Comparative Analysis of Open Pit Gold Mine Project NPV’s Under Price Uncertainty Using Real Options and Dynamic Mine Plans

Open Pit Mine Production scheduling under commodity price uncertainty suffers from an exponentially increasing problem size as simulations and real options flexibility are used to generate and evaluate multiple production schedules. Robustness evaluation techniques attempt to evaluate a production schedule that is generated on a single set of economic parameters against several varying prices and sources of uncertainty. This approach is invalid as the corresponding optimal LOM mine plan will change for each set of evaluation parameters. Using commodity market futures and treasury bonds as production schedule economic input parameters provides fully price and time-value-of-money risked scheduling parameters that maintain a deterministic problem size. This paper will provide comparative analysis of project NPV’s coming from traditional price uncertainty evaluation based on a single fixed LOM mine plan using varying prices versus evaluation based on varying LOM plans that are both generated and evaluated using varying prices. When cross evaluating constant price mine plans against simulations, the upside potential and downside risk of a project are significantly misrepresented. INTRODUCTION The life of mine (LOM) production scheduling problem seeks to answer the question of from where and when to extract a given block within the ultimate pit limit as well as where and when to process it. Solving this problem takes into account the constraints of extracting any particular block while seeking to maximize the net present value (NPV) of the mineral asset as a whole. A direct driver of the value of a block, and there for the entire asset, is the market price of the commodity in question. Complications arise when an optimal production schedule is attempted to be solved under price uncertainty. Many solution methodologies have been proposed in an attempt to optimize under this criterion, yet there are three salient aspects that are overlooked during this process. They are: • Generating a single production schedule and evaluating it against many simulated price paths. • Failing to understand the mechanism describing particular commodity price behavior • Inappropriate risk adjustment In an effort to address these aspects of production scheduling under commodity price uncertainty, we propose a methodology to define the economic parameters as input that is applicable to most if not all production scheduling approaches. This methodology will not only simplify the production scheduling process in terms of establishing block value but utilizes the risk adjustment of real options valuation to avoid the arbitrary blanket risk adjustment of traditional discounted cash flow valuation. Our findings conclude that attempting to optimize around individual price paths is futile and using a market risk adjusted single price forecast provides a justified economic basis for production scheduling while maintaining the same problem size as a deterministic production scheduling problem.