Open Pit Mine - Planning and Design-3rd Edition

Open Pit Mine - Planning and Design-3rd Edition

(Parte 5 de 7)

- Warehouse inventories.

- A contingency allowance for unforeseen adverse happenings and for unestimated small requirements that may arise. - Operating capital sufficient to pay for running the mine until the first revenue is received.

- Financing costs and, if applicable, preproduction interest on borrowed money.

A separate exercise is to forecast the major replacements and the accompanying provisions for postproduction capital spending. Adequate allowance needs to be made for small requirements that, though unforeseeable, always arise in significant amounts.

Operating cost estimation: - Define the labor strength, basic pay rates, fringe costs.

- Establish the quantities of important measurable supplies to be consumed - power, explosives, fuel, grinding steel, reagents, etc. - and their unit costs.

- Determine the hourly operating and maintenance costs for mobile equipment plus fair performance factors.

- Estimate the fixed administration costs and other overheads plus the irrecoverable elements of townsite and social costs.


16 Open pit mine planning and design: Fundamentals

Table 1.3. (Continued).

Only cash costs are used thus excluding depreciation charges that must be accounted for elsewhere. As for earlier studies, post-mine costs for further treatment and for selling the product are best regarded as deductions from the gross revenue.

Marketing'. - Product specifications, transport, marketing regulations or restrictions.

- Market analysis and forecast of future prices.

- Likely purchasers.

- Costs for freight, further treatment and sales.

- Draft sales terms, preferably with a letter of intent.

- Merits of direct purchase as against toll treatment.

- Contract duration, provisions for amendment or cost escalation.

- Requirements for sampling, assaying and umpiring.

The existence of a market contract or firm letter of intent is usually an important prerequisite to the loan financing of a new mine.

Rights, ownership and legal matters: - Mineral rights and tenure.

- Mining rights (if separated from mineral rights).

- Rents and royalties.

- Property acquisitions or securement by option or otherwise.

- Surface rights to land, water, rights-of-way, etc.

- Licenses and permits for construction as well as operation.

- Employment laws for local and expatriate employees separately if applicable.

- Agreements between partners in the enterprise.

- Legal features of tax, currency exchange and financial matters.

- Company incorporation.

Financial and tax matters'. - Suggested organization of the enterprise, as corporation, joint-venture or partnership.

- Financing and obligations, particularly relating to interest and repayment on debt.

- Foreign exchange and reconversion rights, if applicable.

- Study of tax authorities and regimes, whether single or multiple.

- Depreciation allowances and tax rates.

- Tax concessions and the negotiating procedure for them.

- Appropriation and division of distributable profits.

Environmental effects:

- Environmental study and report; the need for pollution or related permits, the requirements during construction and during operation. - Prescribed reports to government authorities, plans for restoration of the area after mining ceases.

Revenue and profit analysis: - The mine and mill production schedules and the year-by-year output of products.

- Net revenue at the mine (at various product prices if desired) after deduction of transport, treatment and other realization charges.

- Calculation of annual costs from the production schedules and from unit operating costs derived previously.

- Calculation of complete cash flow schedules with depreciation, taxes, etc. for some appropriate number of years - individually for at least 10 years and grouped thereafter.

- Presentation of totals and summaries of results. - Derived figures (rate of return, payback, profit split, etc.) as specified by owner or client.

- Assessment of sensitivity to price changes and generally to variation in important input elements.

1.5 PLANNING COSTS Mine planning 17

The cost of these studies (Lee, 1984) varies substantially, depending upon the size and nature of the project, the type of study being undertaken, the number of alternatives to be investigated, and numerous other factors. However, the order of magnitude cost of the technical portion of studies, excluding such owner's cost items as exploration drilling, special grinding or metallurgical tests, environmental and permitting studies, or other support studies, is commonly expressed as a percentage of the capital cost of the project:

Conceptual study: 0.1 to 0.3 percent Preliminary study: 0.2 to 0.8 percent Feasibility study: 0.5 to 1.5 percent


The material presented in this section has been largely extracted from the paper 'Mine Valuation and Feasibility Studies' presented by Taylor (1977).

1.6.1 Tonnage and grade

At feasibility, by reason of multiple sampling and numerous checks, the average mining grade of some declared tonnage is likely to be known within acceptable limits, say ±5%, and verified by standard statistical methods. Although the ultimate tonnage of ore may be known for open pit mines if exploration drilling from surface penetrates deeper than the practical mining limit, in practice, the ultimate tonnage of many deposits is nebulous because it depends on cost-price relationships late in the project life. By the discount effects in present value theory, late life tonnage is not economically significant at the feasibility stage. Its significance will grow steadily with time once production has begun. It is not critical that the total possible tonnage be known at the outset. What is more important is that the grade and quality factors of the first few years of operation be known with assurance. Two standards of importance can be defined for most large open pit mines:

1. A minimum ore reserve equal to that required for all the years that the cash flows are projected in the feasibility report must be known with accuracy and confidence.

2. An ultimate tonnage potential, projected generously and optimistically, should be calculated so as to define the area adversely affected by mining and within which dumps and plant buildings must not encroach.

This reduces to two items - throughput and recovery. Open pit mining units have well established performance rates that can usually be achieved if the work is correctly organized and the associated items (i.e. shovels and trucks) are suitably matched. Performance suffers if advance work (waste stripping in a pit) is inadequate. Care must be taken that these tasks are adequately scheduled and provided for in the feasibility study.

The throughput of a concentrator tends to be limited at either the fine crushing stage or the grinding stages. The principles of milling design are well established, but their application

18 Open pit initie planning and design: Fundamentals requires accurate knowledge of the ore's hardness and grindability. These qualities must therefore receive careful attention in the prefeasibility test work. Concentrator performance is part of a three way relationship involving the fineness of grind, recovery, and the grade of concentrate or product. Very similar relations may exist in metallurgical plants of other types. Again, accuracy can result only from adequate test-work.

Some cost items, notably in the operating cost field, differ little from mine to mine and are reliably known in detail. Others may be unique or otherwise difficult to estimate. Generally, accuracy in capital or operating cost estimating goes back to accuracy in quantities, reliable quotes or unit prices, and adequate provision for indirect or overhead items. The latter tend to form an ever increasing burden. For this reason, they should also be itemized and estimated directly whenever possible, and not be concealed in or allocated into other direct cost items.

Contingency allowance is an allowance for possible over expenditures contingent upon unforeseen happenings such as a strike or time delaying accident during construction, poor plant foundation conditions, or severe weather problems. To some extent the contingency allowance inevitably allows for certain small expenditures always known to arise but not foreseeable nor estimable in detail. Caution is needed here. The contingency allowance is not an allowance for bad or inadequate estimating, and it should never be interpreted in that manner.

The accuracy of capital and operating cost estimates increases as the project advances from conceptual to preliminary to feasibility stage. Normally acceptable ranges of accuracy are considered to be (Lee, 1984):

Conceptual study: ±30 percent Preliminary study: ±20 percent Feasibility study: ±10 percent

It was noted earlier that the scope of work in the conceptual and preliminary studies is not optimized. The cost estimate is suitable for decision purposes, to advance the project to the next stage, or to abort and minimize losses.

1.6.4 Price and revenue

The revenue over a mine's life is the largest single category of money. It has to pay for everything, including repayment of the original investment money. Because revenue is the biggest base, measures of the mine's economic merit are more sensitive to changes in revenue than to changes of similar ratio in any of the expenditure items.

Revenue is governed by grade, throughput, recovery, and metal or product price. Of these, price is: (a) by far the most difficult to estimate and (b) the one quantity largely outside the estimator's control. Even ignoring inflation, selling prices are widely variable with time. Except for certain controlled commodities, they tend to follow a cyclic pattern.

The market departments of major metal mining corporations are well informed on supply/demand relationships and metal price movements. They can usually provide forecasts of average metal prices in present value dollars, both probable and conservative, the latter being with 80% probability or better. Ideally, even at the conservative product price, the proposed project should still display at least the lowest acceptable level of profitability.


The feasibility study is a major undertaking involving many people and a variety of specialized skills. There are two basic ways through which it is accomplished.

1. The mining company itself organizes the study and assembles the feasibility report. Various parts or tasks are assigned to outside consultants.

2. The feasibility work is delegated to one or more engineering companies.

Contained on the following pages is an eleven step methodology outlining the planning (Steps 14) organizing (Steps 5-10) and execution (Step 1) steps which might be used in conducting a feasibility study. It has been developed by Lee (1984, 1991).

Phase A. Planning Step 1: Establish a steering committee. A steering committee consisting of managers and other individuals of wide experience and responsibility would be formed to overview and evaluate the direction and viability of the feasibility study team. One such steering committee might be the following:

- Vice-President (Chairman); - General Manager, mining operations;

- Vice-President, finance;

- Chief Geologist, exploration;

- Vice-President, technical services;

- Consultant(s).

Step 2: Establish a project study team. The criteria for selection of the study team members would emphasize these qualities:

- Competent in their respective fields. - Considerable experience with mining operations.

- Complementary technical abilities.

- Compatible personalities - strong interpersonal qualities. - Commitment to be available through the implementation phase, should the prospect be viable.

The team members might be: - Project Manager;

- Area Supervisor, mining;

- Area Supervisor, beneficiation;

- Area Supervisor, ancillaries.

Step 3: Develop a work breakdown structure. The Work Breakdown Structure (WBS) is defined by the American Association of Cost Engineers (AACE) as:

a product-oriented family tree division of hardware, software, facilities and other items which organizes, defines and displays all of the work to be performed in accomplishing the project objectives.

The WBS is a functional breakdown of all elements of work on a project, on a geographical and/or process basis. It is a hierarchy of work packages, or products, on a work area basis. The WBS is project-unique, reflecting the axiom that every project is a unique event.

A WBS is a simple common-sense procedure which systematically reviews the full scope of a project (or study) and breaks it down into logical packages of work. The primary

20 Open pit initie planning and design: Fundamentals challenge is normally one of perspective. It is imperative that the entire project be visualized as a sum of many parts, any one of which could be designed, scheduled, constructed, and priced as a single mini-project.

There are a number of categories which can be used to construct a work breakdown structure. These include: (1) Components of the product; (2) Functions; (3) Organizational units; (4) Geographical areas;

(5) Cost accounts; (6) Time phases; (7) Configuration characteristics; (8) Deliverables;

(9) Responsible persons; (10) Subpurposes.

It is not a rigid system. WBS categories can be used in any sequence desired, including using the same category several times. A sample WBS is shown in Figures 1.4 and 1.5.

An alternative to this is the Work Classification Structure (WCS). This commodity-based classification of goods and services is commonly used by construction contractors and consulting engineering firms as the primary cost-collection system. The specific intent of the WCS is to provide a consistent reference system for storage, comparison and evaluation of technical, man-hour and cost data from work area to work area within a project; and from project to project; and from country to country. The WCS may have different names in different organizations, but it is the 'original' costing system. It is the basis for virtually all of the estimating manuals and handbooks which identify unit costs for commodities such as concrete, or piping, or road construction, or equipment installation. The WCS provides a commodity based method to estimate and control costs. The key to the success of the WCS system within an organization is the absolute consistency with which it is used.

The WBS is of primary interest to owners and project managers - both of whom are interested in tracking cost and schedule on a work area basis. The WCS is primarily of interest to construction contractors and engineering consultants, who measure actual performance against forecast performance on a commodity basis.

Professional project managers and cost engineers normally use cost coding systems which encode both the commodity and the work package. This allows them to evaluate job-to-date performance, then forecast cost or productivity trends for the balance of the project.

Step 4: Develop an action plan for the study. An action plan in its simplest form, is just a logical (logic-oriented) time-bar plan listing all of the activities to be studied. Figure 1.6 is one example of such a time-bar graph. A more general action plan would have these characteristics: 1. Purpose: the action plan serves as a control document during the execution of the feasibility study. It functions as a master reference, against which change can be measured and resolved. It provides a visual communication of the logic and progress of the study. 2. Methodology: it may be possible for one person, working in isolation, to develop an action plan. However, it is substantially more desirable to have the project study team develop their plan on a participative, interactive basis. (Texas Instruments' Patrick Haggerty insisted that 'those who implement plans must make the plans'). This interaction

(Parte 5 de 7)