cash flows may be produced.

Multiple ore-processing methods and multiple ore types can be

handled.

The original development of the LG method was undertaken by Lerchs and Grossmann (1965).
Subsequent work by J. Whittle and others (see, for example, Alford and Whittle [1986], Whittle
[1988], Whittle and Rozman [1991], and Roditis [1993]) have extended the theory and application
of this technique to account for the time value of money in sequenced excavation.

CAPITAL VALUES AND DEVELOPMENT STRATEGIES

Each of the three techniquescutoff grades, cost ranking, and pit optimization leads to mine
plans that maximize the value of the resource within certain constraints. However, there is
nothing to ensure that this maximum value is actually positive. The mine does not need to be
profitable for one to undertake these sorts of analyses on it.

This leaves at least three important issues unaddressed:

1. The origin of costs. The techniques are largely concerned with operating costs. The extra
costs of mining extra ore are usually the operating costs. The initial application of the
techniques requires the user to assume certain operating costs. However, the operating
costs are a function of the equipment and methods deployed, and the equipment and
methods deployed are a function of production, and production is a function of reserves.
In practice, the equipment suited to many deposits can be quite clearly defined in
advance, yet this still doesnt solve all of the problems. Truck haulage by contractor
implies the whole cost is an operating cost (the rate includes an amount that the
contractor applies to repaying his or her capital), but truck haulage using identical owned
equipment has a lower operating cost because it excludes capital repayment components.

2. . Accounting for fixed costs. The techniques include as ore everything that makes a
positive contribution to the value of the minebut they are based on an implicit
assumption that the mine is already established. If the extra revenues received (from
extending the limits of mining) exceed the extra costs, the block should be included. Yet
there is no indication whether the surplus is sufficient to cover the fixed costs or even the
increase in fixed costs (see Example 6.3 after this list). Also, there is no indication whether
the possible higher returns from alternative schemes might justify even higher fixed costs.

3. Extraction sequence. The techniques map out economically viable ore, but they normally
do not indicate the optimum sequence for extracting this ore. A mine plan focused on
higher-grade ores early in the mine life may yield a higher net present value, even if this
means wasting viable but lowergrade ores

Example 6.3:
Access to 10 additional strips might require additional ramp development, the cost of
which cannot be borne by any one strip alone. Allocating one-tenth of the development to
 each of the strips is inappropriate (except as an ex post accounting measure) because the
ramp has to be in before the first strip is mined. Once the ramp has been developed, other
blocks will be viable to mine even if they are unable to shoulder their proportionate cost
of ramp development.

The issues mentioned in the preceding list are addressed in the following subsections

Limiting the Mining Options Available

In a mine plan with thousands of potential mining blocks, assessment of the capital and operating
cost trade-offs and optimum development strategy is not a trivial process. For practical purposes,
it is usually addressed in two steps:

1. Establish the maximum and minimum production rate and capital cost that would apply to
the mine given its known or assumed cost structure. A mine that requires the construction
of a new railway and port is unlikely to be viable at low production rates, for example.
2. Within the limitations just mentioned, establish the key constraints having a significant
influence on the mines development and economics. This usually reduces the possible
choices much further. For example, large, electrically powered equipment may be
infeasible in remote mine sites with no connection to the power grid.

Each potential mining method has different maxima and minima for both production and capital
investment. The deposit will have to be considered at least as many times are there are different
mining methods to exploit it.

Example 6.4:

A potential mine for which the economics have been assessed assuming dragline operating
costs would have greater reserves and potentially higher rates of production than the same mine
assessed based on shovel/truck operating costs. This doesnt mean that the dragline case is
necessarily more profitable. Because the operating costs per volume of waste moved by dragline
are generally less than shovel/truck waste operating costs, the reserves will be greater. Whether
the mine is more economical will depend on whether the additional surplus (price less variable
cost) is sufficient to cover the additional capital in the dragline method.

Even for fixed mining techniques, different production rates may imply different sizes of
equipment, with significant changes in cost.

Example 6.5:

A dragline technique will have a minimum sizeequivalent to just one dragline. Anything smaller
than this will require a smaller dragline, for which the operating costs and technical limitations
may be quite different.

Most mines, if planned with higher production rates, also exhibit lower costs. But the
cost/production rate function is seldom a smooth curve. There may be increments of production
that are so important in economic terms that the mine should logically be developed around these
increments.

Example 6.6:

Suppose an existing railway has a maximum capacity of 500,000 tpy. Beyond this, a new railway
would have to be built. Because any new railway has high fixed costs, the next step would
demand production of at least 5 million tpy to be a viable option.

In practice, the range of options available usually reduces to a manageable number of iterations.
The number of iterations can be further reduced by the scrutiny of capital requirements, a
description of which is set out in the next subsection of this chapter.

Most large-scale mining is capital-intensive, and full utilization of highcapital-cost equipment is

important. This does not mean that if capital cannot be fully utilized the mine is likely to be
uneconomic. An assumption that increments in capital strongly dictate mine development
strategies may be an error. Chapter 10 sets out an example of capital utilization demonstrating
how an underutilized large machine can still be more economical than a fully utilized smaller
machine because of the lower operating costs per unit of material moved.

Example 6.7:

A dragline strip mine is not necessarily bound to production from integral numbers of draglines.
For instance, production equivalent to 2.5 (larger) draglines may have similar economics to
production from an exact 3 (smaller) draglines, even though the third (larger) dragline is only 50%
utilized

Amount of Capital a Mine Will Support

At such an early stage of assessment of a mining project, capital investment requirements are
difficult to estimate. Nevertheless, once the operating costs of each block of ore and waste are
known, then the maximum amount of capital that the mine will support can be determined.

Most of the capital is expended at the start of the mine, and the highest return on this capital is
achieved by a mine plan for which the greatest cash flows occur early in the mine life. Assuming it
is feasible, the greatest return on investment will be realized if the lowest-cost mining blocks are
mined first, progressing to higher-cost blocks later in the mine life. Ideally, the block to be mined
last would be the one for which the operating costs were just below the selling price, because this
is the block making almost no contribution to paying off the mine capital.

The maximum amount of capital a mine will support is determined by the net present value of the
surplus cash flows when reserves are exploited in sequence from the lowest cost to highest cost.

Figure 6.3 shows an example plot of cumulative mining reserves arranged in increasing order of
mining cost (for a certain assumed mining method). The mining costs in this case are the total
direct operating costs of the mine assigned to the blocks, excluding capital, administration
overhead, and marketing costs.

In some mines it is not possible to sequence the lowest-cost ore ahead of the higher-cost oreif
the reserves occur together, mining the lowest-cost ore might destroy access to the higher-cost
ore. Yet a surprisingly large number of mines can be developed this way if so desired, e.g., simple
(single-seam) open pit coal mines, phosphate mines, beach sand mines, most bauxite mines, and
other alluvial deposits where the mine is relatively shallow and has a large lateral extent.

Regardless of whether the lowest-cost-ore-first sequence is possible or not, there is no doubt that
the present value of the cash flowand hence the amount of capital investment the project will
supportis maximized in this scheduling sequence. Scheduling the grade/tonnage (or
cost/tonnage) curve places an upper limit on the capital.

The first 6 years of production from the example deposit used for Figure 6.3 are shown in Table
6.4, based on an annual production rate of 4 million tpy

(except only 60% of this production in year 1). The direct operating costs in Table 6.4 are the costs
that were assigned to the blocks in the cost-ranking/ cutoff analysis. Table 6.4 also shows the
addition of overhead operating costsin this case an amount of $2 million annually, plus $1.25/t.
The total operating costs are shown and plotted in Figure 6.4.

The difference between the selling price and the cost of production is the surplus that is available
to pay back the capital. Table 6.5 shows the first 6 years of production again, calculating the
surplus cash flow available with the selling price of $22/t and expressing the whole 10-year cash
flow in present value terms. At a production rate of 4.0 million tpy, the project is capable of
supporting a maximum initial capital investment of $105 millionassuming that an optimum
mining sequence is possible.

At lower production rates, the project has smaller cash flows and will therefore support less
capitalhowever, less capital is needed at these lower rates. Figure 6.5 shows the same project
analyzed at production rates varying from 500,000 tpy to 7 million tpy, showing the maximum
capital investment possible for these rates of production. The calculation in Table 6.5 shows that a
production rate of 4 million tpy will support a maximum of $105 million of capital. Since this is the
best possible sequence for maximizing the present value of the cash flow, if at this stage a mine
cannot be developed for less than that amount of capital, then there is little point in proceeding
further. From a strategic viewpoint, there are two options available:

1. Examine alternative production scenarios assuming the same basic equipment.

 2. Reexamine the whole mine on the basis of some alternative mining scheme. This will require
reevaluation of the costs, cutoff, reserves, and potential mining schedules.

A clue as to the optimum production rate can be derived from the marginal capital requirement.
The right-side axis of Figure 6.5 shows this marginal capital calculationthe extra capital that is
supported for each 1 million tpy increase in annual production.

In the example, at the base case production rate of 4 million tpy, the incremental capital to
expand or contract production by 1 million tpy is $18.3 million. If the incremental capital
supported by the higher tonnage is more than the capital needed to produce the additional 1
million tpy, then the economics of the mine would be improved by adopting a higher production
rate. Conversely, if the incremental capital supported by the higher production is less than the
extra cost of equipping the mine for that higher production, then the economics of the mine
would be improved by adopting a lower production rate.