc. Tonnes = 5423/21%
19.93
16,549
2. Qty x Rec = Metal
15%
90%
3.96
3,382
53%
14,083
10.35
26,571
51

Copper concentrate sold to Smelter A
Copper
Gold
Tonnes of Conc. 25,824 tonnes
Metal in Conc. 5,423 tonnes
Metal per Tonne of Conc. 0.21 tonnes
463 Lbs
Metal Deduction 24.26 Lbs
Payable Metals
Metal Price
Value of Metal
439
Lbs
1.50 $ / lb
658 $ / t. conc.
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16,549 ounces
0.64 ounces
19.9 grams
2.5
grams
Copper concentrate sold to Smelter B

Copper
Gold
25,824
5,423
0.21
463
tonnes
tonnes
tonnes
Lbs
16,549 ounces
0.64 ounces
19.9 grams
24.26 Lbs
2.5
17.4 grams
439
$925 $ / oz
518 $ / t. conc.
1.50 $ / lb
658 $ / t. conc.
Lbs
grams
Zinc Concentrate sold to Smelter C

Zinc
Gold
26,571
14,083
0.53
1169
tonnes
tonnes
tonnes
Lbs
3,382
0.13
4.0
ounces
ounces
grams
Lbs
grams
17.4 grams
1169
Lbs
3.0
grams
$925 $ / oz
518 $ / t. conc.
0.50
584
$ / lb
$ / t. conc.
$925
88
$ / oz
$ / t. conc.
52

Copper concentrate sold to Smelter A
Copper
Gold
658 $ / t. conc.
518 $ / t. conc.
Value of Metal
Deduction and Charges

Treatment Charge (T/C)
Transport
Loading & Representation
Penalties (As, Sb, Bi, Hg)
Price Participation
Subtotal Deductions
75
34
5
0
0
114
$ / t. conc.
$ / t. conc.
$ / t. conc.
$ / t. conc.
$ / t. conc.
$ / t. conc.
Refining Charges (R/C) 0.075 $ / lb

33 $ / t. conc.
Value After Deductions and
511 $ / t. conc.
Refining
tonnes of ore per ton. conc. 10.65
Value per tonne of Ore 48.01 $ / t. ore
Grade of Ore 2.32%
NSR Factor 20.69 $ / %
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Copper concentrate sold to Smelter B

Copper
Gold
658 $ / t. conc.
518 $ / t. conc.
80
45
5
0
0
130
$ / t. conc.
$ / t. conc.
$ / t. conc.
$ / t. conc.
$ / t. conc.
$ / t. conc.
Zinc Concentrate sold to Smelter C

Zinc
Gold
584 $ / t. conc.
88
135
26
3
0
0
164
$ / t. conc.
$ / t. conc.
$ / t. conc.
$ / t. conc.
$ / t. conc.
$ / t. conc.
$ / t. conc.
6
3
$ / oz
$ / t. conc.
0.08
35
$ / lb
$ / t. conc.
6
3
$ / oz
$ / t. conc.
0
0
$ / lb
$ / t. conc.
6
3
$ / oz
$ / t. conc.
515
$ / t. conc.
493
$ / t. conc.
515
$ / t. conc.
420
$ / t. conc.
85
$ / t. conc.
10.65
10.65
10.65
10.35
48.37 $ / t. ore
46.30 $ / t. ore
48.37 $ / t. ore
40.61
2.55
2.32%
2.55
5.69%
19.96 $ / %
18.97 $ / g
g/ t
18.97 $ / g
g/ t
7.14
10.35
$ / t. ore
$/%
8.18
$ / t. ore
2.55
g/ t
3.21
$/g
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NSR Factors
Concentrate
Smelter
Relative
sales
Copper
($ / % Cu)
Gold
($/gram)
Copper
35%
20.69
18.97
Copper
65%
19.96
18.97
100%
20.22
18.97
Copper
Zinc
100%
Total NSR factors
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20.22
Zinc
($ / % Zn)
3.21
7.14
22.17
7.14
54
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OPEN PIT MINE PLAN

DESIGN : GENERALITIES
Open Pit Mine Plan & Design Part 1
Waste
CB
Long term Production Scheduling
-1
CB -2
CB
Pushbacks | Cutbacks
-3
Ultimate Pit limits
Short term Production Scheduling
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Open Pit Mine Plan & Design:

The Floating Cone Algorithm
Algorithm:
Start from the surface and search for ore blocks (positive
economic value).
Construct the minimum removal cones on such ore blocks.
If the sum of the block economic values of all blocks contained
in a given cone, including the ore block in question, is
positive, consider the cone removed.
The shape left after the removal of all positive valued cones
forms the ultimate pit layout.
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The Floating Cone Algorithm
Economic block model
Pit design based floating cone
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The Floating Cone Algorithm Pitfalls
Figure 1 a) floating cone algorithm failure to recognise the true ultimate pit in the case of the extension
of the pit; B) true pit.
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The Floating Cone Algorithm Pitfalls
Figure 1 a) Floating cone failure to recognise the true ultimate pit in the case of overlapped cones; b) true
ultimate pit.
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The Lerchs Grossmann Algorithm
Step1. A dummy node X0 is added to the tree (representing the
block model). In this case X0 is the reference vertex root.
Step2. Search for a vertex X belonging to a strong branch and extract
out from the tree. If there exists an overlying vertex Y belonging to a
weak branch that must be mined to expose vertex X identify the root
vertex of the strong branch and then go to Step3, otherwise go to
Step5.
Step3. The two branches found in Step2 are combined into one by
removing the arc between X and root vertex, and connecting vertex
X to vertex Y. In addition, all the arcs on the chain have changed
their status. That is, a p-edge becomes an m-edge and vice versa.
Step4. The combined branch must be re-evaluated for every node in
it. Normalization is then performed for the resultant branch by
removing any strong arc from the branch and connecting it to the
dummy root. Go to Step2.
Step5. Stop the iteration: the maximum closure consists of all the
vertices on the strong branches of the final normalised tree.
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The Lerchs Grossmann Algorithm
Figure 1 Ultimate pit limits found by using the Lerchs-Grossmann Algorithm.
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Open Pit Mine Plan & Design: LG Algorithm

Slope Angles
When planning and designing an open pit mine project, one of the principal
technical constraints that need to be specified is the pit slope angle(s). In its
simplest, the pit slope angle is the minimal angle, at which a pit can be exploited
in a safe way, i.e., it is the angle at which the stability of the open pit wall is
expected to be stable. Normally, the pit slope angle(s) is estimated after a rock
mechanic study of the mineral deposit (it is recommended to look at more
technical literature about rock mechanics and pit slope angle estimation). Figures
55 and 56 are showing the profile of an open pit where the working pit slope and
the final overall pit slope angle.
As mentioned in the Lerchs-Grossmann Section, the slope angle is very important
when defining the arcs between the blocks that can be considered for being
extracted, i.e., to be considered in the Graph-tree of blocks when performing the
Lerchs-Grossman pit design process.
Note: Observe also that during the feasibility studies for a proposed open pit
mine, an estimate of the safe slope angles is required for the calculation of ore to
waste ratios.
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Open Pit Mine Plan & Design: Slope Angles

Working Slope Angles
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Open Pit Mine Plan & Design: Slope Angles

Final (Overall) Slope Angles
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Production Scheduling
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Production Scheduling: Worst Case
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Production Scheduling: Best Case
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The Discounted Cash Flow Analysis and Related Investment

Criteria
THE DCF ANALYSIS
The Discounted Cash Flow Analysis and

Related Investment Criteria
The prediction of the value of a mining project is a complex matter. The reason
is the specific nature of mining projects. This section describes the Discounted
Cash Flow model as a tool for evaluating mine projects.
Consequently the Objectives of this section are:
The formulation of financial cash flow models
The DCF model and related investment criteria:
Net Present Value (NPV)
Internal Rate of Return (IRR)
Payback Period (PP)
Capital Efficiency Index (CEI).
How to construct a simple DCF model in both real and nominal dollars
term
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A mine project evaluation is a techno-economic model simulating the financial
performance of a mining project over its whole Mine Of Life (MOL).
The financial model will depend on the commodity (metal or non metal)
under consideration.
Non-Metals
Others
Coal
-
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Thermal coal
Coking coal
72

Also depending of the various mine project stages, different financial models
will be generated:
Pre-production
Exploration and resources delineation
Desktop
Pre-feasibility
Feasibility
Development and construction
Production
Closure and restoration
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The Discounted Cash Flow Analysis

Discovery Stage
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Desktop Stage
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The Discounted Cash Flow Analysis PreFeasibility Stage
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(Bankable) Feasibility Stage
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Feasibility models have three main components:
Technical
Selection of optimal mining method and design
Economical/Financial
Optimal annual mine throughput
Maximum expected value added to owners
Risk Analysis and Management

Project risk to be hedged, insured, contracted out or borne by the
owners
Financial risk - leverage trade-off acceptable to share holders and
financing institutions
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Use of Financial Models:
Investment decision determining the worth of the project assuming 100%
equity.
Financing decision determining the optimal level of gearing to enhance
the return to equity holders consistent with their willingness to bear the
additional financial risk.
Portfolio decision determining the desirability of the project in light of
possible synergies with other existing corporate assets, i.e., its capacity to:
Either increase the combined expected returns, or
Decrease the combined risk (diversification), or
A combination of both
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Cash flow analysis involves simulating what is happening or what is

expected to happen in the mine project over time.
It is a forward looking, or ex-ante, process, where all cash flows money
flowing into or out of the company bank accounts are included.
The purpose of preparing a cash flow analysis is to be able to make a
financial decision. The extra cash flow associated with the companys
investing in a particular project call it project A is compared to the cash
flow associated with whatever else might be chosen call this alternative
investment project B.
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In order to calculate an accurate valuation of a mining project it is necessary to
have access to detailed information (i.e. primary research) about all aspects of
the project that is:
its deposit,
mine plan,
process routes,
operating costs,
financial structure,
tax regime and
management qualities.
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Financial DCF Model Structure
The most important factors in DCF method is the Discount Factor and the
assumption of long-term prices.
The other principal factors which need to be estimated in providing input

to a DCF analysis are:
Tonnage and grade of the mineable reserve
Revenue (Quantity x price)
Production costs
Operating Costs
Capital Expenditure
Fixed cost
Taxes and Royalties
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1 Oz = 31.1034768gr
Year 0
Year 1
1,200,000
0.98
85%
32,138
1,500 $
Year 2
3,000,000
0.89
85%
72,966
1,500 $
Year 3
3,000,000
0.75
85%
61,488
1,500 $
Year 4
3,000,000
0.7
85%
57,389
1,500 $
Year 5
Total
2,500,000
12,700,000.0
0.65
85%
44,408
268,389.61
1,500 $
1,500
Ore Production (tonnes)

Average gold grade (gr/tonne)
Recovery
Gold produced (Oz)
Gold Price (A$/Oz)
Sales revenue (x 1000)
$ 48,206.83 $ 109,449.18 $ 92,232.45 $ 86,083.62 $ 66,612.33 $ 402,584.41
Capital gain -Salvage Value

Less: Site Operating Cost (x 1000)
Royalty (2.5%)
Refining Cost (x 1000)
Depreciation (x 1000)
$
$
$
$
(8,000.0)
(964.1)
(3,000.0)
(800.0)
$
$
$
$
(11,000.0)
(2,189.0)
(3,400.0)
(800.0)
$
$
$
$
(15,000.0)
(1,844.6)
(3,400.0)
(800.0)
$
$
$
$
(15,000.0)
(1,721.7)
(3,400.0)
(800.0)
$
$
$
$
$
10,000
(12,000.0)
(1,332.2)
(3,060.0)
(800.0)
$
$
$
$
$
10,000.00
(61,000.0)
(8,051.7)
(16,260.0)
(4,000.0)
Operating Profit before Tax (x 1000)
$ 35,442.69 $ 92,060.20 $ 71,187.81 $ 65,161.95 $ 59,420.08 $ 323,272.73
Less:
Income Tax (30%) (x 1000)
Operating Profit After Tax (x 1000)

Depreciation (x 1000)
Capital Expenditure (x 1000)
Undiscouted Net Cash Flow (x 1000)
ROMPEV
(27,618.06) $
(21,356.34) $
(19,548.59) $
(17,826.02) $
(96,981.8)
$ 24,809.88 $ 64,442.14 $ 49,831.46 $ 45,613.37 $ 41,594.06 $ 226,290.91

$
$
800.00 $
800.00 $
800.00 $
800.00 $
(150,000.00)
800.00 $
$
4,000.0
(150,000.0)
$ (150,000.00) $ 24,809.88 $ 64,442.14 $ 49,831.46 $ 45,613.37 $ 41,594.06 $ 226,290.91
Discount factor (12%)
Cash Flow Present Value (NPV) (x 1000)

Net Present Value ($ Million) (x 1000)
IRR
Payback
Capital Efficiency
(10,632.81) $
$
$
0.8929
(150,000.00) $ 22,151.68
52,045.45
31%
2.5
0.37
0.8929
0.8929
0.8929
0.8929
$ 57,537.62 $ 44,492.38 $ 40,726.22 $ 37,137.55 $ 202,045.45
85

CAPEX
NPV
Discount Rate
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86
The Discounted Cash Flow Analysis The

Discount Rate
One of the most important parameter in a DCF model is
the discount rate factor, which represents the cost of
capital a mining company will be able to accept as
economically viable.
As matter of fact, the discount rate could be visualised as

the Atlas holding the entire project risk.
Butwhat about project risk?

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Discount Rate
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88

Discount Rate
In finance, risks are broadly classified as market risks
and private risks.
Market risks: Risks that can be captured in the value of a
traded security. In the case of a mine project, this risks is
reflected by the company (owner) activity in the market.
Also by the metal price, because traded in the metal
market.
Private risks: All risks not captured by the market, e.g.,
geological (grades, tonnes, etc.) risks, political, and
environmental risks, among others.
This leads us to the discount rate dilemma.
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Discount Rate Dilemma
Since every mine project evaluation is build on NPV
calculations, and every NPV calculations requires a
discount rate, one of the biggest dilemmas a practitioner
faces is what discount rate to use in the NPV
calculations.
Two important factors determine the discount rate for a
given cash flow stream:
Magnitude of risk (cash flow uncertainty)
Type of risk (private versus market risks)
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90

When determining the discount rate to be used on a
given cash flow stream, we should consider the
following:
The first consideration should be whether there is
uncertainty associated with that cash flow stream.
Irrespective of whether it is market or private risk; no
uncertainty means no risk- so the risk-free is the
appropriated discount rate.
If there is uncertainty associated with a cash flow
stream, the next consideration is whether that cash flow
stream is influenced by private or market risk. In this
case a premium is added to the risk-free yielding the
discount rate of the mine project.
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91

Weighted Average Cost of Capital (WACC)
Cost of capital that represents the cost of financing an
organisations activities, which is normally done through some
combination of debt and equity.
Since debt and equity carry different costs of capital, a weighted
average is required. The weighted average cost of capital (WACC)
is defined as: determining the discount rate to be used on a given
cash flow stream, we should consider the following:
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93

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94

Normally, in mining industry, the mining companys cost of capital or
WACC is used as a bench mark discount rate for cash flow analysis. In this
context, the companys WACC is adjusted in proportion to the expected risk
of the project. In this approach the project risk is evaluated using established
risk assessment methodologies, and a risk rating is assigned to the project.
If the risk is relatively low and the project represents business as usual
WACC is used as the discount rate, otherwise higher risks than WACC are
used.
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95

So,.
Should the risk premium be different for cash inflows versus cash
outflows?
By general agreement..NO
What is the appropriate discount rate to discount the cash flows in
Monte Carlo simulation?
Will depend if the Monte Carlo is performed in a DCF or Real
Option framework.....Why?......lets return to this question when
reading the real Options part..
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96

In general, the estimation of the discount rate is a
very important step when building a cash flow
model. The reason for this is that it holds the
entire project risk so if it is estimated to high/low
the expected project value could be low/collapse.
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97

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98
The Discounted Cash Flow Analysis NPV

and Internal Rate of Return (IRR)
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99
The Discounted Cash Flow Analysis NPV

and Internal Rate of Return (IRR)
Criteria for making final decision:

If IRR > Capital Cost, INVEST
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100
Risk Analysis in Mine Project

Planning, Design and
Valuation
Dr. Luis A. Martinez
GM and Principal
REAL OPTIONS
CORPORATE MANAGEMENT
MINING
2013 Copyright ROMPEV Pty Ltd. All rights reserved
RISK ANALYSIS
TRAINING & COACHING
FORECASTING
Thursday, 8 August 2013
Objective
Introduction
Mine project evaluation a complex problem
Main sources of uncertainty in a mine project evaluation
Uncertainty: A source of value?.. management flexibility
Build an appreciation of mine planning, technical,
economic, logistics and access considerations and
perspectives on risk
Complex processes do not need complex solutions, but
practical ones
Provide a platform for the iVof engine
Upfront project optionality assessment
Advanced Valuation Technique (AVT) application
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Introduction
Undertaking valuations is an art rather than a pure science as they involve judgment and
analysis, and the size and scope of takeover transactions are broad
INPUT
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OUTPUT
103
Mine Project Evaluation A Complex

Process
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104
Risk Analysis in Mine Project Evaluation
INTRODUCTION TO
UNCERTAINTY ANALYSIS
Understanding Uncertainty
So,what is uncertainty??
Uncertainty is a subjective definition of
an unknown event (lack of
information).
There are some statements that you
know to be true, others that you know
are false, but with the majority of
statements you do not know whether
they are true or false; we say that, for
you, these statements are UNCERTAIN.
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106
Understanding Uncertainty
So,... What is dynamic / static uncertainty?
It will rain tomorrow
The card drawn from a well-shuffled
pack will be an ace
Shares in a mining company will raise
over the next month
Copper grade in a specific area within
the deposit is 3%/t.....
Dynamic uncertainty because it varies with
time. Conversely, static uncertainty does
not vary with time
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107
Quantifying and Modeling Uncertainty

,... How do we quantify uncertainty?
The prediction of the occurrence of an
uncertain event cannot be represented
or quantified by a single number!!!.
Planning for an uncertain future calls
for a shift in information management
from numbers to probability
distributions.
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108

The most basic building block of uncertainty is the
concept of an uncertain number. Examples includes:
Next months sales, this afternoons temperature, tomorrows
closing price for your favourite stock.
In statistics courses the closely related term random

variable is used in the discussion of uncertain
numbers.
To avoid confusion Personally I prefer to use uncertain
number.
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109

The Mean, Mode and Median are often misunderstood
concepts, which may all be grasped in terms of
histograms. For symmetric histograms these three
numbers are the same. But for asymmetric ones they will
be different as shown in the figure below.
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110

Using a Spinner to drawn uncertain numbers
Open the Excel file named Spinner_Example1.
Folder/Workshop2/Spinner_example1.xls
Use the Settings tab to set up the Spinner mode click OK.
This example was extracted from professor Sam Savage
http://analycorp.com/uncertainty/
Observe that in this case we will be able to drawn an uncertain
number between 0-1 by spinning the spinner.
Come on, get familiar with the Spinner.
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111

A Risky Business
Suppose that you are considering the start up of a new mine project.
Revenues in the first year are quite uncertain. Imagine for example
that the uncertainty in revenue is the same as if God spins the
spinner and multiplies by $1Billion. The downside is that if
revenues are less than $300 Millions you will go out of business.
Task: Quantify the uncertainty of the first year revenue
Open the Excel file named Spinner_Example2.
Folder/Workshop2/Spinner_example2.xls
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112

Depending of the nature of the uncertainty, different
distribution of probabilities can be defined.
Examples of these distribution of probabilities are:
Normal (Gaussian) distribution;

Log-normal distribution;
Triangular distribution;
Uniform distribution; and
Geometric distribution, among others.
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114

Sampling the Triangular Distribution
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115

Sampling the Triangular Distribution
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116
Suppression of Uncertainty
Everything about the future is uncertain, as is most of
the past; even the present contains a lot of uncertainty
Despite uncertainty being all about us,

uncertainty is often denied....why?
Even the best historians, who are meticulous
with their sources, can blur the borderline
between facts and options.
Politicians are among the worst examples of
people who deny any uncertainty, distorting the
true scenario to make their view appear correct.
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117
However, there are places, like the casino or the race course where
the uncertainty is openly admitted and exploited to add to the
excitement....hmmmm
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118
Mining Projects are Very Complex
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119
Why people deny uncertainty even though they have the
perception of its existence?
One reason for suppression is clear: People

do not like to be unsure and instead prefer to
have everything sharply defined.
People like to be told emphatically that the
sun will shine, rather than to hear that there
might be the chance shower to spoil the picnic,
so they embrace the false confidence of some
weather forecast, THOUGH they are annoyed
when the forecast is incorrect.
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120
Downside Risk and Upside Potential

Given a distribution model that quantifies an existing
uncertainty, Risk is the probability that a bad event will
happen. Normally the risk is measured from an
established reference point (value) within the distribution
of probabilities.
Conversely with risk, Upside Potential is the probability
that a good event will happen, given the same reference
point.
Observe that the sum of both probabilities, i.e., the risk and the
upside probabilities defines the entire uncertainty or
distribution function.
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121
Downside Risk and Upside Potential
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122
Introduction to Monte Carlo Simulation
The last thing you do before climbing on a ladder to paint the side
of your house is to give it a good shake. By bombarding it with
random physical forces, you simulate how stable the ladder will be
when you climb on it. You can then adjust it accordingly so as to
minimise the risk that it falls down with you on it.
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123
The shaking forces you apply to the ladder are known as the
input probability distribution and correspond to the uncertain
demand levels for your product, the magnitudes of potential
earthquakes, or the sizes of the enemy forces you will
encounter (in our example above the stability of the ladder).
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124
The subsequent movements of the ladder are known as

the output probability distribution and correspond to
the profit of the business, the deflection of the bridge, or
the number of casualties you suffer.
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125
A computational technique similar to the shaking of a ladder can test the stability of
uncertain business plans, engineering designs, or other activities. Monte Carlo
Simulation, as it is known, bombards a model of the business with thousands of
random inputs, while keeping track of the outputs. This allows you to estimate the
risk and potential of your business.
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126

Upside
Potential
Risk
Reference
Recoverie
Uniform distribution. s
Risk
Log-Normal distribution.
Defined byUpside
the mean
Potential
and variance
Risk
Risk
Upside
Potential
Unif
Define
Defined by the mean an
Project
NormalValue
distribution.
Defined by the mean
and variance
and variance
Upside
Potential
Risk
Reference
Uniform distribution.
Defined by a maximum
and a minimum
Normal distribution.
Upside
Defined by the mean
Potential
and variance
Reference
Reference
Reference
Upside
Potential
Upside
Potential
Reference
Mining
Project
Triangular distribution.
Defined by the mean
Defined by a maximum,
Uniform
distribution.
and variance
minimum and most likely values
Risk
Metal
Production
Reference
Uniform distribution.
and a minimum
Risk Defined by a maximum,
Upside
and a minimum
Potential
Defined by the mean
and variance
Reference
Upside
Costs
Potential
Risk
Upside
Potential
Reference
Risk
Reference
Reference
Defined by the mean
and variance
Reference
Reference
Reference
Risk
Upside
Potential
Upside
Potential
Reference
Risk
by the mean
Risk DefinedUpside
andPotential
variance
Risk
Upside
Defined by the
mean
Potential
and variance
Risk
Upside
Potential
Reference
Prices
Upside
Potential
Upside
DefinedRisk
by the
mean
Potential
and variance
Risk
Risk
Reference
Reference
Reference
Risk
Upside
Potential
Risk
Reference
Grades
Upside
Defined by the mean
Potential
and variance
Upside
Potential
Risk
Reference
Risk
Upside
Potential
Un
Def
and a minimum
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127
Simulations dont add up. Consider a mining project that has two
sources of uncertainty . We will model each source of uncertainty as
its own ladder, and model the entire project as the two ladders
joined by a wooden plank. Now suppose that by shaking either
ladder by itself you would predict a 10% of the project falling over
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128

How can we choose the
appropriated distribution of
probability for each
uncertain variable when
applying Monte
Carlo?.....Why?
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129
Mine Project Evaluation The Flaw of

Averages
Mining Project
CASH FLOW BASE CASE FORECAST
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130
Mine Project Evaluation The Flaw of

Averages
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131
On Average is he Alive?
From the Book: Decision Making with Insight

http://www.stanford.edu/~savage/flaw/
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132
Main Sources of Uncertainty in Mine project

Evaluation - ROM Metal Grades
In the 1980s, a study of 35 Australian gold mines found that
68% failed to deliver the planned head grade
(Burmeister, 1988)
A similar review of nearly 50 North American

projects showed that only 10% achieved their
commercial aims with 38% failing within about one
year (Harquail, 1991).
A study of the start-up performance of nine
Australian underground base metal mines found
that only 50% achieved design throughput by Year
3 and 25% never achieved it at all (McCarthy and Ward, 1999).
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133
Quantifying / Forecasting Future Precious

Metal Prices
Forecasted Price Data
historical Metal Price Data
1991
1992
1995
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1998
2001
2002
2005
1998
2000
2002
2005
2008
2013
134
Quantifying / Forecasting Future Precious

Metal Prices
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135
Quantifying / Forecasting Future Base Metal

Prices
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136

Evaluation - Metal Grades
Traditional DCF and NPV10
Year 0
Ore
Waste
Avg Grade
Recovery
Metal Qty
Price
Mining Cost
Process. Cost
Ref. Cost
Revenue
Und. Cash Flow
Disc. Rate Factor
Disc. Cash Flow
Cum. DCF
CAPEX
NPV
IRR
Year 1
80000
24000
3.78%
97.00%
2929.821574
700
-211200.00
-96000.00
-292.98
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Geometric Brownian Model for Prices
Year 9
80000
80000
80000
80000
80000
80000
80000
8000
256000
32000
0
8000
224000
16000
2.77%
2.06%
2.60%
3.11%
0.51%
0.45%
0.95%
97.00%
97.00%
97.00%
97.00%
97.00%
97.00%
97.00%
2149.77237 1596.009031 2016.767044 2415.174205 399.453995 348.395968 739.605921
700
700
700
700
700
700
700
-193600.00
-734400.00
-278400.00
-214400.00 -188000.00 -716000.00 -269600.00
-96000.00
-96000.00
-96000.00
-96000.00
-96000.00
-96000.00
-96000.00
-214.98
-159.60
-201.68
-241.52
-39.95
-34.84
-73.96
8000
0
1.54%
97.00%
119.78099
700
-23200.00
-9600.00
-11.98
$2,050,875.10 $1,504,840.66 $1,117,206.32 $1,411,736.93 $1,690,621.94 $279,617.80 $243,877.18 $517,724.14

$1,743,382.12 $1,215,025.68 $286,646.72 $1,037,135.25 $1,379,980.43
$4,422.15 $568,157.66 $152,050.18
12%
$0.89
$0.80
$0.71
$0.64
$0.57
$0.51
$0.45
$0.40
$2,000,000.0 $1,556,591.18 $968,611.03 $204,029.47 $659,118.20 $783,037.95
$2,240.40 $257,005.67 $61,410.52
$3,991,955.9 $2,435,364.7 $1,466,753.7 $1,262,724.2
$603,606.0 $179,431.9 $177,191.5
$79,814.1
$2,000,000.00
$1,991,955.92
39%
$83,846.69
$51,034.72
$0.36
$18,403.63
$18,403.6
2000
Series1
1800
Series2
1600
Series3
1400
Series4
Series5
1200
Series6
1000
Series7
800
Series8
Series9
600
Series10
400
Series11
200
Series12
Series13
0
1
Effect of GBM prices on Project NPV
Series14
10
$3,000,000.0
Series1
Series2
$2,500,000.0
Series3
Series4
$2,000,000.0
Series5
Series6
$1,500,000.0
Series7
Series8
Effect of GBM
prices on
Series11
Project
Series12
Series13 Cash Flow
Series9
$1,000,000.0
Series10
$500,000.0
$0.0
Series14
Series15
$500,000.0
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137

Evaluation - Metal Grades
Traditional DCF and NPV10
Year 0
Ore
Waste
Avg Grade
Recovery
Metal Qty
Price
Mining Cost
Process. Cost
Ref. Cost
Revenue
Und. Cash Flow
Disc. Rate Factor
Disc. Cash Flow
Cum. DCF
CAPEX
NPV
IRR
Year 1
80000
24000
3.78%
97.00%
2929.821574
700
-211200.00
-96000.00
-292.98
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
80000
80000
80000
80000
80000
80000
80000
8000
256000
32000
0
8000
224000
16000
2.77%
2.06%
2.60%
3.11%
0.51%
0.45%
0.95%
97.00%
97.00%
97.00%
97.00%
97.00%
97.00%
97.00%
2149.77237 1596.009031 2016.767044 2415.174205 399.453995 348.395968 739.605921
700
700
700
700
700
700
700
-193600.00
-734400.00
-278400.00
-214400.00 -188000.00 -716000.00 -269600.00
-96000.00
-96000.00
-96000.00
-96000.00
-96000.00
-96000.00
-96000.00
-214.98
-159.60
-201.68
-241.52
-39.95
-34.84
-73.96
8000
0
1.54%
97.00%
119.78099
700
-23200.00
-9600.00
-11.98
$2,050,875.10 $1,504,840.66 $1,117,206.32 $1,411,736.93 $1,690,621.94 $279,617.80 $243,877.18 $517,724.14

$1,743,382.12 $1,215,025.68 $286,646.72 $1,037,135.25 $1,379,980.43
$4,422.15 $568,157.66 $152,050.18
12%
$0.89
$0.80
$0.71
$0.64
$0.57
$0.51
$0.45
$0.40
$2,000,000.0 $1,556,591.18 $968,611.03 $204,029.47 $659,118.20 $783,037.95
$2,240.40 $257,005.67 $61,410.52
$3,991,955.9 $2,435,364.7 $1,466,753.7 $1,262,724.2
$603,606.0 $179,431.9 $177,191.5
$79,814.1
$2,000,000.00
$1,991,955.92
39%
$83,846.69
$51,034.72
$0.36
$18,403.63
$18,403.6
Mean Reversion Model for Prices
Effect of MR prices on Project NPV
Effect of MR
prices on
Project
Cash Flow
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138
Ordinary Kriging Base Case Block Models
Cu Spatial Distribution
Ordinary Kriging
ROMPEV
139
True (unknown) grade value distribution(g/t)
Ore Resource Estimation Dilemma

Ore Classified
as Ore
Waste
Classi
fied as
Ore
Ore Classified as Waste
Waste Classified as
Waste
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Estimated grade value distribution(g/t)
140
Sequential Gaussian Simulation
Sequential Gaussian
Simulation Realisation
20
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141
Sequential Gaussian
Simulation Realisation
20
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142
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143
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144
Base Case

Evaluation - ROM Metal Grades
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145
Evaluating a Gold Project

Drill-hole data set
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146
Rock Type Model
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147
Economic and Technical Parameters for the

Gold Mine Project
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148

Ordinary Kriging
Rock Type Model
Block Model
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149
Open Pit Mine

optimisation
Process
Zone 7
Zone 6
Zone 8
Zone 5
Z
E
N
ROMPEV
Parameter Description
Assumed Production Period (years)
Expected Gold Price (Au$/gr)
Expected selling cost (Au$/gr)
WACC discount rate
Time cost / period (millions of Au$)
Mill capacity / period (Mt)
Maximum mine capacity / period (Mt)
Procesing cost Oxide rock (Au$/t)
Procesing cost Transitional rock (Au$/t)
Procesing cost Primary rock (Au$/t)
Recovery-Oxide rock
Recovery-Transitional rock
Recovery-primary rock
Slope angle Zone 1 (degrees)
Slope angle Zone 7 Degrees)
Slope angle Zone 8 (Degrees)
Value
1
27.5
0.6875
12%
1.5
2
9
15.39
16.66
16.9
94%
94%
90%
52
57
50
48
45
50
55
60

Cut-Back Design
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151

Production Schedule
Cut-Back Design
Design
ROMPEV
152
Gold Project Economic and Technical

Indicators
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153

Indicators
ROMPEV
154

Indicators
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155
Mining Costs
-40
Ore Tonnes
Gold Mine Project Design
3
2
1
0
1
-25
-20
-15
-10
-5
Production Periods (Years)
-20
-15
-10
1
4
3
2
1
Production Periods
3.5
3.5
3
2.5
2
1.5
1
2.5
0.5
0
1
Cum. Mine Value (Millions of Au$)
Cumulative Cash Flows
60
45
30
15
0
1
250
200
150
100
50
0
1

Sensitivity Analysis - Spider
Gold Mining Project

15%
33%
Period 1
Period2
22%
Period 3
Period 4
NPV (Millions of Au$) Value
Mine Value (Millions of AU$)
Gold Mining Project Value

75
400
300
200
100
0
60%
80%
30%
100%
120%
% Change in Input Value

WACC Discount Rate
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Production Period (Years)
Production Period 1
Production Period 2
Production Period 3
Production Period 4
90
Gold Grade
Stripping Ratio
Productio Periods (Years)
Gold Grade (gr/t)
-25
Striping Ratio (Waste\Ore)
Selling Costs (Millions of AU$)
Processing Costs (Millions of Au$)
-30
-5
-4.5
-4
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
Selling Costs
Processing Costs
-35
Waste Tonnes
-30
Waste (Million of tonnes)
-35
Ore (Million of tonnes)
Mining Costs (Millions of Au$)
Gold Qty (Millions of grams)
Gold Qty Production

7
Metal Price (Au$/gr)
But, what if....

Metal grades are
not the expected
ones?
Simulation 1- Orebody model
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Orebody Simulations
What IfThe Resulting Metal

Grades are not the Expected ones?
Project Indicators
Variations
Ore tonnes
Base-Case Open Pit Design
Waste tonnes
Metal Production
Average Grade
Cash Flow
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Advanced Quantitative Risk Analysis
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REAL OPTIONS IN MINING
Real Options in Mining
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How should a corporate manager facing
uncertainty over future market conditions
decide whether to invest in a new project ? "
Traditional NPV approach:

NPV = Present value of the expected cash
flow
Present value of the expenditures
If NPV > 0 => invest
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Weaknesses:
=> approach based on faulty assumptions
Reversibility of investment
Now-or-never opportunity
=> No contingency for delaying or
abandoning
the project (fixed scenario)
=> we need to take into account more
information
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Apply financial option theory to real
assets, e.g., a mine , oil, engineering, R&D,
among others.
Option
NPV
Costs
r%
LOM
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Uncertainty: A source of Value?..

Management Flexibility
Option 1
Operational
Drilling
Base Case
Project
Time 1
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Option 3
Managerial
Expand
Expanded NPV
Flexibility Value
Option 2
Operational
Cut-Off
NPV
Expected Mine Project Value ($m)
Project Value Creation from Flexibility

ENPV
= NPV + OpVal
Decision Making
Optimised
Project
Time 2
175
Real Options in Mining Example of Option

to Close
Ore Toones / Year
Operating Costs/ Year
RUN REAL OPTION PROCESS
Grades / Year
Recoveries
Quantifying Future Metal Price Uncertainty

Arbol binamial de precios
Year 0
Prod. Period
Year 1
Year 2
2,014
2,013
$19.00
Average
TotalProbability
$25.02
0.47
$14.43
0.53
$19.38
1.00
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0.47
0.53
0.47
0.53
$32.94
0.22
$19.00
0.50
$10.96
0.28
$19.77
1.00
Year 3
2,015
0.47
0.53
0.47
0.53
0.47
0.53
$43.38
0.10
$25.02
0.35
$14.43
0.40
$8.32
0.15
Year 4
2,016
0.47
0.53
0.47
0.53
0.47
0.53
0.47
0.53
$20.16
1.00
$57.11
0.05
$32.94
0.2176631
$19.00
0.37
$10.96
0.28
$6.32
0.08
$20.57
1.00
Year 5
2,017
0.47
0.53
0.47
0.53
0.47
0.53
0.47
0.53
0.47
0.53
$75.20
0.02
$43.38
0.13
$25.02
0.29
$14.43
0.33
$8.32
0.19
$4.80
0.04
$20.98
1.00
Year 6
2,018
0.47
0.53
0.47
0.53
0.47
0.53
0.47
0.53
0.47
0.53
0.47
0.53
$99.02
0.01
$57.11
0.07
$32.94
0.20
$19.00
0.31
$10.96
0.26
$6.32
0.12
$3.65
0.0228
$21.40
1.00
Year 7
2,019
0.47
0.53
0.47
0.53
0.47
0.53
0.47
0.53
0.47
0.53
0.47
0.53
0.47
0.53
$130.39
0.0049
$75.20
0.04
$43.38
0.13
$25.02
0.25
$14.43
0.29
$8.32
0.20
$4.80
0.07
$2.77
0.01214
$21.83
1.00
Year 8
2,020
$171.69
0.47
0.0023
0.53
$99.02
0.47
0.02
0.53
$57.11
0.47
0.08
0.53
$32.94
0.47
0.19
0.53
$19.00
0.47
0.27
0.53
$10.96
0.47
0.24
0.53
$6.32
0.47
0.14
0.53
$3.65
0.47
0.05
0.53
$2.10
0.0065
$22.26
1.00
176

to Close
Quantifying Future Cash Flow Uncertainty
Ao 0
Year 1
2,013
Year 2
2,014
Year 3
2,015
Year 4
2,016
Year 5
2,017
Year 6
2,018
Year 7
2,019
Year 8
2,020
$208,346.12
$176,243.94
$130,323.27
$90,814.51
$73,430.98
$40,747.95
$25,837.63
($2,339.56)
$0.00
($18,548.60)
$75,823.43
$33,794.90
$7,440.35
$307.94
$34,876.74
$38,111.86
$24,236.32
$9,076.37
($5,088.58)
($8,880.41)
($13,315.89)
$67,348.97
$54,870.75
$15,077.79
$7,224.91
($8,463.70)
$107,274.13
$46,096.97
$16,939.03
$119,972.56
$18,672.15
$4,403.62
($6,319.08)
($16,778.77)
($18,175.03)
$7,134.65
($7,067.12)
($15,204.01)
($23,513.54)
$476.19
($13,675.47)
($20,316.68)
($3,355.30)
($17,486.54)
($5,579.57)
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to Close
Estimating Project NPV Without Options
Ao 0
Year 1
Year 2
2,014
2,013
Year 3
2,015
Year 4
2,016
Year 5
2,017
Year 6
2,018
Year 7
2,019
Year 8
2,020
$208,389.12
$334,413.45
$386,688.79
$383,688.74
$356,394.93
$294,601.86
$225,997.54
$139,258.58
$
63,637.01
$173,353.52
$72,810.43
($371.67)
$110,197.83
$54,319.05
$41,412.74
($18,240.41)
($29,908.44)
48,809.0
63,637.01
Potencial
14,828.01
VAN Forward
64,904.71
$7,177.65
($3,506.12)
($24,728.50)
($55,049.82)
$$AU$66.6 millions
VAN proyecto
$18,715.15
$16,728.90
($481.46)
($60,621.55)
VAN caso base
$38,154.86
$51,494.96
$13,642.17
($53,322.82)
$67,391.98
$105,678.70
$87,207.09
$15,683.79
($29,110.87)
$197,465.42
$221,501.67
$205,151.66
$124,754.04
$120,015.56
$519.19
($15,166.61)
($38,698.33)
($3,312.30)
($21,895.02)
($5,536.57)
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178
43.0

to Close
Estimating Project NPV With Options
Ao 0
Year 1
Year 2
2,014
2,013
Year 3
2,015
Year 4
2,016
Year 5
2,017
Year 6
2,018
Year 7
2,019
Year 8
2,020
$208,389.12
$334,413.45
$386,688.79
$120,015.56
$383,688.74
$197,465.42
$356,394.93
$221,501.67
$294,601.86
$226,135.20
$
$110,197.83
$125,017.75
74,996.89
$105,678.70
$173,353.52
$142,055.30
$51,494.96
$54,824.21
$41,412.74
$25,483.37
$16,728.90
$88.15
$1,372.24
$106.79
$
48,809.0
74,996.9
$44.83
64,904.7
145.2
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$44.83
$519.19
$48.47
$44.83
$44.83
Valor de la opcion
$
26,187.9
$$AU$74.9
millions
Increase %
54%
VAN Forward
$7,177.65
$48.47
$88.15
VAN caso base
$18,715.15
$14,609.85
$3,272.69
VAN expandido-RO
$38,154.86
$87,207.09
$78,046.96
$18,933.71
$67,391.98
$205,151.66
$43.00
$44.83
$43.00
Closing Value
$
119.3
106.8
88.1
48.5
44.8
44.8
179
43.0

to Close
Estimating Project NPV With Options
Ao 0
Year 1
Year 2
2,014
2,013
Year 3
2,015
Year 4
2,016
Year 5
2,017
Year 6
2,018
Year 7
2,019
Year 8
2,020
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
48,809.00
74,996.89
26,187.89
54%
VAN Forward
64,904.7
CONTINUE
CONTINUE
CONTINUE
CLOSE
CONTINUE
CLOSE
CLOSE
CLOSE
$$AU$74.9 millions
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CONTINUE
CONTINUE
CLOSE
$
$
$
CONTINUE
CONTINUE
CLOSE
CLOSE
VAN caso base

VAN expandido-RO
Valor de la opcion
Increase %
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CONTINUE
CLOSE
CLOSE
CLOSE
CLOSE
CLOSE
180
Dealing With Uncertainty in Mine Planning,

Technical, Economic, Logistics are Complex
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181
Complex Process Needs Easy to Build

Practical Process
Building
The Pascal Triangle
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182
Complex Process Needs Easy to Build

Practical Process
The Polynomial Extension
So, it is Easy to solve (a+b)100

But, we need the technology to build the algorithm
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183
So, We Need a Simple Process To Solve the

Mine Project Evaluation Problem..
P3
P2
P1
CS
2
CS
1
RC1
RC2
OP3
OP2
OP1
PC21
PC22
PC32
RCn Pit Conveyor
PC11
LO1
PC33
LO2
LO3
PCn Product Conveyor

Crusher
Plant
Product 1
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Product 2
Product 3
Loadout
184
But, Remember the Objective is to Build a

Useful and Practical Model..
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185
The Integrated Valuation Optimisation

Framework Engine iVof
UPSTREAM
DEFINE
ScopeDEFINE
& Structure
Scope & Structure
MIDSTREAM
ANALYSE
ANALYSE
Option
Modelling
Risk / Potential Quantification & Analysis
DOWNSTREAM
IMPLEMENT
IMPLEMENT
Solution
Syndication
Option Modelling and Decision Making
Data Collection
Quantify & Model Uncertainties
Integration/Interaction of
uncertainties
Opportunities
Low Impact
High Cost
Low Impact
Low Cost
High Impact
High Cost
High Impact
Low Cost
Flexibility (aggregated) Value
Risk
AU$ Millions
Expected Target
Identify & Group

Uncertainties
Risk Management Strategy

Identify strategies to mitigate
risk/manage opportunity
Cost of Implementing
Economic/Technical Strategy
(AU$ Millions)
Base Case Modeling

(LOM)
Minimum
Maximum
Risk/Opportunity
Assessment
Quantative analysis using
Value@Risk &
Upside/Downside
Management
Decision making
Process
Impact of decision
on Project Outcome
/ NPV
CDF of Current Market Project Value-after IVOF
Probability of achieving target
0.9
Optimistic
HIstogram of Current Market Project Value-After IVOF

0.18
0.16
0.8
0.14
0.12
0.1
0.7
0.08
0.6
Expected
0.06
F(x)
Prioritize
key
uncertainties
for modeling
Average
0.04
Expected
Expected
0.02
0
0.75
0.5
0.8
0.85
0.9
0.95
1.05
Current Project Value (A$)
1.1
1.15
1.2
1.25
9
x 10
0.4
0.3
0.2
0.1
BC-Expected
0
0.75
0.8
0.85
0.9
0.95
1
1.05
Current Project Value (A$)
1.1
1.15
1.2
1.25
9
x 10
Commercial in confidence. 2010 Copyright ROMPEV Pty Ltd. All rights reserved
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186
The Mathwork Matlab Platform
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187
Thanks
But.............,
we still need to
model
some risks through
the
discount rate, which
is
easier than
modelling the
entire project risk
through it.
ROMPEV
188

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Block Model Based Interpolation

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Weighted average (power = ?) ?

Example when =1:

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The weight (influence) of a sampled

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z(i) = f(i) + s(i) +

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blue dots represent the data

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Using Geostatistics to Estimate the Value of

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Using Geostatistics to Estimate the Value of

Improving Project Expectations

Using Geostatistics to Estimate the Value of

where h is the distance separating sample locations si

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Improving Project Expectations

Using Geostatistics to Estimate the Value of