Impact of Rehabilitation and Closure costs on Production Rate and Cut-off Grade Strategy

B.M. King Rio Tinto Technical Services Limited, Bristol, United Kingdom

Abstract
Even after the last bucket of ore has been mined, a number of activities must take place before the mining operation is considered closed. This may include revenue generating activities, such as selling off equipment, supplies and infrastructure, and closure costs, including decommissioning and rehabilitation of the mine, treatment plant, tailings and waste dump sites. In the past the value of the revenue generating components were considered greater than the closure costs giving little impact on the mining strategy. However, any substantial mining venture must account for appropriate rehabilitation of the land impacted by the mining activities. This paper shows how rehabilitation and closure costs may impact the production rate and cut-off grade strategy for a mining operation. The paper also highlights the need to understand the assumption base of software optimization tools when applying them in practice and interpreting their results.

Introduction - Mining Objectives and Constraints

One of the objectives of a mining operation is to maximize the net present value (NPV) of the project. This objective is subject to many constraints including long term responsible stewardship of the resource and the environment. In the past, mine closure may have been seen as a positive contribution to the company cash flow, as the equipment salvage value is considered. Responsible mining ventures now consider rehabilitation and decommissioning costs that often exceed the salvage values. These may include reprofiling waste dumps, removal and disposal of buildings and infrastructure, hazardous materials disposal and native revegetation of impacted areas. Mine closure and rehabilitation policies should also conform to the mine objectives and constraints. The purpose of this paper is to show how closure and rehabilitation costs can be incorporated into the mine schedule to maximize the NPV within operational constraints. In order to clearly illustrate the issues, examples have been chosen which exaggerate the impact of these parameters. While showing these results the paper also highlights the importance of knowing the assumption base that is used by optimizing tools.

Production Rate and Cut-off Grade Optimization Background

A breakeven mining strategy may simply process all the material that would cover its mining and treatment costs. This would result in a long life operation with a large amount of rock processed. This policy does not guarantee the best return on the project and could, in some cases, make a project unable to cover initial capital costs. 4, 5 The objective of cut-off grade optimization tools is to maximize the value of the entire reserve model, considering both the present value of mining a reserve block with the discounted benefit of mining it at some time in the future. This often leads to higher processed grades in the early life of the mining operation, then gradually reducing towards the breakeven grade at the end of

the mine life. As a consequence of maximizing the project value, the mine life is often reduced as a declining cut-off grade policy applied.5

A number of examples have been prepared to illustrate the value of incorporating closure and rehabilitation costs during mine design. Initially, an example was chosen with a simple geometry in order to highlight the impact of the production rate and cut-off grade, without the complexity of real geological and economic variability. A more complex example follows with a sequence of realistic rock properties. In each case, the material is scheduled to maximize the net present value of the operation.

Simple Examples
The same mining parameters used by Dowd3 to illustrate dynamic programming has been used in this paper. The deposit consists of mixture of high grade and low grade rock. This material is evenly distributed requiring simultaneous mining. The high grade portion can be separately processed if necessary. The entire deposit consists of 400 t of low grade and 200 t of high grade material. A treatment plant with an annual capacity of 100 t can treat either high and low grade material together or the high grade ore only. If both rock types are treated then a net cash flow of $ 5 is achieved from each tonne of rock. If only the high grade material is processed then a net cash flow of $ 10 per tonne of rock processed is generated. The mining rate is not constrained for the purposes of these examples. A discount rate of 20% is assumed for the project. Case A - No closure costs In this first case, the material is scheduled without any other costs impacting on the schedule (Table 1). This case equates to the example given by Dowd3 to illustrate the principals of dynamic programming.1 Period 1 2 3 4 Totals Processed material High grade only Low and High Low and High Low and High Mass Mined 300 100 100 100 600 Mass Processed 100 100 100 100 400 Cash Discounted Flow Cash Flow $ 1,000 $ 1,000 $ 500 $ 417 $ 500 $ 347 $ 500 $ 289 $ 2,500 $ 2,053

Table 1 : No closure costs As can be seen in the above schedule, the first period uses half the resource to enable the mill to be filled with high grade ore. The remaining periods fill the mill with the high and low grade mixture.

Case B - Closure Cost as a Terminal Value The next case considers closure as a cost after all the mining is complete. This may represent the case where the major proportion of the closure costs are concerned with decommissioning the tailings dams and removing surface infrastructure. For this example a cost of $1 000 in the period following the completion of processing is used. Case B-1 Ignoring Closure Costs During Planning By ignoring the closure cost during the planning stage, the same mine plan is developed as above except the cash flow is added in the period following exhaustion of the resource (Table 2). Period Processed Material 1 2 3 4 5 Totals High Low and High Low and High Low and High Closure Costs Mass Mined 300 100 100 100 600 Mass Processed 100 100 100 100 400 Cash Flow $ 1,000 $ 500 $ 500 $ 500 -$ 1,000 $ 1,500 Discounted Cash Flow $ 1,000 $ 417 $ 347 $ 289 -$ 482 $ 1,571

Table 2 : Ignoring Closure Costs During Planning As can be seen by the resulting NPV, the project still has an overall positive value after the closure cost is incorporated. Case B-2 Considering Closure Costs During Planning By incorporating the closure information during the planning stage, a new mine plan is developed to maximize the NPV and keep the mill operating at full capacity (Table 3). Period 1 2 3 4 5 6 7 Totals Processed Material Low and High Low and High Low and High Low and High Low and High Low and High Closure Costs Mass Mined 100 100 100 100 100 100 600 Mass Processed 100 100 100 100 100 100 600 Cash Flow $ 500 $ 500 $ 500 $ 500 $ 500 $ 500 -$ 1,000 $ 2,000 Discounted Cash Flow $ 500 $ 417 $ 347 $ 289 $ 241 $ 201 -$ 335 $ 1,660

Table 3 : Considering Closure Costs During Planning The project has a 5.7% increase in NPV by modifying the schedule to fill the mill with low grade ore throughout the mine life.

After some thought, it is apparent that an even greater project NPV could be achieved by reducing the production rate in the last periods. Table 4 illustrates this schedule: Period 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Totals Processed Material Low and High Low and High Low and High Low and High Low and High Low and High Low and High Low and High Low and High Low and High Low and High Low and High Low and High Closure Costs Mass Mined 100 100 100 100 100 30 10 10 10 10 10 10 10 600 Mass Processed 100 100 100 100 100 30 10 10 10 10 10 10 10 600 Cash Flow $ 500 $ 500 $ 500 $ 500 $ 500 $ 150 $ 50 $ 50 $ 50 $ 50 $ 50 $ 50 $ 50 -$ 1,000 $ 2,000 Discounted Cash Flow $ 500 $ 417 $ 347 $ 289 $ 241 $ 60 $ 17 $ 14 $ 12 $ 10 $8 $7 $6 -$ 93 $ 1,834

Table 4 : Considering Closure Costs During Planning with Reduced Mining Rates In this case the project NPV was raised another 10%. The question that arises now is why drop down to only 10 t in the final periods and not down to say 1 t, or 0.1 t? The schedule that would theoretically maximize the NPV would be to not mine the last block of material unless the discounted closure cost was less than the value of the last increment of resource. This may be likened to maintaining a nominal mining capacity to avoid incurring the closing costs. There are several reasons why this does not occur in practice. Firstly, if fixed annual costs are higher than the benefit of delaying closure may also stop this type of solution from being considered optimum. Secondly, at low production rates, operating costs tend to increase, making the business a loss making operation. A third reason is of a more practical nature, at some low production rate, the operation violates constraints under which the deposit can be mined. Responsible stewardship constraints on the resource will remove schedules with periods of no production since they are no longer mining. Minimum mining rates and environmental constraints are specific to the mining operation being considered so a general answer can not be prescribed for all operations. While this simple example does not warrant detailed study into how to overcome the problem, it does highlight the advantages of understanding the assumption used in optimization software, and the need to check the results in the light of these assumptions. Case C - Rehabilitation Cost as an Annual Cost For the final situation, rehabilitation costs are assumed to be distributed throughout the life of the project. This may be caused by the rehabilitation of old mining areas and the clean up of moving heap leach pads or tailings dams.

Case C-1 Fixed Annual Rehabilitation Costs Consider firstly a deposit where the annual rehabilitation costs are not related to how much material is mined. In this case the annual rehabilitation cost are $ 200 which cover regulatory surveys and reports. The first schedule shows the case of simply adding these costs after the schedule has been developed (Table 5). Period 1 2 3 4 Totals Processed Material High Low and High Low and High Low and High Mass Mined 300 100 100 100 600 Mass Processed 100 100 100 100 400 Cash Discounted Flow Cash Flow $ 800 $ 800 $ 300 $ 250 $ 300 $ 208 $ 300 $ 174 $ 1,700 $ 1,432

Table 5 : Schedule Without Considering Fixed Annual Rehabilitation Costs During Design If these costs are included as fixed annual costs the optimum schedule mines all the resource in two years as shown in Table 6: Period 1 2 Totals Processed Material High High Mass Mined 300 300 600 Mass Processed 100 100 200 Cash Flow $ 800 $ 800 $ 1,600 Discounted Cash Flow $ 800 $ 667 $ 1,467

Table 6 : Schedule Considering Fixed Annual Rehabilitation Costs During Design The resulting schedule is 2 years shorter and has just over 2 % higher NPV. It should be noted that this optimum schedule does not simply change depending on the whether or not fixed costs are included, it is also important what level of fixed annual costs. For example, fixed annual costs of $ 150 would not have changed the scheduled quantities and cut-off grade. Annual costs of $ 250 would have led to the same high grade processing schedule but with an 8 % improvement in NPV. Case C-2 Rehabilitation Costs Per Mass Processed A second example may contain rehabilitation costs that are proportional to the mass of material mined. Typical costs that may be in this category are revegetation costs, acid water treatment, dust suppression and contaminated waste disposal. The following example shows the original schedule to which a further $ 1.0 t-1 charge has been added (Table 7).

Period 1 2 3 4 Totals

Processed Material High Low and High Low and High Low and High

Mass Mined 300 100 100 100 600

Mass Processed 100 100 100 100 400

Cash Flow $ 700 $ 400 $ 400 $ 400 $ 1,900

Discounted Cash Flow $ 700 $ 333 $ 278 $ 231 $ 1,543

Table 7 : Without Considering Rehabilitation Costs Per Mass Processed During Design By scheduling this material taking into account the rehabilitation charge a better schedule is found (Table 8): Period 1 2 3 4 5 6 Totals Processed Material Low and High Low and High Low and High Low and High Low and High Low and High Mass Mined 100 100 100 100 100 100 600 Mass Processed 100 100 100 100 100 100 600 Cash Discounted Flow Cash Flow $ 400 $ 400 $ 400 $ 333 $ 400 $ 278 $ 231 $ 400 $ 400 $ 193 $ 400 $ 161 $ 2,400 $ 1,596

Table 8 : Considering Rehabilitation Costs Per Mass Processed During Design In this case a 3 % increase was realized though again how much the schedule changes is dependent on the surcharge level.

Realistic Example
The importance of applying appropriate rehabilitation and closure costs has been highlighted with a simple example. This section of the paper presents a more realistic example where a combination of these factors is shown. The mine is a hypothetical small copper deposit that may be purchased. Existing mining and processing equipment will be used with no requirement for additional capital expenditure. All cash flows were discounted by 15 % per year. For the purpose of mine scheduling the following costs and capacities were used (Table 9). Description Ore and Waste Mining cost and capacity Ore Processing cost and capacity at 90 % recovery Equivalent Metal Value Value/Capacities $ 1.0 t-1, 20 000 t year-1 $ 5.0 t-1, 2 000 t year-1 $ 1500 t-1 of copper

Table 9 : Mining Capacities and Costs A number of other costs were associated with the rehabilitation and closure of the mine. In this example, the rehabilitation was associated with downstream tailings treatment so was added to the cost of processing ore. Closure was associated with decommissioning of three

separate pits. High costs have been used to illustrate the way these properties impact on the schedules (Table 10). Description Rehabilitation Three Stage Decommissioning of mine Stage 1 - After 120 Mt Stage 2 - After 130 Mt Stage 3 - After 140 Mt Value $ 2.0 t-1 of ore

$ 50 M $ 50 M $ 50 M

Table 10 : Rehabilitation and Closure Costs The above parameters were used to schedule the deposit in three different ways. On each occasion the full rehabilitation and closure costs were applied to the total cash flow and incorporated in the NPV calculation (Table 11). Design Remaining Mine Life 13 years NPV

Ignoring both rehabilitation and closure costs during design, then adding these costs to the resulting cash flows and NPV. Incorporating rehabilitation costs during design but ignoring closure costs. Closure costs were then added to the final cash flows and NPV. Incorporating both rehabilitation and closure costs in the design.

$ 96 M

12 years

$ 92 M

15 years

$ 100 M

Table 11 : Summary of Schedule Results Detailed schedules are provided in the appendices, however the main points are illustrated in the Figures 1 and 2.

1.2

0.8

0.6

0.4

Designed without Rehabilitation or Closure Costs Considered Designed with Rehabilitation but without Closure Costs Considered Designed with both Rehabilitation and Closure Costs Considered

0.2

0 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 Cumulative Mass Of Reserve Mined (kt)

Figure 1 : Cut-off Grade Applied to the Resource

160.00

140.00

120.00

100.00

80.00 Designed without Rehabilitation or Closure Costs Considered 60.00 Designed with Rehabilitation but without Closure Costs Considered Designed with both Rehabilitation and Closure Costs Considered

40.00

20.00

0.00 10 11 12 13 14 15 16 17 Period 18 19 20 21 22 23 24 25

Figure 2 : Time Of Mining the Resource

Several points can be seen from Figures 1 and 2: The inclusion of rehabilitation considerations during the design process led to higher cut-off grades and production rates throughout the mine life. The total mine life was reduced by this process and so brought forward the decommissioning costs. The incorporation of the decommissioning costs led to a longer mine life with lower cut-off grades used to mine the majority of the reserve. The best discounted value for the project was achieved when both rehabilitation costs and closure costs were included in the design. By incorporating the costs selectively (rehabilitation but not decommissioning costs) during the design process, the NPV of the mining schedule was worse than using the original, less complex information. By inspecting the final schedule in Appendix C, questions of what stopped the optimization algorithm further reducing production after year 18 are raised (after an NPV of $ 114 M was found). While the schedule produced may be acceptable, it is not, for the costs and constraints specified, the optimal solution. The reason for this is thought to be that the optimization software tool used assumed the optimal solution was always at one of the maximum capacity constraints (mine, mill or market capacity). While this is normally a reasonable assumption, it is important to interpret the solutions in the light of the optimization assumption base as well as the input data. This highlights the importance of knowing the assumptions used in the software being used and checking the solutions that are produced.2, 6 Remaining closure costs should be modeled using assumptions that reflect the way they are actually paid. For example, money would normally be put aside for meeting mine closure so that the remaining costs are less than the remaining value of the reserves.

Conclusions
This paper has shown the way mine rehabilitation and closure costs can impact the mine schedule. Large closure costs at the end of a mine life generally tend to drop the optimum cutoff grade in the last periods of the mine life and extend the period over which the resource is mined. Rehabilitation costs related to the material processed, tended to increase the cut-off grade and reduce the mine life. Other types of rehabilitation costs may not follow the same trend as those related to the quantity of material processed. Appropriate modeling of rehabilitation and closure costs may lead to small, but significant, changes to the mining schedule and thus improve the NPV. A black box approach to applying an optimization tool could lead to sub-optimal schedules. Optimization tools should be used carefully, with a clear understanding of the assumptions that the algorithms are based on. Suppliers of such software can help reduce inappropriate application by providing clear details of their algorithm assumption base. These assumptions can be considered when applying the software and interpreting the results.

Acknowledgements
The author wishes to thank the management of Rio Tinto Technical Services for permission to publish this paper and study some of the optimization techniques discussed. Also to Nigel Forward, Dr Mike Whateley, Richard Wooller, Dave Hamilton and Ken Lane for their support during the project and assistance in preparing the paper.

References
1. R. BELLMAN: Dynamic Programming, Princeton University Press, 1957, 3-9. 2. B. DENBY and D. SCHOFIELD: Inclusion of risk assessment in open pit scheduling, Transactions of the Institute of Mining and Metallurgy, London, pages A67-A71. 3. P.A. DOWD: Application of dynamic and stochastic programming to optimise cut-off grades and production rates, Transactions of the Institute of Mining and Metallurgy, London, 1976, A22-31. 4. R. D. KELSEY: Cut-off grade economics, 16th APCOM, Littleton, Colombia AIME, 1979, 286-292. 5. K. F. LANE: The Economic Definition of Ore: Cut-Off grades in Theory and Practice, Mining Journal Books, London, 1988. 6. G. A. MATHERSON: Open pit sequencing and scheduling, SME-AIME Fall meeting, Honolulu, Hawaii, 1982, 1-15.

Appendix A - Designed without Rehabilitation or Closure Costs Considered

Period Cut Off Grade Cumulative Quantity Mass Mined Mined Quantity Milled Quantity Metal Recovered (kt) 45.43 38.08 36.63 27.34 26.33 26.25 26.16 26.52 28.67 27.72 26.48 25.22 19.70 380.53 Average Grade Milled (% Cu) 2.39 2.00 1.93 1.44 1.39 1.38 1.38 1.40 1.51 1.46 1.39 1.33 1.26 1483.61 Cash Flow without R&C costs ($ x 1000) 42,765 34,555 33,276 15,085 13,336 13,327 13,316 15,420 25,623 24,644 23,325 21,927 16,814 293,413 Rehabilitation and Closure Costs ($ x 1000) -4,000 -4,000 -4,000 -4,000 -4,000 -4,000 -4,000 -4,000 -54,000 -54,000 -4,000 -54,000 -3,298 201,298 Total Cash Flow Discounted Cash Flow Cumulative Discounted Cash Flow ($ x 1000) 38,765 65,335 87,472 94,761 100,099 104,736 108,764 113,057 103,781 95,436 100,213 93,319 95,845 95,845

(% Cu) Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 Year 21 Year 22 Total 1.11 0.98 0.88 0.78 0.77 0.76 0.75 0.74 0.72 0.66 0.57 0.48 0.37

(Mt) 15.38 27.94 39.61 55.53 71.69 87.75 103.67 118.04 125.43 132.36 138.76 144.67 149.15 149.15

(Mt) 15.38 12.56 11.67 15.92 16.17 16.05 15.93 14.37 7.39 6.94 6.40 5.91 4.49 149.15

(Mt) 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 1.65 25.65

($ x 1000) 38,765 30,555 29,276 11,085 9,336 9,327 9,316 11,420 -28,377 -29,356 19,325 -32,073 13,516 92,115

($ x 1000) 38,765 26,570 22,137 7,289 5,338 4,637 4,028 4,293 -9,276 -8,345 4,777 -6,894 2,526 95,845

Appendix B - Designed with Rehabilitation but without Closure Costs Considered

Period Cut Off Grade Cumulative Mass Mined Quantity Mined Quantity Milled Quantity Metal Recovered Average Grade Milled Cash Flow Closure Costs without Closure costs ($ x 1000) 39,062 30,993 29,718 9,542 9,368 9,367 9,367 17,137 22,423 21,543 20,251 17,568 236,339 ($ x 1000) Total Cash Flow Discounted Cash Flow Cumulative Discounted Cash Flow

(% Cu) Year Year Year Year Year Year Year Year Year Year Year Year Total 10 11 12 13 14 15 16 17 18 19 20 21 1.13 1.01 0.91 0.82 0.82 0.82 0.82 0.82 0.77 0.72 0.63 0.54

(Mt) 15.66 28.56 40.52 57.63 74.79 91.98 109.19 121.41 129.23 136.58 143.35 149.15 149.15

(Mt) 15.66 12.90 11.96 17.11 17.17 17.18 17.21 12.23 7.82 7.35 6.77 5.80 149.15

(Mt) 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 1.86 23.86

(kt) 45.81 38.59 37.12 27.10 27.02 27.03 27.05 28.91 29.49 28.59 27.34 24.25 368.30

(% Cu) 2.41 2.03 1.95 1.43 1.42 1.42 1.42 1.52 1.55 1.50 1.44 1.37 1543.65

($ x 1000) 39,062 30,993 29,718 9,542 9,368 9,367 9,367 -32,863 22,423 -28,457 -29,749 17,568 86,339

($ x 1000) 39,062 26,950 22,471 6,274 5,356 4,657 4,050 -12,354 7,330 -8,089 -7,353 3,776 92,130

($ x 1000) 39,062 66,012 88,483 94,757 100,113 104,770 108,820 96,466 103,796 95,707 88,354 92,130 92,130

-50,000 -50,000 -50,000

150,000

Appendix C - Designed with both Rehabilitation and Closure Costs Considered

Period Cut Off Grade Cumulative Quantity Mass Mined Mined Quantity Milled Quantity Metal Recovered Average Grade Milled Cash Flow Closure Costs without Closure costs ($ x 1000) 37,764 29,379 28,086 15,047 8,989 8,860 8,700 8,500 9,550 18,108 18,108 18,108 18,108 19,492 3,933 250,732 ($ x 1000) Total Cash Flow Discounted Cash Flow Cumulative Discounted Cash Flow

(% Cu) Year 10 Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20 Year 21 Year 22 Year 23 Year 24 Total 1.02 0.88 0.78 0.69 0.66 0.63 0.6 0.57 0.53 0.49 0.49 0.49 0.49 0.49 0.49

(Mt) 14.53 26.27 37.22 50.73 65.08 79.05 92.59 105.69 117.53 123.49 129.46 135.42 141.39 147.85 149.15 149.15

(Mt) 14.53 11.74 10.95 13.52 14.35 13.96 13.55 13.10 11.84 5.97 5.97 5.97 5.97 6.46 1.30 149.15

(Mt) 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 0.43 28.43

(kt) 44.19 36.74 35.35 28.38 24.89 24.55 24.16 23.73 23.59 25.38 25.38 25.38 25.38 26.64 5.51 399.25

(% Cu) 2.33 1.93 1.86 1.49 1.31 1.29 1.27 1.25 1.24 1.34 1.34 1.34 1.34 1.40 1.34 1404.13

($ x 1000) 37,764 29,379 28,086 15,047 8,989 8,860 8,700 8,500 9,550 -31,892 18,108 -31,892 -31,892 19,492 3,933 100,732

($ x 1000) 37,764 25,547 21,237 9,894 5,139 4,405 3,761 3,195 3,122 -9,066 4,476 -6,855 -5,961 3,168 556 100,383

($ x 1000) 37,764 63,311 84,548 94,442 99,581 103,986 107,747 110,943 114,065 104,999 109,475 102,620 96,659 99,827 100,383 100,383

-50,000 -50,000 -50,000

150,000