SELECTION OF A CUTOFF GRADE STRATEGY FOR AN OPEN PIT MINE

G. A. Hufford

Phelps Dodge Corp.

~ o r e n c i ,Arizona

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MINING ENGINEERING
 The cutoff grade applied t o a disseminated
orebody inined b y open p i t a f f e c t s both t h e waste
r a t i o , hence the c o s t of producing o r e , and the
o r e grade, hence the quantity of metal recovered.
A s such i t has a s i g n i f i c a n t impact not only on
the annual p r o f i t or l o s s , but a l s o on the l i f e
of a mining property.
Cutoff Grade S t r a t e g i e s
Some commonly used o b j e c t i v e s i n c a l c u l a t i n g
cutoff grades a r e a s follows:
?linimize Unit Cost of Product (1)
This is found by adding a l l c o s t s associated
with each posslble cutoff such a s mining,
processing, and marketing. This is divided by
the quantity of marketable product obtained a t
each cutoff grade, then finding the minimum.
Because the market value of the product does not
e n t e r the c a l c u l a t i o n i t has no efEect on t h i s
s t r a t e g y : the same cutoff i s s e l e c t e d i n good
times and bad.
Yaximize Total P r o f i t ( 2 )
This is found by s u b t r a c t i n g t o t a l c o s t s from
t o t a l value of product for the e n t i r e orcbody for
cach possible cutoff grade, then picking the
maximucn. Usually t h i s r e s u l t s i n a lower cutoff
than ( 1 ) s i n c e somewhat higher unit c o s t s
associated with processing lower grade o r e a r e
d e s i r a b l e s o long a s they do not exceed the
market value of the product.
k c a u s e any material t h a t c o n t r i b u t e s t o the
o v e r a l l p r o f i t is included a s o r e , t h i s can a l s o
be c a l l e d t h e paylimit objective: material
containing any recoverable metal in which the
value exceeds the processing c o s t a f t e r mining is
considered ore.
laximize p r o f i t per o r e ton (annual p r o f i t ) ( 3 )
nis is found by s u b t r a c t i n g cost from value
of the contained product per ton of o r e for cach
possible cutoff grade, then s e l e c t i n q t h e
~aaximum. Usually t h i s r e s u l t s in a higher cutoff
grade than ( 1 ) a s t h e higher u n i t c o s t s
associated with the higher s t r i p p i n g r a t e a r e
o f f s e t by more marketable product. If a fixed
quantity of o r e can be treatetl annually a t a m i l l
t h i s s t r a t e g y a l s o provides the maximum annual
profit.
Yaximizc Prcscnt Value ( a )
A s suggested by Sotlerbcr% and Rausch (1368).
t h i s i s found by c a l c u l a t i n ~present value (PV)
from cashflows for the e n t i r e orcbody for each
possible c u t o f f yratlc and s c l c c t ing the maximum.
Cutoff Optimization Theorv ( 5 )
This i s found b y p e r i o d i c a l l y s e l e c t i n g cutoff
grades which maximize the PV of a s e r i e s of
cashflows t h a t f l u c t u a t e s i n response t o the
c u t o f f . I t i s conlmonly found by solving a
backwards recurrence r e l a t i o n i n which the cutoff
f o r each period i s s e l e c t e d such t h a t i t makes
the maximum c o n t r i b u t i o n t o the net present
value.
The optimization procedure i s developed
following Schaap (1984). Let V be the value of
t h e remaining part of the orebody when mined with
optimum c u t o f f . Let R(q,k) be the net r e t u r n f o r
a parcel q , of t h e orebody when mined a t a cutoff
k. F u r t h e r , l e t T be the time i n years required
t o mine q , and r be the discount r a t e . Then the
cutoff k f o r q is s e l e c t e d such t h a t
is maximized. This is solved beginning a t the
end of the orebody l i f e when V is zero and .
working backswards t o the present i n increments of
'1.
I t has been noted b y Lane (1964) t h a t the
s t r a t e g i e s maximizing t o t a l p r o f i t and maximizing
annual p r o f i t a r e s p e c i a l cases of the
optimization theory s t r a t e g y with zero and very
l a r g e discount f a c t o r s , r c s p e c t i v c l y .
Example
In order t o more c l e a r l y show the r e s u l t s of
t h e d i f f e r e n t cutoff grade s t r a t e g i e s , an example
is presented below. Although i t i s s l a n t e d
towards an open p i t copper mining and m i l l i n g
o p e r a t i o n , the.conclusions o r e more broadly
a p p l i c a b l e t o o t h e r s i t u a t i o n s with s i m i l a r
characteristics.
The orebody was modeled by a lognormal grade
d i s t r i b u t i o n with mean 0 . 5 % , standard deviation
0.5%, truncated a t 2.0%. >lining c o s t of $1.00
per ton and m i l l i n g c o s t of 53.00 per ton were
s e l e c t e d a s being t y p i c a l of a medium s i z e mining
operation. Thc orebody was assumed t o have a
twenty year l i f e i f mined a t a zero cutoff grade.
Thus each year i t was reduced by one p l u s the
waste r a t i o correspond in^ t o the cutoff t h a t was
a c t u a l l y in e f f c c t . I t is assumed t h a t the m i l l
product is sold without c o n s t r a i n t s of inarkct
demand .
To simplify economic c a l c u l a t i o n s , the value
of the recoverable product i n onc ton of o r c
gradins 1% was used a s the basic u n i t of market
p r i c e . This allows incorporation of any constant
recovery a s pounds of metal rccovercd for cach
u n i t of o r e grade. Post-milling c o s t s t h a t can
most reasonably be charged t o the quantity of
metal rccovcretl ( c g . mnrkoting) can be subrrilcted
from the market p r i c c . I n t.liis example, the
market p r i c c was s e t a t 910 an:l annul11 tliscount
r a t e s c t a t 122.
Table 1 shows t h c r e s u l t s of tho c a l c u l a t i o n .
'The s c l e c t r ~ ( cutoff
l grarlc rnnqcs from 0 . 3 0 % for
s t r a t e g y ( 2 ) t o 0 . 5 % for s t r a t e g y ( 3 ) .
'rhc optimization calcul;ltion ( 5 ) i s shown in
Table 2 . A check cn1cul;ltion of thc PV rlf the
o p t i ~ r ~ ucutoff
~n grade s e l ~ c ~ i oisr ~12.18, l ~ i g t ~ e r
than any i n Table 1 .
The d i f f e r e n t s t r a t c g i c s a l s o have t l i f f c r c n t
r c s l ~ o r ~ s ctso cl~rrngcs i n tile market p r i c e . Sl~ould
t l ~ cp r i c c r i s e , s t r a t e g y ( 1 ) would do nothirlg,
( 2 ) lower c u t u f f , ( 3 ) r a i s c c u t o f f , ( 4 ) and ( 5 )
any of L ~ I Cforegoing, depcrlding on the quantity
o.f r c s c r v e s .
Simulation
Assufning a s t a b l c market p r i c e f o r t h e product
and assu~nir~g the market can absorb a11 the
product rnadc, i t can be seen t h a t t h e curoff
~ r a d co p t i n ~ i z o t i o n ttleory provides t h e bcst
s t r a t e g y under PV c r i t e r i a . While the assurnption
of i:larkctability inay scern j u s t i f i e d t o those of
us i n thc base metals i n d u s t r y , thc assurnption of
market s t a b i l i t y does 11ot. I n order t o a s s e s s
the s e n s i t i v i t y of Lhc o p t i n i z a l i o ~thcory
~ to
random ~ ~ ~ a r kf leutc t u a t i o n s , a )lonte Carlo type
siraulation was done f o r t h e example orcbody.
A mean 12arkct p r i c c was s c l e c t e d for each run
(eg. $10) and indcpcndcnt d e v i a t e s were generated
from a normal d i s t r i b u t i o n v i t h a standard
deviation of $1 r e p r e s e r ~ t i n g tile r a r k c t p r i c e
each year. Cutoff grades wcre then s e l e c t e d f o r
each s t r a t e g y kr~owinl;the c u r r e n t markct p r i c e
and a s s u ~ ~ ~ it hn agt the c u r r e n t p r i c e would
continue i n d e f i n i t e l y .
As a r e s u l t each s t r a t e g y worked iron1 t h e same
s e t of random z a r k e t f l u c t u a t i o n s . The "luck"
f a c t o r o i rlonte Carlo sirniilation would have cone
i n t o play only a f t e r a competing s t r a t c g y had
exhausted i t s r e s e r v e s . Since comparisons were
made on t h e b a s i s of PQ, t h i s would have occurred
a t the time of maximum discounting.
i h r k e t p r i c e s were s c l e c t e d from $7, which is
rougnly t h e lowest p r i c e a t which t h e nine can
meet i t s operating c o s t s . t o S 1 2 . which should be
roughly the p r i c e required t o provide a
reasonable r e t u r n on c a p i t a l investment.
Results
Shown i n Figure 1 is t h e r e s u l t of a t y p i c a l
i t e r a t i o n of the simulation. The cutoff
s e l e c t e d b y each s t r a t e g y is shown a s a function
of the annual market p r i c e . In a d d i t i o n , t h e
consequences i n terms of orebody l i f e can be
seen.
The sirnulation was run for 100 i t e r a t i o n s .
The r e s u l t s , a s shown i n Table 3 a r e i n terms of
PV i n d o l l a r s f o r each ton per year m i l l
capacity.
The r e s u l t s show t h a t t h e optimization (5)
provides t h e best r e s u l t s a t Iligher market
p r i c e s , but not a s mean p r i c e s move towards t h e
Lreekeven point.
In p a r t i c u l a r t h e s t r a t e g y of ~naximizinp
annual p r o f i t ( 3 ) provides t h e best r e s u l t s a t
t h e lowest mean p r i c e . This i s probably because
the b e n e f i t of ~naxializin;: p r o f i t s i n t h e r e l a -
t i v e l y good years exceeds t h e b e n e f i t of con-
serviilg t h e orebody. In a d d i t i o n , the optiaurn
s o l u t i o n when faced with t h e c e r t a i n t y of l o s i n g
money i n t h e long terlit i s t o s e l e c t a s l i g h t l y
higher cutoff than t h e ir~inimur,lu n i t c o s t i n order
t o d e p l e t e ,the orebody, thus shortening t h e time
over which l o s s e s a r e expected. Although t h i s i s
s t r i c t l y t r u e i t seclns i r r e l e v a n t : a b e t t e r so-
l u t i o n would be t o abandon the ~ n i r ~entirely. e
The s t r a t e g y of minimized u n i t cost ( I ) did
.
well i n every cconornic environn~cnt A1 thougt~ tire
Inore s o ~ ~ h i s t i c a t capyroachcs
d seem t o make a
s i g n i i i c a n t d i f f e r e n c e i n t h c cxtrencely high or
low c a s e s , the minir:~ized u n i t cos; stlows i t s e l f
a s a s i n p l c and robust s t r a t c g y .
A s rhc mean market p r i c e is illcreased t o the
point a t which c a p i t a l investment is a t t r a c t i v e .
t h e r e t u r n s from each s t r a t e g y diverge v i t h t h e
optimization (5) providing tltc best r e t u r n .
Conclusion
The cutoff optimization procedure provides a
f a i r l y robust s o l u t i o n t o t h e probler.1 of c u t o f f
grade s e l e c t i o n , however the p o s s i b i l i t y of
%
misleading r e s u l t s should be kept i n mind under
unfavorable economic c o n d i t i o n s . The c a l c u l a t i o n
is r e l a t i v e l y sirnple and the benefit mcitsurcd in
terms of PV can be s u b s t a n t i a l .
Acknowlcdgelnent
The author would l i k e t o thank Phelps Dodzc's
Norenci Branch for providing cornputin: rcsourccs
f o r t h i s study. Thanks a r e a l s o extendcd t o !ir.
A . S o l t a n i f o r a very rhorough review of t h i s
work and t o Mr. J . D. V i l l c s c a s f o r d r a f t i n g t h e
figure.
References
1 . Lane. I. F.."Choosinp t h e Oatimurn Cutoff
Grade", .colorado school-of ~ i n c s(Iuartcrl y ,
Vol. 59, 1964, pp. 311-829.
2 . Schaap. W . ,"Objccti ve Function and Ilethodolo~y
i n Cutoff Grade Theory", Procccdinzs of thc 18th
APCO>I Svml,osium, London: The I n s t i t u t i o n of
i-linin?, and >letallurgy, )larch, 1984. pp. 4 9 3 - 5 0 2 .
3. Sodenberg, A . , and Raush, D. 0.. "Pit Planning
and Layout", i n Surface >lining ( E . P. P f l c i d e r .
e d . ) , New York: AIIIE. 1968, pp. 141-165.
Table 1
Avg. Waste Unit Total Annual PP
Cutoff Grad Ratio L i f e Cost P r o f i t P r o f i t @12=
(XI (XI (yr) (I)* (2)* (3)' (41,
* i n d o l l a r s per annual ton of mill capacity
 Table 2

k (6)
Grade ( 2 )
Uaste Ratio
K(q.k)

Opt. k
---9 ---- ----
20 0.83 0.30
19 0.79 0.30
1a 0.75 0.30
17 0.72 0.30
16 0.63 0.35
15 0.65 0.35
14 0.62 0.35
13 0.53 0.35
12 0.57 0.35
11 0.54 0.40
10 0.52 0.40
9 0.53 0.40
8 0.47 0.60
7 0.45 U.60
6 0.44 0.4U
5 0.42 0.40
4 0.4 0.45
3 U.34 U.45
-
> 0.37 0.45
1 0.35 0.45

'Table 3

STRATEGY*
,-lean ..............................
Price (1) (2) (3) 4 (5)

* i n d o l l a r s per a n n u a l c o n of m i l l c a p a c i t y
R E S U L T OF T Y P I C A L SIMULATION RUN

MARKET
PRICE ,,
$I0

I 0 M A R K E Y PRICE

GRADE 0.451

YEAR
Figure I