Modelling

mining

Open pit copper production in British Columbia

Paul G. Bradley

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The really interesting question is always the particular the general one that its possible to discuss.

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The author Economics, Columbia, Canada.

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University Vancouver,

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This article is an edited version of British Columbia, University of Department of Economics Programme in Natural Resource Economics Resources Paper No 31, January 1979. The programme is financed by the Social Humanities Research Sciences and Council of Canada.

Strachey was concerned with human relationships and addressed questions at once more subtle and profound than those that will occupy our attention. However, the practitioner of economic modelling of resource use is caught in a dilemma akin to his. Frustrated by the barrenness of abstract models of resource use when it comes to explaining real industry behaviour, one turns towards those of the engineers. However, in that body of literature detail overwhelms the larger issues. Between the two extremes there is perhaps an optimal scale of model, and how it is specified may prove to be, for one with an economists turn of mind, the really interesting question. This article describes a model constructed for the purpose of examining by means of simulations various economic issues that are encountered in the mining industry. Discussion is restricted to copper mining in British Columbia, Canada. Variations of the model have been applied to other branches of the Canadian mining industry, but it was originally developed to describe large-scale open pit exploitation of porphyry orebodies. Concern with attaining an optimal scale of model has haunted this work, but the ghost is not laid to rest and no prescriptions are offered. We proceed by first mentioning some of the topics that motivate construction of a model of open pit mining. More complete discussion of most of these questions and insights provided by the model is, or will be, provided in other papers.2 We focus instead on the nature of the model and the economic features which it depicts of copper production in British Columbia. We then explain the structure of the model, while in the following section we describe some of its particular mechanisms. In the concluding portion of this article we present simulation results. Operating conditions, reserves, and mine outputs corresponding to different anticipated price levels are compared for a sample of five orebodies.

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0301-4207/80/060044-16

$02.00

0 1980

IPC Business

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Modelling mining

Economic issues in mining

The question of whether economic rents accrue to the owners of orebodies - and, if so, the magnitude of these rents - has occupied economists since Adam Smith, and arises persistently in discussion regarding public policy towards the mining industry.3 There is agreement on the concept of rent as a surplus earned by a particular factor of production over and above the minimum earning necessary to induce it to do its work.4 Where the factor is a natural resource, natures failure to exact payment when the factor is induced to do its work points to the existence of a surplus to be claimed by whoever has gained title to that resource. However, resource allocation problems must be solved within the context of a given region and timespan. Thus Crommelin5 in summarizing a volume devoted to mineral leasing as an instrument of public policy, remarks that the essential problem associated with rent collection as a policy objective in mineral leasing concerns the identification of rent. That is, if policy problems such as leasing and taxation are to be analysed in this traditional way, the easy-to-discuss concept of rent is only the starting point: circumstances and objectives must be stated and a means found for estimating the appropriate magnitudes. In this way the particular can be rendered capable of discussion. Another avenue of economic inquiry relating to mining has to do with price determination. Quality differences among orebodies provide prima facie evidence for upward sloping mineral supply curves, but whether or how fast price in a particular market will rise when demand expands depends on how steeply the corresponding supply curve slopes upwards. Where a small industry sells in a world market - British Columbias position in copper - the supply curve provides information about how the level and composition of industry activity will vary when world price changes. In either case, estimates of price elasticity of supply are needed; the general proposition alone is not very useful. An important aspect of the supply-response question is the effect of taxation. Economists have developed some familiar and useful general propositions, eg the distorting effect of royalty taxation. However, in actual experience a variety of types of taxation are utilized to achieve a blend of objectives. Comparison of tax regimes according to an efficiency criterion becomes a question of relatives. Such comparisons, derived using an earlier version of the model described in this paper, are reported by Helliwell.6 The question of mineral scarcity has received considerable attention in the wake of the radical changes experienced in fuel resource markets. Availability is gauged, usually misguidedly, by measures of mineral reserves. There is agreement that, in concept, proved reserves, the most widely used measure, refer to stocks which are known with essential certainty to exist and for which production costs are covered at the existing price. Industry statistics for crude oil and natural gas have developed to the point of applying these criteria quite rigorously. However, the non-homogeneity of orebodies and the economic significance of their shapes, not just their sizes, make it difficult to estimate the amounts which are economic to produce at different price levels. The agreement about the defining characteristics of mineral reserves has not yet been followed by consistent application in practice, as is apparent, in the context of this article,

The research reported here incorporates work that has been carried out over a period of several years. My colleague John Helliwell has been closely involved at various points. Computer programming has been ably and innovatively done by Frank Flynn. Robin Gregory provided research assistance at an early stage of the work; more recently John Livernois has ably contributed to both research on the industry and computer programming. A number of persons closely associated with the mining industry have generously offered encouragement and advice, most notably A.J. Sinclair, J.B. Evans, and H.K. Taylor. They have amply warned me of the pitfalls of modelling mining operations, and I must take sole responsibility for the assumptions and conclusions presented here. Financial support for this work was received also from the BC Institute for Economic Policy Analysis.

quotation is taken from the essay by L. Strachey. The really interesting question, in Paul Levy, ed. The Really Interesting Question, Coward, McCann and Geoghegan, New York, 1973. *The consequences of alternative tax regimes were examined by J.F. Helliwell, Effects of taxes and royalties on copper mining investment in British Columbia, Resources Policy, Vol 4, No 1, March 1978, pp 35-44. This employed a precursor of the model described here. A revised version of that paper is being prepared by Bradley, Livernois and Helliwell. This can be illustrated by perusal of the essays in M. Crommelin and A.R. Thompson, eds, Mineral Leasing as an instrument of Public Policy. University of British Columbia Press, Vancouver, 1977; and A. Scott, ed, Natural Resource Revenues, A Test of Federalism, University of British Columbia Press, Vancouver, 1976. The definition is that presented in Joan Robinson, The Economics of imperfect Competition, Macmillan, London, 1954. Crommelin and Thompson, eds, up cit. Fief 3. p 277. B Helliwell, up cit. Ref 2.

The

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C. Carlisle, The economics of a fund resource with particular reference to mining, The American Economic Review, Vol XLIV, 1954, pp 595-616. * H.K. Taylor, General background theory of cutoff grades, Transactions of the Institute of Mining and Metallurgy, Vol 81,1972, pp Al 60-A179. The economics of H. Hotelling, exhaustible resources, Journal of Political Economy.Vol39, 1931, pp 137-175. lo W.D. Schulze, The optimal use of nonresources: the theory of renewable Journal of Environmental extraction, Economics and Management. Vol 1. 1974, pp 53-73. T. On the profitability of Puu, exhausting natural resources, Journal of and Evironmental Economics Management, Vol4, 1977. pp 185-l 99.

when one attempts to add up the reported reserves of copper in British Columbia. The matter of mineral reserves leads to the question of cutoff grade. Carlisle insisted that, when looking at mining, economists should consider how total volume of production changes with price, as well as the traditional question of how rate of output changes. He related volume, or level of recovery, to variation in both ore grade and workability, or ease of recovery. If nature had conveniently arranged the composition of orebodies so that a miner could begin at the rich end and move through successively poorer grades of ore, analysis of the optimal cutoff grade would be simple, and the implications of a change in market price or in tax policy for mine development and ore reserves would be apparent. In reality, there is no convenient positive correlation between ore grade and accessibility; selecting an optimal mining sequence involves balancing both factors. Furthermore, in practice different cutoff trades are defined for different purposes within one operation, so that cutoff grade analysis becomes complex as can be seen in Taylors review of the subject.* For all these topics, the significant questions are posed with the aid of concepts of economic analysis. To achieve an understanding of the mining industry - which for the policy maker means the ability to predict the consequences of alternative actions - research guided by these concepts must be directed to the particulars. Resolution of the questions will take the form of estimation of actual magnitudes and comparison of specific situations. We return to the really interesting question -the design of a suitable model. Recently the literature of mathematical economics has contained a spate of models depicting the extraction of exhaustible, or nonrenewable, natural resources. These continue the venerable tradition of Hotelling, and are pitched at a level of abstraction that soars beyond mining industry questions of the sort just mentioned. Schulze,l for example, begins by assuming an industry comprising firms with identical U-shaped cost functions and output levels which exploit a homogeneous resource of known total quantity. He is concerned with the optimal rate of investment when the conditions of perfect competition are posited. He also deals with the same problem where the resource is assumed to be extracted in strict order of diminishing quality. Puu examines a single mining enterprise, and is again concerned with the optimal rate of investment. He assumes that the firm can vary its amount of capital continuously by offsetting exponential depreciation with new investment. Again the resource is assumed to be extracted in strict order of diminishing quality. The optimizing models which find application in the mining industry lie at the opposite pole of abstraction. In large-scale open pit operations information about the quality of ore is obtained by drilling on a grid pattern so that blocks of material - 40 ft on a side, for example - are characterized by grade. These are identified by three coordinates of spatial location within the deposit. A profit-maximizing programme then generates an optimal order for mining these blocks, taking account of the desirability of mining the better grades first, but also recognizing the added cost of early recovery of material which may be more accessible later. For our purposes models of this type have two disadvantages. First, the level of detail means that the amount of information required is costly. Second, while optimal sequence is important, it is only one of the variables controlled by the

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operator, and we wish to account jointly for all the fundamental decision variables. Accordingly, we turn back from this kind of model by accepting some simplifying assumptions. A recent study by Mackenzie and Bilodeau13 warrants mention because it addresses a number of the economic issues in mining that were listed above. These authors evaluated mining operations in Canada, considering a sample of 124 deposits discovered in the period 1951-54. Mine values at each deposit were computed using actual observed conditions, such as mine and mill capacity, capital and operating costs, and recoverable ore reserves. This study therefore does not contemplate how different values might have been achieved for any deposit had those making the development and production plans entertained a different set of expectations about economic conditions. In that event they would probably have opted for different capacities, specifications for ore reserves etc. Since we are primarily concerned with examining responses to alternative price expectations and tax regimes we require a model that takes account of alternative strategies for exploiting a deposit.

Structure of the model of open pit mining

We describe the nature of the model under several headings: (1) general postulates, (2) circumstances of the industry, and (3) development strategy. This scheme is rounded out in the concluding section of the article where (4) certain relationships or comparisons of interest are specified, and (5) results generated by the model are examined. General postulates As a standard for comparison we are interested in the social value of porphyry orebodies (denoted in the model VRES), defined as the present value of revenues attributable to the mineral less the present value of all costs which must be incurred in obtaining these revenues. Cost is used in the economists sense to refer to the cost of real inputs, exclusive of any transfers from the producer to other claimants against net revenue. Under a given set of physical and economic circumstances, there exists a social value of a resource corresponding to each alternative plan for its production. The model is designed to find the highest value - the one which defines optimal production, the best society can do with what nature has given it. In Canada the actual production plan for the orebody is usually devised by a private operator. More precisely, in British Columbia, where mineral rights are vested in the Crown, the operator is the capitalist who has leased the property. His goal is not to maximize social return, but rather to maximize the return to private capital, that is, the return he receives net of all payments made to any level of government -taxes, rentals, or whatever. Accordingly, the model also is designed to find the production plan which maximizes the present value of this private return (designated KRPP$ or KRPPNC%). This provides the basis for predicting what the actual long-term production plan for the mine will be in particular circumstances. Circumstances of the industry Virtually all copper produced in British Columbia is taken from porphyry orebodies using open pit mining. These orebodies are large,

I2 Construction and use of block models is described in T.B. Johnson and D.G. Mickle, Optimal design of an open pit an application in uranium, in Canadian Institute of Mining and Metallurgy, Decision-Making in the Mineral Industry. Special Vol 12, 1971, pp 331-337; and by R.E. Davis and C.E. Williams, Optimization procedures for open pit mining scheduling, in J.R. Sturgul, ed, Eleventh Symposium on Computer Applications in the Minerals Industry, University of Arizona, Tucson, 1973, pp Cl-ClB. I3 B.W. Mackenzie and M.L. Bilodeau, Assessing the direct effects of mining metal taxation: the case of base investment in Canada, paper presented at Workshop on Rate-of-Return Taxation Minerals, Queens University, of December 1977.

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. S.G. Lasky, How tonnage and grade relations help predict ore reserves, Engineering and Mining Journal, No 15 1, April 1950, pp 81-85; G. Matheron. Etude: remarque sur la loi de Lasky. La Chronique des Mines dOutre-Mer et de la Recherche Mini&e, 27 An&e, No 282, December 1959, pp 463-465. $D.A. Singer, D.P. Cox and L.J. Drew, Grade and tonnage relationships among Geological Survey copper deposits, USGPO, Professional Paper 907A, Washington, DC, 1975. @Paul G. Bradley, Appendix A of the original version of this paper, University of British Columbia Resources Paper No 31, Vancouver, 1979.

having a horizontal expanse of as much as several thousand feet before mineralization tails off to background level. The ore is lowgrade; in fact, British Columbia mines generally yield the lowestgrade copper ore in production anywhere. Mining is commercially successful because the deposits can be worked by open pitting, and they are large enough to permit modern removal and recovery techniques that exploit economies of scale. One of the striking features of porphyry copper deposits is that the richness of mineralization shows certain statistical regularities. These have been examined both with regard to both the distribution of grades within a single orebody14 and the distribution of mean grades across deposits. l5 For the present, it is the former property that is of interest because it affords a basis for generalizing one of the key physical parameters in open pit copper production. The proposition that the grade distribution in porphyry orebodies can be described by the lognormal probability function commands enough empirical support to justify its use to characterize deposits in British Columbia. Elsewhere,16 some sample data are plotted to illustrate this point. However, grade distribution alone is only part of the story, because spatial arrangement must also be considered. Here too there is a general pattern. In British Columbia orebodies, the richest material occurs in vertical pipes nearest a central axis; ore grade diminishes going outwards. Value maximization requires taking the highest-grade ore first, other things being equal, and this is a principle which is well established in the mining industry. However, all ore is not equally accessible, nor, as noted above, is there a positive correlation between richness and accessibility. While there is a typical pattern to the arrangement of ore by grade in a porphyry deposit, the production plan is constrained by the shape which the pit can take. The walls of the pit cannot exceed a critical angle, so one can visualize the possibilities as variations on the shape of an inverted cone. It is evident that the sequence in which ore is removed will reflect the spatial relation betwen the contours defining ore grade within the orebody and the feasible pit shapes. The actual variation in grade of ore produced will thus differ markedly from the sequence which would be chosen if ordering were costless. On the strength of this cursory description of open pit copper mining, one can immediately identify some of the economically significant physical parameters. They include the size and shape of the orebody and the grades of ore which it contains. Grades will have to be specified as a frequency distribution, with attention paid to how different ore grades are arranged within the deposit. The main constraint on pit design is the maximum pitch the wall can safely assume; pit angles typically vary from 30-45 measured from the horizontal. Another important physical parameter is overburden depth, which indicates the amount of extraneous material that must be stripped away before mining of the orebody can proceed. Turning to the technology, open pit mining entails breaking the rock, loading it on trucks, and delivering the ore to be processed to the mill. There it is ground and then flotation is used to separate particles rich in copper from the others, the tailings. Mines in British Columbia produce a concentrate containing 2530% copper which is shipped to Japan for smelting. Some investigation was undertaken to determine cost equations for

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operating costs, both for mining and each of four categories: processing, and capacity costs, again for both mining and processing. Information from mining engineers indicates scale economies in capacity which are particularly pronounced for the concentrating operation. The latter were detectable by regression analysis with the fragmentary investment data available. Cost equations for the four categories are presented elsewhere. I7 The exponents showing scale economies were chosen after inquiries about industry experience; the remaining coefficients were estimated using available cost data. Thus far, the concern has been long-term decision making, that is, choice of scale of operations and time pattern of copper output. Price expectations are foremost among the parameters that characterize the economic circumstances of the industry. A limitless number of future price patterns could be hypothesized; consideration has been restricted to different uniform expected price levels. Other market parameters, which are not elaborated, include opportunity cost of capital to the industry, the rate of social time preference, and the rate of inflation. Controversies in recent years have highlighted the circumstances of the industry with regard to taxation. Specification of the taxes levied by federal and provincial governments is routine, but complicated. One feature that can be noted is the importance of distinguishing the situation where a mine represents the only activity of a firm from that where a firm has several mines or other business ventures. In the latter case, various advantageous deductions given to mining can be charged against combined income flow, with the result that they can often be used sooner and therefore have a higher present value. This distinction is the reason why two alternative maximands were noted earlier for the case of private returns (KRPP$ and KRPPNC$). Development strategy The mine operator, in a particular set of circumstances, must study engineering possibilities and economic projections and decide on investment and production plans. For modelling purposes we need to select the key decision variables which affect the value of the orebody. The model will be designed to optimize over these variables. Scale of operation, or rate of output, will certainly be important. When the ultimate quantity of a resource to be produced is fixed, long-term unit capacity cost will tend to rise with higher rates of output because the larger investment required is borne by the same total output. However, in the present case, and typically, there are significant economies of scale in capacity investment. Both tendencies must be taken into account. With rate of output fixed, rising operating costs per unit of mineral eventually dictate the end of production. This can occur for a homogeneous mineral where cost per unit of ore is rising, as would occur, for example, with increasing depth of pit. Were cost per unit of ore constant, steadily diminishing ore grades would cause the cost per unit of mineral to rise, again eventually signalling an end to production. Here both changing grade of ore and rising cost of ore removal must be taken into account in determining the optimal volume of production. Cutoff grade decisions must be made with reference to the cost of removing particular units of ore. An especially rich lode 300 ft down in a deposit may look less attractive than relatively low-grade ore near

Ibid,

Appendix

0.

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the top. We have already noted that grade-cost possibilities in open pit mining depend on the relation between the location of contours depicting ore grade in the deposit and the shape of the pit. Accepting this relationship as determining the grade of ore coming from the pit, there are at least two cutoff grades which may be specified. The first pertains to pit design. With ore grade tailing off as the pit expands, there will be a cutoff grade beyond which it will not pay to expand a particular bench. It should be noted, however, that the bench may be expanded anyway to gain access to the bench below it. This leads to a second cutoff grade specification, which pertains to the grade of ore fed to the concentrating process. For any pit design, the decision must be made whether to send broken rock coming to the surface to the mill or to the dump. Because the cost of milling is less than the combined cost of mining and milling, we may expect this cutoff grade to be lower than the one used in pit design. So far we have specified four possible design variables. The values of these which yield a maximum value for the mine are jointly determined. If many values for each are tested, the number of possible combinations quickly mounts, and with it the cost of computer time. As will be described when dealing with some of the workings of the model, we accepted certain simplifications. In the model a single cutoff grade is used for pit design and processing. Suppressing for the moment the question of when to shut down, two optimizing variables remain, cutoff grade and scale, or rate of production. That these parameters do indeed have a significant effect on the value of orebodies can be observed in Figure 1, which shows the net present value of the orebody when different operating conditions are specified. For example, at a throughput of 50 000 tons of ore/day, lowering the cutoff grade from 0.30% to 0.25% reduces the value of this particular orebody by roughly 15%. The maximum social value is obtained at a throughput of 40 000 tons/day and a cutoff grade of 0.30%.

Mechanisms of the model

To summarize, the model determines the value of a given orebody for a specified set of economic conditions. This value is posited to be the highest of the values that can be attained with possible combinations of operating conditions. We now consider more detailed features of the model. The concern throughout has been to strike a balance between maintaining sufficient generality to be able to deal with a large variety of mining conditions while not neglecting the relationships known by those experienced in the mining industry to have economic significance. A flow chart depicting the complete model is presented elsewhere.* Although this will be of assistance to one actually working with the computer program, it only serves to illustrate here that even the most basic circumstances and operating variables which we have taken into account are enough to generate a formidable model. In describing some of its workings, we wish primarily to draw attantion to a few of the assumptions which have been made in an effort to generalize about an industry which inevitably displays a great deal of variety. Discussion here is related to the schematic flow diagram shown in Figure 2. The three diamond-shaped boxes at the top of Figure 2 show the major control variables: operating rate (or capacity), cutoff grade,

I8 Ibid, Appendix

C.

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3001

Figure 1. Mine value v cutoff grade at

various daily rates of mill throughput.
1 2 3 4 = = = = 30 40 50 60 000 000 000 000 tons/day tons/day tons/day tons/day 1 025
Cutoff I I

;4
I

I
I

Note: Mine value refers to social value (VRES) rather than private value net of taxes and other payments to governments (KRPP$ or KRPPNC$).

150

L 0 20

0 30
grade (% capper)

0 35

040

@Production in all runs reported here proceeded with an initial 6 year pit followed by 3 year pushbacks. The significance economic of the time sequence can be seen by considering extremes. If the mine were developed without a series of pushbacks - ie if the entire uppermost wafer were exploited before going down to the ore below it all investment in overburden removal would be incurred initially and lowergrade ore from outer edges of upper wafers would be removed before highgrade ore within reach from lower wafers. Frequent, short pushbacks, on the other hand - amounting to continual sharing of all benches - would necessitate costly relocation of roadways.

and production sequence. With regard to the latter, the input specification consists of the duration of an initial production period and the durations of succeeding periods, in industry parlance pushbacks. The aggregate production period is the sum of the initial period plus all the pushbacks which the model finds to be economic. In practice we have focused on operating rate and cutoff grade as the crucial value-determining variables, setting the intervals for production from the initial pit and for subsequent pushbacks in accord with prevailing industry practice.ig It is necessary to specify the shape of the orebody. Actual orebody configurations do display some regularities, but do not, of course, conform to convenient geometric shapes. An exact rendering of nature - ie the specification of mineralization at all points in three dimensional space - would require an enormous input of information, a demand which cannot be denied in actual mining operations. For modelling purposes, however, we construct various symmetrical shapes by the device of assembling wafers - our designation for cylinders whose heights are very short relative to their diameters along a central axis. This affords considerable flexibility, because the composite shape can be varied between such extremes as pencil-like cylinders, near-spheres, or discs. Computer input thus includes the total volume of mineralized rock, together with the number, thickness, and relative diameters of the wafers into which the orebody being modelled has been resolved.

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.
Define conflgurotlon of orebody

1
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Figure 2. Abbreviated

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computational

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While we mentioned above that two or more cutoff grades may be used in practice at different stages of the mining operation, we have so far employed a single cutoff grade which governs both pit design and mill feedstock. Referring to the box in Figure 2 designated define configuration of pit, the problem posed is to determine, starting from an initial size and shape, the final dimensions of the pit such that over the prescribed interval the material removed will supply the mill for operation at design capacity. Broken rock emerging from the pit is divided: that above cutoff grade, now distinguished as ore in the strict economic sense, goes to the mill, while that below cutoff is waste and goes to the dump. Related to the assumption that the differences associated with multiple cutoff grades would not have first order significance is the assumption that there would not be a very large increment to value to be gained by processing low-grade material from the dump once the mining part of the operation had ceased. Redesign of the pit occurs before each pushback period. A relationship of economic importance in open pit mining is the strip ratio, defined here as the ratio of the total amount of material that is removed to the usable portion, that is, the ratio [ (ore + waste)/(ore) 1. If one visualizes a pit in the shape of an inverted cone exploiting a regularly shaped, homogeneous orebody, it is clear that more waste material must be removed to get at successively deeper ore. A rising strip ratio implies increasing cost per unit of ore, and acts in conjunction with trends in grade to determine the optimal ultimate size of the pit. The economic significance of the increasing strip ratio

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20 R.H. Seraphim, Some problems met in the evaluation of porphyries , Western Miner, April 1973, pp 91-97. 2 H.K. Taylor, A mainly-technical review of the paper (Helliwell, 1978) and associated matters, personal correspondence, January 1977. Helliwell, 1978. refers to op cit. Ref 2. z Bradley, op cit. Ref 15, Appendix D. 1. 23 We have assumed that the distribution of mineralized material by grade is lognormal. The first partial amount of this distribution is also lognormal and is interpreted as the fraction of copper contained in material above a specified grade. See J. Aitchison and J.A.C. Brown The Lognormal Distribution, Cambridge UP, Cambridge, 1963, p 12. Using this distribution we can readily calculate the amount of copper contained in the ore within any range of grades. Bradley, op tit, Ref 16, Appendix D.2.

usually observed over the period of mine operation is emphasized by Seraphim*O and Taylor.*l Elsewhere simulation results are presented to illustrate the variation in strip ratios which is encountered with our model.** With the configuration of the orebody fixed and a procedure that establishes the shape and size of the pit, the mining sequence is determined. The quantity of ore produced over any interval has already been specified, but in addition we are able to compute the grade of ore going to the mill. This computation depends on assumptions mentioned above, namely that grade diminishes regularly in each wafer along a horizontal ray from the central axis, and that within any wafer the grade distribution of ore conforms to the lognormal probability function. Provision is made for the possibility of dilution, defined as the presence within the orebody of varying percentages of non-mineralized rock. The actual computational procedure, which is not detailed here, relies for its simplicity on properties of the distribution of the first partial moment of the lognormal variate.23 The product of the mill, as the concentrating operation is labelled in Figure 2, is copper concentrate which is sold at a price referred to as the net minesite realization. Revenue is thus generated in each period; corresponding operating costs are also computed. Thus company operating earnings are determined, and tax calculations can be made, to be added to other transfers that may be required between the private operator and the federal or provincial government. We do not discuss specific tax regimes here. The general point is that for each period through which the model iterates the incomes accruing to the private operator, the provincial government and the federal government are calculated. These increments, with appropriate discounting, are accumulated, so that at the end of the mines life we can observe how the value of the orebody was divided among claimants, here numbering three. The final feature to which attention is drawn is determination of the life of the mine. If ore could be removed in strict order of diminishing grade, specification of a cutoff grade would determine the volume of ore to be produced, so that for a particular operating rate the mines life would be determined in advance. Here the grade sequence depends on the orebody configuration and the pit design. If the grade of ore being removed did not vary, the tendency for an increasing strip ratio previously noted would induce a monotonic decline in profitability. To date we have assumed that the grade distribution in each constituent wafer reflects the overall distribution, so that there is no systematic quality variation vertically in the deposit. Fluctuations in grade of ore are observed, however, with markedly higher grades sent to the mill when production advances to the richer central portion of a deeper wafer. This is seen in the figures elsewhere,24 giving average grade of ore by year for several simulation runs. Variation in profitability attributable to changing ore grade will be smoothed out when annual values are averaged over a pushback period. We have assumed that profitability measured over pushbacks does decline monotonically, and, on this assumption, mining is continued until a pushback is encountered which would not add to the value of the mine. Referring to Figure 2, in the final period of a pushback the profitability of the next possible pushback is computed. If it is zero or negative, operations cease without its being undertaken.

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If it is positive, operations continue and the next pushback is evaluated. The operating profit figures given elsewherez5 support the monotonic decline assumption for orebodies of the sort considered here. There would be situations, however, where the presence of a relatively large amount of richer ore in the lower part of a deposit may cause the assumption to be violated, so in general one should verify that mine value cannot be increased by a programme which includes several more pushbacks.

Simulation results
To apply the model which has now been described we must specify relationships which are of interest, simulate mine development and production, and analyse the results. Furthermore, if the simulation results are to be of use, we must establish the models validity, ie infer from the reasonableness of both the assumptions which have been made and the resulting observations that the model does in fact depict relationships which are true for the mining industry. We have constructed a sample of five orebodies in which we seek to represent the primal features of porphyry copper deposits in British Columbia - those features taken into account in the model. The parameter values assigned to each orebody in the sample reflect the characteristics of an actual orebody, but it is important to state carefully the degree of correspondence between the sample deposit and the real one. Clearly the models symmetry assumptions limit the faithfulness with which the sample orebody can reproduce the original. This applies to the configuration of the deposit and to the pattern of distribution of mineral values by grade. Furthermore, with respect to the grade distribution, the assumption of a regular decline in quality outwards from a central axis corresponds to what in actuality is an observed tendency.26 Given the indicated degree of correspondence between sample orebodies and real ones, the question naturally arises as to how closely we would expect the mine development plans generated by the model to resemble the operating characteristics of actual mines. It must be remembered that the results which are reported pertain to the long-term, or planning, situation: we are concerned with how a mine would be developed to maximize value under a specified tax regime when a given set of expectations about future economic conditions is held. To make comparisons between model results and real-world observations, one must have insight into the conditions posited when the real mine was designed. Furthermore, although much of the investment required for mineral production is for practical purposes irreversible, alterations in equipment and operating procedures can be made after production has begun when economic conditions diverge from earlier expectations. Consequently, a good deal of judgment is required in assessing whether model results are a reasonable representation of actual industry operations. In the following paragraphs we report the parameters which describe orebodies in our sample, and then turn to the operating conditions which are optimal in various economic circumstances, specifically, for different price expectations. The reader with experience in copper mining will wish to consider how these results match those of actual operations in comparable circumstances. In addition to this type of comparison, the knowledgeable reader should

25Ibid. Appendix *O Correspondence

D.3.

of the type noted exists for these pairs: mine A - Jersey Pit (Bethlehem), mine B - Brenda, mine C Granisle, mine D - Lornex, mine E Similkameen.

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Table 1. Physical parameters Orebody Deposit size, lo6 tons Surface diameter, ft Ratio, [ surface diameter I maximum diameter Dilution, fraction mineral-bearing Pit angle, degrees from horizontal of sample orebodies. A 250 1 460 0.80 1 .o 40 B 900 2 775 0.80 1 .o 45 C 350 1 925 1 .o 1 .o 38 D 1 800 3 920 0.80 1 .o 35 E 350 1 925 1 .o 0.8 40

Bradley,

op cit.

Ref 16, Appendix

A.

also examine the way in which operating conditions specified for a particular sample mine change in response to different price expectations. Our efforts to model copper mining have already benefitted greatly from criticisms and suggestions elicited by earlier versions of the model reported here. Physical parameters used to describe the sample mines are presented in Table 1. Although most of the designations appear selfevident, some explanation is desirable. Deposit size denotes the quantity of mineralized rock; this figure together with the grade distribution determines the amount of copper in a deposit, in total and for all grade classes. It is greater than either of the two magnitudes which are usually reported, amount of material above any specified cutoff grade or amount of ore reserves; these figures will be compared later. Configuration is described in the table by two numbers, diameter at the surface of the deposit and the ratio of this figure to the largest diameter. Where the ratio is unity, the deposit is assumed to have a cylindrical shape, but otherwise the shape resembles that of a barrel. In all cases only material to a depth of 1 440 ft from the surface of the orebody is considered, and overburden is assumed to be 100 ft thick. Dilution indicates the extent to which the deposit contains interspersed non-mineralized rock which can be sorted out before the concentrating operation. Pit angle refers to the maximum pit wall slope which can be employed. Parameters for the lognormal function which specifies grade distribution are not shown in Table 1. For the results reported here the same parameters were used for all deposits.27 The importance of two of these physical parameters, orebody configuration and pit angle, scarcely needs to be pointed out to those with experience in open pit mining. It is, however, worth stressing in connection with ore reserves and mine value. Table 2 provides comparisons where an orebody of a given size is posited and these parameters varied. In Part A three shapes are considered: cylindrical, tabular (thin, with large area1 extent), and roughly spherical. The permissible pit angle is assumed to be 45. In each case figures are given for reserves, or usable ore, and value of the mine. If the most favourable case is compared with the least favourable (tabular against cylindrical), reserves are seen to be about 75% greater while value is 143% greater. In Part B of Table 2 the sensitivity of reserves and value to pit angle is examined. If a 45 angle is possible, compared to a 35 angle, reserves are increased by about 34% while value goes up by 179%. Here the posited orebody has the roughly spherical shape. Discussion of the results shown in Table 3, mine operating conditions which maximize the private value of each orebody, will be limited to a few brief comments. We observe that with higher prices successively lower cutoff grades are chosen while mill operating rates increase. At the same time mine lives are shortened, although the net

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Table 2A. Reserves and mine value for different Ore reserves (106 tons) 110 192 137 orebody configurations.a Cutoff (%I 0.35 0.15 0.35 grade

Mine value (106$1976) 60 146 61

Configuration Cylindrical Tabular Spherical

a Mine value refers to FIRES). Maximization of (KRPPNC $) under current Net assumed. minesite $0.60/lb ($1976). Pit angle:

social value private value tax regime is realization: 45.

Table 28. Reserves and mine value for different Pit angle (degrees) 35.0 40.0 45.0

pit angles.b Mine value f106$1976) 22 42 61

b Mine value refers to social value (VRESI. Maximization of private value (KRPPNC $) under current tax regime is assumed. Net minesite realization: $0.60/lb ($1976). Configuration: spherical (approximate). Optimal cutoff grade was 0.35% in each case.

Ore reserves (106 tons) 102 131 137

Table 3. Mine operating

conditions:

private value of orebody Mine A Mine B 50 4 0.40 30 60 20 0.35 15

maximized

under different Mine C

price expectations.a Mine 0 Mine E 60 50 0.35 12 75 (100) (0.25) (12) 100 (100) (0.25) (15) 75 3 0.25 27 100 16 0.20 12

Expected price, cents/lb Mill operating rate, lo3 tons/day Cutoff grade, % Mine life, years

100 12 0.20 15

75 55 0.25 12

100 (1001 (0.20) 19)

75 5 0.30 18

100 28 0.20 9

50 16 0.40 21

a Private value is present discounted value of after-tax profits to mine owner with no other income (KRPPNC$). Price denotes net minesite realization. Real price in 1976 dollars assumed to remain constant. Mine life consists of initial pit

design for six years production followed by successive three year expansions (pushbacks). Where values are not reported for a particular price a mine would not have been economic. Current (1978) British Columbia and federal tax

regimes assumed to prevail over the life of the mine. Mine operating rate was constrained to a maximum of 100 000 tons/day. Where this constraint is binding the results are shown in parentheses.

a See, for example, H.H. Cox, Definition of ore and classification of ore reserves in Canadian Institute of Mining and Metallurgy, Ore Reserve Estimation and Grade Control, Special Vol 9, 1968.

effect is that larger quantities of ore are ultimately produced. We next examine how different price levels affect stocks of mineable copper, or reserves, and industry output. There does not appear to be disagreement over the principle that mineral reserves should be defined with reference only to that portion of a deposit which can be produced at a cost which is covered by the realization, or selling price. 28 In a short-term context, where the only choice lies between continuing production and shutting down, reserves include that material for which the realization covers operating cost. Long-term application of the concept must similarly focus on whether increments of material add to profitability. Thus the present model, which is designed to evaluate optimal production plans, will generate reserves estimates: the cumulative output of an optimal production plan over the lifetime of a mine is the appropriate forecast of reserves. The significance of this is recognition of the dependence of reserves on all aspects of mine development and production plans. Such factors as scale of operations and ability to selectively use material according to grade will condition the amount of material which it is profitable to mine. The elasticity of reserves with respect to price, or net minesite realization, can be seen in Figure 3. For mine A reserves are nil until the highest of the several assumed price levels, $l/lb, is reached. For the more valuable orebodies, such as B and D, reserves are very responsive to price. For example, an anticipated price level of $0.60, rather than $0.50, results in increases of reserves for these two mines

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--1

Figure

3. Copper

reserves:

individual

mines and industry total. Notes: I = industry total. Operating conditions maximize value of mine to enterprise with no other income sources (KRPPNC$). Points are in parentheses where output rate is constrained.

800

I600 Copper

2400 reserves

3200 mll Iton )

4 000

( lb

Orebody

Figure material

4. Ore reserves above cutoff.

compared

to

of about 220% and 110% respectively. The kinking upward effect seen, for example, for mine D can be attributed to a constraint imposed on the rate of output. The maximum permissible mill throughput was taken to be 100 000 tons/day, a rate which may already be beyond the range for reasonable extrapolation of our cost relationships. Where there is a ceiling on output it will apparently pay to select a higher cutoff grade than otherwise. Average grade of ore processed will be higher, so that even though less copper is ultimately produced the present value of output will be greater than if the adjustment to a higher cutoff grade had not been made. Additional insight into the growth in reserves with higher mineral prices can be gained by resolving that growth into two components, the increase resulting because a larger portion of the orebody is potentially usable with a lower cutoff grade, and the increase resulting because a larger fraction of this above-cutoff material becomes profitable to mine. Referring to Figure 4, which depicts a cylindrical orebody, the lightly shaded area represents material with mineral values above the chosen cutoff grade. In general, the optimal cutoff grade falls with a higher price, so a larger fraction of the orebody will be included in this area. A conical pit is shown in the sketch as it would exist after the termination of production. Although the increasing strip ratio as a pit is deepened raises the unit cost of material delivered to the mill, a larger pit will normally be worthwhile with a higher price. The darkly shaded area, which shows the amount of material above cutoff which is removed, will typically be larger absolutely and relative to the potentially usable material. A numerical illustration of how reserves increase with a higher price level is provided in Table 4, which pertains to mine B, a mine capable of profitable operations at all price levels which were examined. Suppose, for example, that the mine was developed in anticipation of a $0.75, rather than a $0.60, net minesite realization. At the higher price about 36% of the material in the orebody is above the optimal cutoff grade of 0.25% copper, and this material contains 62% of the total amount of copper in the deposit. The comparable figures at the $0.60 level, for which the optimal cutoff grade is 0.35%, are 19% and 41% respectively. At the higher price it pays to mine 73% of the material above cutoff instead of 63% as at the $0.60 price, so that 41% of the copper in the above-cutoff material is taken rather

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Table 4. Elasticity Mine 9 Price (cents/lb) Cutoff grade (%) Ore Fraction of orebody above cutoff Fraction mined of material above cutoff Fraction of orebody utilized Contained coooer Fraction inmaterial above cutoff Fraction mined in material above cutoff Fraction in deposit utilized 0.14 0.35 0.048 0.33 0.12 0.041 0.19 0.63 0.12 0.41 0.32 0.13 0.36 0.73 0.27 0.62 0.41 0.25 (0.50) (0.73) (0.37) (0.74) (0.46) (0.34) 50 0.40 60 0.35 75 0.25 (100) (0.20) of reserves with respect to price.

Note: Values shown in parentheses where rate constrained by mine operating 100 000 ton/day ceiling.

a This

value is computed as an arc elasticity with reference to the midpoint of the $0.60-0.75 range.

than 32%. Combining these two effects, the fraction of copper in the deposit which is utilized is 0.25 at the higher price compared with 0.13 at the lower. This corresponds to a price elasticity of reserves of roughly 2.8 in this range.29 Conventional market analysis relies on comparisons of demand and supply, supply referring to the outputs forthcoming at different price levels. In Figure 5 the simulation results are applied to portray supply curves for the different mines in the sample and the corresponding aggregate supply curve. These curves relate to the long-term, or planning, situation: outputs are those corresponding to optimal production plans for the price levels indicated with the tax regime assumed to remain unaltered. It is evident from Figure 5 that industry output is responsive to price both at the intensive and extensive margins. As with the case of reserves, when output is constrained the curves are kinked. Here, in the case of mine D, the supply curve is actually backward-bending. As already noted, an output ceiling leads to a higher cutoff grade choice, which curtails the growth of reserves in response to higher prices. Moreover, with the constraint and higher prices it becomes attractive to operate the mine longer, with the result that average annual copper output falls. It appears that-if the expected price level were a step higher than that experienced recently, considerably larger copper output would be forthcoming from British Columbia deposits. Consider the effect of a

Figure mines

6.

Supply

curves: total.

individual

and industry

Notes: I = industry total. Operating conditions maximize value of mine to enterprise with no other income sources (KRPPNC$). Points are in where output rate is parentheses constrained.

200 Average

400 copper output

600 (IO3 lb/day

800

1000

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30This value is also computed as an arc elasticity with reference to the midpoint of the $0.60-0.75 range.

$0.75 rather than a $0.60 net minesite realization. At the intensive margin, mines B and D would be designed to produce at substantially higher levels, their combined percentage increase in output being almost 85%. At the extensive margin, the $0.75 price makes it profitable to mine orebodies C and E. The total increase in supply represents a price elasticity of about 3.2 in this range.30 Determinations of reserves and rate of use are fundamental to mineral economics. The responsiveness of either of these magnitudes to mineral value is the resultant of many interrelated factors. We have attempted in the present model to incorporate within an overall framework of value maximization the economic and physical relationships and the design possibilities that must be considered. A balance has been struck between simplicity and abstraction, on the one hand, and elaboration and particularization, on the other. Little has been said about returns generated by mining or the distribution of these returns between private capital and federal and provincial tax collectors. In fact, the questions of primary interest to us have to do with the consequences of different tax policies. How might changes in taxation alter the development and production strategy chosen by a private operator, and how might they alter his expected returns, and hence incentive to invest at all? The model is designed to facilitate comparisons of economic efficiencvd in different tax settings, and it is, we believe, far enough advanced in its evolution to be capable of providing valid insights. Aspects of this subject will be considered in a subsequent article.

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