44 Int. J. Mining and Mineral Engineering, Vol. 2, No.

1, 2010

Risk-based decision making within strategic

mine planning

Bryan Maybee*
MIRARCO – Mining Innovation,
Laurentian University,
935 Ramsey Lake Road,
Sudbury, ON P3E 2C6, Canada
E-mail: bmaybee@[Link]
*Corresponding author

Steven Lowen
Mineral Resource Mineral Reserve Reporting Group,
Vale Inco,
Copper Cliff, ON P0M 1N0, Canada
E-mail: [Link]@[Link]

Paul Dunn
Faculty of Science and Engineering,
Curtin University of Technology,
Western Australian School of Mines,
G.P.O. Box U1987, Perth, WA 6000, Australia
E-mail: [Link]@[Link]

Abstract: Creating maximum value for shareholders within the underground

mine planning process under varying economic and technical factors has
become a reality. Due to the uncertainty and individual characteristics that
define underground mining projects, each will exhibit its own individual
risk profile, and thus cannot be evaluated based on historical information.
This paper introduces a risk-based evaluation methodology that can be
used to evaluate alternative mining strategies. The use of this methodology
is illustrated through its application to a strategic level case study. Through
this application it is shown that the inclusion of more information in the
decision-making process can not only provide a more accurate valuation
and allow for the recognition of risk, but can also alter the ultimate decision
that is made.

Keywords: mine planning; valuation of mining projects; risk; risk-based

evaluation; discounted cash flows; real options; flexibility; uncertainty
recognition.

Reference to this paper should be made as follows: Maybee, B., Lowen, S. and
Dunn, P. (2010) ‘Risk-based decision making within strategic mine planning’,
Int. J. Mining and Mineral Engineering, Vol. 2, No. 1, pp.44–58.

Copyright © 2010 Inderscience Enterprises Ltd.

 Risk-based decision making within strategic mine planning 45

Biographical notes: Bryan Maybee graduated from the Commerce program

at Laurentian University in Sudbury in 1999, and received his MBA from
Dalhousie University in Halifax in 2002, specialising in Finance and
Accounting, and is currently a PhD Candidate in the Natural Resources
Engineering programme at Laurentian University. Since graduating with his
MBA, he has been employed at MIRARCO – Mining Innovation (Laurentian
University) in numerous roles from Financial Officer to Research Associate,
and is currently the Project Leader responsible for research projects in Schedule
Optimisation and Risk Mitigation for the mining industry. His research focuses
on bringing advanced risk recognition and mitigation tools from the Financial
Industry to the valuation of mining operations.

Steven Lowen received his Honours Bachelor Degree in Applied Science

(Geological Engineering) from Queen’s University in 1994. He has worked
for Vale Inco’s Ontario Operations for more than 15 years in various
capacities including Chief Mine Geologist at Garson Mine and Chief Engineer
responsible for the Operations’ Life of Mine Plan. He is currently the
Principle Sulphide Engineer with Vale Inco’s Mineral Resource Mineral
Reserve reporting group.

Paul Dunn received his Honours Degree in Mining Engineering from

University of Newcastle Upon Tyne in 1983, Masters (Eng) from the
University of Witwatersrand and PhD from the University of Queensland
in 2003. He has held positions in the South African gold mining industry,
at WASM as a Lecturer, with the CMTE (now CRC Mining), and with
MIRARCO/Laurentian University as Director and Chair for Mining
Technology before joining Curtin as Director of WASM in October 2008.
His particular technical interests are in mine planning, high pressure water jet
technologies, virtual reality mining applications and optimisation of integrated
mine processes.

1 Introduction

The valuation of projects in the mining industry is a challenging task. As noted by

Snowden et al. (2002), the mining industry differs from most other industries in that the
true characteristics of the product are never known exactly, and are thus based to a large
extent on estimates derived from sample data. Further, the bottom line that can be
realised by mining companies is controlled to a large extent by world commodity
prices. The result is an industry where decisions are made under an increased level of
uncertainty.
The mining industry has undergone numerous changes in the valuation methodologies
it employs, as a result of the specific nature of the characteristics that affect
each project under evaluation. Like many other industries, the mining industry
faces numerous sources of uncertainty, from the market price of the commodity
being extracted to uncertainty from exploration undertaken to delineate the orebody.
As well, there are aspects that are project specific which have a high degree of influence
on the evaluation.
46 B. Maybee et al.

Lee and Strang (2003) noted that the most widely used valuation technique in the
mining industry is Discounted Cash Flows (DCF), which has been used within the mining
industry for decades, with two commonly identified shortfalls. First, DCF valuations are
very reliant on the views of the corporation and not the individual characteristics of the
project, as it depends on a discount rate to recognise uncertainty. Second, DCF valuations
do not allow for the inclusion of choice within the value assigned to a project. As a result,
many practitioners have attempted, and been successful in applying more advanced
valuation techniques to mining projects that recognise additional levels of risk.
The first application of the Real Options (RO) valuation technique in the mining
industry was by Brennan and Schwartz (1985) with their model of temporary mine
closure. They developed a mine valuation model in which management can temporarily
close an operating mine, re-open a closed mine, or abandon the project. They were
successful in placing a value on a temporarily closed mine. As well, an optimal operating
policy was created for the current operations, signalling at what copper price the mine
should resume operations, or close, depending on the current state of operations, and at
what price the project should be abandoned. Samis and Poulin (1996, 1998) used decision
trees in combination with DCF to incorporate the heterogeneous nature of a mineral
deposit into a valuation model. Kazakidis (2001) used multiple European put and call
barrier options to value flexible operating alternatives within an underground mine that
are associated with ground-related problems. Using a Monte Carlo simulation to consider
two alternative mining sequences during the planning of the extension of a mine,
it was found that the inclusion of flexibility into the mine plan can alter the decision
that is to be made. Rodriguez and Padua (2005) applied portfolio optimisation
techniques to Exploration and Production projects in the petroleum industry, with the
aim of maximising the worth of the company. All of these applications showed that
a better understanding and evaluation of a mining project can be obtained through the
incorporation of more advanced valuation techniques.
The ability to meet production levels is also a crucial element of underground
operations, and a crucial element of the mine planning process. McCarthy (2002) noted
that 50% of underground base metal mines do not reach their production targets by year
three of their operations, and 25% never reach them. The effects can be as influential on
the value created by a project as the external sources of uncertainty that are recognised
through the discounting of cash flows. There are numerous reasons why a mine may fail
to meet its production plan, for example, poor ground conditions, a changing labour
force, etc. (Kazakidis and Scoble, 2003). The result is that the value expected through the
implementation of a specific mine plan will not be realised. Maybee et al. (2009a) noted
that even the smallest change in the rate of advance for development activities can have a
significant effect on the value of a mining project.
Maybee et al. (2009b) introduce a Schedule Optimisation Tool (SOT) based upon
a powerful genetic algorithm to automate part of the schedule creation process. SOT
identifies thousands of feasible scheduling options for a given mine design and set of
capacity constraints in a reasonably short period of time. The software takes mine
activities (development, production, backfilling, etc.), along with user-input resources
(e.g., people, machines, processing capacity, etc.) and financials (revenues, operating
costs, capital costs, etc.) to produce hundreds of valid schedules in a fraction of the time
needed by traditional methods. To take schedules from the feasible to the near optimal
level, an artificial intelligence tool – the genetic algorithm – is employed. When a set of
schedules are generated, the algorithm seeks out the best qualities of individual schedules
 Risk-based decision making within strategic mine planning 47

and combines them to generate a new set of results. By repeating this process the results
‘evolve’ into schedules with higher and higher NPVs.
As computing power increases, so does the ability of analysis tools to crunch large
quantities of data. As a result, previously unimaginable optimisation problems are being
solved in a reasonable amount of time. The use of SOT allows a mine planning
professional to identify and evaluate thousands of feasible mine schedules for a given
mine design. If numerous high value potential schedules share a common sequence
of activities with small deviations, there is a higher level of certainty that the actual
mine value will be high, returning a lower risk profile. On the other hand, if a sequence
of extraction yields a high expected value under one schedule, but all other schedules
that start in that area of the mine return relatively low expected values, then the risk
associated with achieving this plan will be high. This is due to small changes in the
scheduling sequence dramatically altering the resultant project value. Figure 1 presents a
theoretical hill of value representation of this situation, which clearly shows a dramatic
decline in value if the high risk strategy is not implemented as prescribed.

Figure 1 Hill of value

As external sources of uncertainty (e.g., market prices) are taken into account through the
use of a discount rate in traditional valuation techniques, the uncertainty surrounding the
ability to achieve a specific mine schedule should also be included within the evaluation
process. Unfortunately, it can take a substantial amount of time to create these alternative
schedules through manual planning processes, making it difficult to evaluate more than
a handful of alternatives. In essence, the number of options considered for mine
scheduling tends to be limited by the time available rather than establishing the risk
profile surrounding a projects potential value.
This paper introduces a risk-based evaluation methodology, and shows its application
to a strategic planning decision through a case study. This methodology uses SOT’s
ability to rapidly create scheduling alternatives to introduce the notion of a mining
strategy. It then combines standard evaluation practices used in the mining industry
(Discounted Cash Flows, Real Options, Monte Carlo Simulation, etc.) with the concepts
of Modern Portfolio Theory to establish an evaluation methodology that recognises
financial uncertainty in the context of technical scheduling factors.
48 B. Maybee et al.

2 Risk-based evaluation methodology

In most cases, decisions about what the mine plan will be are made very early in the
planning process, before sufficient data has been accumulated to make such a decision.
While uncertainties are recognised, due to a lack of time, the data required to perform
a proper risk-based evaluation is not produced. Instead, many companies limit their
investigation to an expected, best and worst case scheduling option to evaluate the risk
of a plan. Through this process they fail to capture the true mean-variant profile of the
plan being investigated, and severely limit the number of plans that are investigated
(Figure 2).

Figure 2 Typical strategic valuation process (see online version for colours)

With automated scheduling tools like SOT being integrated into the planning process,
additional information and sequencing alternatives are easily created. As a result,
it is possible to identify and evaluate strategies for the mine plan by grouping the
scheduling alternatives that exist. Due to the individual nature and characteristics of an
orebody, the strategies chosen for each deposit will be different, and thus must be
investigated individually to identify the one that adds the most shareholder value.
Unfortunately, by making the decision of what strategy to follow early in the process,
a great deal of historical information (which is unrelated to the orebody under
investigation) is translated into the decision.
Figure 3 depicts an overview of the risk-based evaluation methodology that has been
developed, with a more detailed depiction in Figure 4. In this methodology the choice
of a particular mining extraction strategy is delayed until sufficient information has been
produced to perform a full risk-based evaluation.
 Risk-based decision making within strategic mine planning 49

Figure 3 Risk-based evaluation methodology (see online version for colours)

Figure 4 Detailed risk-based evaluation methodology (see online version for colours)

Step A: Assume Scheduling Constraints

To begin the evaluation process, a mine planning horizon must be identified.
This horizon is an integral part of creating a mine extraction strategy, as it is a common
set and timing of activities in this horizon that make different schedules part of the same
50 B. Maybee et al.

strategy (see Step B). When combined with a set of technical scheduling constraints,
different groups and specific timings of activities within this planning horizon are
produced, representing the alternative strategies to be evaluated. These technical
constraints can include information such as a mill capacity, the amount of development
that can be achieved in a year or the amount of waste that can be hoisted out of each
mine. These are the technical scheduling factors that must be adhered to when planning
and scheduling the extraction of a set of mining activities.
Once these constraints have been combined, different mining environments are
produced. SOT is used to identify scheduling alternatives for these environments
so that the different combinations of constraints can be evaluated. From this analysis,
a set of constraints is selected as the environment within which the mine must operate,
and this environment is taken through the evaluation process. Of course, the process is
not limited to one set of constraints. It can easily be re-run for multiple realisations of the
planning environment.
Step B: Identifying Mining Strategies and Scheduling Alternatives
In this methodology, a mining strategy is not a single schedule for extracting
the available ore or sequencing the available mining projects, but rather a group of
schedules that share a common set and timing of activities within the planning horizon.
These schedules then differ after the planning horizon to allow for flexibility and give
management the ability to make decisions that take advantage of opportunities and
mitigate risks as the uncertainties are resolved. Figure 5 depicts three schedules that are
considered part of the same mine extraction strategy. As shown, a strategy is a group of
schedules that share a common set of both activities and timing within the mine planning
horizon. Many strategies exist for a scheduling environment; with one of them eventually
being selected, in combination with its mining environment, to be implemented as the
mine plan.

Figure 5 Representation of a mining strategy (see online version for colours)

From the constraint analysis, strategies are selected based on different parameters
commonly used to guide the underground scheduling process, with no limit to the
number of strategies selected. To perform the evaluation (prior to deciding upon
which will be implemented), scheduling alternatives are produced for each strategy.
This is accomplished by pinning the activity start times for each activity that is scheduled
to start within the planning horizon, and then allowing SOT to generate new schedules
that alter the order and timing of the activities that occur after this time frame, identifying
a group of scheduling alternatives for the strategy.
To evaluate the identified strategies, a financial model is created in Microsoft
ExcelTM. For each of the scheduling alternatives within a strategy, a tab is created to
contain its physical mining information (tonnages per mine, grades, costs, etc.).
 Risk-based decision making within strategic mine planning 51

Step C: Assume Uncertainties

Through the use of a financial spreadsheet model and Pallisade’s @RISKTM simulation
package, the strategies can be investigated for their sensitivity to random changes in
uncontrollable influences. Within this workbook the financial uncertainties that randomly
impact the mining operations are identified and modelled with probability distributions.
These uncertainties surround factors that the mining operations do not have control over,
but impact the value of the project. The most common of these factors is the market price
that is realised for the mineral after extraction. While schedules are created using an
assumed market price and revenue stream, the reality is that these prices will change from
the time that the plan is created to the time it is executed. Likewise, the grade of mineral
extracted may also differ from the expectations when the plan was created due to
geological uncertainty and estimation techniques. These uncertainties are modelled as
different distributions of likely occurrences.
Step D: Evaluate Strategy
With the strategy identified and the uncertainties modelled in the Microsoft ExcelTM
model as probability distributions, a Monte Carlo simulation is run to investigate how
these changes affect each of the schedules that comprise the strategy. This Monte
Carlo simulation is run for 10,000 iterations, with each of the scheduling options
for the strategy being evaluated using that realisation of the uncertain factors (e.g., market
price and average grade). Using these values, the NPV for each of the scheduling
options within the strategy is re-calculated, providing numerous NPVs for each of the
iterations.
At this point a Real Options approach to valuation is taken. Since the scheduling
alternatives share a common set of activities in the planning horizon, it is assumed that
management has the ability to make decisions after that point depending upon the state of
the environment. To account for this, it is assumed that the choice would be the one that
yields the highest NPV, and thus increases shareholder value. For this reason, that one
NPV with the greatest value is recorded as the result for the strategy under each iteration.
This process then continues for the next iteration, until the schedules have been sampled
10,000 times.
After 10,000 iterations, a distribution of the possible values obtained from that
strategy is created. This distribution shows the expected value (mean), as well as the
standard deviation of the results. The evaluation process is then re-run for each of the
identified strategies, and the mean-variance results are compared to decide on the strategy
of mining that should be undertaken.
Step E: Compare Strategies
Finally, with the identification of financial uncertainties, and through the use of Monte
Carlo simulation and a Real Options approach, each of the identified strategies is
evaluated for its potential under various realisations of random shifts in the environment.
Through this process, more information is produced, allowing for more informed
decisions. By sampling the strategy 10,000 times, statistics such as the mean, mode and
standard deviation can be collected, allowing for a more thorough comparison of the
strategies being investigated.
52 B. Maybee et al.

2.1 Limitation of risk-based evaluation model

The risk-based evaluation model presented in this paper requires that the mining projects
be divided into extraction activities having physical attributes, including a fixed rate and
duration. This fixed rate and duration cannot be altered within the evaluation model,
as the activities are treated as individual pieces that must be mined from start to finish.
In practice, these rates may actually be altered as mining progresses and uncertainty is
resolved, thus altering the duration and physical properties of the activities.
To partially overcome this limitation, more activities can be created so that the
mining environment is more accurately modelled. Even with this limitation, the model
offers an improvement upon current RO and dynamic DCF valuations in that it can
handle very large datasets with thousands of activities to be scheduled. Whereas current
models that evaluate the risk of a mine plan are limited to working at the level of mine
areas or zones, the risk-based model presented in this paper can evaluate the entire
dataset as a complete project.

3 Case study

This section of the paper describes the strategic application of the risk-based evaluation
methodology outlined in Section 2. This strategic application looks at the scenario where
an organisation has multiple operating mines that must feed a single processing plant.
For the purpose of this paper, the names and data have been altered.
To begin the evaluation process, a mine planning horizon must be identified. For the
purposes of this study, and because of the relative ease with which the evaluation process
can be re-run, the planning horizon was set at three years. This three year timeframe
coincides with the influence that a decision has in the company’s operations. Along with
the planning horizon, the operating environment must be identified. From the analysis of
potential operating levels at each of the mines, the set of constraints presented in Table 1
is selected as the environment within which the company must operate. Also, as these
projects feed a single processing plant, the combination of their extraction levels cannot
exceed 14 million tonnes per year.

Table 1 Mining project capacities

Mining project Yearly capacity (tonnes)

Mine A Unlimited
Mine B 1,613,000
Mine C 1,790,000
Mine D 2,300,000
Mine E 1,100,000
Mine F 1,159,000
Mine G 200,000
Mine H 4,260,000
Mine I Unlimited
Mine J 766,000
 Risk-based decision making within strategic mine planning 53

Table 1 Mining project capacities (continued)

Mining project Yearly capacity (tonnes)

Mine K 1,100,000
Mine L 819,500
Mine M 1,097,200
Mine N 1,601,000
Mine O 1,598,000
Mine P 89,000

It should be noted that this list of constraints is in no way all encompassing. Any number
of additional constraints could be modelled and used in the alternative schedule creation
process. Some examples of these additional constraints are the number of development
metres that can be accomplished in a year, the number of Jumbo crews in the mine,
or even the amount of ventilation that can be sent into a specific area of the mine. For this
analysis, the constraints around tonnages were deemed to be the most important, and are
thus being used for the alternative schedule creation process with SOT.
Five strategies were identified and selected for investigation as in Table 2.
These strategies have been identified using mining attributes that have been historically
used to guide the mine scheduling process, and are named as such. SOT was then applied
to these strategies to create the scheduling alternatives.

Table 2 Mining strategies

Strategy name Description

1 Highest Grade Schedules the activities with the highest grade as early
as possible, irrespective of their physical location
2 Highest Mineral Weight Schedules the activities with the highest mineral
weight as early as possible, irrespective of their
physical location
3 Lowest Cost Schedules the activities with the lowest cost as early
as possible, irrespective of their physical location
4 Highest Grade by Area Schedules activities in the area with the highest grade
as early as possible
5 Highest Mineral Weight by Area Schedules activities in the area with the highest
mineral weight as early as possible

Within the financial model for this case study, the uncertainties that randomly impact
the mining operations were identified as those surrounding the mined grade and market
price of the mineral; however, the analysis is not limited to these uncertainties, and any
number of uncertain factors could be modelled. For the purpose of this case study,
these uncertainties are modelled using triangular distributions that fluctuate around the
mean used for the constraint analysis and strategy identification as in Figures 6 and 7,
respectively. Of course, these distributions could take much more complex forms, but for
the purposes of showing how the risk-based evaluation methodology is applied, these
simple triangular distributions will suffice.
54 B. Maybee et al.

Figure 6 Distribution for mined mineral grade

Figure 7 Distribution for mineral price

Figure 8 presents the results from 10,000 iterations of the Monte Carlo simulation for the
five strategies identified assuming that the only uncertainty surrounds the market price
that will be recognised for the mineral being extracted. The bar chart in this figure
represents the highest and lowest NPV found for each strategy. The dots show the 66%
confidence interval, while the overlaid bar shows the mode (most likely) for this strategy.

Figure 8 Risk-based evaluation results – price uncertainty only (see online version for colours)
 Risk-based decision making within strategic mine planning 55

As can be seen, the market price of the mineral is very influential upon the value that
this company will realise. From the 66% confidence interval it is noted that most
of the strategies offer scheduling alternatives that will maintain positive value. However,
the potential results within that confidence interval take on a different shape for the
different strategies, as illustrated by the positioning of the most likely value. For example,
the potential value for strategies 1 and 3 take on a logarithmic shape with a negative
skew. These strategies have a higher probability of returning a value that is in the upper
portion of the 66% confidence interval. Alternatively, strategies 2, 4 and 5 exhibit more
of a normal distribution, where the expected value falls near the centre of the confidence
interval.
Figure 9 presents results for the same strategies assuming that the mined grade of the
mineral being extracted is now the only source of uncertainty.

Figure 9 Risk-based evaluation results – grade uncertainty only (see online version for colours)

Here it is noted that all of the strategies return positive value under every realisation
of the environment. There are two possible reasons for this. First, the grade of
the mineral being extracted does not influence the value of the operations substantially.
Second, the distribution used to represent this uncertainty may not be accurate (plus and
minus 15%). As a result, more time could be taken modelling the uncertainty around
this input.
From the assumptions made, we see that strategy 3, which returns the highest
NPV, and offers the 66% confidence interval with the highest upper bound, has
a lower expected value than strategies 1 and 4. While these two strategies exhibit
normally distributed potential values, strategy 3 exhibits a logarithmic distribution that is
positively skewed, and thus may not be the correct strategy to implement.
To correctly identify the strategy to implement, the same Monte Carlo simulation
is run under the assumption that both uncertainties (price & grade) exist (Figure 10).
It is apparent from these results that once again the market price heavily influences
the value that the company will realise, as under every strategy there is the slim
potential of realising a negative return. However, the 66% confidence intervals show
that it is more likely a positive value will be realised. What is interesting is that
when both uncertainties are taken into account, it is strategy 4 that offers the greatest
expected NPV, even though it offered the second lowest maximum NPV. This strategy
(scheduling the mines with the highest average grade as early as possible) offers the
56 B. Maybee et al.

greatest flexibility for management to minimise the potential downside in the event of
unfavourable market conditions.

Figure 10 Risk-based evaluation results – price & grade uncertainty (see online version
for colours)

Figure 11 shows the same results for the assumption that both price and grade uncertainty
exist presented in mean-variance space, where the mean is represented by the expected
value and the variance as the standard deviation squared.

Figure 11 Mean-variant results

In this figure, increasing value is plotted on the y-axis, while increasing variance,
or risk, is plotted on the x-axis. Through this presentation, we can see how much
additional risk must be assumed to achieve a greater value. Looking at the graph,
we see that very little additional risk is required to move from strategy 1 to strategy 4,
yet the increased expected value is substantial. Also, strategies 3 and 5 are considered
inefficient, because we can expect a higher return from strategy 4, with less risk.
The result is that under the assumptions that have been modelled, strategy 4 would be the
most attractive.
 Risk-based decision making within strategic mine planning 57

4 Conclusions

Risk mitigation in underground mine planning is a very broad concept, and can
have numerous implications depending on the situation. This is a result of the high
level of uncertainty that exists within the mine planning process, from the delineation
of the orebody (grade and tonnage) to the market price that will be realised for the
mineral produced. There are also numerous sources of uncertainty that surround the
implementation of underground mine schedules. The ability to meet production levels is a
crucial element of underground operations, whose effects can be as influential on the
value of a project as the market price of the mineral. In underground mining, changes
occur on a daily basis which influence the implementation of the long-term mine
extraction sequence and thus impact on the short term scheduling process. Thus, having a
strategy that allows management the opportunity to react to changes in the operating
environment can add substantial confidence in the decisions that are made by identifying
the strategies that are less susceptible to reductions in value as a result of operational
changes.
This paper has introduced a risk-based evaluation methodology that shows
application to valuing mining decisions at the strategic level. Using the additional
scheduling data produced with automated scheduling tools like SOT, this methodology
allows for the creation of mining strategies, and an evaluation of these strategies whilst
quantifying the risk profile. As a result, the process and methodology presented allows
for the introduction of more information pertinent to the decision making process.
The combination of the proposed methodology and automated tools that allow the
investigation of many different scheduling alternatives has the potential to provide more
confidence in mine planning outcomes.

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