Micon recently completed a very successful scoping-level trade-off study to determine the optimum rate of production of a mineral deposit based upon orebody configuration, types of plant feed available, recovery options, infrastructure requirements, capital, and operating costs.
The selection of a mine’s production rate is one of the most significant decisions in the development phase of a mineral deposit. Production capacity is a root driver to optimise the economic return of a mineral deposit and is linked to the organisation’s tolerance to risk. It is therefore vital to identify the most appropriate production capacity as early as possible.
Estimation of the optimum rate of production is linked to the qualities and characteristics of the mineral resource (size, grade, deposit setting and metallurgical exploitation), the mine’s production life, and the economic attributes of CAPEX, OPEX, saleable metal and organisational risk attitude. A lower production rate normally equates to a lower CAPEX whilst a higher rate of production typically allows for lower OPEX but requires a higher risk appetite. Additional considerations to be taken into account include environmental and social impacts, availability and cost of project finance, life of mine and infrastructure development.
The primary objective of mine planning is to select the best alternative that will create the highest economic return for the defined level of risk. This value can be quantified by the IRR and NPV of the Project, which remain the most widely used metrics by most mining companies and financial institutions.
According to McIsaac and Smith (2019), an economic evaluation should be undertaken to confirm the optimum production rate of a mining project. Micon performs such evaluation through DCF analysis. McIsaac and Smith noted that as production rates increase, the mining project will typically present an increase in economic value (both in terms IRR and net NPV). However, at some point the marginal rate of return reaches a maximum and then declines as the production rate increases. This maximum capacity occurs when the increasing CAPEX for the higher production rate is no longer offset by decreasing OPEX. No equation exists to determine the maximum point of the marginal rate of return. Empirical determination of this point requires the economic evaluation of several cases at different production rates.
Assessing the optimum production rate requires thorough analysis of the mining production rate and the rate of metallurgical processes concerned with the treatment of the mined ore and its various products. The best solution represents the mining schedule and processing capacity that optimise the IRR, NPV within the level of uncertainty (i.e., risk) that the organisation is willing to accept in anticipation of the economic return.
Micon determined the optimum production rate for the mineral deposit against a range of productions rates for which separate CAPEX and OPEX costs were estimated and production schedules developed.
Production rate is a key metric in mine planning since it interconnects technical with economic parameters. In determining the optimal production rate, minerals must be extracted to maximise the economic return of the operation. Several issues must be considered: the distribution of grades and ore types varies with time through the deposit, recoveries vary depending on varying ore types and grades and costs vary depending on ore types and grades. In future, revenue can vary depending on commodity prices and costs can change due to inflation.
In cash flow assessments, technical and economic factors such as mine scheduling, recovery, costs as well as the distribution of deposit and time value of money are considered. The main objective is to increase economic return during the production period in order to comply with technical and economic constraints. The goal of maximising economic return over the mine’s life, as well as the correlation with grade, tonnage and recovery are performed by developing a broad range of Microsoft Excel DCF models.
Micon generated DCF models for each of the selected production rates. The resulting economic return for each DCF model was evaluated and compared to one another in order to select the optimum rate that maximised productivity.
Micon considers the cash flow approach the most appropriate method to determine the optimum production rate. In applying this method, Micon is aligned with international best practices. The cash flow approach relies on the “value in use” principle and requires determining the present value of future cash flows over the useful life of the asset. The economic value of the asset is determined using the free cash flow capitalisation, i.e. the DCF methodology.
The economic value is based on the value, in present day terms, of an anticipated series of future income streams. Feasibility studies are crucial in this assessment process.
It is difficult to accurately predict several years into the future. However, the cash flow assumptions are based upon “best” realistic estimates, at the time of the assessment, of the required capital spending, production, sales revenues and expenditures. Consequently, Micon developed new production schedules as well as CAPEX and OPEX estimates for each of the selected production rates.
Discount rates were applied to the post-tax cash flows to determine the NPV. The discount rate depends on the nature and risk profile – i.e., the risk profile of the production rate being assessed.
The risks associated with the production rates were assessed applying the Mining Build-Up model proposed by Petr Bora and Michal Vaněk in a November 2017 publication entitled: “Estimating the Cost of Equity Using a Mining Build-up Model” (https://acta.mendelu.cz/media/pdf/actaun_2017065051643.pdf). Using the MBM and answering a few questions to determine the risk profile associated with each production rate, Micon could develop a discount rate specific for each production rate.
For any assistance to determine the optimum production rate, including developing geological resource models, mine production schedules, or mineral asset valuations contact the author, Derick R de Wit or any of our professional staff through the Micon website: www.micon-international.com/our-team.