Cut-off Grade Optimisation for a Bimetallic Deposit: A

Case Study of the Ruashi Mine Copper-Cobalt Deposit

Daniel Mugwagwa

A research report submitted to the Faculty of Engineering and the Built Environment,
University of the Witwatersrand, Johannesburg, in partial fulfilment of the
requirements for the degree of Master of Science in Engineering.

Johannesburg, 2017
DECLARATION
I declare that this research report is my own unaided work. It is being submitted for the Degree of
Master of Science at the University of the Witwatersrand, Johannesburg. It has not been submitted
before for any other degree or examination in any other University.

(Signature of candidate)

28th day of March 2017

at Braamfontein

i
ABSTRACT
The research was driven by the need to optimise the Ruashi Mining operation to prevent further
high-grading without destroying the value of the mine. Ruashi Mining incurred a five-year stripping
backlog caused by the drive to reduce costs. As a result of this, a decline in metal production was
imminent in the subsequent years. The study was conducted mainly using SimSched Direct Block
Scheduler (SimSched DBS) in comparison with schedules from Datamine Net Present Value
Scheduler (NPVS) and MineSched. The scenarios investigated have shown that running a mine
based on break-even cut-off grade does not optimise the net present value of an operation as shown
through the results of Ruashi Mining. The research also proved that royalty affects the cut-off grade
for Ruashi Mining, and cannot be ignored.

The proper scheduling of wasting stripping resulting from cut-off grade optimisation has
contributed to a timeous exposure of high grade to avert the decline in metal production. All the
three scenarios have shown that high grade ore can be availed on time, thus producing a smooth
metal output for the life of mine.

Cut-off grade optimisation is very crucial for any mining organisation as it is the main driver of
value. Ore reserves are important in the determination of a company’s share price. High cut-off
grade results in fewer reserves, and vice versa. Since mineral reserves are the source of revenue,
therefore, the higher the reserves, the higher the revenue. Low cut-off grade may result in the
processing of material that does not give high profit at the beginning of the life of mine. This,
therefore, lowers the mining company’s net present value. This makes it imperative to optimise the
cut-off grade during the mine life in order to optimise the net present value.

During mining operations, there are various stakeholders whose interests must be considered during
cut-off grade optimisation because they derive many benefits from the mine. These stakeholders
include shareholders, employees, government, the community and non-governmental organisations.

Cut-off grade optimisation has shown that there is an opportunity to improve the net present value
of Ruashi Mining. SimSched gives a higher net present value (NPV) compared to the current Ruashi
life of mine schedule. This indicates that SimSched can be used to improve the NPV for Ruashi by
producing an optimised schedule. It is important to note though that there is need for the software to
have provisions to take into account the initial stockpile status so that there is a holistic approach to
the schedule optimisation.

ii
The grade-tonnage curve is steeper closer to zero implying that a small change in cut-off grade has a
huge impact on reserves. Based on the results of the study it was clear that optimisation in
SimSched DBS results in a steeply declining cut-off grade policy compared to NPVS. In addition,
optimisation in SimSched leads to highly accelerated mining rate and massive stockpiling.

Royalty is a cost which has to be incorporated in cut-off grade optimisation. The study has shown
that the cut-off grade for Ruashi is increased by 19.8%. Ignoring royalty may result in overvaluing
of an operation. Environmental considerations favour the optimisation of the use of the mieral
resources. Consideration of environmental costs lowered the cut-off grade for Ruashi by 16%.

iii
ACKNOWLEDGEMENTS
I am very grateful to my supervisor Mr. T. Zvarivadza for his guidance in the execution of this
research. I am ever thankful to my mentor, Dr. Matthew Randall of Axe Valley Mining for his
selfless guidance for he has always been there whenever I needed him. A sincere gratitude goes to
Professor R. Minnitt for giving me the chance to pursue this research. I am also grateful to Mr. T.
Tholana for his guidance in formulating this research.

I am indebted to Mr. T. Williams of Metorex and Mr. S. Allen of Ruashi Mining for affording me
the opportunity to undertake this study and for allowing me to use data from Ruashi. I am also
thankful to Mr. S Bakhaazi and Mr. G Sosole for taking me through the Ruashi financial data.

MiningMath Associates, in particular, Mr. Rodolfo Ota and Mr. Matheus Ulhoa, provided me with
the opportunity to freely use SimSched and supported me all the way through. I am also thankful to
Ezra Moonde and Mr. N. Simwanza for guiding me in manipulating the Ruashi block model in
Surpac.

I am grateful to colleagues like D. Magazi and N. Ndlovu for reading through some of my work and
encouraging me to soldier on. Also, many more assisted me in one way or the other. I am grateful to
all of them

iv
DEDICATION
I dedicate this document to my beloved wife, Nyadzie Blessing for the unconditional support, love,
and patience while I spent long nights and days studying. I also dedicate it to my loving children,
Tafadzwa, Tinayeshe, Tawananyasha Faith and Tavonga Lemuel for being good children while I
was busy with this research. Lastly but not least, I dedicate it to my brother Enock who made me
into what I am today. If he was alive, he would be rejoicing to see the fruits of his work and love.

v
TABLE OF CONTENTS
DECLARATION .................................................................................................................................i
ABSTRACT ....................................................................................................................................... ii
TABLE OF CONTENTS ..................................................................................................................vi

LIST OF TABLES ............................................................................................................................. x

LIST OF FIGURES ..........................................................................................................................xi
LIST OF ABBREVIATIONS .........................................................................................................xiv
CHAPTER 1: INTRODUCTION .................................................................................................... 1
1.1 Chapter overview ......................................................................................................................... 1
1.2 Problem Statement ....................................................................................................................... 1
1.3 Background ............................................................................................................................. 5
1.4 Justification for cut-off grade optimisation at Ruashi Mining .......................................... 7
1.5 Present status of cut-off grade policy ................................................................................... 8
1.6 Data source, acquisition and treatment of the findings ...................................................... 9
1.7 Chapter 1 Summary ............................................................................................................. 10
1.8 Structure of the report ......................................................................................................... 10

CHAPTER 2: LITERATURE REVIEW ....................................................................................... 12

2.1 Chapter Overview ................................................................................................................ 12
2.2 What is cut-off grade?.......................................................................................................... 13
2.2.1 Distinction of mined material ................................................................................................ 13
2.2.2 Grade and cut-off grade ......................................................................................................... 14
2.3 The cut-off grade dilemma .................................................................................................. 18
2.4 Types of cut-off grade .......................................................................................................... 22
2.4.1 Geological cut-off grade ........................................................................................................ 24
2.4.2 Planning cut-off grade ........................................................................................................... 24
2.4.3 Budget cut-off grade .............................................................................................................. 24
2.4.4 Accounting cut-off grade ....................................................................................................... 24
2.4.5 Break-even cut-off grade ....................................................................................................... 24

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2.4.6 Minimum (marginal) cut-off grade ....................................................................................... 25
2.5 Costs used in cut-off Grade calculation.............................................................................. 26
2.6 Cut-off grades for polymetallic deposits ............................................................................ 28
2.6.1 Single grade cut-off approach ............................................................................................... 30
2.6.2 The equivalent cut-off grade approach .................................................................................. 30
2.6.3 Dollar value cut-off grade approach ...................................................................................... 31
2.7 Cut-off grade calculation considering environmental factors.......................................... 31
2.8 Mining royalties and tax ...................................................................................................... 34
2.9 Capacity constraints ............................................................................................................. 36
2.10 Cut-off grade optimisation .................................................................................................. 38
2.11 Cut-off grade with option to stockpile ................................................................................ 42
2.12 Price and revenue ................................................................................................................. 43
2.13 Risk ........................................................................................................................................ 44
2.14 Opportunity costs ................................................................................................................. 45
2.15 Modifying factors ................................................................................................................. 46
2.16 Multiple process options ...................................................................................................... 46
2.17 Discount rate ......................................................................................................................... 47
2.18 Throughput and hardness ................................................................................................... 47
2.19 Leach time ............................................................................................................................. 47
2.20 Chapter 2 summary ............................................................................................................. 48

CHAPTER 3: METHODOLOGY ................................................................................................. 50

3.1 Chapter overview ................................................................................................................. 50
3.2 Break-even analysis .............................................................................................................. 50
3.3 NPV Scheduler pit optimisation.......................................................................................... 51
3.4 MineSched life of mine schedule ......................................................................................... 52
3.5 SimSched life of mine schedule ........................................................................................... 53
3.5.1 Preparation of the block model for use in SimSched DBS ................................................... 56
3.6 Environmental costs consideration ..................................................................................... 57

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3.7 Stockpiling and blending ..................................................................................................... 57
3.8 Sensitivity and risk analysis ................................................................................................ 58
3.9 Chapter 3 summary ............................................................................................................. 58
CHAPTER 4: RUASHI MINING OPERATIONS OVERVIEW................................................ 59
4.1 Chapter overview ................................................................................................................. 59
4.2 Market overview ................................................................................................................... 59
4.3 Location, climate and infrastructure .................................................................................. 60
4.4 Geology .................................................................................................................................. 62
4.4.1 Regional geology.................................................................................................................... 62
4.4.2 Ruashi local geology ............................................................................................................. 63
4.5 Mining ................................................................................................................................... 66
4.6 Mineral processing ............................................................................................................... 66
4.7 Chapter 4 summary ............................................................................................................. 67
CHAPTER 5: RESULTS ................................................................................................................. 68
5.1 Introduction .......................................................................................................................... 68
5.2 Ruashi break-even cut-off grade......................................................................................... 68
5.2.1 Input Parameters and Assumptions ....................................................................................... 68
5.2.2 Life of mine cash flow based on break-even cut-off grade ................................................... 75
5.3 Cut-off grade optimisation in NPVS................................................................................... 76
5.4 Optimisation based on recoverable value (SimSched DBS) ............................................. 81
5.4.1 Parameters and Assumptions .............................................................................................. 81
5.5 Parametric cut-off grade ........................................................................................................ 89
5.5.1 Parameters and assumptions.................................................................................................. 89
5.5.2 Optimisation results ................................................................................................................ 89
CHAPTER 6: ANALYSIS OF RESULTS .................................................................................... 94
6.1 Introduction ........................................................................................................................... 94
6.2 Comparison of scenarios ....................................................................................................... 94
6.3 Sensitivity analysis ................................................................................................................ 99

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6.3.1 Effect of processing costs ..................................................................................................... 99
6.3.2 Effect of mining costs ......................................................................................................... 100
6.3.3 Effect of discount rate ........................................................................................................ 101
6.3.4 Effect of copper price ......................................................................................................... 103
6.4 Cut-off grade incorporating environmental costs ........................................................... 105
6.5 Risk analysis using @Risk ................................................................................................. 106
6.6 Chapter summary .............................................................................................................. 110
CHAPTER 7: CONCLUSIONS AND RECOMMENDATIONS ............................................. 111
7.1 Conclusions ............................................................................................................................... 111
7.2 Recommendations .................................................................................................................... 113
REFERENCES ............................................................................................................................... 115
APPENDIX A ................................................................................................................................. 121
Cut-off grade calculation formulae .............................................................................................. 121

ix
LIST OF TABLES
Table 1.1: Material classification for scheduling ............................................................................. 2
Table 2.1: Operating cost categories .............................................................................................. 27
Table 2.2: Sources of increased value in mining operations .......................................................... 33
Table 4.1: NB Mining equipment fleet .......................................................................................... 66
Table 5.1: Price and costs assumptions ......................................................................................... 70
Table 5.2: Figures for calculating break-even cut-off grade for copper ........................................ 72
Table 5.3: Figures for calculating break-even cut-off grade for cobalt ......................................... 73
Table 5.4: Life of mine schedule based on break-even cut-off grade ............................................ 76
Table 5.5: Life of mine schedule from NPVS ................................................................................ 78
Table 5.6: Life of mine cash flow based on NPVS ........................................................................ 82
Table 5.7: SimSched DBS life of mine schedule ........................................................................... 84
Table 5.8: Stockpile schedule from SimSched DBS ...................................................................... 85
Table 5.9: The practical life of mine schedule extraxted from SimSched DBS ............................ 89
Table 5.10: Life of mine cashflow based on SimSched DBS ......................................................... 89
Table 5.11: Life of mine schedule based on parametric cut-off grade ............................................ 90
Table 5.12: Stockpile schedule based on parametric cut-off grade................................................ 91
Table 6.1: Effect of varying discount rate on cut-off grade ......................................................... 102
Table 6.2: Cut-off grade incorporating dump rehabilitation costs ................................................. 66
Table 6.3: Assigning probability distributions to SimSched DBS optimisation output............... 108

x
LIST OF FIGURES
Figure 1.1: Variation of Ruashi life of mine stripping ratios ............................................................ 3
Figure 1.2: Variation of Ruashi life of mine feed grades ................................................................. 4
Figure 2.1: Open pit long-term production planning variables interacting
in a circular fashion (Dagdelen, 2001) ............................................................................................ 18
Figure 2.2: Stakeholders in the cut-off grade determination ........................................................... 19
Figure 2.3: Interrelationships of factors influencing cut-off grade policy ...................................... 21
Figure 2.4: Definition/purpose of cut-off grades ............................................................................ 23
Figure 2.5: Cost-volume relationships ............................................................................................ 27
Figure 2.6: Plot of true and estimated values .................................................................................. 29
Figure 2.7: Generic value versus cut-off curve ............................................................................... 40
Figure 2.8: A typical underground hill of value versus cut-off and production targets…. …… .. ..41
Figure 3.1: Break even points for unit, total and unit variable costs............................................... 51
Figure 3.2: Typical Minesched setup .............................................................................................. 53
Figure 3.3: Typical block model for SimSched scheduling ............................................................ 54
Figure 3.4: Block model prepared for import into SimSched ......................................................... 55
Figure 3.5: Typical SGeMS display showing schedule coloured by period ................................... 56
Figure 3.6: Ruashi orebody showing ore zones .............................................................................. 57
Figure 4.1: Five-year copper spot price .......................................................................................... 60
Figure 4.2: Location of Ruashi Mining and other Metorex projects ............................................... 61
Figure 4.3: Litho-stratigraphic sequence of the Katangan Sequence
in the Democratic Republic of Congo… ........................................................................................ 62
Figure 4.4: Ruashi local stratigraphy .............................................................................................. 64
Figure 4.5: Satellite image of relative position of the three Ruashi ore bodies and pits ................. 64
Figure 4.6: Simplified processing flow diagram ............................................................................. 67
Figure 5.1: Relationship between copper and cobalt cut-off grades ............................................... 74
Figure 5.2: Grade-tonnage curves for copper.................................................................................. 75
Figure 5.3: Grade-tonnage curves for cobalt .................................................................................. 75

xi
Figure 5.4: Variation of copper grades over the life of mine ......................................................... 67
Figure 5.5: Variation of cobalt grades over the life of mine .......................................................... 79
Figure 5.6: Life of mine metal output ............................................................................................ 80
Figure 5.7: Life of mine NPV ........................................................................................................ 81
Figure 5.8: Life of mine cumulative NPV ...................................................................................... 81
Figure 5.9: SimSched DBS setup ................................................................................................... 83
Figure 5.10: Overview of SimSched DBS setup ............................................................................ 84
Figure 5.11: Variation of NPV over the life of mine ..................................................................... 85
Figure 5.12: Stockpile schedule from SimSched DBS ................................................................. 86
Figure 5.13: Variation of cobalt feed grade over the life of mine .................................................. 87
Figure 5.14: Variation of copper grade over the life of mine ........................................................ 87
Figure 5.15: SimSched DBS cumulative life of mine NPV ........................................................... 67
Figure 5.16: SimSched DBS copper equivalent stockpile schedule .............................................. 92
Figure 5.17: Copper equivalent grades variation ............................................................................ 92
Figure 5.18: Variation of copper equivalent metal output ............................................................. 93
Figure 5.19: Variation of copper equivalent NPV over the life of mine ........................................ 93
Figure 5.20: Ex-pit mining for copper equivalent life of mine ...................................................... 94
Figure 6.1: Comparison of cut-off grade policies from the scenarios ............................................ 96
Figure 6.2: Mined tonnages ............................................................................................................ 96
Figure 6.3: Life of mine copper production ................................................................................... 97
Figure 6.4: Variation of NPV over the life of mine ....................................................................... 67
Figure 6.5: Total NPV per scenario ............................................................................................... 99
Figure 6.6: Effect of processing costs on cut-off grade ............................................................... 100
Figure 6.7: Variation of ore reserves with processing costs ........................................................ 101
Figure 6.8: Effect of ptocessing costs on metal output ................................................................ 101
Figure 6.9: Effects of mining costs on NPV ................................................................................ 102
Figure 6.10: Effect of varying discount rate on NPV .................................................................. 103
Figure 6.11: Effect of varying discount rate on NPV .................................................................. 103

xii
Figure 6.12: Effect of variation in copper price on the cut-off grade .......................................... 104
Figure 6.13: Effect of price changes on NPV .............................................................................. 105
Figure 6.14: Effect of variation in price on copper output ........................................................... 105
Figure 6.15: Effect of price on NPV ............................................................................................ 106
Figure 6.16: Tornado diagram – ranked effects of inputs ............................................................ 109
Figure 6.17: Probability of improving NPV aabove base value .................................................. 110
Figure 6.18: Probability of making a loss for Ruashi .................................................................. 110

xiii
LIST OF ABBREVIATIONS
%TCu - percent Total Copper

%TCo – percent Total Cobalt

BOMZ – Black Ore Mineralised Zone

CSV – Comma Separated Value

DRC – Democratic Republic of Congo

GAC – Gangue Acid Consumption

NPV – Net Present Value

NPVS – Net Present Value Scheduler

SAMREC – The South African Code for Reporting of Exploration Results, Mineral Resources and
Mineral Reserves

SimSched DBS – SimSched Direct Block Scheduler

USA – United States of America

SNEL - Société Nationale de Electricité

xiv
CHAPTER 1: INTRODUCTION

1.1 Chapter overview

This chapter defines the problem to be investigated and the justification for the
research. It also suggests reasons for the current situation of Ruashi Mining as well as
the importance of cut-off grade optimisation to the mining industry in general. Further,
it points out some of the main contributors to cut-off grade optimisation and the need
for cut-off grade optimisation.

1.2 Problem Statement

The main challenges which prompted this research can be stated as:

 The stripping backlog incurred in the past which is destroying the value of
Ruashi Mining;
 Unavailability of high grade ore due to previous high-grading which threatens
the premature closure of the mine. This can be mitigated by cut-off grade
optimisation;
 The opportunity to improve the Net Present Value (NPV) of Ruashi Mining in
cognisance of the prevailing operational challenges.

Ruashi orebody hosts two economic minerals, namely cobalt and copper. Copper is the
main product while cobalt is a by-product. The life of Ruashi Mining is currently based
on the external cut-off grade calculated during pit optimisation. This external cut-off
grade is used to generate ore classes in the block model in preparation for scheduling in
MineSched software. The ore classes are shown in Table 1.1 below. The classes used
were generated for blending purposes only.

The grade is based on two components, namely acid soluble and insoluble parts. It is
necessary to determine the acid soluble part because it is the one which is leachable.
The lower limit value for low grade ore is the break-even cut-off grade calculated
during pit optimisation. The coded block model is used in MineSched for life of mine
scheduling. Sensitivities of different target mill feed grades are used to generate
different scenarios subsequent to which the scenario that generates the best cash flow is
chosen for budgeting purposes. This has resulted in high grading and a waste stripping

1
backlog. In fact, whenever there was a need to reduce mining costs the reduction was
always achieved by reducing waste stripping. This high-grading, compounded by the
reduced stripping has resulted in a decline in metal production in the second year of the
life of mine plan. This has to be addressed through accelerated waste stripping in the
initial two years of the life of mine as shown in Figure 1.1 generated from MineSched.

Table 1.1: Material classification for Scheduling

Grade Range Description Destination

0 - 0.30% TCu Waste Waste dump

Mineralised waste
0.30 - 0.90%TCu Mineralised waste
dump

Run of Mine Pad/Low

0.90 – 2.50%TCu Low Grade Ore
Grade Stockpile

Run of Mine
2.50 – 3.50%TCu Medium Grade Ore Pad/Medium Grade
Stockpile

Run of Mine Pad/High

Above 3.50%TCu High Grade Ore
Grade Stockpile

Above 0.20%TCo and

Cobalt Ore (BOMZ) Run of Mine Pad
below 0.90%TCu

Where:

%TCu is % Total Copper grade

%TCo is % Total Cobalt grade
BOMZ is Black Ore Mineralised Zone, which is cobalt ore.

2
 Ruashi Life of Mine Stripping Ratio
8.0
7.0
Stripping Ratio

6.0
5.0
4.0
3.0
2.0
1.0
0.0
1 2 3 4 5 6
Year

Figure 1.1: Variation of Ruashi life of mine stripping ratios

Accelerated stripping is not favoured by the time value of money concept because
higher cash outflows must be delayed as much as possible. In the case of Ruashi,
accelerated waste stripping has to be done to rectify the waste stripping backlog
incurred in the last four years. Although ideally waste stripping would have been spread
evenly in the first four years to improve the NPV, there has not been flexibility to do
so.

The stripping backlog is reflected in the decline in life of mine feed grades in Figure
1.2 as generated from the MineSched life of mine schedule. The feed grade drops in the
second and third years because not enough high grade ore is exposed by that time. The
cobalt grade is high in the first two years because of the exposure of the enriched cobalt
cap in the Pit 3 pushback.

3
 Ruashi Life of Mine Feed Grades
3.30 0.60
3.20 0.50
Copper Grades (%)

Cobalt Grades (%)

3.10 0.40
3.00 0.30
2.90 0.20
2.80 0.10
2.70 0.00
1 2 3 4 5 6
Year

Copper Grades Cobalt Grades

Figure 1.2: Variation of Ruashi life of mine feed grades

It is the aim of this research to investigate the possibility of optimising the feed grades
so as to optimise the NPV of the mine in order to mitigate the effects of the waste
stripping backlog. The mining schedule produced from the cut-off grade optimisation is
used to direct the mining operations. The periodic pit shells generated during
scheduling are used in short term planning. This ensures that the planned grade is
achieved while accelerating the stripping also, hence metal production is not drastically
affected. As stated before, the cut-off grade generated through pit optimisation is
referred to as an external cut-off grade. The external cut-off grade is applied during pit
optimisation to identify blocks that generate revenue. Blocks below the external cut-off
grade are treated as waste. Once the pit optimisation is done and a design is produced,
post-pit optimisation is carried out to optimise the life of mine extraction strategy of the
resource within the designed pit. There are different value drivers that can be optimised
to maximise the value of the mine. These include internal cut-off grade and increasing
throughput (Breed & van Heerden, 2016). The internal cut-off grade refers to the cut-
off grade applied to material inside the designed pit and is used to determine the
destination of blocks within the pit which must be mined as ore or waste (Baird &

4
Satchwell, 2001). This report is aimed at producing an optimised internal cut-off grade
policy for Ruashi using the SimSched Direct Block Scheduler (DBS) software
developed by MiningMath.

1.3 Background
Hall (2014) defines grade as any parameter that is used to describe the relative value of
a block of rock. The grade can be the metal grade in a single metal deposit, or a metal
equivalent grade or a monetary value measure in a polymetallic deposit. Cut-off grade
represents the minimum amount of valuable product that a measured quantity of rock
must contain for it to be considered as ore (Rendu, 2008). Cut-off grade is used to
distinguish between ore and waste. This cut-off grade is normally the break-even cut-
off grade that is calculated during pit optimisation to determine the ultimate pit. Once
the pit shape has been determined, and the operational pit is designed the internal cut-
off grade is subsequently applied to material inside the designed pit. Cut-off grade
optimisation is applied to the internal cut-off grade which is used for scheduling
material for processing or stockpiling. There are different types of internal cut-off
grades depending on the objective and parameters used in their calculation. The
bottlenecks in the production system also determine the type of cut-off grade applied.
The bottleneck at Ruashi Mining is the mill capacity, but mining capacity is unlimited
under the present operating conditions. The maximum mill throughput is 1.25 million
tonnes but the mine can produce in excess of 2.5 million tonnes of ore. So if the mill
throughput were to be doubled the mine can still meet the mill feed requirements (Lane,
1988).

Mining is a business and businesses are undertaken to make profit and to grow wealth
for shareholders. One significantly important value driver in all mining operations is
the cut-off grade. Ultimately cut-off grade policy adopted by a mining operation
determines its profitability and life. According to Hall (2014), the cut-off policy is a
planned sequence of cut-offs for an operation over time. There is a correlation between
a high cut-off grade policy and increase in short-term profitability and NPV of the
mine. However, increasing the cut-off grade results in a decrease in the life of the mine.
Conversely, a high cut-off grade policy may be implemented to reduce political risk by

5
getting higher financial return over a short time period. It is rare for the cut-off grade to
remain the same over the life of the mine even if costs and product prices remain
unchanged. Commodity prices are cyclic, meaning that they go through repetitive
periods of high prices followed by those of low prices. A shorter mine life might
reduce time-dependent opportunities offered by price cycles. For example, copper
prices are very low at present (year 2016) but are expected to increase again in the next
three to four years which coincides with the time of the end of life for Ruashi mine.
Governments and local communities expect long-term benefits from mining operations;
hence a short life of mine can give rise to high socio-economic impact due to reduced
long-term employment and decreased benefits to employees and local communities
(Rendu, 2008).

Optimal cut-off grades depend on limiting capacities in the various stages of the
production process (Lane, 1988). In the case of Ruashi Mining, there has been a drive
to minimise stockpiling of low grade ore. The grade distribution of the orebody dictates
that a lot of low grade ore be mined in order to expose higher grade ore. It is the
objective of this report to derive an operating strategy that maximises the profit of the
mine by also optimising stockpiling. This may also extend the life of the Ruashi mining
operations. This profit maximisation is based on stockpiling low grade material during
the earlier years of the life of mine through prioritising the processing of high grade ore
to generate higher cash flow in earlier years (Nieto & Bascetin, 2006).

The optimised cut-off grade is used in the simulation of mine processes to determine
which configuration yields the maximum economic value (Gholamnejad, 2008). Given
varied purposes of cut-off grade, it is important to define strategic goals at the outset
before commencing the cut-off grade optimisation.

Ruashi Mining has gone through a period of high- grading and reduced waste stripping.
This has resulted in decreased metal production and increased costs due to the need to
accelerate waste stripping in order to clear the stripping backlog to avail higher grade
ore. There is a need to run a post pit optimisation to produce an optimised cut-off grade
policy for the future development of Ruashi so as to maximise the value of the mine.

6
This cut-off grade policy is also expected to produce a more manageable waste
stripping schedule that will help address the waste stripping backlog.

1.4 Justification for cut-off grade optimisation at Ruashi Mining

The research seeks to address key operational challenges at Ruashi Mining. The major
areas addressed in the research are:

 to mitigate the effects of high-grading that has been practised in previous years;
 to address the stripping backlog caused by previous drives to reduce costs by
deferring waste stripping without adverse impacts on profits;
 to investigate the opportunity to improve the NPV of Ruashi Mining.

The ultimate goal of the mining business is to extract valuable minerals. The value of a
block of material is normally expressed as a grade. The revenue obtainable from the
extraction of the mineral from that block is linked to the grade. There is a minimum
grade below which the mining operation runs at a loss.

In any production process of a mining venture, there are bottlenecks which result in
opportunity costs. Processing low grade material in a production process that has
bottlenecks result in lower metal production. Lower metal production results in lower
revenue. This gives a loss in an opportunity for the company. Running an operation at
break-even cut-off grade destroys value. Given that the time value of money favours
higher cash inflows in the early years of the life of mine to optimise net present value
(NPV) it is prudent to determine a cut-off grade policy that takes this into account. The
cut-off grade that maximises the NPV of an operation in the presence of bottlenecks is
of much higher value than the break-even cut-off grade. In the case of Ruashi, the mill
is the bottleneck.

This report seeks to optimise the internal cut-off grade for Ruashi Mining and provide
guidance on the scheduling process currently applied at the mine. Optimised cut-off
grade policy aims to augment the life of mine planning process. The optimised cut-off
grade policy provides the annual feed grades and pit mining progression in line with the
required waste stripping to avail the ore. It is therefore the aim of this cut-off grade

7
optimisation study to guide the operation on an optimised cut-off grade policy to
address the stripping backlog. Continued high-grading is not sustainable in the medium
to long term as it may lead to the sterilisation of resources. Hence it can make
economic sense to operate under an optimised cut-off grade policy.

1.5 Present status of cut-off grade policy

Storrar (1977) refers to cut-off grade as ‘pay limit’ which he defines as the minimum
value at which ore can be mined and treated without profit or loss. This definition is
however based on break-even analysis which takes into account financial parameters
only. Under the break-even, analysis prices are compared with costs after being
adjusted to account for metallurgical recovery. Under this analysis, if the grade of the
mineralised material is sufficient for the revenue obtained to pay for the costs
associated with extracting, processing and selling, it is classified as ore. This break-
even cut-off grade calculation model does not account for grade distribution of the
mineralisation and neither does it account for the capacities of the mining and
processing plants. The break-even model can be used as long as it is augmented by the
outcomes of more comprehensive models, like those recommended by Lane (Hall,
2014).

Mortimer (1950), cited in Hall (2014) considered both the financial aspect on one hand
and the geology and nature of the mineralisation expressed by the tonnage versus grade
curves on the other. This dual holistic consideration ensures the satisfaction of break-
even conditions and the delivery of specified profit targets by the delineated material.
Lane’s (1988) approach accounts for financial, geological as well as production
systems capacities to handle rock, ore and product. Cut-off grades are determined based
on which process in the system is a bottleneck. Lane also introduced the concept of
opportunity costs if lower grade ore displaces higher grade ore in the feed. This
opportunity cost is included in cut-off grade optimisation. This is re-visited in Section
2.15. Parametric grades, especially when dealing with polymetallic deposits, are
indirectly related to the grade distribution of the mineralised body. This enables the
calculation of equivalent grades for polymetallic ore bodies in order to simplify cut-off
grade optimisation. Section 2.6 explains the most commonly used parametric cut-off

8
grades. The need for stockpiling arises from the fact that an optimum cut-off grade
policy entails a general decline in cut-off grades during the life of the mine. Material
with grades that are not economic to treat in the earlier years may have economic
benefits in later years of the life of mine. Hence no material originally classified as ore
is discarded as waste (Lane, 1988).

Rendu (2008) elaborates on Lane’s work and simplifies the complex mathematical
derivations from Lane’s approach. For Rendu, capital costs incurred before the
calculation of cut-off grade are considered as sunk costs. Stay-in-business capital costs
are to be recovered from the profits of the operation; hence they are included in cut-off
grade calculation. Rendu elaborates on costs to be considered in cut-off grade
calculation. The costs used determine whether the result is break-even, marginal,
budget or planning cut-off grade (Rendu, 2008).

At Ruashi Mining, the marginal cut-off grade has been used to generate an optimum pit
during pit optimisation (van Daalen, 2012). The marginal cut-off grade is similar to the
processing cut-off grade. The selected optimal pit is subsequently used to design an
operational pit. Various cut-off grades are defined in the Ruashi Mining Planning
Protocol and they include planning, budget and marginal cut-off grades. The formulae
for calculating these grades are given in Appendix A. The marginal cut-off grade is
used to determine the processing cut-off grade whilst the price, costs and metal
recoveries are used to determine the copper equivalent cut-off grade. This equivalent
grade is subsequently built into the block model as an attribute. The copper equivalent
cut-off grade is used for determining the resources and reserves based on the respective
parameters which include prices and costs.

1.6 Data source, acquisition and treatment of the findings

This is a case study of the cut-off grade optimisation at Ruashi Mining. Ruashi
Mining’s 2016 budget forecast data and long term prices have been used in this study.
Basing the study on Ruashi Mining’s 2013 pit designs, various data sources were used
for the research, including commodity prices, geotechnical, mining and metallurgical
parameters. The commodity prices used are those supplied by Metorex Mineral
Resources Management. Geotechnical, mining and metallurgical parameters were

9
obtained from Ruashi Strategic Planning Assumptions and the block model used is
called ruashi_jul_2014_v3.mdl that was last updated in July 2014. The May 2016
survey month-end topography has been used to deplete the model. The resulting
periodic grades are used to produce a life of mine schedule.

1.7 Chapter 1 Summary

The problem to be addressed by this research report is to mitigate the effects of the
high-grading previously practised at Ruashi Mining. This is achieved by generating an
optimised cut-off grade policy for the mine. The distinction between external and
internal cut-off grades is that the former is applied during pit optimisation to determine
the optimum pit whilst the latter is for scheduling. It has however been shown in this
chapter that this distinction is somewhat vague at many mining operations including
Ruashi Mining. Optimisation of the internal cut-off grade prevents high-grading,
especially when this is done simultaneously using software like SimSched DBS. High-
grading has been practised at Ruashi Mining for the past four years and this has
resulted in the need for accelerated waste stripping to maintain the target feed grade and
throughput, and hence the metal output. Ultimately, cut-off grade optimisation is aimed
at addressing this in a way that does not significantly impact on the NPV and cash flow
for the mine. Benefits for implementing internal cut-off grade optimisation have been
given in the chapter. The cut-off grade policy currently being practised at Ruashi
Mining has also been explored and it needs improvement in many areas.

1.8 Structure of the report

Chapter 1 provides background to the study through outlining the nature of the problem
to be addressed and giving the causes of the problem at Ruashi Mining. The chapter
also justifies the need to address the problem promptly. Chapter 2 reviews some of the
literature on cut-off grade and related parameters from ample literature on cut-off grade
and other related economic factors. The methodology for the research is explained in
Chapter 3. Results from three software are used in the research, namely SimSched
DBS, Net Present Value Scheduler (NPVS) and MineSched. In addition, the
preparation of the required inputs is described. Chapter 4 gives an overview of the
Ruashi Mining operations focussing on location, geology, mining and processing. The

10
chapter aims to provide an understanding of the context of Ruashi Mining operations.
The results obtained from break-even analysis; NPVS and SimSched are presented in
Chapter 5. The results from the scenarios are presented. Sensitivity and risk analyses
are carried out in Chapter 6. Risk analysis is conducted using the trial version of @Risk
software developed by Palisade Corporation. Chapter 7 rounds up the report by
drawing conclusions from the research findings and ultimately provides
recommendations for both Ruashi Mining and MiningMath who are the developers of
SimSched DBS.

11
CHAPTER 2: LITERATURE REVIEW

2.1 Chapter Overview

Since Lane’s 1988 work, the subject of cut-off grade calculation and optimisation has
received a lot of scholarly attention. A lot of perspectives and knowledge have been
added on the cut-off grade policy space. This chapter critically looks at the definition of
cut-off grade as given by various authors. There is a general agreement on the
definition of cut-off grade by most prominent authors like Rendu and Hall, and they
also agree with Lane (1988). The section on cut-off grade dilemma shows that a lot
more needs to go into the determination of the cut-off grade given the difficulty of
attempting to balance the divergent interests of various stakeholders on a mining
operation. The research also explains the different types of cut-off grade to clarify their
usage and provides a brief discussion on costs used in cut-off grade determination. It is
important to be able to know which costs apply at any particular point particularly
given that some deposits host more than one economic mineral which should also be
considered in the determination of cut-off grade. Notably, this study is based on a bi-
metallic deposit which necessitates the need to discuss how it is handled in practice.
Further, environmental considerations are important in cut-off grade estimation, with
conservationists requiring the maximisation of the usage of the mineral resources and
therefore slowdown in the opening of new mines (Rashidinjad, Osanloo, & Rezai,
2009). Mining companies are subjected to royalties and taxes on their produce and on
mining claims. This is discussed in the section on royalty and taxes. The section on
capacity constraints discusses the bottlenecks that may be present in the system. These
bottlenecks give rise to different ways of deriving cut-off grades. The section on cut-off
grade optimisation discusses ways of optimising NPV through cut-off grade
optimisation in the context of mining revenues being affected by volatile commodity
prices. This discussion leads to the topic on risk, given that mining is largely a risky
business with long payback periods.

12
2.2 What is cut-off grade?

2.2.1 Distinction of mined material

It is important to understand all the parameters involved in deriving cut-off grades.
There is a general assumption by many authors that all readers have the same
understanding of mining terminology. The life of a mine begins with exploration in
which a lot of money is spent. This investment in exploration must be recovered from
the minerals that are later produced (Sinclair & Blackwell, 2004). Agricola, as way
back as 1556, cited in Appleyard et al (2001), described the process of establishing a
mine when he noted:

“The miner ignorant and unskilled in the art digs out the ore without careful
discrimination while the learned and experienced miner first assays and proves
it, and when he finds the veins either too narrow and hard or too wide and soft,
he infers therefrom that these cannot be mined profitably and so works only the
approved ones” (Appleyard, Gilfillan, & Northcote, 2001).

This indicates that exploration has been recognised as a vital component of mining
since time immemorial. Consequently, many steps are involved in coming up with the
cut-off grade, and hence the reserves of a project. Many minerals are found in the crust
in varying concentrations, and yet in many cases, the concentrations of the minerals are
too low for economic extraction. Mining as an industry deals with the progressive
concentration of minerals to a form where they become marketable. There is a
boundary which distinguishes mineralised material that is extracted for further
treatment from that which is discarded. This boundary is derived from a cut-off grade.
The word ‘ore’ is used to describe the mineralised material which is extracted for
treatment. Further, the establishment of the economic basis for determining cut-off
grades also results in the economic definition of ore (Lane, 1988).

Hall (2014) defines grade as the ratio of the amount of product to the amount of ore in
which it is contained. There is need to distinguish between three types of material,
namely rock, ore, and product. The term rock refers to the total material that is mined
before it has been separated into ore or waste. It also refers to all the material mined

13
and transported from the pit. Ore represents the material that is destined for processing.
The product is the valuable material that is extracted from the ore. Hall (2014) gives the
following equation in order to clarify the classification of material in an open pit mine:

Rock = ore (treated or stockpiled) + waste = total material moved

It is also important to note that these materials are the major cost drivers for cut-off
grade derivation and optimisation (Hall, 2014). The South African Code for reporting
of exploration results, mineral resources and mineral reserves (SAMREC Code, 2009)
describes a mineralised body as a resource only if there are reasonable prospects of
eventual economic extraction. The term ore is reserved for that part of the resource that
can be extracted economically at a defined point in time.

2.2.2 Grade and cut-off grade

Hall (2014) defines the term grade as a parameter that describes the relative value of a
block of rock in the mineralised body. The grade may be expressed as:

 Grams per tonne (g/tonne) for gold or as a percentage (%) for base metals;
 Metal equivalent grade per tonne for multi-mineral deposits;
 Dollar value per tonne especially for multi-mineral deposits.
Relatedly, Asad and Topal (2011) define ore as the economically exploitable portion of
a mineral deposit. Lane (1988) laid the foundation when he stated that cut-off grade is
the boundary that distinguishes between material that is treated from that which is
discarded. The cut-off grade represents the minimum amount of valuable product a
given mass of material must contain for it to be classified as ore. It determines the
profitability and the life of a mine. A high cut-off grade increases the short-term
profitability of a mine and maximizes the NPV. However, high cut-off grades also
shorten the life of the mine. In many cases, high cut-off grades are implemented where
there is high political risk and investors aim to achieve high financial return over a
short time to reduce exposure to risk (Rendu, 2008). It must also be pointed out that
implementing high cut-off grades results in high stripping ratios and hence high unit
costs due to handling the same material for reduced ore tonnages (John, 1985). It is also
crucial to note that the cut-off grade is site specific because it is driven by unique

14
characteristics inherent in that operation (Sinding & Larsen, 1995). Ultimately, cut-off
grades vary with the geological characteristics of the material being mined.

Dagdelen (2001) adds to the definition of cut-off grade by noting that it is the grade that
is used to distinguish between ore and waste during scheduling. He brings in the
scheduling part which is silent in many definitions by the other authors. Most open pit
mines are designed and scheduled using break-even analysis which maximises the
undiscounted profits. The cut-off grade that maximises the NPV of the cash flows also
depends on mining, milling, and refinery capacity limitations as well as the grade
distribution within the deposit.

According to Crone and Hunter (1992), “the present value of a projected mining
operation calculated at the nominated interest rate (a rate which reflects the cost of
capital) gives a measure of the profitability of the mining operation. Therefore,
maximization of present value represents a fundamental objective in guiding the
conduct of a mining operation. Maximization of the present value means that the capital
invested in the operation is being used most efficiently” (Crone & Hunter, 1992, p. 81).
The cut-off grade is therefore that grade which determines whether mineralised
material is processed, stockpiled or discarded. The present value of an operation can be
improved by proper cut-off grade selection. A common approach is to determine the
balancing situation, that is where the marginal grade of ore is such that the revenue
obtained from its treatment balances the cost of producing the ore. Such an approach
maximises the recovery of valuable minerals and maximises the (undiscounted) net
revenue or profit. However, it is unlikely to maximize the NPV because if there is a
large volume of material just equal to the cut-off grade treated early in the life of the
operation, the treatment plant tends to be filled with material which yields low profit,
with negative effects on the present value of the total operation (Crone & Hunter,
1992). Fundamentally, cut-off grade is the most important driver of value for a mining
operation and therefore its implementation must be transparent and well understood by
all stakeholders.

It is important to distinguish between the cut-off grade applied for the definition of ore
and that used for deciding whether to process or not. Many mining operations use the

15
same cut-off grade for both determining the ultimate pit and deciding whether to
process or to discard a certain tonnage of material. The two processes are different and
therefore the derivation of cut-off grades will also be different. Large, supergene-
enriched porphyry copper deposits tend to have grade-tonnage curves that are relatively
flat over the low grade range because they contain large tonnages of enriched copper
ore and the proportion of the total ore tonnes that fall in the low grade range is
relatively small. In porphyry deposits where supergene enrichment has been less well
developed (as shown in Figures 24 and 25 for Ruashi Mining), grade-tonnage curves
tend to be steeper and significant proportions of the total ore tonnage may fall in the
low grade range. In the latter case, the resource contained inside the optimized pit limits
can be sensitive to the cut-off value used and can be sensitive to where and when the
cut-off is applied. The contained resource is sensitive to the assumptions made about
metal prices, recoveries, costs and potential penalties associated with mining,
processing, smelting and refining of concentrates (Baird & Satchwell, 2001).

Ore reserves, mine life and cut-off grades cannot be predicted with confidence because
of volatile commodity prices and high costs prevalent in the mining industry. The
prevailing conditions in the base metals industry dictate an improved understanding of
the terms ore and cut-off grade and their proper application in mining strategic plans.
The definition of ore or ore reserves is a dynamic concept, reflecting the cumulative
effect of changes in geological, technical and economic conditions. The cut-off grade is
determined to classify mineral resources as economic or uneconomic in a specified time
frame. The author agrees with Pasieka and Sotirow (1985) when they state that the
capacity of an existing operation is normally considered an imposed constraint for long-
term planning purposes rather than a basis for further option analysis to optimise the
plan (Pasieka & Sotirow, 1985).

Noble (1993) defines the cut-off grade as that grade above which mineralised material
is economic to mine and process. Material below the cut-off grade is discarded as
waste, but material above may be classified as ore under the right conditions. Noble’s
definition separates the mineralised material into three parts, namely material below the
cut-off grade (waste), material equal to the cut-off grade (not classified) and material

16
above the cut-off grade (ore). It is essential to determine what happens to the material
with grade equal to the cut-off grade. Should it be treated as ore or waste? Hall (2014)
asserts that the tonnage of material whose grade is equal to the cut-off grade is mostly
insignificant for practical purposes. He however suggests that the material whose grade
is equal to the cut-off grade be classified as waste since it does not generate any profit
for the operation. However, what is regarded as waste in the short term may become
economic to process in the long-term. Hence, a cut-off grade optimisation policy is
applicable at a point in time.

Up till the present times, the cut-off grade has been applied to the main product in the
mineralised material. Situations may arise where some impurities result in penalties to
the operation. Consumers of the by-product cobalt concentrates from Ruashi impose
penalties if the lead and iron content in the concentrates exceed specified quantities.
Gangue acid consuming (GAC) elements must be minimised in the ore that is fed to the
leach tanks to minimise acid consumption.

The financial viability of every mining project rests with a proper definition of the
economic portion of a mineral deposit. The economic definition of ore dictates that at
the very least every increment of mineralized material has to contain a sufficient
concentration of metals enough to pay for the cost of mining, processing, and all the
related costs of access.

Where there is limited mill capacity, the use of the break-even cut-off grade in
scheduling ore processing results in a lower NPV for the operation. The focus on NPV
maximisation gives rise to cut-off grades which are higher than the break-even cut-off
grade in the earlier years of the life of mine. This results in declining cut-off grade
strategy. The opportunity costs determine how high the implemented cut-off grade is
from the break-even cut-off grade (Dagdelen & Mohammed, 1997). The declining cut-
off grade strategy is important because some of the overhead costs tend to decrease
especially for an operation which is in a harvesting mode and is nearing closure like
Ruashi. Lower grade material can then be treated during this time of reduced fixed
costs. In most mining operations higher grade material tends to get depleted first,

17
resulting in excess capacity which can then be used for treating low-grade material
from the stockpiles (if any).

Dagdelen (2001) divided the cut-off grade optimisation process into the stages shown
in Figure 2.1. The initial production capacity in mining is estimated based on costs and
commodity prices. The production costs, in this case, all the costs including head office
are used to produce the ultimate pit. Cut-off grade estimation is a part of the whole pit
optimisation and design process. Pit optimisation is an iterative process as shown in
Figure 2.1. Economic block values are used to determine whether the block value can
pay for the removal of overburden above it. The break-even cut-off grade is used for
this analysis (Gholamnejad, 2008). The chosen ultimate pit is used to design pushbacks.
The internal cut-off grade is applied for material in the pushbacks for use in production
scheduling.

Figure 2.1: Open pit long-term production planning variables interacting in a

circular fashion (Dagdelen, 2001)

2.3 The cut-off grade dilemma

There are different stakeholders for any mining operation who may have diverging
interests from those of the operating policies of an operation (Sinding & Larsen, 1995).
In other words, a mining operation’s policies have wider repercussions on various
stakeholders which renders the calculation of cut-off grade somewhat complex. It
becomes a challenge to be able to satisfy all the stakeholders, more so in these days
where there is emphasis on the importance of the Social License to Operate (SLO).

18
Mining companies no longer have the liberty to conduct business on their terms. A
mine may fail to start operating regardless of all the necessary approvals having been
acquired if the community does not consent to it operating. The SLO is not merely a
piece of paper but consent, though unwritten, by the community for the mining to go
ahead. This SLO can be withdrawn at any time if the community is infuriated by the
operation. Many mining operations are operating in volatile communities, especially in
the Democratic Republic of Congo (Macfarlane, 2014).

According to Sinding and Larsen (1995), mine employees may adopt lower than
optimal cut-off grades in order to prolong the life of the mine for longer term
employment. Where managers’ bonuses are tied to the reserves declared, this may
result in sub-optimal cut-off grades being applied in order for the managers to earn their
bonuses. The various stakeholders influencing the determination of cut-off grade are
shown in Figure 2.2. The parent company is concerned with overall financial
performance of the group. However, debt service, share performance on the stock
market or internal finance needs may dictate a different cut-off grade policy with higher
cash inflows at the beginning of the life of mine (Sinding & Larsen, 1995). The recent
sharp decline in commodity prices has resulted in impaired assets for many mining
companies. A number of them have also declared the impairment of their assets around
the world. This has also dealt a serious blow to share prices on the stock market.

Figure 2.2: Stakeholders in the cut-off grade determination (Sinding & Larsen,
1995)

19
A high cut-off grade enhances short-term profitability and maximises the NPV of a
project, which is beneficial to shareholders and other financial stakeholders, including
government and local communities. Conversely, a shorter mine life may result in lower
longterm socio-economic benefits due to reduced long-term employment and decreased
benefits to employees and local communities. Banks and other financial institutions
may also impose their requirements in the way in which cut-off grades are determined.
In some instances, a conscious decision might be made to increase the mining capacity
while keeping the processing capacity constant. This allows an increase in cut-off
grade. Some of the lower-grade material may be stockpiled for processing at a later
date. In turn stockpiling may increase the life of the processing facilities but may also
result in increased environmental risks and decreased metallurgical recovery of
stockpiled material. Sulphide ores tend to cause acid drainage which is detrimental to
the environment. Some ores tend to oxidise when exposed to the environment and
hence their recovery is also affected. Reserves enter into the calculation of capital
depreciation, company book value, unit cost of production and taxes. Published
reserves are also linked to the value that the financial markets give to a mining
company (Prasetya & Simatupang, 2012).

Reserves are published to inform stakeholders for informed decision making. It is

important to understand the interests and objectives of all stakeholders and take them
into consideration in cut-off grade determination (Rendu, 2008). Figure 2.3 shows the
complex interrelationships among stakeholders in the determination of cut-off grades.

20
Figure 2.3: Interrelationships of factors influencing cut-off grade policy (Sinding
& Larsen, 1995)
Lenders are more concerned about debt service and less about optimal cut-offs. They
are most interested in stable cash flows over the repayment period. The mineral owner
lays claim to part of the mineral rent derived from the operation by raising tax
revenues. The rents are based on various tax instruments most of which are based on
profits, calculated net rent or revenue. Government receives the largest discounted
revenues if an optimal cut-off policy is pursued at a mining operation. Tax may also be
based on actual mineral output or fixed annual payments. In such cases a cut-off grade
policy which maximises the life of mine is preferred. Even if it is both optimal and
rational to favour an optimal cut-off grade policy, it may serve to exacerbate economic
cycles in the local economy. An optimal cut-off grade tends to concentrate cash flows
in a much shorter period, and tax revenues are correspondingly concentrated. This gives
large but short-lived revenue streams to the regional authority. Since the authority is
likely to be politically unable to resist pressure to spend the revenue this gives rise to
corresponding bursts in government spending. This creates two problems in the
regional economy. First, boom and bust cycles associated with the concentrated

21
exploitation of mines under optimal cut-off grade policies are exacerbated by high
levels of government spending. Second, once government expenditures have increased,
they are much more difficult to reduce when incomes decline (Sinding & Larsen,
1995).

Sinding and Larsen (1995) assert that adoption of suboptimal cut-off grades by local
management is only likely when the managers have a reasonable expectation of
extending their employment beyond the closure date indicated by an optimal policy. If
the turnover rate for local management is such that management is replaced over a
period shorter than the remaining life, then only the last manager has a real incentive to
extend mine life. Employees derive benefits from production in the form of local
benefits and have an interest to extend the mine life to continue enjoying these benefits
including guaranteed long term employment.

The extent of environmental disturbance depends on both how long the mining
operations go on and how extensive they are. An optimal cut-off grade policy results in
a shorter and more concentrated mining operation followed by closure. The amount of
ore mined is lower, and as a result, the quantity of waste generated is also smaller.
While local environmental concerns favour optimal cut-off grade policies, and local
employment favours maximisation of mine life through lower cut-off grades, another
environmental consideration favours lower than optimal cut-off grade policies. By
extracting more material from each mine, fewer sites will have to be disturbed to
produce the same quantity of metal (Sinding & Larsen, 1995).

2.4 Types of cut-off grade

There has been confusion in the choice of cut-off grade to apply. Baird and Satchwell
(2001) clarify this point, arguing that the break-even cut-off grade, where NPV of the
whole project is equal to zero, is used for getting optimum pit shell or stope shape in
underground mining. Once the pit size or stope shape has been determined, a different
set of cut-off grades then applies. Hence, for open pit mining, there are two classes of
cut-off grades; external and internal cut-off grade. External cut-off grade is applied
during pit optimisation to define the ultimate pit. Internal cut-off grade is applied after

22
pit optimisation for blocks that are in the optimal pit to define ore reserves. This is the
point where the delineation of ore and waste is done (Baird & Satchwell, 2001).

Pasieka and Sotirow (1985) explain the application of different cut-off grades by means
of a diagram as shown in Figure 2.4. They show which cut-off grades are applied for
strategic planning and which ones are for operational planning. It is critical to note that
ore-waste delineation is only applied for operational purposes depending on the short
range objectives. On the other hand, strategic planning mainly addresses the overall life
of mine project value and long term objectives. It is, therefore, important to understand
which part of the planning cycle is being undertaken in order to apply the correct cut-
off grade.

Figure 2.4: Definition/purpose of cut-off grades (Pasieka & Sotirow, 1985)

Where:
N.P.V = net present value
N.C.F = net cash flow
The formulae used in the calculation of different types of cut-off grade are given in
Appendix A.

23
2.4.1 Geological cut-off grade
This is used for generating grade frequency distributions in order to separate
mineralised material from waste and plot grade-tonnage curves for the mineralised
material. The geological cut-off grade is used to estimate ore resources. The ore
resources are part of the mineralised material which show reasonable prospects of
eventual economic extraction (Pasieka & Sotirow, 1985).

2.4.2 Planning cut-off grade

As stated by Pasieka and Sotirow (1985), the planning cut-off grade is used for
strategic planning. This is the grade at which the NPV of the project is equal to zero.
The project must be able to cover capital, operating and financial costs. The project
must also be able to cover all taxes and royalties during its life. The planning cut-off
grade is also used for determining the mine capacity or plant capacity.

2.4.3 Budget cut-off grade

This reflects the cut-off grade that is required in order to generate some required cash
flow in a particular year. This is normally required in order to satisfy a particular
corporate objective for a desired cash flow for the company (Pasieka & Sotirow, 1985).

2.4.4 Accounting cut-off grade

According to Williams (2014), the accounting cut-off grade is the annual cut-off grade
which is sufficient for a specified capacity to deliver revenue that covers operating cost,
depreciation of fixed assets and minimum profit requirements. Pasieka and Sotirow
(1985) pointed out that depreciation is a noncash cost and hence its use may have a
negative effect on the operational cut-off grade strategy.

2.4.5 Break-even cut-off grade

This is the grade whose revenue covers all out-of-pocket cash expenses. These costs
include fixed and variable costs, corporate and mining taxes and all allocated capital
expenditures (Pasieka & Sotirow, 1985). Dagdelen and Kawahata (2007) define the
economic break-even cut-off grade as that grade which can be used to differentiate
between ore and waste and is determined by equating the value at the mill to the value
at the dump. For no additional dumping cost this grade is derived as follows:

24
 Valuemill ($/ton) = (P – s) * g * y – m – c
Valuedump = - m
Where
P: price
s: sales and refining costs
g: grade of the material
y: recovery
m: mining cost
c: process cost
and at the breakeven cut-off grade,
(P – s) * gbreakeven * y – m – c = - m
Therefore

gbreakeven = c/((P – s) * y)

To operate the mill with full capacities, yearly ore tonnes (Qc), stripping ratio (SR), the
determination of the yearly mining capacity (Qm) and the yearly metal production (Qr)
are presented as follows:

Qm = Qc x (SR + 1)

Yearly profits are then calculated as follows (Dagdelen & Kawahata, 2007):

Profits = (P – s) x Qr – Qc x c – Qm x m

The break-even analysis is used to determine the final pit limits. The break-even point
is that point in the life of a mine where the operating costs are equal to the value of the
product sold.

2.4.6 Minimum (marginal) cut-off grade

The marginal cut-off grade is that which meets only the variable operating costs
(excludes allocated administrative and other fixed operating and capital costs). It is
used to determine the lowest grade which could be mined without losses if there is no

25
other mineralised material available for the specified capacity to generate a positive net
cash flow (Pasieka & Sotirow, 1985). This grade is used to separate ore from waste
within the optimum pit limit.

2.5 Costs used in cut-off Grade calculation

Operating costs are those costs incurred in the execution of a mining operation. Some
costs are incurred to move the total rock, ore or the product produced. It is important to
classify and correctly allocate costs in order to accurately derive cut-off grades. It is
also important to identify the behaviour of costs with respect to rock, ore and product.
Costs must be allocated according to the physical parameters that drive them. These
parameters are referred to as cost drivers (Hall, 2014). Musingwini (2011) in Tholana
(2012) define operating costs as money which is spent in a process in order to produce
a product. Operating costs are categorised according to their behaviour as the
underlying level of activity changes. The activity level refers to production volume
(Tholana, 2012).

Operating costs are divided into fixed and variable. Fixed costs are expenses that do not
change in proportion to the level of activity within a specified time. Such costs are
normally given as dollars per year or per month. Each elapsed period results in the
expenditure of the stated amount regardless of the quantity of production. Variable
costs change in direct proportion to the level of production. The higher the quantity
produced, the higher the cost incurred. Table 2.1 gives examples of fixed and variable
costs. The profit from the operation is determined by the difference between the
revenue realised and the operating costs incurred. The profit is the difference between
the total costs and the revenue as shown in Figure 2.5 (Tholana, 2012). The break-even
volume is that volume where revenue received balances out the total costs incurred. All
production volumes above the break-even volume will generate profit. If the operating
costs are higher than the revenue, the operation incurs a loss as shown in Figure 2.5. All
volumes below the break-even volume will generate a loss for the operation. The break-
even point forms the basis for the derivation of the break-even cut-off grade for the
operation (Birch, 2016).

26
Figure 2.5: Cost-volume relationships (Tholana, 2012)

Table 2.1: Operating cost categories

Examples of fixed costs Examples of variable costs

 Wages and salaries  Drilling

 Administration  Blasting
 Pumping  Sampling
 Interest expenses  Loading
 Depreciation  Flotation
 Business licenses  Smelting and refining
 Insurance  Crushing and grinding the
 Permit fees ore
 shipping

Pasieka and Sotirow (1985) show that operating costs are classified into direct and
indirect mining, milling, smelting, refining and marketing costs. Taxes and royalties
payable in cash are treated as cost items. Capital expenditures include expenses
incurred for exploration, permanent development, new and replacement equipment and
capitalised supplies which are necessary to start and/or maintain production. All capital
expenditures incurred prior to the time (year) of cut-off grade determination should be
treated as sunk costs. If previously incurred capital expenditures are included into the

27
cut-off grade calculations, the resulting cut-off grade will be higher, resulting in lower
reserves declared. On the other hand, higher cut-off grade may result in the operation
being uneconomic due to fewer reserves hence loss of capital already spent.

According to Birch (2014), costs which are included in the cut-off grade calculation
vary throughout the life of an operation. A budget cut-off grade is used in the earlier
years of the project to enable the initial capital to be recovered. The budget cut-off
grade is calculated by considering the costs plus an additional percentage for capital
recovery (Birch, 2016). In the final years of the life of mine, costs are minimal as a
result of less stripping or development costs, resulting in areas that were previously
marginal becoming profitable. At this stage the marginal cut-off grade can be used
(Lane, 1988).

2.6 Cut-off grades for polymetallic deposits

Rendu (2008) defines polymetallic deposits as mineral occurrences that contain more
than one metal of economic value. Calculation of cut-off grades must consider the
contribution of each of the metals to the total revenue. There are however some
elements which may cause penalties for the operation. These penalties have a negative
contribution to the revenue, since the penalty fee is subtracted from the revenue. For
example, there are penalties for a certain percentage of iron present in the cobalt
concentrate for Ruashi Mining. In essence there are different ways of expressing the
combined cut-off grade for the different minerals. The combined cut-off grade must
also take into account the in-situ metal content (for both the main product and by-
products), the mining and metallurgical factors, the cash cost and the price received for
each product sold (Heugh, 2010).

It is important to check the calculation process of cut-off grade for a polymetallic

deposit in order not to misclassify material. Wrongly derived formulae may result in
what is shown in Figure 2.6 which shows a scatter plot of true values versus estimated
values. The first quadrant shows ore which is lost due to an incorrect classification and
the third quadrant shows waste that is incorrectly classified as ore. This demonstrates
the importance of correctly determining the equivalent grade formula.

28
Cut-off grade calculation for a multi-mineral orebody is done using parametric cut-off
grades. A parametric cut-off grade is one which is indirectly related to the grade
distribution of the mineralised orebody. For a deposit like Ruashi with copper as the
main mineral and cobalt, the by-product the grade is expressed in terms of the copper
equivalent grade. This is done by calculating the cobalt equivalent grade in each copper
category and adding the equivalent grade to the copper as shown below.

𝐂𝐮 𝐄𝐪𝐮𝐢𝐯𝐚𝐥𝐞𝐧𝐭 𝐆𝐫𝐚𝐝𝐞
𝐺𝑟𝑎𝑑𝑒𝐶𝑜 ∗ (𝑅𝑒𝑐𝑜𝑣𝑒𝑟𝑦𝐶𝑜 ∗ (𝑃𝑟𝑖𝑐𝑒𝐶𝑜 − 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝐶𝑜𝑠𝑡𝐶𝑜 ) − 𝐸𝑙𝑒𝑚𝑒𝑛𝑡 𝑃𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝐶𝑜𝑠𝑡𝐶𝑜 )
= Grade𝐶𝑢 +
Recovery𝐶𝑢 ∗ (𝑃𝑟𝑖𝑐𝑒𝐶𝑢 − 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝐶𝑜𝑠𝑡𝐶𝑢 ) − 𝐸𝑙𝑒𝑚𝑒𝑛𝑡 𝑃𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝐶𝑜𝑠𝑡𝐶𝑢

Where:

𝐶𝑢: copper

Co: cobalt

Calculated cut-off grade

True cut-off grade
Figure 2.6: Plot of true and calculated values (Hall, 2014)

29
Once the mineralised body is represented as an equivalent grade, all analysis can
continue as for a single mineral ore deposit (Lane, 1988). The following subsections
give the different ways of dealing with various minerals in a polymetallic deposit.

2.6.1 Single grade cut-off approach

Baird and Satchwell (2001) give the following formula to be used for a theoretical
break-even cut-off grade when other metal credits and penalties are taken into
consideration. In this approach, by-products do not attract costs. The costs are all
allocated to the primary product, but these costs are offset by the revenue received from
the by-products.

Cut-off grade = (Ct – Cr) 100/(re(P – Cb)

Where:

Ct = cost per tonne for mining and milling and overhead

Cr = net credits (sum of by-products unit revenue minus total penalties per unit)

Cb = cost per pound for freight, tolling and refining.

P = commodity price per pound

r = the metallurgical recovery

e = 2 204.6 lb/t

They also suggest that the credits and penalties may be calculated using the average
grades for the respective by-products and penalty elements for the optimised pit.
However, they point out that this may generate cut-off grades that are impractical due
to the by-products contribution. The formula does not provide for capital recovery.

2.6.2 The equivalent cut-off grade approach

The combined grade of the metals is expressed in terms of the primary metal, and this
is called the primary metal equivalent grade. It involves calculating the value of the by-
products (positive or negative) and then calculating what this is equivalent to in terms
of the primary metal. The equivalent grade must be calculated for each block in the
model based on assumed prices and recovery to treat the by-products. This metal
equivalent grade is then applied to the resource (Baird & Satchwell, 2001).

30
2.6.3 Dollar value cut-off grade approach
The polymetallic grade can be expressed in different intrinsic values. According to Hall
(2014), the grade of a polymetallic deposit can be expressed as an in situ value,
recoverable value or payable value. The in situ value is calculated by multiplying the
metal prices by the respective grades of any block. This ignores the possible recoveries
of the various metals. The recoverable value (also called the net smelter return) takes
into account the metallurgical recoveries in the calculation of the grade. The payable
value approach takes into account all the metallurgical losses, product associated costs
and payable proportions of the recovered products. The payable value approach is the
method used in the SimSched software that is applied in this research. The author is of
the opinion that the dollar value cut-off grade calculation method has to be augmented
by other methods because it may result in impractical cut-off grade values due to the
contribution of the other metals. In Ruashi’s case, copper is the main product even
though the price for cobalt is higher than that of copper. In blocks where the
concentration of cobalt is higher in comparison with copper, the method will be biased
towards cobalt by targeting the blocks with higher values and give rise to low copper
grades that cannot be handled in leach.

2.7 Cut-off grade calculation considering environmental factors

Gholamnejad (2008) extends Lane’s algorithm to cater for rehabilitation requirements.
Emphasis is placed on minimising waste generation at source by maximising the
utilisation of the resource. This approach favours the application of lower cut-off
grades which results in higher amounts of ore being processed, thus generating lower
amounts of waste materials to be dumped. The dumped waste attracts rehabilitation
costs which add to operating costs. The rehabilitation cost is the unit cost of
rehabilitating material of a particular type of waste rock after it has been dumped.
Accounting for rehabilitation costs in cut-off grade derivation results in a decrease in
the cut-off grade. This increases the amount of ore to be processed, resulting in the
reduction of waste that is sent to the dump (Gholamnejad, 2008).

Environmental protection takes centre stage in modern mining with many non-
governmental organisations being involved in policing mining operations in particular.

31
These organisations help local communities to force mining companies to adhere to
environmental legislations and international environmental standards. They are also
involved in ensuring that the communities have a say in granting the license to operate.
Mining in general and particularly surface mining has negative impact on the
environment due to waste disposal on the surface, primarily in the form of tailings and
waste material structures such as tailings dams and waste dumps. The open pit itself
leaves an irreparable scar on the surface since most operations do not backfill the pits at
closure. Some of the waste materials may be acid generating. It is less expensive to
eliminate or minimise waste generation at the source than to design mitigation
measures after the waste has been generated. It is important to also consider
environmental and social issues during the mine design stage. Table 2.2 shows the
mutually dependent sources of increased value in mining operations. The optimal cut-
off grade strategy and tactics are important considerations in an endeavour to increase
the value of an operation.

Sustainable development calls for the application of improved and environmentally-

friendly technologies. This must be incorporated into the plan before the project starts.
The cut-off grade and the pit limits are sensitive to changes in revenue (e.g. metal price
fluctuations) and costs (i.e. mining, milling, selling, taxes, mine decommissioning and
mine closure) (Rashidinjad, Osanloo, & Rezai, 2009). The potential for acidic drainage
is determined in the planning process and provision made to either segregate reactive
wastes or blend acid generating material with inert material.

32
Table 2.2: Sources of increased value in mining operations (Gholamnejad, 2008)

Taking rehabilitation costs into account can decrease the cut-off grade resulting in an
increased amount of ore that is processed and a decrease in the waste to be sent to the
waste dump (Gholamnejad, 2008). Ruashi Mining is mill capacity constrained, hence
the cut-off grade calculation which considers environmental cost is derived from
Gholamnejad (2008) as given in the following equation:

33
 The symbols used are
T = production period (e.g. a year)
C = mill capacity (tonnes per period)
m = unit mining cost ($/t of material mined)
r = selling cost ($/t of product
h = rehabilitation cost ($/t of rehabilitated material)
f = fixed costs per period
s = selling price ($/tonne of product)
y = recovery
Qm = quantity mined
Qc = quantity milled per period
Qr = quantity of product produced
The cut-off grade when the mill is the bottleneck is given by:

Cut-off grade = (c + f/C – h)/ ((s – r)*y)

The inclusion of the environment costs lowers the cut-off grade in order to reduce the
amount of waste discarded at the waste dump.

2.8 Mining royalties and tax

The so-called resources curse or paradox of poverty in the midst of plenty refers to the
paradox that countries and regions with an abundance of natural resources, non-
renewable resources like minerals and fuels, tend to have less economic growth and
worse development outcomes than countries with fewer or no natural resources
(Maxwell, 2013). Resource-rich economies constantly face changing commodity prices
resulting in revenue volatility. Volatile mineral prices are partly responsible for the
resource curse as fluctuating government revenues linked to unstable commodity prices
may impede long-term planning and prudent fiscal policy.

According to Ricardo (1821), “Rent is that portion of produce of the earth which is paid
to the landlord for the use of the original and indestructible powers of the soil.”
Therefore, the rent for mines is that payment which is made for the minerals removed

34
from the earth (Minnitt, 2015). Mineral resources rent vary in direct proportion to the
price cycle.

According Maxwell (2013), a country’s dependence on mineral resources rent leads to

unsustainable currency appreciation and fosters consumption rather than diversification
and sustainable economic growth. This also discourages productive investment outside
the non-rent sector and encourages rent-seeking and predatory behaviour by
government. The lack of investment in other sectors of the economy has the pernicious
effect known in mineral economics circles as the Dutch disease. Companies expect
governments to use mineral revenues effectively for the benefit of the community in
order to enhance a good image within communities. Arguably, if public revenues from
mining are spent effectively and in a transparent manner, there would be less or no
pressure from local communities to provide infrastructure and services normally
provided by the public sector (Corden & Neary, 1982).

Harman and Guj (2013) suggest that mining companies should be subjected to special
taxes different from other industries because they cause the depletion of non-renewable
resources and the public as the owners of the natural resources must also benefit. The
owner of mineral resources may acquire economic rents either by undertaking mining
activity directly or through an agreement with another party. Governments are normally
the custodian of the resources on behalf of the community. Governments do not
normally extract the resources directly, but they lease the extraction of these resources
to private companies. The private companies then pay royalty taxes to the government
so that the local communities can also benefit from the resources. Royalties are a
payment for the transfer of ownership of the resource from the community to the
tenement holder. Different countries have different royalty and tax regimes for the
mining industry and for different commodities.

There are several types of tax in the minerals sector. They include specific (unit-based)
royalties, ad valorem (value of production-based) royalties, accounting profit-based
taxes and resource rent taxes. Specific (unit-based) royalties are levied on a tax base
relating to the physical rather than a financial measure of a mineral resource, for
example, dollars per tonne. Ad valorem royalties consist of a uniform percentage (the

35
rate) of the gross sale price (the base) of a mineral product where the sale is made by
the entity that extracted the resource (Harman & Guj, 2013).

Birch (2016) points out that the mineral royalty tax is applied to the total mineral sales
revenue regardless of whether the operation makes profit or not. The mineral resources
royalty tax must be accounted for in cut-off grade calculation. It is considered as a cost
because it is levied on total revenue. The royalty tax results in an increase in cut-off
grade due to an increase in costs which in turn results in reduced reserves and hence a
shorter mine life. On the other hand, income tax is calculated on profits and does not
affect the economic behaviour of the mining business. Some governments charge
higher royalties for unrefined commodities while others impose a levy to force
companies to add value to commodities before export. Mangondo (2006) argues that a
good tax regime should not disturb economic behaviour (Birch, 2016).

In the Democratic Republic of Congo (DRC), the highest marginal corporate income
tax for corporations is 35%, but mining companies are subjected to 30% levied on net
profits of the company. The export of copper and cobalt concentrates was banned in
2013 to force mining companies to process and refine these metals domestically. The
royalty is paid from the date of commencement of exploitation and is 2% for copper
(KPMG, 2013/14). However, the government set up a mining company called
Gecamines which oversees the mining of copper in the country. Ruashi Mining also
pays royalty to Gecamines with the total royalty adding up to 3.6%.

2.9 Capacity constraints

Lane (1988) divided a whole mining operation into three stages namely mining,
processing and marketing. In surface operations, the mining stage comprises drilling
and blasting, loading and hauling. The processing or treating stage consists of crushing,
grinding and separation (or concentration). Marketing is made up of smelting, refining,
and selling (Lane, 1988). This subdivision of the operation makes it easier to analyse it
for cut-off grade optimisation. Mining is a capital-intensive business with long lead
times before the return on capital employed is realised. Capital is also scarce in the
current hard economic times where commodity prices are more volatile than before.
The size of the deposit and the extraction rate determine the size of the operation. This

36
implies that one of the stages or a combination has a limited capacity. The stage with
the limited capacity forms the bottleneck of the operation. It is prudent to fully utilise
that stage which has limited capacity. This brings the issue of opportunity cost; a loss
incurred by an investor for tying up capital in the present mining operation instead of
investing in another more lucrative undertaking (Minnitt, 2004). According to Rendu
(2008), the opportunity costs or benefits result from mining and processing material not
previously scheduled for processing thereby displacing higher grade material.
Opportunity costs are only incurred where the operation is capacity constrained or has a
bottleneck.

Wooller (2001) concurs with Lane (1988) by pointing out that cut-off grade
optimisation maximises the NPV of a project based on capacity constraints on the mine,
the mill, and the market. The capacity constraints are expressed as annual limits to the
material handled by the respective stage of the mining process. This is true because
constraints arise due to the scarcity of capital. If capital was ubiquitous, then the
processes would be overdesigned for flexibility. In the case of limited capacity, the
sacrificing of low-grade material enables the mill to process higher grade ore that
delivers a higher cash flow. Reducing the residence time of ore in the mill results in a
higher tonnage throughput but at a lower metal recovery. This is arguably not the
efficient utilisation of resources although the net result is an increase in the rate of
metal production and cash flow (Wooller, 2001). As argued earlier, this is wasteful and
is not sustainable. The solution could be blending opportunities between high- and low-
grade ore which enables the efficient and effective utilisation of the mineral resources.
If the cut-off grade applied is too high, the overall resource would be too small and
economic material would be sent to the waste dump. The mine and processing plant
capacity would be uneconomically overused in case of too low a cut-off grade
(Abdollahisharif, Bakhtavart, & Anemangely, 2012). Pasieka and Sotirow (1985) assert
that in strategic planning it is necessary to be adaptable and think ‘out of the box’ by
varying capacities. Existing capacities should be considered but never accepted as
limitations for long-term cut-off grade determination. Varying operational capacities
enable the justification of capital expenditures if there is value-add for increased
capacities. It is also necessary to consider other treatment alternatives. These views

37
should be taken into account particularly in view of scarce capital. Lane (1988) derived
formulae for the analysis of cut-off grades in the presence of capacity constraints. This
gives rise to six optimum cut-off grades depending on which capacity is the bottleneck.
These cut-off grades are classified into two groups each with three types of cut-off
grade. They are limiting cut-off grades and the balancing cut-off grades. The three
limiting cut-off grades are based on break-even formulae depending on which stage is
independently the bottleneck in the production process. The balancing cut-off grades
arise when two production stages simultaneously operate at full capacity. The limiting
cut-off grades are the mining-limited, treatment-limited and marketing-limited cut-off
grades. The balancing cut-off grades are mining-and-treatment-limited, mining-and-
marketing-limited and treatment-and-marketing-limited cut-off grades (Hall, 2014).
The bottleneck at Ruashi Mining is the mill capacity. So according to Lane (1988), the
Ruashi operation is treatment-limited. The products (copper and cobalt) have ready
markets, and the mining capacity is beyond the current treatment capacity.

2.10 Cut-off grade optimisation

Optimisation of the corporate business plan for an operation or multiple operations
must take account of the complete process stream, from having the mineralisation
identified and described by geologists to final sale and receipt of revenue. The use of
declining cut-off grades is usually mistakenly assumed to cause high-grading. This may
hold true if an artificially high discount rate is used in the cut-off grade optimisation
process (Border, 1991). However, Birch argues that optimising on NPV may give rise
to the temptation to focus on short-term at the expense of longer-term gains (Birch,
2016).

Birch (2015) concurs with Dagdelen and Mohammed (1997) when he points out that
the break-even cut-off grade can be used in defining reserves since mining and
processing all the economic ore enable the company to maximise the undiscounted
profits from a mining venture. However, if break-even cut-off grade is used to
determine immediate processing of given ore this may result in a suboptimal schedule
given that the NPV is not optimised in this instance, (Dagdelen & Mohammed, 1997).
This emphasises the need to separate pit optimisation from production scheduling. The

38
break-even cut-off grade is used to determine the ultimate pit during pit optimisation.
Once the pit shape has been determined and a design made, then cut-off grade
optimisation is conducted on material inside the pit in order to maximise the present
value of the operation. The present value can be maximised by implementing a cut-off
grade strategy throughout the life of the mine. It is a dynamic process. Treating lower
grade material with a grade slightly above the break-even cut-off grade in the earlier
life of the mine displaces higher grade ore. Higher grade ore makes more profit, and
hence it is prudent to treat it at the beginning of the mine life. Higher grade material
must be prioritised in the processing decision in order to maximise the NPV. This
approach leads to declining cut-off grade over time (Crone & Hunter, 1992). Nieto and
Bascetin (2006) also reinforce this idea when they postulate that cut-off grade
optimisation maximises the profit of a mine by stockpiling low grade ore at the start of
the mine life. The high grade ore sent to the mill results in higher cash flow at the
beginning of the mine life (Nieto & Bascetin, 2006). Rendu (2008) also builds on this
idea, asserting that since the cut-off grade defines both the profitability and the life of
the mine, a high cut-off grade increases short term profitability and NPV but decreases
the mine life. Increased cut-off grades are normally applied so as to reduce political
risk. This is because the company achieves higher financial return over a very short
period of time. High cut-off grade results in the wasting of low grade material that can
be processed at the end of the mine life when the higher grade ore is depleted,
particularly in cases where there is no option to stockpile for treatment later, (Rendu,
2008).

More recently, Hall (2014) argued that cut-off grade optimisation must not be divorced
from the rest of the overall mine planning process, implying that the cut-off grade must
not be calculated before the optimisation process. In reality, the cut-off grade is one of
the outputs to the strategic optimisation process. “The mine strategy optimisation
process is a multi-dimensional analysis that is accounting for everything of importance.
It seeks to identify the best combination simultaneously of cut-off grades and other
design and strategic decision parameters in order to achieve the corporate goal” (Hall,
2014, p. 102). This means that the corporate goal should be specified on the onset of
planning for a mining operation. It is possible to increase the cut-off grade until an

39
optimum value is achieved as illustrated in Figure 2.7. Adopting grades that are higher
than the cut-off grade may result in the destruction of value when valuable material
ends up being discarded as waste.

Figure 2.7: Generic value versus cut-off curve (Hall, 2014)

It is important to get the best possible value for the company. This can only be done by
optimising the important parameters simultaneously. For example, the cut-off grade and
production can be optimised together in order to get the optimum value for the
company. This approach gives a three dimensional surface with a peak, which is called
a hill of value, (Hall, 2014). This is shown in Figure 2.8.

Hall (2014) developed a method for optimising cut-off grade based on the various
limiting factors by simplifying Lane’s (1988) complex mathematical formulas which
previously dissuaded the desire to pursue this important subject for so many years.

40
Figure 2.8: A typical underground hill of value versus cut-off and production
targets (Hall, 2014)
According to Lane (1988) cited in Dagdelen and Mohammed (1997), the cut-off grade
equation that maximizes the NPV of the cash flows coming from the deposit when the
mill capacity is limited is given as:

gopt(i) = (c + f + F(i))/(P – s) x y

Where i =1, ... N (mine life), and gopt(i) is the cut-off grade to be used in year i; F(i)

is the opportunity cost per ton of material milled in year i and it is defined as:

F(i) = (d x NPV(i))/C

where NPV (i) is NPV of future cash flows of the years i through to the end of mine life
N; d is the discount rate; and C is the total milling capacity in year i. The f is the fixed
costs per ton ore milled in a year and it is defined as:

f = fa/C

Where fa, is the annual fixed costs.

Clearly, the determination of the mining operation NPV at a given point is an iterative
one. The initial NPV is assumed to be zero so as to be able to calculate the initial cut-

41
off grade. This initial cut-off grade is then used to run the iteration to generate NPVs
for the coming years and hence a cash flow schedule. Iterations continue until the cut-
off grade strategy and the resulting cash flows converge and stay constant.

Since cut-off grade optimisation tends to discard low grade material between the cut-off
grade and the break-even cut-off grade, the ore feed to the mill is reduced. But the same
amount of material is mined from the pit. The metal recovered is also reduced. The life
of the mine is significantly reduced compared to the break-even cut-off. If the
stockpiling was allowed, then the stockpiled material has to be worked into the mining
schedule or processed at the end of the mine life. The cut-off grade optimisation with
the stockpiling policy further enhances the NPV of a given mining project (Dagdelen &
Mohammed, 1997).

The discounted cash flow or NPV is a better measure of profitability than straight cash
flow because it takes into account the time value of money. Cut-off grade optimisation
gives a shorter project payback period for the initial investment. The value of a project
is increased by increasing early cash flows at the expense of later cash flows. It is,
however, important to point out that high cut-offs in the first years of an operation also
result in high stripping ratios (Whittle & Wharton, 1995). As such in order to maximize
the project NPV, it is important to use dynamic cut-off grades, rather than the constant
breakeven cut-off grade.

2.11 Cut-off grade with option to stockpile

Dagdelen and Mohammed (1997) show that the break-even cut-off grade is used for
defining ore reserves. Scheduling the application of the break-even cut-off grade gives
a sub-optimal schedule if the process is capacity constrained. The cut-off grade that
maximises the NPV of an operation with capacity constraints is much higher than the
break-even cut-off grade. The magnitude of the optimum cut-off grade is determined by
the opportunity costs and the grade distribution of the deposit. Mineralised material
classified as waste at the beginning of the life of mine may become economic towards
the end of life of the mine and may then be processed, (Asad, 2005). The optimised cut-
off grade initially takes values much higher than the break-even grade. This implies that
grades which are marginally economic to process at the beginning of the mine life due

42
to availability of higher economic value ore can be treated later when the higher grade
ore gets depleted. This material with grades between the optimum grade and break-
even grade is therefore stockpiled for later processing. Economic analysis of processing
the stockpiles has to be done also in the same way as it is done for mining (Dagdelen &
Mohammed, 1997). This gives rise to dynamic optimum cut-off grades which decline
with time as the reserves get depleted. Metal prices and operating costs change during
the mine life. This declining NPV favours higher cut-off grades in the earlier years of
life of mine and lower cut-off grades in the later years.

Smith (2012) however warns against unnecessarily too high cut-off grades, stressing
that filling plant capacity with optimum grade ore can only be implemented if the plant
operates at full capacity and also helps avoid sterilising reserves in the pit by high-
grading. The use of stockpiles means that intermediate grades are not lost, but merely
deferred for later processing, albeit with a cost for re-handling and possibly with
reduced recoveries due to degradation with time (Wharton, 1996). Stockpiles are
generated throughout the life of the mine. However, there are options to make use of
the stockpiles in parallel to the ore coming from the pit or they can be processed later
when the pit is depleted (Asad & Topal, 2011). Whittle and Whittle (2007) also pointed
out that if it is feasible to stockpile the lower grade material and process it later, then
the negative effects of raising the cut-off grade are lessened. If stockpiling is
implemented, there will not be any loss of overall life of the project as all the material
over the marginal cut-off grade will eventually be processed. The cost of re-handling
and any change in recovery due to further oxidisation of stockpiled material must be
taken into account in the calculations (Whittle & Whittle, 2007).

2.12 Price and revenue

This research will not be complete without addressing the issue of price and revenue.
These are pivotal in the maximisation of economic earnings through the cut-off grade
strategy (Khodayari & Jafarnejad, 2012). It is extremely difficult to confidently predict
the long-term trend in metal prices due to the current and constantly high economic and
political instability. This is why it is necessary to update the long-term cut-off grade on
an annual basis and adjust the ore reserves based on the new cut-off grade. The long-

43
term forecast price must take into consideration the available technological, business
and political intelligence of demand-supply related parameters (Sinding & Larsen,
1995).

In instances where an orebody hosts more than one mineral, an allowance must be
made in the revenue for the contribution of each by-product in the cut-off grade
calculation. In many cases metallurgical recoveries vary with the variation in mill feed
grade. In addition, most commodities are currently experiencing historic low prices.
Prices affect the value of material in the pit. Increase in price increases the value of
lower grade material which might make it minable under the prevailing price and cost
conditions. Higher metal prices, therefore, lower the marginal cut-off grade and vice
versa. In turn, when prices increase, reserves also increase as a result of the decrease in
cut-off grade (Khodayari & Jafarnejad, 2012).

2.13 Risk
The common adage that mining is a risky business is true. Risk stems from the inability
to accurately predict the future. Whilst many authors have written many books and
papers on the subject, it is beyond the scope of this report to delve much into this well-
researched and documented topic. The main aim of this section is to briefly discuss risk
as it applies to cut-off grade optimisation.

In his definition which denotes that risk can be quantified, Heuberger (2005) defines
risk as the amount of uncertainty in the outcome of a result. There are many types of
risk which investors consider for their investments. Political Risk refers to the
possibility that investment returns could suffer as a result of political changes or
instability in a country. Instability affecting investment returns could stem from a
change in government, legislative bodies, other foreign policy makers, or military
control. Political risk becomes a significant factor as the time horizon of an investment
gets longer. The outcome of political risk could drag down investment returns or even
go so far as to remove the ability to withdraw capital from an investment (Birch, 2015).
Country risk encompasses a collection of risks associated with investing in a foreign
country. These risks include political risk, exchange rate risk, economic risk, sovereign

44
risk and transfer risk, which is the risk of capital being locked up or frozen by
government action. Country risk varies from one country to another. Some countries
have high enough risk to discourage much foreign investment. Country risk can reduce
the expected return on an investment and must be taken into consideration whenever
investing abroad. Some country risks do not have an effective hedge. Other types of
risk, such as exchange rate related ones, can be protected against with a marginal loss
of profit potential. The United States of America (USA) is generally considered the
benchmark for low country risk and most nations can have their risk measured as
compared to the USA. Country risk is higher with longer term investments and direct
investments, which are investments not made through a regulated market or exchange
(Anon, 2015).
The software called @Risk is used for modelling and analysing risk in Microsoft Excel.
@Risk is useful in developing risk models, identifying uncertainty and then using
simulation to conduct risk analysis (Anon, 2004). The modelling produces options from
which decisions can be made. The use of options enhances the likelihood of achieving
the planned return on investment and optimises the achieved returns. Commodity prices
cannot be predicted with certainty. If prices change, the mine plan also changes in line
with the changes in the reserves. For a bimetallic deposit like Ruashi, it is prudent to
channel more resources to the product with the higher price and less for the lower price
product. The way in which an operation adjusts to changes in the operating
environment determines its risk (Runge, 1998). According to Runge (1998), @Risk
aims to critique the worst case scenario in order to be ready for any eventualities.

2.14 Opportunity costs

As stated earlier, opportunity cost is a loss incurred by an investor for tying up capital
in the present mining operation instead of investing in another more lucrative
undertaking (Minnitt, 2004). Opportunity cost involves the delay in the realisation of
income as a result of processing unscheduled ore in preference of the scheduled ore. It
is incurred due to bottlenecks in the production system. High opportunity costs result in
high cut-off grade. Ultimately, there would be no opportunity costs if there were no
constraints. Constraints are caused by the scarcity of capital or bad designs. If capital
was available then the production system would be overdesigned (Rendu, 2008).

45
Further, opportunity costs or benefits may result from mining and processing material
not previously scheduled for processing. No opportunity cost is incurred if there are no
capacity constraints. This is because adding one more tonne to the process will have no
impact on previously expected cash flows. An opportunity cost is the cost of an
alternative that must be forgone in order to pursue a certain action, meaning the
benefits one could have received by taking an alternative action. If there is capacity
constraint, the opportunity cost includes the cost of displacing high grade material
already scheduled for processing and postponing treatment of this material (Lane,
1988).

2.15 Modifying factors

Besides the factors that have been stated before like cost, revenue and marketing, there
are other modifying factors which are applied to a mineral resource in order to generate
reserves. These include mining and metallurgical recoveries, dilution and geotechnical
parameters (Appleyard & Smith, 2001). It is crucial to be able to measure the mining
recovery which may be distorted by an overestimation of metal content or inaccurate
density. It is also important to have good sampling standards in place in order to be able
to account for the metal. Mining and processing plant production need to be compared
through mine to mill reconciliation. This also aids metal accounting and analyses
estimates from the resource and grade control models (Tetteh & Cawood, 2015).

Elbrond (1994) points out that even though the builder of a resource is highly skilled
the resulting model he delivers will never exactly model the real deposit as it appears in
reality. This is because the delineation process may include some waste into the deposit
and exclude some ore (Elbrond, 1994).

2.16 Multiple process options

Multiple processes in a mining operation require that cut-off grades be calculated to
distinguish between ore and waste. For example, ore sent to the leach pad may be of
lower cut-off grade compared to ore that is sent to the flotation plant. Deciding among
the processes involves determining the differences between the values derived from
each of them. The material of a particular grade may then be sent to the process that

46
produces the highest value from that particular material. The variations among the
varied processes result from differences in the cost regimes, metallurgical processes
and recoveries, and the product characteristics. Product quality may vary which might
also results in different prices for the respective products (Rendu, 2008).

2.17 Discount rate

Nhleko and Musingwini (2016) define discount rate as the weighted sum of the cost of
debt and equity. It is not the intention of this research to delve much into the specifics
of discount rate calculations. The reader is referred to the many articles by other
authors on the same topic. It is in the discount rate that project risk is accounted for.
The discount rate is vital for the value of mineral projects. However, the determination
of the discount rate depends on subjective perception of the degree of risk and other
past experience factors (Park & Matunhire, 2011).

The discount rate is an indicator of the investors’ confidence in a particular project

where a low discount rate shows investor confidence with the future and increases the
present value of the project. Where investors perceive risk they tend to advocate for a
high discount rate at the expense of the NPV. The aim is to recoup the investment as
quickly as possible and move out of the risky project (Runge, 1998). From the above, it
is clear that high NPV favours high cut-off grades. This is reflected in the declining cut-
off grades strategies.

2.18 Throughput and hardness

The metal output also depends on the mill throughput. The higher the mill throughput
at a particular grade, the higher the metal output, all other factors being constant. The
mill throughput is affected by ore hardness and the milling circuit power (Prasetya &
Simatupang, 2012). The metal recovered depends on the metal input into the system. If
more metal cannot be availed by the rated throughput, most operations will resort to
increasing the input metal by increasing the cut-off grade.

2.19 Leach time

The time in which the ore resides in the leach tanks determines how much of the
material can be recovered. More resident time means more metal is dissolved from the

47
gangue. However, an optimum resident time needs to be determined in order not to
sacrifice metal output. The higher the resident time the lower the cut-off grade required.
However, this is not a linear relationship. According to Padilla, Cirsternas and Cueto
(2008), leaching time among other factors affects both the recovery and the capacity of
the leaching operation. Their observation also showed that the optimum recovery is not
necessarily the maximum recovery (Padilla, Cirsternas, & Cueto, 2008). This indicates
that it might be required to increase the cut-off grade but reduce the leaching time in
order to achieve optimum metal production.

2.20 Chapter 2 summary

The review of the literature on cut-off grade has shown that there has been a lot of
research done on this topic since the ground breaking documents from Lane.
Generally, Lane’s work is the foundation for the study of cut-off grade calculation. The
determination of cut-off grade is actually the economic definition of ore. The cut-off
grade is the main driver of value in a mining operation. It is used to estimate reserves
for a mining operation and determines the life of a mine. However, there are many
stakeholders with diverging interests on the mining operation. The cut-off grade must
be determined with all these interests in mind which can be a complex process.

It has been shown that the external cut-off grade is used to determine the pit limits. One
such grade is the break-even grade which is used to determine the pit limits or stope
shape. Once the stope shape or pit limit has been determined, the internal cut-off grades
are applied to material inside the pit to determine the reserves. Most operations use the
external cut-off grade throughout. There are various ways of expressing the grade of a
polymetallic deposit. Each of them has its own advantages and disadvantages. The
payable value grade expresses the grade of the polymetallic deposit in terms of value to
be recovered should the ore blocks be mined. This is the concept used in the SimSched
software which is used in this study. Stockpiling maximises the utilisation of the
resource by keeping the material with grades between break-even and the optimal cut-
off grade, thus extending the life of the processing facilities. The work that has been
done shows that consideration of environmental factors favours a lower cut-off grade in
order to reduce the waste that is generated. The cut-off grade strategy that results in

48
higher NPV for a given project starts with high cut-off grades during the initial years of
the deposit. As the deposit matures the cut-off grades gradually decline to breakeven
cut-off grade depending upon the grade distribution of the deposit.

49
CHAPTER 3: METHODOLOGY

3.1 Chapter overview

This chapter describes the methodology that has been employed for the research. The
few methods and software selected are presented in this chapter. There is some
manipulation that needs to be done to the Ruashi block model for it to be usable in
some of the software. The first is the break-even cut-off grade calculated in an excel
spreadsheet to show the impact of pursuing the break-even cut-off grade policy. Ruashi
Mining currently uses MineSched for life of mine scheduling. The NPVS is used in this
study in order to optimise the extraction of both copper and cobalt without resorting to
parametric cut-off grades. Finally, the use of SimSched is also explained and the
expected results outlined. Blending and stockpiling are also given since there are huge
low grade stockpiles at Ruashi. The research also looks at the postponement of waste
dump rehabilitation in a bid to increase the NPV and lower the cut-off grade to
optimise the resource utilisation. Findings from these may guide Ruashi in the strategic
planning of the operation. The use of @Risk software is also described to show how the
software will be used to conduct risk analysis on results from SimSched DBS.

3.2 Break-even analysis

The break-even cut-off grade is the grade at which the realised revenue balances out the
incurred costs of generating that revenue. The break-even cut-off grade is based on the
principle of breaking even and not adding value (Birch, 2015). There are various break-
even cut-off grades depending on the costs used in the calculations. The marginal
break-even cut-off grades will be calculated using the processing and refining variable
costs since the Ruashi operation is mill capacity constrained. The contribution of each
of the two products is then analysed to investigate its contribution to the cash flow. The
break-even cut-off grade is the grade at which the NPV is equal to zero. Since the pit
optimisation has already been done the break-even analysis will be based on variable
costs only. The two types of break-even are shown in Figure 3.1.

50
Figure 3.1: Break even points for unit total and unit variable costs (Hall, 2014)

The NPV of cash flow based on the break-even cut-off grade is also considered in the
life of the mine. This is mainly to show the effect of running an operation on break-
even cut-off grade. The results will be tabulated in spreadsheets.

3.3 NPV Scheduler pit optimisation

Lerchs and Grossmann in 1964 published a mathematical method for the determination
of the optimal shape of an open pit in three dimensions. This used in an orebody block
model to generate lists of related blocks that should, or should not be mined. The final
list describes the pit with the highest possible total value, subject to the required pit
slopes. The NPVS program uses the same Lerchs-Grossmann technique to produce a
set of nested optimal pits. Each pit is optimal for a different set of value ratios, and
these are used to guide different mining schedules. Financial analysis of these
schedules, with discounted cash flows, allows selection and sensitivity analysis of the
best pit according to different criteria set by the operation (Gawthorpe, 2005).

51
The cut-off grade optimisation strategy in NPVs is the declining cut-off grade given by:

Cut-off grade = (h+(f+F)/H)/((p-k) *y)

Where:

h = milling cost ($/t)

f = fixed costs per annum ($/year)

F = Opportunity cost ($/year)

H = mill capacity (t/year)

p = price ($/t)

k = marketing cost ($/tonne of metal

y = plant recovery (%)

The results from the cut-off grade optimisation are incorporated into a spreadsheet to
determine the life of mine NPV.

3.4 MineSched life of mine schedule

MineSched is used to automatically generate long-term plans that respect input

constraints specified by the user. MineSched blends material from stockpiles,
processing plants, and waste dumps, producing schedules with complete reports and
graphical results. MineSched also creates schedules that meet quality and material ratio
targets while considering practical mining constraints and suitable mining methods.
MineSched is a target-based scheduling algorithm which automatically creates a
sequence that tries to meet the targets while adhering to set rules. Figure 3.2 shows a
typical Minesched set-up for ore supply and destinations with material targets.

52
Figure 3.2: Typical Minesched setup

3.5 SimSched life of mine schedule

Direct block scheduling allows a complete schedule to be executed directly from the
block model. The scheduler finds a mining plan that maximises the NPV of the project.
This report is based on the scheduling of material inside the current Ruashi pit design.
This file must have a header without special characters with fields separated by
commas and using dot notation as the decimal separator. Air blocks are removed in
order for the software to identify the topography. The metric system is used as units for
imported data.

The required fields for each block are:

53
Figure 3.3 shows a schematic block model for scheduling in SimSched.

Figure 3.3: Typical block model for SimSched scheduling

The indices of each block represent its position in the model, indicating in which
column line and level (IX, IY and IZ) it is. The indices must be integer values, starting
with any value. The model’s origin is located in the minimum coordinates at X, Y and
Z. Each block must have associated economic values related to it being sent to either
process or waste dumps

Other optional fields:

3
).

Figure 3.4 shows a typical model prepared for input into SimSched for scheduling.

54
Figure 3.4: Block model prepared for import into SimSched
Each field related to economic value (Economic Value Process/Waste) must report the
value of each block as a function of its destination, grades, recovery, cost of mining,
transport, treatment and selling price. The following calculations show how the block
value is calculated.

𝐵𝑙𝑜𝑐𝑘 𝑇𝑜𝑛𝑛𝑒𝑠=𝐵𝑙𝑜𝑐𝑘 𝑉𝑜𝑙𝑢𝑚𝑒 ∗𝐵𝑙𝑜𝑐𝑘 𝐷𝑒𝑛𝑠𝑖𝑡𝑦

𝑇𝑜𝑛𝑛𝑒𝑠 𝐶𝑢 = 𝐵𝑙𝑜𝑐𝑘 𝑇𝑜𝑛𝑛𝑒𝑠∗𝐺𝑟𝑎𝑑𝑒 𝐶𝑢/100

𝑀𝑎𝑠𝑠 Co = 𝐵𝑙𝑜𝑐𝑘 𝑇𝑜𝑛𝑛𝑒𝑠∗𝐺𝑟𝑎𝑑𝑒 Co

𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑉𝑎𝑙𝑢𝑒 𝑃𝑟𝑜𝑐𝑒𝑠𝑠 = (𝑇𝑜𝑛𝑛𝑒𝑠 𝐶𝑢∗𝑅𝑒𝑐𝑜𝑣 𝐶𝑢∗(𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒

𝐶𝑢−𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝐶𝑢))+(𝑀𝑎𝑠𝑠 Co∗𝑅𝑒𝑐𝑜𝑣 Co∗(𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 Co−𝑆𝑒𝑙𝑙𝑖𝑛𝑔
𝐶𝑜𝑠𝑡 Co))−(𝐵𝑙𝑜𝑐𝑘 𝑇𝑜𝑛𝑛𝑒𝑠∗(𝑃𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝐶𝑜𝑠𝑡+𝑀𝑖𝑛𝑖𝑛𝑔 𝐶𝑜𝑠𝑡))

𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑉𝑎𝑙𝑢𝑒 𝑊𝑎𝑠𝑡𝑒 =− 𝐵𝑙𝑜𝑐𝑘 𝑇𝑜𝑛𝑛𝑒𝑠∗𝑀𝑖𝑛𝑖𝑛𝑔 𝐶𝑜𝑠𝑡

SimSched generates the volume report directly in Microsoft Excel and the optimised pit
(blocks and surface) in SGeMS. Mined blocks can be exported to CSV in the block

55
model folder. This model is usable in other software. Figure 3.5 shows a typical output
from SGeMS, which is the graphical display of SimSched DBS.

Figure 3.5: Typical SGeMS display showing schedule coloured by period

3.5.1 Preparation of the block model for use in SimSched DBS
The bench height for the Ruashi open pit is 5m. The block model has to be regularized
to a 5 x 5 x 5 m blocks to conform to the mining configuration. Ruashi orebody consists
of the oxide mineralisation at the top followed by a transition zone and lastly the
sulphide This is shown in Figure 3.6. The current Ruashi refinery only processes oxide
material. The cut-off grade optimisation therefore has to be conducted on the oxide and
transition materials. Hence the sulphide mineralisation is flagged as waste in the model
since it cannot be processed using the present set-up. The other parameters for
calculating block economic value are also coded into the model.

56
Figure 3.6: Ruashi orebody showing ore zones
It is important to restrict the schedule to the unmined part of the model. Hence the May
2016 survey month end topography is used to deplete the mined out part of the
orebody. The model is then exported to csv for import into SimSched DBS.

3.6 Environmental costs consideration

Ruashi Mining carries out the waste dump rehabilitation concurrently with the mining.
Once a dumping area is declared full, the rehabilitation process starts. This work is
budgeted on an annual basis. It has been shown that delaying the waste dump
rehabilitation increases the NPV and lowers the cut-off grade (Gholamnejad, 2008). Of
the optimisation methods mentioned so far, only NPVS considers environmental costs.
In order to investigate the impact of the waste dump rehabilitation to the cut-off grade,
the environmental costs have to be extracted from the mining costs and the cut-off
grade calculation redone per Gholamnejad (2008)’s findings.

3.7 Stockpiling and blending

Cut-off grade optimisation results in a declining feed grade policy if it is implemented

(Dagdelen & Mohammed, 1997). Some operations like Ruashi Mining resorted to ore
blending as a way of controlling some of the impurities in the ore but still maintain the
required feed grade. This inevitably results in the mining of excess lower grade ore
which has to be stockpiled for later processing. The stockpiled ore would then have to

57
be re-handled when there is enough capacity in the processing plant. The re-handling
involves equipment and labour which are costs. This implies that ore that is stockpiled
must have higher grade than the break-even cut-off grade to cater for the re-handling
costs.

SimSched DBS takes into account the costs of re-handling ore from the stockpile.
Dagdelen and Mohammed (1997) give their findings on cut-off grade with and without
stockpiling options. SimSched does not currently cater for processing of pre-existing
stockpiles but NPVS does cater for pre-existing stockpiles. Only stockpiles that are
generated during the execution of the schedule are processed..

3.8 Sensitivity and risk analysis

Input parameters are varied to investigate their effects on the NPV and cut-off grade.
The major inputs to be varied include metal price, processing costs, discount rate and
mining costs. Effects of rehabilitation costs are also demonstrated by incorporating
rehabilitation costs in break-even cut-off grade.

@Risk software is used for risk analysis for optimisation results from SimSched.
Probability distributions are assigned to the input parameters. These are then used
instead of discrete values. The risk analysis results are then used to determine the
parameters that have the greatest influence on the NPV. This will be shown on Tornado
diagrams.

3.9 Chapter 3 summary

The chapter has given the selected methods that will be used in the research. The
purposes of the inclusion of each of the methods has been given. It was also shown that
three mining software will be used in order to compare results. The investigation of the
effect of waste dump rehabilitation costs will also be done to show the effect on NPV
and cut-off grade. @Risk software is used to conduct risk analysis.

58
CHAPTER 4: RUASHI MINING OPERATIONS OVERVIEW

4.1 Chapter overview

This chapter gives a brief overview of the Ruashi mining operations. The location of
Ruashi in Katanga province of the Democratic Republic of Congo is given. A brief
description of the regional and local geology is also given. The local stratigraphy and
the Ruashi orebodies are shown. Ore minerals that make up the copper and cobalt
mineralisation are described. The mining and processing operations overview is
required for better understanding of the bottlenecks in the system.

4.2 Market overview

Copper is used in building, electronics, transportation and industrial machinery. It is
also used in ‘green’ technologies such as solar cells and electric vehicles, and its
antimicrobial properties are used to reduce the transfer of germs and disease. The price
for copper has been decreasing over the past five years mainly due to the reduced
Chinese demand given that the country consumed 40% of the world copper production.
Figure 4.1 shows the five-year variation in the price of copper. The price of copper is
however projected to rebound in the next three to four years (SRK Consulting, 2013).

Cobalt is used in the production of Ni-Cad batteries and as an alloy hardening agent for
aircraft jet engines, gas turbines and coatings for other metal surfaces as well as
diamond tools. Cobalt is used in pigmentations for glass and porcelain and as a
supplement in animal feedstock. In organic derivative forms, it is used in paints and
60
tyres. Radioactive Co is used in the treatment of cancer. Cobalt is a component of
vitamin B12. The market for cobalt is poised for growth owing to its use in rechargeable
batteries that are currently used in the production of hybrid electric vehicles (SRK
Consulting, 2013).

59
Figure 4.1: Five-year copper spot price (KITCO, 2016)

4.3 Location, climate and infrastructure

The Ruashi Mine is located in the DRC, 10 km east of Lubumbashi, the capital city of
Katanga Province. The mine is located in the peri-urban area to the northeast of
Lubumbashi and on the outskirts of Ruashi Commune. The mine is located
approximately 3.5 km southeast of the Lubumbashi International airport. The
Congolese Copper belt is located in a sub-tropical zone characterised by distinct wet
and dry seasons. Annual rainfall is approximately 1 200 mm and occurs during a wet
season lasting from October to March with the heaviest rainfall occurring between
December and March. Figure 4.2 shows the location of Ruashi Mining and other
Metorex operations in the Democratic Republic of Congo.

Mining production is frequently impacted by the high rainfall as production from the
open pits is stopped to allow haul ramps to dry. Key run-of-mine stockpiles and
primary crushing installations are also impacted if material is too wet. Exploration
drilling activities on the prospects are generally restricted to the dry season as vehicle
access off the main bush tracks is not feasible during the wet season.

60
Figure 4.2: Location of Ruashi Mining and other Metorex projects (van Daalen,
2012)
The average air temperature remains fairly constant at between 17oC and 24oC
throughout the year and there is no distinct winter and summer temperature regime.
Average temperatures peak during September and October at 32oC. The coldest month
is July with an average daily minimum of 6oC.

Water to the mine is supplied from underground aquifers. The geology is largely
dolomitic and significant quantities of subsurface water are available. Return water
from the tailings dam is also reused in the plant.

Power in the DRC is regulated and supplied by Société Nationale de Electricité

(“SNEL”), the national power utility. The Ruashi Mine is fed at 220 kV (40 MW) by a
dedicated power line. The mine has 13 diesel generators capable of producing 13 MW
and a further 7 Caterpillar diesel generators, capable of producing 15 MW.

61
4.4 Geology

4.4.1 Regional geology

The Ruashi orebody is a stratiform, sediment-hosted copper deposit located in the
Central African Copper belt which contains a third of the world’s cobalt resources and
a tenth of the world’s copper reserves. The ore bodies are hosted by meta-sedimentary
rocks of the Late Proterozoic Katangan System which is a 7 000m thick succession of
minor volcanics, volcanoclastics and intrusives (Savage, 2014). The Katangan
Sequence is divided into three Supergroups separated by two marker conglomerates as
shown in Figure 4.3. The Kundelungu Supergroup was formed by detrital marine
sediments which are predominantly dolomitic. Minor sandstone units are scattered
throughout the succession. The Nguba (also known as Lower Kundelungu) was formed
by detrital marine sediments which were predominantly dolomitic and is 3 000m thick.

Sequence Supergroup

Kundelungu
KATANGAN

Nguba

Roan

Figure 4.3: Litho-stratigraphic sequence of the Katangan Sequence in the

Democratic Republic of Congo (Lubala, 2015)

The Roan Supergroup was formed by lagoonal and fluvial marine sediments consisting
of dolostone, dolomitic siltstones and black shales with interstratified collapse breccias
formed by the dissolution of evaporitic horizons with arkosic sandstones and
conglomerate units. The thickness of the Roan Supergroup is 1 500m. The Roan
Supergroup comprises the Roches Argileuses Talceuse (RAT), Mines, Dipeta and

62
Mwachya Group. The stratiform ores occur within two principal formations confined to
a 40m thick succession at the base of the Mines Series. The upper formation comprises
sandy shale, containing some carbonates. The lower formation consists of bedded
dolomitic sandstone. The ore formations average approximately 10 m in thickness
separated by 20m to 30m of siliceous dolomite. Ore grades commonly vary between
0% and 13% Cu and around 0.4%Co (Savage, 2014).

The weathered oxide zone generally extends to a depth of between 70 m and 150m, but
may vary considerably between deposits. The weathering process commonly leads to
high-grade supergene deposits near surface, but may also result in leaching of the
mineralisation in places and/or concentration in otherwise barren horizons. At depth, a
mixed oxide-sulphide zone grades into sulphide ore, sometimes at depths greater than
250m (SRK Consulting, 2013).

4.4.2 Ruashi local geology

Figure 4.4 shows the Ruashi local stratigraphy. Structurally, the Lower Roan fragments
dip steeply to the north and strike in a NW-SE direction. The contacts with the Lower
Kundelungu are brecciated. Three ore bodies have been identified within the Ruashi
area: Ruashi I, Ruashi II and Ruashi III. Their relative positions are shown in Figure
4.5.

The Ruashi 1 orebody is the largest of the three ore bodies located in the extreme
northwest of the area. The orebody is an overturned syncline formed by diapiric
intrusion of RAT sediments into already existing large northwest-southeast trending
fault zones. Downward leaching and subsequent erosion resulted in the mineralisation
of the oxide minerals malachite and heterogenite in a near surface enriched zone in the
form of a blanket zone overlying the orebody. However, the BOMZ-SDS oxide zone
dips steeply at 70 degrees to the southwest. This oxide zone extends up to 300 meters
below surface in the Pit 3 area. The lateral extent of the Pit 1 oxide orebody is about
900m in a NW-SE direction and 350m across strike. Sub-horizontal faulting has
displaced the near surface part of the orebody to the NE.

63
Figure 4.4: Ruashi local stratigraphy (Savage, 2014)

Figure 4.5: Satellite image of relative position of the three Ruashi ore bodies and
pits (Google Maps, 2016)

64
The depth extent of significant primary sulphide mineralisation is 100 to 150 meters
below surface. The orebody terminates against massive breccia in the west and a
vertical faulting and sheared breccia in the east. The breccia is part of a major south
dipping thrust fault.

Ruashi II is a smallest orebody extending along strike for about 300m and 250m across
strike and the oxide orebody also terminates on strike against sheared breccia. A thick
breccia zone separates Ruashi II from Ruashi I. The structural and weathering history
of the orebody is similar to that of Ruashi I. Also, sub-horizontal faulting (breccia) has
displaced the near surface part of the orebody 150 metres to the northeast. The
geometry of the orebody below the breccia is now defined with borehole intersections.
Significantly good sulphide mineralisation, especially in the RSC zone has been
exposed. The bulk of the oxide part of Ruashi II has been depleted.

Ruashi III occurs at the south-easterly end of the strike and has a strike length of about
700m and extends across strike for 200m. The orebody occurs as an overturned
syncline with less rotation compared to Ruashi I. It is overlain by a 20 to 50m thick
ferruginous laterite. The orebody is terminated at a depth of 300m against a horizontal
breccia. A deep weathering profile is present and the transition/sulphide boundary tends
to conform to the lower portion of the orebody. The oxide ore has been indicated to
extend to a depth of 300m. Primary sulphide mineralisation does occur within Ruashi
III.

The major copper oxide minerals are malachite (copper carbonate), chrysocolla
(hydrous copper silicate) and azurite (hydrous copper carbonate) in decreasing order of
abundance. The major copper sulphide minerals are bornite (copper iron sulphide),
chalcopyrite (copper iron sulphide) and chalcocite (copper sulphide). The major cobalt
oxide minerals are heterogenite (hydrous cobalt oxide) cobaltocalcite (cobalt
carbonate). The major cobalt sulphide mineral is carrolite (copper-cobalt-nickel
sulphide). The transition between oxide and sulphide occurs over a distance of about
10m as observed in exposure in Pit 1.

65
4.5 Mining

The mining equipment is contractor owned and maintained by NB Mining. The mining
is predominantly free dig of waste and ore by excavators. The ore is hauled to the
designated stockpile area or run of mine pad and the waste is hauled to the designated
waste dump. The mining fleet is shown in Table 4.1.

Table 4.1: NB Mining equipment fleet

Equipment Type Number Remarks

Excavators Hitachi ZX870L CR-3 3.6 m 4 In-Pit Ore & Waste Mining
Excavators Hitachi X61200 6.5 m3 1 In-Pit Ore & Waste Mining
Excavators Liebherr R974C HD 1 In-Pit Ore & Waste Mining
Excavators CAT 374D 1 In-Pit Ore & Waste Mining
Dump Trucks B40D 6x6 - 40t 7 In-Pit Ore & Waste Mining
Dump Trucks B50D 6x6 - 50t 25 In-Pit Ore & Waste Mining
Back Hoe Bell 315SJTurbo 4x4 1 In-Pit Ore & Waste Mining
Dozers Cat D9R 6 Waste Dumps & In Pit
Dozers Cat D8R 2 Waste Dumps & In Pit
Graders Bell 770D 3 Haul Roads
Graders Bell 872D 1 Haul Roads
Graders Cat 140K 2 Haul Roads

4.6 Mineral processing

The Ruashi plant is a hydrometallurgical process which incorporates leaching,
decantation, Solvent Extraction-Electrowinning (SX-EW) and cobalt purification and
precipitation operations.

The Ruashi plant is a typical SX-EW plant. A simplified processing flow diagram is
shown in Figure 4.6. Copper cathode is the main product with a cobalt carbonate
produced as a by-product through precipitation. The plant was designed to treat 120
kilotonnes per month of feed ore and produce 3,800 tonnes per month copper cathode
and 420 tonnes per month cobalt (contained in hydroxide).

66
Figure 4.6: Simplified processing flow diagram, (van Daalen, 2012)

While each individual process has a capacity constraint based on one or more physical
quantity or rate, the total process capacity is usually governed by one main bottleneck
which is a capacity of 1,260,000 tonnes per annum. This is essentially a bottleneck in
the leaching circuit, but measured in terms of mill feed tonnes.

4.7 Chapter 4 summary

The price of copper has been declining but is expected to rebound in the foreseeable
future. Cobalt will soon be highly on demand for the manufacturing of rechargeable
batteries. Ruashi is located in the Central African Copper Belt. There are three
orebodies at Ruashi, namely Ruashi I, II and III. The oxide for Ruashi II has since been
depleted. All the three orebodies comprise of oxide, transition and sulphide ore. The
oxide is found at the top while the sulphide is found at depths. The transition zone
between oxide and sulphide is approximately 10m.

Mining at Ruashi is carried out by a contractor who owns and maintains the mining
equipment. The Ruashi plant is a typical hydrometallurgical plant which produces
copper SX-EW processes. Cobalt is precipitated as cobalt hydroxide concentrates. The
main bottleneck for Ruashi Mining is the mill which has an annual capacity of 1.26
million tonnes.

67
CHAPTER 5: RESULTS

5.1 Introduction
The chapter gives the analysis and comparison of results from the various optimisation
processes that were carried out. The effect of royalty on Ruashi cut-off grade is also
shown. The life of mine schedules for each of the scenarios are also given including the
NPV and profit from each scenario. The scenarios investigated are, break-even cut-off
grade, parametric, NPVS, SimSched and current MineSched life of mine cut-off grade
policies. The main objective is to recommend a cut-off grade policy for Ruashi Mining
that optimises the NPV.

5.2 Ruashi break-even cut-off grade

5.2.1 Input Parameters and Assumptions

The break-even cut-off grade refers to that grade at which revenue generated is equal to
the production costs. Ore with grades higher than the break-even cut-off grade will
generate more revenue than ore with grade below the cut-off grade. Hence, grades
below the cut-off grade cannot pay for themselves. It is important to clarify costs that
are used in break-even cut-off grade calculation and the objectives of using those costs
should be stated (Hall, 2014). The parameters used in cut-off grade optimisation are
given in Table 5.1.

Hall (2014) asserts that when the size of a pit has already been selected then the
variable mining costs will be incurred for all the rock mined from the pit whether it is
ore or waste. Open pit mining variable costs are therefore not included in ore – waste
break-even distinction. This research is based on the Ruashi Mining 2013 pit designs.
Hence there is no need to calculate the overall break-even cut-off grade at this point.
Instead it is only necessary to calculate the marginal break-even cut-off grade based on
the process which is the bottleneck in the Ruashi Mining production process. The mill
is the bottleneck at present.

68
Table 5.1: Price and costs assumptions

Description Symbol Units Value

Copper London Metal Exchange (LME) Price pcu $/t metal 6 200
Cobalt LMB Price pco $/lb metal 12.96
Copper Payability (% of LME Price) mcu % 100.00
Cobalt Payability (% of LMB Price) mco % 69.50
Royalty factor r 0.9608
Mining cost m $/t mined 5.59
Processing cost h $/t milled 43.87
$/t copper
Element processing cost - copper hcu contained in 671.35
feed
$/t cobalt
Element processing cost - cobalt hco contained in 3 802.89
feed
Unit time costs f $/t milled 37.53
Selling cost per tonne copper kcu $/t metal sold 495.88
Selling cost per tonne copper kco $/t metal sold 2574.20
Discount rate i % 12.83
Copper recovery (Acid soluble copper AsCu) y % 95
Cobalt recovery (Acid soluble cobalt AsCo y % 85
Acid solubility As % 90
Grade acid soluble copper AsCu %
Grade total copper TCu %
Grade acid soluble cobalt AsCo %
Grade total cobalt TCo %
Dilution d %

69
The Ruashi break-even cut-off grade for copper only (without considering cobalt
credits) is calculated first using the following equation which does not take royalty into
account:

COG = d*(h+f)/(y*(pcu – kcu) – hcu)

Where:

COG = cut-off grade

Therefore, for the given data and disregarding dilution because of the selective mining
process:

COG = (43.87+37.53)/(95*(6200 – 495.88) – 671.35)

COG = 1.50% AsCu

COG (TCu) = 1.50/0.9

COG = 1.67% TCu

Ruashi Mining pays royalty to the government and to Gecamine, the mining company
set up by the government to control the extraction of copper resources. The two add up
to 3.93% of the revenue after the deduction of the transport, assay, insurance and
marketing costs. Tax for corporations is pegged at 35% of net profit. However, mining
companies are subject to a tax of 30% on net profits and not the 35%. Export of copper
and cobalt concentrates was banned in 2013 to encourage mining companies to refine
the metals locally before export.

It has been shown that royalty is a cost and has to be considered in the calculation of
the cut-off grade (Birch, 2016). Therefore, the cut-off grade for copper is given by:

COG = d*(h + f)/(y(*pcu*r*mcu – kcu) – hcu)

This formula was incorporated into an Excel spreadsheet as shown in Table 5.2 to get
the cut-off grade for copper.

70
Incorporating the royalty in the calculation of the break-even cut-off grade results in a
19.8% increase in the cut-off grade to 2.00 %TCu. This implies that royalty plays a
significant role in determining the Ruashi cut-off grade and cannot be ignored because
it has huge impact on profits. Hence the break-even cut-off grade for copper is
2.00 %TCu. The same formula was used to calculate the cut-off grade for cobalt
assuming that the mine was a cobalt producing mine (that is ignoring the copper
contribution).

Table 5.2: Figures for calculating break-even cut-off grade for copper

Parameter Units Value

Cu LME price $/t 6,200

Royalty factor - 0.96
Payability (% of LME) - 1.00
Processing cost $/t milled 43.87
Time cost - allocated to processing $/t milled 37.53
Element processing cost $/t metal contained in feed 671.35
Selling cost $/t metal produced 495.88
Processing recovery % of AsCu 95
Mining dilution - 1.00
Processing cut-off grade % AsCu 1.80
Ratio AsCu to Tcu 0.90
Processing cut-off grade % TCu 2.00

This formula was again incorporated into an Excel spreadsheet as shown in Table 5.3
below.

COG = d*(h + f)/(y(*pco*r*mco – kco) – hco)

The cobalt is a by-product in the copper production process. The break-even cut-off
grade for copper must therefore include the contribution of cobalt to the revenue. This
means there is a combination of copper and cobalt grades which make the company
make no profit. This is illustrated in Figure 5.1. A line joining the copper and cobalt

71
break-even cut-off grades is the distinction between ore and waste as shown in Figure
5.1. Material with combined grades above the line will be processed while that below
will be discarded as waste. The diagram shows that material with copper grades which
are less than 2.00%TCu can still be treated as long as the corresponding grade of cobalt
makes the material fall above the line. This is caused by the contribution of cobalt to
the revenue.

Table 5.3: Figures for calculating break-even cut-off grade for cobalt

Parameter Units 2016 Value

Co LMB price $/lb 12.96
Royalty factor - 0.96
Payability (% of LMB) - 0.70
Processing cost $/t milled 43.87
Time cost - allocated to processing $/t milled 37.53
Element processing cost $/t metal contained in feed 3,803
Selling cost $/t metal produced 2,574.20
Processing recovery % of AsCo 0.85
Mining dilution - 1.00
Processing cut-off grade % AsCo 0.80
Processing cut-off grade % TCo 0.88

72
Figure 5.1: Relationship between copper and cobalt cut-off grades (van Daalen,
2012)
Figure 5.2 shows that about 30 million tonnes of the material has grades below
1.00%TCu, which is about 81% of the mineralised material. The Ruashi deposit grades
are skewed towards the lower grades because the tonnage graph in Figure 5.2 is steeper
at the beginning and then flattens gradually. This means that the bulk of the tonnage is
in the low grade range. This is why a small change in cut-off grade results in a huge
change in tonnage. For example, the change from the current break-even cut-off grade
of 0.9%TCu applied at the mine to 2.0%TCu calculated above has resulted in a loss of
2.7 million tonnes of ore from the reserves.

73
 40.0 14.00

Average grade above cut-off

35.0 12.00
Tonnes (million)

30.0 10.00
25.0
8.00
20.0
6.00
15.0
4.00
10.0
5.0 2.00

0.0 0.00

Cut-off grade

Tonnes Average Grade above cut-off

Figure 5.2: Grade-tonnage curves for copper (%TCu)

The grade distribution for cobalt mineralisation follows a similar trend to that of copper
even though there is no correlation between the two. Figure 5.3 shows the tonnage-
grade curves for cobalt.

40.0 3.00

Average grade above cut-off

35.0
2.50
30.0
Tonnes (million)

2.00
25.0
20.0 1.50
15.0
1.00
10.0
0.50
5.0
0.0 0.00
0.35

2.55
0.05
0.15
0.25

0.45
0.55
0.65
0.75
0.85
0.95
1.05
1.15
1.25
1.35
1.45
1.55
1.65
1.75
1.85
1.95
2.05
2.15
2.25
2.35
2.45

2.65

Cobalt cut-off grade

Tonnes Average grade above cut-off

Figure 5.3: Grade-tonnage curves for cobalt

74
The curves are very steep for grades in the lower grade range. Since the biggest amount
of material is concentrated closer to zero, a small change in the cut-off grade caused by
a change in either the price or the costs has a significant impact on the reserves and
hence on the life of mine.

5.2.2 Life of mine cash flow based on break-even cut-off grade

Table 5.4 shows the profit and NPV generated for the life of mine based on the break-
even cut-off grade of 2.00%TCu calculated in Section 5.2.1.

Table 5.4: Life of mine schedule based on break-even cut-off grade

Mined Tonnes Processing COG Average Grades Cu Cathode Co in Conc Profit NPV
Year
(Mtonnes) (Tonnes) %TCu %TCu %TCo (Tonnes) (Tonnes) ($m) ($m)
1 10.74 1.2 2.00 3.75 0.26 38,274 2,059 79.33 70.31
2 10.74 1.2 2.00 3.75 0.26 38,274 2,059 79.33 62.32
3 10.74 1.2 2.00 3.75 0.26 38,274 2,059 79.33 55.23
4 2.41 0.3 2.00 3.75 0.26 8,597 462 17.82 10.99
Total 34.62 3.87 3.75 0.26 123,419 6,638 255.82 198.85

The cobalt cut-off grade is not considered in this case because it is only a by-product.
However, its contribution to the revenue is taken into account by including cobalt
credits in the calculation of the copper cut-off grade. The effect of this is to lower the
variable production costs with the credits received from the cobalt by-product. All the
costs from mining to solvent extraction are allocated to copper (Figure 4.6). Cobalt is
only allocated those costs directly related to it like the element processing cost, cobalt
selling costs and royalty. These have to be deducted from the cobalt revenue (price) per
tonne.

If one merely looks at an average feed grade of 3.75%TCu, it is easy to be inclined

towards thinking that this method is perfect. It is however important to recall that the
break-even grade is based on financial parameters only which are adjusted for
metallurgical recoveries. It does not take into account the spatial distribution of the
grades in the orebody. In practice the grades would vary either above or below the
average grade. This is not good for the plant because the spikes in feed grade would
negatively affect the metal recoveries and hence the revenue. Therefore, the predicted
NPV might not be achievable.

75
The break-even cut-off grade does not provide for capital payback because it makes no
provision for profit. Investments are made in order to primarily grow the wealth of
shareholders and yet the break-even grade does not provide for this. The grade
distribution of the Ruashi orebody is skewed towards the low grade portion as shown in
Figure 5.2. As such, the cut-off grade calculated cuts out most of the lower grade
portion of the material. This drastically reduces the mineral reserves.

5.3 Cut-off grade optimisation in NPVS

5.3.1 Parameters and Assumptions

The financial parameters used in this cut-off grade optimisation are shown in Table 5..
As in all other scenarios, sulphide mineralisation was flagged as waste in the model to
ensure that the optimisation was only run on oxide mineralisation. The Ruashi Base
Metal Refinery (BMR) is only designed to treat oxide ore. The NPVS adopts a
declining cut-off grade given by the following equation:

COG = (h + (hcu + F)/H)/((pcu – kcu)*y)

Where:
F = opportunity cost ($ per annum)
H = mill capacity (tonnes per annum)
The rest of the symbols are as defined in Table 5.1.

The scheduler was set up to run in quarters of a year, so the necessary adjustments were
made to the parameters. This was done to make the results clearer since the mine has a
short life.

5.3.2 Optimisation results

Table 5.5 shows the results from the NPVS. Copper grades are around 2% or above.
This is mainly due to the fact that NPVS considers the contribution of both metals in
the optimisation process. The life of mine schedule from NPVS favours the declining

76
cut-off grade strategy. Figure 5.4 shows the declining copper grades over the life of
mine.

Table 5.5: Life of mine schedule from NPVS

Year Rock Mill_Feed %TCu %TCo Cu_Cathode Cobalt_R Strip
1 3,299,035 1,260,749 3.14 0.24 31,987 1,852 1.6
2 2,098,831 1,260,603 2.71 0.21 27,608 1,662 0.7
3 3,273,019 1,259,433 2.30 0.31 23,394 2,443 1.6
4 3,617,355 1,259,926 2.39 0.36 24,288 2,801 1.9
5 2,018,975 1,259,325 2.26 0.40 23,004 3,075 0.6
6 787,375 653,749 2.12 0.20 11,184 798 0.2
Total 15,094,590 6,953,785 2.52 0.29 141,465 12,632 1.2

The copper average grade starts low in the first quarter because of the unavailability of
enough exposed high grade ore due to waste stripping backlog, rises in the second and
then declines gradually over the life of mine. The stripping ratio shown in Table 5.5 is
high at the beginning due to accelerated waste stripping in order to expose high grade
ore, then drops in order to minimise cash outflow to increase the NPV. It then starts
increasing gradually.

4.00
3.50
3.00
2.50
%TCu

2.00
1.50
1.00
0.50
0.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Quarter Number

Figure 5.4: Variation of copper grades over the life of mine

77
The copper grade is generally high at the beginning of the life of mine and then
decreases gradually until the end of the life of mine. The cobalt grade is not showing
any trend because cobalt is a by-product in the process. It was not targeted in the
optimisation process but was included as a source of additional revenue. Figure 5.5
shows the variation of the cobalt grade over the life of mine. The cobalt grades start up
low and then increase towards the end of life and then revert to the downward trend.
This is caused by the nature of mineralisation. In most cases blocks with high cobalt
content contain less or no copper at all. The aim is to optimise copper output because it
is the major source of revenue. So trying to increase the grade of cobalt in the blend has
a dilution effect on the copper grade. The schedule therefore favours those blocks
which contain both copper and cobalt even if cobalt is at a lower grade.

0.70
0.60
0.50
0.40
%TCo

0.30
0.20
0.10
0.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Quarter Number

Figure 5.5: Variation of cobalt grades over the life of mine

The metal outputs follow the same distribution as the grades over the life of mine.
Figure 5.6 shows the copper and cobalt output over the life of mine.

78
 10 000 1 200
9 000
1 000
8 000
Copper Tonnes

7 000

Cobalt Tonnes
800
6 000
5 000 600
4 000
400
3 000
2 000
200
1 000
0 0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Quarter Number

Cu_Tonnes Cobalt_Ton

Figure 5.6: Life of mine metal output

The decline in metal output in the first quarter is quite evident. As mentioned earlier,
this is caused by the waste stripping backlog which accumulated over the previous
years. The cobalt production is not optimised because the main focus is on copper
output which is the main source of revenue. Cobalt output follows an opposite trend to
that of copper. Cobalt production is maximised (automatically) when the copper is
getting depleted. Maximisation of copper grades tends to displace cobalt from the feed,
hence the increase in cobalt output after the depletion of copper.

Figure 5.7 shows the life of mine NPV. The low NPV is evident in the first quarter. It
can however be seen that the NPV is highest at the beginning of the life of mine which
is in line with the objective of cut-off grade optimisation.

79
 35.0

30.0

25.0

20.0
NPV ($m)

15.0

10.0

5.0

0.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Quarter Number

Figure 5.7: Life of mine NPV

The life of mine is about 5.8 years. Schedule optimisation in NPV does not lead to
high-grading. Figure 5.8 shows the cumulative NPV for the life of mine.

400
350
300
250
200
NPV ($m)

150
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Quarter Number

Figure 5.8: Life of mine cumulative NPV

80
The cumulative NPV increases steadily over the life of mine as one might expect. The
curve almost flattens at the end of the mine life.

Table 5.6: Life of mine schedule based on NPVS

Mined Tonnes Processing Optimum Grades
Cu Cathode Co in Conc Profit NPV
Year
(Mtonnes) (MTonnes) %TCu %TCo ($m) ($m)
(t) (t)
1 3.30 1.3 3.14 0.24 33,671 1,950 88.83 78.72
2 2.10 1.3 2.71 0.21 29,061 1,750 74.92 58.85
3 3.27 1.3 2.30 0.31 24,625 2,571 61.93 43.11
4 3.62 1.3 2.39 0.36 25,565 2,948 67.50 41.65
5 2.02 1.3 2.26 0.40 24,215 3,237 71.56 39.13
6 0.79 0.7 2.12 0.20 11,772 841 27.43 13.30
Total 15.09 6.95 2.52 0.29 148,909 13,297 392.16 274.77

The NPVS gives a lower average grade for the reserves but the tonnage is higher than
that produced by the break-even analysis. The NPVS follows the declining cut-off
grade policy as shown in Table 5.6. Material is scheduled in such a way that the low
grade ore which is processed at the end of the mine life still remains economic to
process.
5.4 Optimisation based on recoverable value (SimSched DBS)

5.4.1 Parameters and Assumptions

The parameters are as shown in Table 5.. The setup for scheduling in SimSched DBS is
shown in Figures 5.9 and 5.10.

81
Figure 5.9: SimSched DBS setup

82
Figure 5.10: Overview of SimSched setup

5.4.2 SimSched DBS Optimisation results

The mill feed tonnes are achieved for six years. However, the feed grade becomes too
low to a level which might render the recovery of the metal uneconomic. The results
are shown in Table 5.7.
Table 5.7: SimSched DBS life of mine schedule
Waste Tonnes Copper Cobalt
Feed Grades
Period Mined Processed Produced Produced
(kt) (kt) %TCu %TCo (kt) (kt)
1 6,734.6 1,258.1 4.07 0.23 43.5 1.86
2 6,731.1 1,264.5 3.08 0.46 33.1 3.74
3 7,339.0 1,264.0 3.00 0.24 32.2 1.95
4 1,248.8 1.75 0.25 18.5 2.05
5 1,249.3 1.08 0.27 11.5 2.21
6 1,248.0 0.80 0.20 8.5 1.59
Total 20,804.7 7,532.6 2.30 0.27 147.2 13.4

83
However, the treatment of lower grade ore from Year 5 onwards is not economic
because the grades are low and metal output is also low. SimSched DBS shows positive
NPV as shown in Figure 5.11. The mill capacity is fully utilised with low grade ore.
The recovery at such low grades might not be high enough to extract the metal. Further
studies are required to investigate the effect of feed grade on metal recovery.

Figure 5.11: Variation of NPV over the life of mine

The schedule suggested in Table 5.7 requires massive stockpiling of low grade ore for
processing later as shown in the stockpile schedule in Table 5.8.

Table 5.8: Stockpile schedule from SimSched DBS

Removed
Added to Stockpile
from
Year stockpile balance
stockpile
(Mt) (Mt)
(Mt)
1 3.2 1.2 1.9
2 3.7 1.2 4.4
3 0.6 1.2 3.8
4 - 1.2 2.5
5 - 1.2 1.3
6 - 1.2 0.0
Total 7.5 7.5

84
The stockpile schedule is also given in Figure 5.12.

5.0
4.5
4.0
3.5
Tonnage (Mt)

3.0
2.5
2.0
1.5
1.0
0.5
-
1 2 3 4 5 6
Year

Stockpile addition Processed Stockpile balance

Figure 5.12: Stockpile schedule from SimSched DBS

The life of mine grades are generally high whilst there is still production from the pit.
Once ore from the pit is depleted and stockpile reclamation starts, the grades also begin
to drop. Figure 5.13 shows the variation of the cobalt feed grade over the life of mine
and Figure 5.14 shows the corresponding grades for copper. Both copper and cobalt
generally follow the declining cut-off grade trend.
SimSched DBS optimises the net smelter return, which is depicted by the block
economic values in the block model. In the first year, the value is optimised by
scheduling the optimum grade of copper. In the second year the available blocks have
lower copper grade, which results in a decline in net smelter return. This gap in net
smelter return is addressed by optimising the grade of available cobalt. As a result the
grade of cobalt in the second year increases to the maximum available. In subsequent
years higher grade material for both copper and cobalt is depleted and hence feed
grades for both decline.

85
 0.50

0.45
Feed Grade TCo (%))

0.40
0.35

0.30

0.25

0.20

0.15
1 2 3 4 5 6
Year

Figure 5.13: Variation of cobalt feed grade over the life of mine

4.50
4.00
Feed Grades TCu (%)

3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1 2 3 4 5 6
Year

Figure 5.14: Variation of copper grade over the life of mine

SimSched DBS optimises the NPV by optimising the schedule based on block value.
The block values are skewed towards the cobalt production due to the higher price of
cobalt hence the processing of marginally low copper grades which might not be

86
practical to process since they might not be leachable. There is a sharp increase in the
NPV in the first three years of the life of mine. Thereafter it tails off due to the
depletion of high grade ore. The life of the mine is short and hence the schedule is
similar to high-grading. This is evidenced by such a high stockpiling of low grade
material in just three years of mining. Figure 5.15 shows the cumulative NPV over the
life of the operation. The NPV follows the same trend as that produced by NPVS in
Figure 5.8. The different timescales somewhat distorts the cumulative NPV shown in
Figure 5.8.

Figure 5.15: SimSched DBS cumulative life of mine NPV

As mentioned above, the practical life of mine from this schedule is approximately six
years. SimSched DBS processes 8.4% more ore compared to the NPS. Table 5.9 shows
the life of mine production schedule from SimSched DBS.

87
Table 5.9: The practical life of mine schedule extracted from SimSched

Waste Tonnes Copper Cobalt

Period Feed Grades
Mined Processed Produced Produced
Years
(kt) (kt) %TCu %TCo (kt) (kt)
1 6,734.6 1,258.1 4.07 0.23 43.5 1.86
2 6,731.1 1,264.5 3.08 0.46 33.1 3.74
3 7,339.0 1,264.0 3.00 0.24 32.2 1.95
4 1,248.8 1.75 0.25 18.5 2.05
5 1,249.3 1.08 0.27 11.5 2.21
6 1,248.0 0.80 0.20 8.5 1.59
Total 20,804.7 7,532.6 2.30 0.27 147.2 13.4

Economic metal output is only achieved in the 3 out of the 6 years. Table 5.10 shows
the life of mine NPV.

Table 5.10: Life of mine cash flow based on SimSched DBS schedule
Mined Tonnes Processing Optimum Grades Cu Cathode Co in Conc Profit NPV
Year
($m) ($m)
(Mtonnes) (MTonnes) %TCu %TCo Tonnes Tonnes
1 7.99 1.26 4.07 0.23 43,490 1,856 105.33 93.35
2 8.00 1.26 3.08 0.46 33,062 3,740 84.84 66.64
3 8.60 1.26 3.00 0.24 32,209 1,955 62.73 43.67
4 1.25 1.25 1.75 0.25 18,523 2,054 43.19 26.65
5 1.25 1.25 1.08 0.27 11,469 2,209 19.01 10.39
6 1.25 1.25 0.80 0.20 8,455 1,590 2.33 1.13
Total 28.34 7.53 2.30 0.27 147,208 13,404 317.41 241.83

The mine makes profit for six years and the profit is at its maximum in the first year in
line with the goal of cut-off grade optimisation. The feed grade is highest at the
beginning and declines over the life of mine. SimSched DBS does not carry out
optimisation based directly on grades, but the recoverable value of each block. It is
apparent that the software follows a declining cut-off grade policy. It is also evident
that even though the optimisation is based on the recoverable value, the copper grades
are indeed optimised.

88
5.5 Parametric cut-off grade

5.5.1 Parameters and assumptions

The conversion to copper equivalent for a block is based on the following equation:

TCo ∗ (y ∗ (pco − kco) − hco)

Copper Equivalent Grade = TCu +
y ∗ (pcu − kcu) − hcu

The symbols are as given in Table 5..

This formula was incorporated into the block model and the model depleted with the
May 2016 Survey month end measurement. The resulting model was then exported to
csv format for use in SimSched DBS. The other financial parameters were assumed to
be those for copper.

5.5.2 Optimisation results

Table 5.11 shows the scheduling results from SimSched.

Table 5.11: Life of mine schedule based on parametric cut-off grade

Optimum
Mined Processed Grade (% Metal Output
Period
(Mt) (kt) Copper (kt)
Equivalent)
1 7.76 1,261.5 4.70 50.43
2 6.67 1,264.3 3.21 34.49
3 9.99 1,264.2 3.78 40.57
4 1.25 1,248.2 2.29 24.32
5 1.25 1,247.4 1.55 16.47
6 1.25 1,248.3 1.14 12.14
Total 28.17 7,534.0 2.79 178.42

The copper equivalent optimised grade follows the declining cut-off grade in the life of
mine, which results in higher metal output in the first three years. This is also in line
with the cut-off grade optimisation objective of optimising the value of the mine. The

89
optimisation results in accelerated mining and massive stockpiling. The stockpiling
process is shown in Table 5.12.

Table 5.12: Stockpile schedule based on parametric cut-off grade

Period Addition Depletion Balance

(Mt) (Mt) (Mt)
1 4.72 0.00 4.72
2 1.90 0.00 6.62
3 1.70 0.00 8.32
4 1.25 7.07
5 1.25 5.83
6 1.25 4.58

Table 5.12 shows that a whopping 8.3 million tonnes is stockpiled in the first three
years of the life of mine. This ties up a lot of capital in the ore on the stockpiles. This is
due to the policy to accelerate the mining rate to get the higher grade ore for NPV
optimisation. About 4.6 million tonnes remain on the stockpile because it becomes
uneconomic to process that material at such low grades. The mill throughput is fully
utilised but with very low metal output. Figure 5.16 shows the stockpile schedule.
Because of the requirement to optimise value, the stripping is accelerated to expose the
high value blocks.

The depletion of ore from the stockpiles only starts when the mining from the pit is
exhausted. This also marks the beginning of the decline in grade and hence a
corresponding decline in metal output.

90
 9.00
8.00
7.00
Tonnage (mtonnes)

6.00
5.00
4.00
3.00
2.00
1.00
0.00
1 2 3 4 5 6
Year

Addition Depletion Balance

Figure 5.16: SimSched DBS copper equivalent stockpile schedule

Figure 5.17 shows the grade variation over the life of mine. It is worth noting the
decline in grade in the second year due to the stripping backlog.

5.00
Copper equivalent grade (%)

4.50
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
1 2 3 4 5 6
Year

Figure 5.17: Copper equivalent grades variation

91
The metal output also declines in line with the same pattern as the decline in metal
grades. Figure 5.18 shows the copper equivalent metal output over the life of mine.

60.0
Copper equivalent metal

50.0
40.0
(ktonnes)

30.0
20.0
10.0
-
1 2 3 4 5 6
Year

Figure 5.18: Variation of copper equivalent metal output

The NPV also follows the same trend as the metal output. This is based on the
assumption that the income from the metal is realised in the year it is produced. Figure
5.19 shows the variation of the NPV over the life of mine.

120.00
100.00
NPV ($m)

80.00
60.00
40.00
20.00
0.00
1 2 3 4 5 6
Year

Figure 5.19: Variation of copper equivalent NPV over the life of mine

The cut-off grade optimisation entails processing of those blocks with the highest
recoverable values at the beginning of the life of mine. This process is achieved by

92
accelerated mining and the stockpiling of lower value blocks on the stockpile for later
processing. Figure 5.20 shows the mining trend over the life of mine. Very high
tonnages are mined in the first three years, thereafter the mining declines to only satisfy
the mill feed. This was also shown in the massive stockpiling in Section 5.5.2.

12.00
Tonnes mined (million)

10.00
8.00
6.00
4.00
2.00
0.00
1 2 3 4 5 6
Year

Figure 5.20: Ex-pit mining for copper equivalent life of mine

This cut-off grade optimisation process favours stockpiling and accelerated stripping.
For Ruashi Mining, this was exacerbated by years of failing to meet the necessary
stripping on a regular basis aimed at reducing costs. The mill throughput is maintained
throughout but the metal output decreases to uneconomic levels. This may be improved
by reducing fixed costs towards the end of the mine life in order to remain profitable.

93
CHAPTER 6: ANALYSIS OF RESULTS

6.1 Introduction
The chapter gives the analysis of results. The scenarios investigated in this report are
compared. This comparison includes resultant policies, tonnes mined, life of mine and
NPV. Sensitive analysis is conducted in order to evaluate the effects of the various
factors like, costs, metal prices and discount rates on the cut-off grade, and hence on
NPV. The effects of the environmental costs on cut-off grade are also given. Finally,
risk analysis using a trial version of @Risk is conducted.

6.2 Comparison of scenarios

The results have shown that all the methods used and applied to this study adopt a
declining cut-off grade policy except for the break-even cut-off policy which remains at
the average grade over the mine life. Figure 6.1 compares the cut-off grade policies for
the methods investigated. SimSched DBS, NPVS and parametric cut-off grade policies
all give a six-year life of mine at declining cut-off grades. The current life of mine cut-
off grade policy gives an apparent life of mine of about nine years. This is mainly
because the current stockpiles were added and this increases the metal available. The
stockpiles were not removed for comparison with the current policy. Massive
stockpiling may not be advantageous because of the reclamation costs from the
stockpiles.

94
Figure 6.1: Comparison of cut-off grade policies from the scenarios
The stripping backlog is clear in all the scenarios except the NPVS which smoothen the
mining. This is shown in Figure 6.2. The current life of mine and the break-even cut-off
grade policies both give a four year mining (stripping) life. Thereafter, the pit gets
depleted but the processing plant goes on processing ore from the stockpiles for a
longer period.

14.0

12.0
Tonnes mined (million)

10.0

8.0

6.0

4.0

2.0

0.0
1 2 3 4 5 6
Year

Current LOM Break-even Simsched NPVS Parametric

Figure 6.2: Mined tonnages

95
Copper production is shown in Figure 6.3. Break-even cut-off policy gives a smooth
copper output but for the shortest duration. NPVS, parametric and SimSched cut-off
grade policies produce copper for six years at declining quanties in line with the cut-off
grade policies. The current life of mine graph is included for information only since it is
based on more ore compared to the rest of the scenarios due to the inclusion of current
stockpiles. The current stockpiles are not included in other scenarios since SimSched
DBS does not cater for pre-existing stockpiles.

Figure 6.3: Life of mine copper production

The current life of mine is based on schedule optimisation in Geovia MineSched. This
optimisation is also based on the current pit design but with no financial input. It is
assumed that all the ore inside the design is economic. NPVS has shown that some of
the ore in the current pit is not economic to mine. The parametric cut-off produces
copper equivalent metal which is a combination of copper and cobalt. That is why the
graph starts higher than the rest.

All the scenarios show declining NPV with time as shown in Figure 6.4. As mentioned
before, this is caused by the declining cut-off grade policies and hence the declining
metal output.

96
Figure 6.4 shows that the graph for SimSched gives a steady decline in NPV compared
to the current life of mine. The current life of mine gives the lowest NPV in the first
two years before rising above the rest of the graphs. This caused by the suboptimal
stripping to clear the waste mining backlog. There is therefore need to smoothen this by
the cut-off grade policy from SimSched DBS.

120.0

100.0
NPV ($m)

80.0

60.0

40.0

20.0

0.0
1 2 3 4 5 6 7 8 9
Simsched 93.3 66.6 43.7 26.6 10.4 1.1
Current LOM 50.6 20.7 59.8 48.3 38.8 23.7 15.8 8.7 2.9
Break-even 70.3 62.3 55.2 11.0
NPVS 78.7 58.9 43.1 41.6 39.1 13.3
Parametric 101.0 47.4 48.3 27.8 9.1 0.4
Year

Figure 6.4: Variation of NPV over the life of mine

Comparison of the NPV from the investigated cut-off policies gives the results shown
in Figure 6.5. The current life of mine plan was expected to give the highest NPV since
it incorporates additional metal from the stockpiles. However, this is not the case due to
delayed cash inflows and higher cash outflows caused by increased stripping in the
earlier years of the mine life.

97
 300.0 269.3 274.8
241.8 234.0
250.0
198.9
200.0
NPV ($m)

150.0

100.0

50.0

0.0
Current Break-even Simsched NPVS Parametric
LOM

Figure 6.5: Total NPV per scenario

The NPVS gives the highest NPV due to delayed cash outflows by reduced mining at
the beginning of the life of mine as shown earlier in Figure 6.2. The NPVS NPV has
further been boosted by the removal of the last uneconomic pit which gave a huge
negative NPV at the end of the life of mine. SimSched and parametric cut-off are close
to each other in terms of NPV because they are based on the same principles. The cut-
off grade optimisation based on recoverable value or net smelter return tends to high-
grade the mine, especially for a mine with a short life like Ruashi. This then sterilises
some of the lower grade ore. The massive stripping and stockpiling at the beginning of
the life of mine has a negative impact on the mine life due to higher cash outflows
caused by early stripping and re-handle from the stockpiles.

98
6.3 Sensitivity analysis

6.3.1 Effect of processing costs

Processing costs were varied from 80% to 120% and the effect was then observed. The
effect on cut-off grade is shown in Figure 6.6.

2.70
2.65
2.60
2.55
%TCu

2.50
2.45
2.40
2.35
2.30

120%COST
80%PCOST

85%PCOST

90%PCOST

95%PCOST

100%PCOST

105%PCOST

110%PCOST
% Processing Cost

Figure 6.6: Effect of processing costs on cut-off grade

It is observed from Figure 6.6 that the increase in processing costs also increases the
cut-off grade. The increase in cut-off grade decreases the ore reserves available for
treatment as shown in Figure 6.7.

99
 8.0
7.5
7.0
Ore (Mt)

6.5
6.0
5.5
5.0
4.5
4.0

%Processing cost

Figure 6.7 Variation of ore reserves with processing costs

The decreased reserves also result in a decrease in metal output as shown in Figure 6.8.

145
144
143
Copper metal output (kt)

142
141
140
139
138
137
136
135
80%PCOST 85%PCOST 90%PCOST 95%PCOST 100%PCOST 105%PCOST 110%PCOST 120%COST

% Processing cost

Figure 6.8: Effect of processing costs on metal output

6.3.2 Effect of mining costs

The mining costs were varied from 80% to 120% of the mining costs. The variation of
the NPV with mining costs is shown in Figure 6.9. Since there is no significant change
in NPV, it follows that the ore reserves are not affected. Small changes to Ruashi

100
mining costs have no major influence on the cut-off grade. This is in line with what was
pointed out that mining costs do not influence the processing cut-off grades.

390
370
350
NPV ($M)

330
310
290
270
250
80% 85% 90% 95% 100% 105% 115% 120%
% Mining costs

Figure 6.9: Effects of mining costs on NPV

6.3.3 Effect of discount rate
The discount rate was varied from 12.8% to 20%. Table 6.1 shows the variation in
grades produced from NPVS.

Table 6.1: Effect of varying discount rate on cut-off grade

Year 12.80% 13% 14% 15% 16% 18% 20%
1 3.14 3.14 3.14 3.14 3.14 3.14 3.14
2 2.71 2.71 2.71 2.71 2.71 2.73 2.73
3 2.30 2.30 2.30 2.30 2.30 2.29 2.29
4 2.39 2.39 2.39 2.39 2.39 2.44 2.44
5 2.26 2.26 2.26 2.26 2.26 2.21 2.21
6 2.12 2.12 2.12 2.12 2.12 2.12 2.12
Average 2.52 2.52 2.52 2.52 2.52 2.52 2.52

It is clear from Table 6.1 that varying the discount rate has no effect on the cut-off
grades. The discount rate is only used on the profit after all the deductions are made. In
this case, the discounting rate is not being treated as a cost and as such it has no part in
cut-off grade optimisation. However, the NPV decreases with increase in discount rate.
Figure 6.10 shows that all graphs for scenarios with discount rate values above 12.8%

101
are all below the graph for the base value. This analysis shows that trying to recover
capital by increasing discount rate does not work for Ruashi Mining.

120

100

80
NPV variation
($m)

60

40

20

0
1 2 3 4 5 6
Year

12.80% 13% 14% 15% 16% 18% 20%

Figure 6.10: Effect of varying discount rate on NPV

The total NPV also decreases when the discount rate is increased. This is given in
Figure 6.11. High discount rates have a negative impact on the value for Ruashi.

380

360
Total NPV ($m)

340

320

300

280
12.80% 13% 14% 15% 16% 18% 20%
Discount rate

Figure 6.11: Effect of varying discount rate on total NPV

102
6.3.4 Effect of copper price
The price was varied from 70% to 110% of the long term forecast price. Figure 6.12
shows the variation of the minable average grades as the price was varied. The
distribution of the minable grades in the orebody is such that individual trends are not
clearly visible. The trend is visible on the minable grades for each percentage change in
price.

2.80
2.75
2.70
Average grade (%TCu)

2.65
2.60
2.55
2.50
2.45
2.40
2.35
2.30
70% 75% 80% 85% 90% 95% 100% 105% 110%
Price percentage

Figure 6.12: Effect of variation in copper price on the cut-off grade

As the copper price is increased the grade decreases. As the price increases, the revenue
from a parcel of material exceeds the costs associated with mining, processing and
selling the metal produced. Hence, some of the lower grade material that is uneconomic
to extract at the lower price becomes economic and lowers the average grade of the ore
available for mining which increases the reserves. The effect of price on the reserves is
shown in Figure 6.13. An increase in price avails more ore for processing.

103
 7.4
7.2
7.0
Reserves (Mt)

6.8
6.6
6.4
6.2
6.0
5.8
70% 75% 80% 85% 90% 95% 100% 105% 110%
Percentage price

Figure 6.13: Effect of price changes on ore reserves

It also follows that the more the reserves the more the copper produced if the ore
characteristics are not affected by the grade. For example, some metal recoveries are a
function of the feed grade. However, this is not the case for Ruashi Mining at present.
Figure 6.14 shows the variation of copper output with price.

144

142
Copper cathode (kt)

140

138

136

134

132
70% 75% 80% 85% 90% 95% 100% 105% 110%
Percentage price

Figure 6.14: Effect of variation in price on copper output

104
The increased copper output with increase in price implies increased cash inflows and
hence increase in NPV. Figure 6.15 gives the variation of NPV with price.

490

440

390
NPV ($m)

340

290

240

190

140
70% 75% 80% 85% 90% 95% 100% 105% 110%
Percentage price

Figure 6.15: Effect of price on NPV

6.4 Cut-off grade incorporating environmental costs

Rehabilitation of waste dumps contributes to the running costs of the mining operation.
The waste dump rehabilitation costs were used in the calculation of the processing
break-even cut-off grade since Ruashi is mill constrained. Table 6.2 shows the extract
from the calculation of the cut-off grade that takes waste dump rehabilitation into
consideration. The cut-off grade has decreased from 2.00%TCu to 1.68%TCu. This
represents a 16% decrease in cut-off grade.

105
Table 6.2: Cut-off grade incorporating dump rehabilitation costs
Description Units 2016
Cu LME Price $/t metal 6,200
Co LMB Price $/lb metal 2.96
Cobalt sales - % of LMB price % 69.50%
Mining cost - average $/t mined 5.59
Processing cost $/t milled 43.87
Element processing - Cu $/t Cu contained in feed 671.35
Element processing - Co $/t Co contained in feed 3,802.89
Time Costs $ 87,740,769
Unit Time Costs $/t milled 77.90
Selling cost per tonne - Cu $/t metal 495.88
Selling cost per tonne - Co $/t metal 2,574.20
Copper royalty % 0.961
Cobalt royalty % 0.961
Discount rate % 0.13
Unit environmental cost $/t 0.389
Plant capacity t/year 1,387,000
Copper recovery 0.85

Cut-off grade % 1.68

The calculation shows that environmental costs considerations favour lower cut-of
grade in order to minimise the amount of waste generated. The low amount of waste
generated means reduced environmental pollution. Hence, it is crucial to consider
environmental costs in the calculation of cut-off grades for Ruashi. This was not
implemented in this research since dump rehabilitation is at an advanced stage at
Ruashi Mining, therefore a more detailed needs to be done in order to have a more
representative cost regime.

6.5 Risk analysis using @Risk

Guj (2013) defines risk as the potential for negative outcomes compared to one’s
objectives. This separates risk from opportunity which is the potential to realise higher
gains than expected. It is the objective of risk analysis to identify and quantify the
effects of risk or opportunity.

106
There are many ways of conducting risk analysis. The software called @Risk which
was developed by Palisade Corporation is used for conducting risk analysis and
modelling in Microsoft Excel. @Risk uses Monte Carlo simulation to model risk and
gives results in Microsoft Excel (Palisade Corporation, 2004). Probability distributions
are used as data inputs in simulation instead of using single values (Hall, 2014).

As noted by Guj (2013), many natural phenomena normally follow the lognomal
distribution. Table 6.3 shows the assigned distributions for the various inputs in
SimSched DBS optimisation output.

Table 6.3: Assigning probability distributions to SimSched DBS optimisation

output
Description Distribution
Cu LME Price Lognormal
Co LMB Price Lognormal
Mining cost - average Lognormal
Processing cost Lognormal
Element processing - Cu Lognormal
Element processing - Co Lognormal
Unit Time Costs normal
Selling cost per tonne - Cu normal
Selling cost per tonne - Co normal

The distributions were assigned as shown in Table 6.3 in the @Risk software to
investigate the impact of each of the input parameters on the NPV. The Tornado
diagram in Figure 6.16 shows the effect of the various parameters on the NPV.

107
 Total NPV
Inputs Ranked By Effect on Output Mean
Copper price 279.64 429.58
Processing cost 249.35 351.14
Throughput 1 283.96 383.93
Element proc cost Co 279.67 367.87
Throughput 3 290.02 374.60
@RISK Input…
Throughput 2 280.36Trial Version
361.06 Input…
For Evaluation Purposes Only
6 / %TCu 283.99 359.24
2 / %TCo 274.60 347.36
2 / %TCu 284.81 355.36
Selling cost Co 277.94 346.43 Baseline = 319.00
240

260

280

300

320

340

360

380

400

420

440
Total NPV
Figure 6.16: Tornado diagram - ranked effects of inputs

The copper price has the highest impact on the cut-off grade. Notably, high prices are
also essential for higher NPV, low prices reduce it. Price forecasts need to be as
accurate as possible in order to maximise the NPV. High throughput and high grades
also contribute to high NPV. High processing costs have a huge negative impact on the
NPV. Figure 6.16 makes it clear which parameters are worth the focus for Ruashi.

The initial calculated NPV is $241.80. Risk analysis using @Risk shows that there is a
91% probability of getting a higher NPV than the original estimate. This is shown in
Figure 6.17.

108
Figure 6.17: Probability of improving NPV above base value
As such if this risk analysis was conducted in order to evaluate the risk or opportunity
of achieving the estimated NPV then the results show that the project can go ahead
because of the high likelihood of success. On the other hand, the probability of the
project failing is zero as shown in Figure 6.18.

Figure 6.18 Probability of making a loss for Ruashi

@Risk has actually shown that the NPV needs to be improved by about 143% by
varying the relevant inputs.

109
6.6 Chapter summary
Of the investigated scenarios, it has been shown that the break-even cut-off grade
policy gives the shortest life of mine. SimSched DBS promotes production of more
metal in the early years of the life of mine. The effects of the waste stripping backlog
have been mitigated by following a cut-off optimisation policy.

The results have shown that mining costs have no effect on the processing cut-off
grade. However, the increase in metal price lowers the cut-off grade and vice versa.
Taking environmental costs into consideration lowers the cut-off grade. @Risk was
also used to identify risks and opportunities in cut-off grade optimisation for Ruashi.

110
CHAPTER 7: CONCLUSIONS AND RECOMMENDATIONS

7.1 Conclusions
The research was aimed at addressing the following:

 The stripping backlog incurred in the past which is destroying the value of
Ruashi Mining;

 Unavailability of high grade ore due to previous high-grading which threatens

the premature closure of the mine;

 The opportunity to improve the Net Present Value (NPV) of Ruashi Mining in
cognisance of the prevailing operational challenges.

The life of mine schedule produced from SimSched DBS has given an optimised cut-
off grade policy which can be applied at Ruashi. The mill feed grades are also targeted
based on the ore that can be availed in a particular year. The scheduled mining periods
are displayed in different colours in Figure 3.5. The periodic surfaces can be exported
to other mine design software and used to control the mining process so that the
targeted grades are achieved. The surfaces are used as constraints to prevent mining of
unplanned ore and to ensure the planned waste is mined accordingly.

Proper scheduling of waste stripping through cut-off grade optimisation has shown that
the high grade ore can be availed starting in the first year of the life of mine. All the
three methods used to produce the cut-off grade policy have shown that high grade ore
can be can be availed in the early years of the life of mine.

There is an opportunity to improve the NPV of Ruashi mining by optimising the cut-off
grade. The comparison of the NPV from the current life of mine against that produced
by the three scenarios in Figure 6.5 attests to that. The current life of mine includes ore
from the current stockpiles which is not included in the scenarios. If the stockpile ore is
included, the NPV might be way above that of the current life of mine.

Care needs to be taken however, due to the high influence of cobalt price on the block
values that may cause high-grading. This has been shown by the sterilisation of lower

111
grade material which is not economic to treat anymore because it fully utilises the full
plant capacity without much metal output. NPVS seems not be as aggressive as
SimSched in maximising metal output, hence it gives a smoother schedule.

The metal equivalent grade gives almost the same results as the Net Smelter Return
(NSR) in SimSched even though it is slightly lower. In this case copper equivalent was
used. It simplifies the optimisation process but may not be ideal for further economic
analysis. It is important to know how much of each metal is being produced although
the back calculation becomes cumbersome.

The break-even cut-off grade gave the lowest NPV of all the scenarios investigated.
This shows that running a mine on break-even cut-off grade does not optimise the value
of the operation. As such, this cut-off grade must only be used as a quick estimation.

Risk analysis conducted using @Risk software has shown that it is possible to improve
the NPV from that based on SimSched DBS by focusing on the critical input
parameters like lowering processing costs, increasing throughput and optimising the
cut-off grade policy. @Risk has also shown that unless something catastrophic
happens, Ruashi’s NPV will always be positive based on the investigated parameters.

112
7.2 Recommendations

It is necessary to control the mining rate in the earlier years of the life of mine in
SimSched DBS to prevent high cash outflows at the beginning of the life of mine. The
scheduled mining rate is astronomically high in the first three years. This results in
huge stockpile volumes. This ties up a lot of capital in the stockpiled ore, which is not
in line with the time value of money. To optimise NPV, it is necessary to maximise
cash inflows and delay cash outflows as much as possible without damaging the
reputation of the company. Delaying cash outflows can be achieved by reducing the
mining rate at the beginning of the life of mine. The NPV from SimSched could have
been much higher with a reduced mining rate. It is a bit of a challenge for Ruashi to
reduce the mining rate due to the short mine life.

There are a lot of calculations outside the SimSched DBS programme. It is necessary to
have SimSched generate block economic values automatically so as to make the
program more user-friendly. This also makes the optimisation runs even faster from a
human point of view. It is also necessary to have SimSched convert the coordinates of
the block model to indices without the user having to do it manually. The aim is to try
to reduce human errors as much as possible.

The optimisation on block economic value has tended to have high-grading effect on
the Ruashi orebody which is a bimetallic orebody. The by-product has a higher unit
price compared to the core product. This has resulted in the inclusion of blocks with
copper grades below the break-even cut-off grade. This results in scheduling of very
low grades which might not be practical for metal recovery in the plant. Incorporating a
way to prevent mining of uneconomically low grades may assist in preventing this.

There is also need to cater for pre-existing stockpiles in SimSched for a complete cut-
off grade optimisation. At the moment SimSched just caters for material from the
model only. In many cases stockpiles are not modelled but the tonnages and average
grades are known.

113
Parametric cut-off grade is ideal for simplifying cut-off grade optimisation for
polymetallic deposits. However, it becomes necessary to revert to component grades
for further economic analysis beyond the cut-off grade optimisation. The parametric
cut-off grade conceals the parameters which the engineer can use to benchmark with
other operations. It is also necessary to know the quantities of specific products. As a
result, it is the researcher’s feeling that parametric cut-off grades are only more useful
academically.

Fixed recoveries have been applied for all grades of the ore. This might be overvaluing
the deposit because recoveries commonly decrease with ore grade. A study needs to be
conducted to investigate this assumption for Ruashi Mining. This will enable the
determination of the relationship between feed grade and metal recovery.

114
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APPENDIX A

Cut-off grade calculation formulae

(William, 2014)

f+F+X
m+h+( )
𝑃𝑙𝑎𝑛𝑛𝑖𝑛𝑔 𝑐𝑢𝑡 − 𝑜𝑓𝑓 𝑔𝑟𝑎𝑑𝑒 = H
(p − k)y

f+C+C
m+h+( )
𝐵𝑢𝑑𝑔𝑒𝑡 𝑐𝑢𝑡 − 𝑜𝑓𝑓 𝑔𝑟𝑎𝑑𝑒 = H
(p − k)y

f+F+C+X
m+h+( )
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 𝑐𝑢𝑡 − 𝑜𝑓𝑓 𝑔𝑟𝑎𝑑𝑒 = H
(p − k)y

f+X
m+h+(
𝐵𝑟𝑒𝑎𝑘 − 𝑒𝑣𝑒𝑛 𝑐𝑢𝑡 − 𝑜𝑓𝑓 𝑔𝑟𝑎𝑑𝑒 = H )
(p − k)y

s+h
Marginal cut − off grade =
(p − k)y
Where

m = mining variable cost

f = fixed cost

F = opportunity cost

X = ongoing capital expenditure

H = treatment capacity

C = minimum profit or net cash flow

p = price

k = variable marketing cost

y = yield (recovery)

s = rehandle cost from stockpile

121