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Comparison of cut-off grade models in mine planning for improved value

creation based on NPV

Conference Paper · March 2018

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 Comparison of cut-off grade models in mine planning for
improved value creation based on NPV

J. Githiria and C. Musingwini

University of the Witwatersrand, Johannesburg, South Africa

Cut-off grade is defined as the grade that is used to distinguish between ore and waste
within a given orebody. It also differentiates between various types of ore for different
metallurgical processing options. The cut-off grade for a mining operation is expected to
vary over time in relation to changing technical and economic conditions.

The development of cut-off grade models can be traced back to the 1960s in the published
work of Henning and Lane. This paper discusses cut-off grade optimization models
commonly used in the mining industry such as break-even, heuristic, and Lane’s cut-off
grade model. Six cut-off grade models, both classical and modern, are compared to
illustrate the significance of optimizing cut-off grades based on the net present value
(NPV) and life-of-mine (LoM) impacts identified during the mine planning process. The
two classical models produced sub-optimal results compared to the four modern models,
which yielded better value creation through improved NPVs. In addition, the variance of
results generated from the four modern models is about 0.14%, indicating that these
models are all appropriate for optimizing cut-off grades.

Keywords: cut-off grade optimization, Lane’s cut-off grade theory, break-even cut-off
grade, heuristic cut-off grade, net present value.

INTRODUCTION

Overview of cut-off grade optimization

Production scheduling determines the quantities of ore that can be mined, processed, and refined in a
given period under specified mining, processing, and refining capacities. The production schedule that
is developed identifies the quantities of material to be mined, including ore quantities and
corresponding metal amounts to be extracted. A cut-off grade policy enables the life-of-mine (LoM) and
production schedule to be determined in terms of the applicable inter-temporal cut-off grades, quantity
mined, processed, and refined under likely economic and technical conditions. Economic conditions
include costs and price estimations, while technical conditions include geological and operational
parameters. The cash flows generated from the production schedule are discounted at the appropriate
discount rate to give the net present value (NPV) for the specific mining project.

The relationship between cut-off grade and NPV provides a means by which cut-off grades are
optimized (Minnitt, 2004). The NPV for a mining project is dependent on interrelated variables such as
mining and milling capacities, extraction sequence, and cut-off grade. Mine planning is the process by
which optimal values for each of these variables are set during the life of the mine.

Society of Mining Professors 6th Regional Conference 2018

Johannesburg, 12–14 March 2018
The Southern African Institute of Mining and Metallurgy
347
Research work on the determination of cut-off grades and corresponding production rates started in the
1960s when Henning (1963) and Lane (1964) developed methods for calculating cut-off grades. Later,
several contributions from different authors (Taylor, 1972; Dowd, 1976; Taylor, 1985; Krautkraemer,
1988; Dagdelen, 1992) provided more insights into and extensions to cut-off grade optimization. Some
of these cut-off grade models have been incorporated into some of the mine planning software packages
in use in the mining industry. For example, Maptek Evolution® and Whittle 4X® are among the software
packages applying Lane’s cut-off grade optimization model.

A mining complex constitutes a mine, an ore processing plant, and a metal refinery. In order to avoid
losses in a mining system, these areas should be optimally planned. Mathematical optimization (or
operations research) techniques have been used in the mining industry to develop several software
packages currently used in the mining industry to maximize value. Examples of the mathematical
optimization techniques used include linear programming techniques (mixed-integer programming,
integer programming, binary integer programming), dynamic programming, greedy method, and
heuristic methods such as local search, Tabu search, simulated annealing, and genetic algorithms.

Mathematical formulations to solve complex optimization problems in mine planning have been more
widely developed for, and implemented in, open pit mining compared to underground mining because
of the increasing complexity of the underground mining environment (Musingwini, 2016). Cut-off
grade optimization is important in mining since it assists in determining the economic feasibility of a
mining project. A cut-off grade policy enables risk-quantified decision-making process streams that
create sustainable utilization of mineral resources through major investments (Asad and
Dimitrakopoulos, 2013).

Despite the positive developments in the optimization of cut-off grade, there is still a need to develop
optimization algorithms that incorporate all aspects of a mining operation for improved and more
realistic optimization. This need is underpinned by the fact that most approaches to optimizing cut-off
grade assume that input and output variables are deterministic, yet these are characterized by
variability over the life of an operation. In order for mine plans to incorporate such variability,
optimization methods need to be adapted from being deterministic to being stochastic in nature
(Musingwini, 2016).

This study emphasises and illustrates the need to optimize the cut-off grade used by mining engineers
to calculate the production rates and NPV of the mining projects. These values are calculated by models
designed to facilitate the work done by the mining engineers when dealing with complicated scenarios.
Different models used in calculating cut-off grade in both open pit and underground mining operations
are reviewed and analysed.

LITERATURE REVIEW

Break-even Cut-off Grade Approach

A cut-off grade approach is used to develop a model. A break-even cut-off grade model is basically a
one-dimensional process because it accounts for economic parameters only and ignores both the grade-
tonnage distribution of the deposit and production capacities (mining, processing, and refining
capacities). The model assumes that every ton classified as ore pays for itself at the time it is treated,
leaving it open to different interpretations as to what constitutes cost used in the calculation of the break-
even cut-off grade. Despite its shortcoming, this approach is applied in mining operations due to its
simplicity.

The break-even formula used in determining the grade at which revenue obtained is equal to the cost
of producing that revenue is given by Equation [1].

C os t ($ / t) (c + mo − mw)
Break − even grade (g / t) = = [1]
Product price ($ / g) × re cov ery ( y ( s − r ))

348
where c is the cost to process ore, mo represents cost to mine ore, mw represents cost to mine waste, y
represents metal recovery, s represents unit metal sale price, and r represents refinery unit cost.

Heuristic Cut-off Grade Approach

Rendu (2014) discussed several ways of calculating cut-off grades using heuristic approaches. Heuristic
cut-off grade optimization models generally use cut-off grades that are higher than break-even cut-off
grades during the early years of the mine operation for faster recovery of capital investment. They then
lower the cut-off grades to break-even cut-off grades during the later years in order to maximize
extraction. Heuristic models produce improved NPVs but are sub-optimal since they consider only
direct operating costs (Dagdelen, 1992). Capacity constraints and opportunity costs are not taken into
consideration.

Lane’s Optimum Cut-off Grade Approach

Lane (1964) made the very important observation that the cut-off grade is not only a function of the
grade distribution, but is also constrained by the capacities of the various interdependent components
of the mining operation. Each component of the mine has its own set of costs and capacities and,
therefore, its own optimum cut-off grade. The overall optimum cut-off grade for an operation is one
that balances the capacities of the mine, mill, and refinery (market). Lane’s optimum economic cut-off
grade is the grade that maximizes the NPV of future cash flows.

Lane’s model is a three-dimensional process that considers a mining operation (mining complex) as a
combination of three stages, namely mine, mill or concentrator, and refinery or market. Each of these
three components has its own limiting capacity to handle either ore or product and has its own set of
associated costs. In addition, the whole operation has a set of fixed costs, which do not necessarily relate
to any one stage or the level of production.

Lane’s optimum cut-off grade policy determines the optimum cut-off grade among the limiting
economic and balancing cut-off grades that maximize the NPV of a mining operation (Lane, 1964, 1988).
The three limiting economic cut-off grades are the mining limiting cut-off grade (gm), concentrator
limiting cut-off grade (gc), and refinery limiting cut-off grade (gr). These limiting cut-off grades change
with changes in economic and technical parameters. They are based upon the capacities of the
individual mining stages and associated costs at each stage, and the price of the commodity. The other
three balancing cut-off grades are the mine and concentrator balancing cut-off grade (gmc), refinery and
concentrator balancing cut-off grade (grc), and mining and refinery balancing cut-off grade (gmr). The
balancing cut-off grades are based on the grade distribution of the mined material and capacities at each
stage of production.

The objective is to find the cut-off grade that produces the overall maximum profit subject to mining,
concentrating, and refining constraints. An optimum cut-off grade will be determined for each of the
three pairs of operations. For example, when the mine and the concentrator are considered as a pair,
there are three possible options for the optimum cut-off grade, Gmc. These are gm, gc and gmc. The
optimum cut-off grade is the middle value among Gmc, Grc, and Gmr. The quantity of material mined
(Qm), quantity of ore processed (Qc), and quantity of concentrate refined (Qr) and the NPV can then be
computed (Lane, 1964, 1988).

Optimization formulae developed by Lane (1964, 1988) are all-inclusive but counter-intuitive from a
mining perspective, yet they provide good first-pass approximations to the optimum cut-off grade.
Financial and technical modelling and simulation have been applied to account for most of the
circumstances facing a mining operation.

The optimal cut-off grade approach (Lane 1964, 1988) has been modified in several studies to
incorporate different mining scenarios that can be encountered in a real mining complex. Some of the
modified approaches are now incorporated into some of the existing mine planning and optimization
software such as Maptek Evolution®, OptiPit®, and Geovia Whittle 4X®.

349
METHODOLOGY

There are several methods used in calculating cut-off grade such as the break-even model, traditional
or heuristic methods, Lane’s cut-off grade model, and extensions to Lane’s model. The subsequent
discussions in this paper focus on the quality of the results that are obtained from several optimization
techniques in cut-off grade calculations. The results are compared based on the outputs from the:
•
Break-even cut-off grade approach
•
Traditional and heuristic cut-off grade approach
•
Modern cut-off grade optimization approaches that include the following models: (i) OptiPit®
software (Dagdelen and Kawahata, 2007), (ii) Geovia Whittle 4X® (Whittle and Wharton, 1995),
(iii) Maptek Evolution® (Myburgh, Deb, and Craig, 2014) and (iv) Cut-off Grade Optimizer
(Githiria Muriuki, and Musingwini, 2016).

The results are compared to illustrate the significance of optimizing cut-off grades based on their NPV
and LoM impacts during the mine planning process. The comparison is based mainly on the NPV
generated and associated LoM to assist in decision-making associated with these indicators.

Input Parameters used in the Cut-off Grade Optimisation Models

The input parameters for a cut-off grade model typically include economic and technical (geological
and operational) parameters. Economic parameters include: metal price, mining cost, processing cost,
refining/selling/marketing cost, fixed/period cost, and discount rate. Geological input is represented
by the grade-tonnage curve within the ultimate pit limit or pushbacks of an orebody model. Operational
parameters include mining, processing, and refining capacities, and metallurgical recovery. Table I
shows the input parameters generally used in cut-off grade models and realistic values for each
parameter used in a case study to compare each of the six cut-off grade optimization models that were
mentioned earlier.

Table I. Economic and technical parameters used in the cut-off grade models (Dagdelen and Kawahata, 2007;
Myburgh, Deb, and Craig, 2014).

Notation Explanation Unit Value

s Price $ per oz 600
m Mining cost $ per ton 1.2
c Milling cost $ per ton 19
r Refining cost $ per ton 5
f Annual fixed costs Million $ per annum 8.35
y Recovery % 90
d Discount rate % 15
M Mining capacity Million tons per Unlimited
annum
C Milling capacity Million tons per 1.05
annum
R Refining capacity t/a 8500

Definitions of the maximum capacities, unit costs and quantities involved in any cut-off grade policy
are presented as follows (Hustrulid, Kuchta, and Martin, 2013).

(1)
Costs
Costs used in calculation of cut-off grade are divided into two categories: fixed and variable.
Fixed costs refer to the expenses that remain constant within a specific period or scale of
production, while variable costs change in relation to the level of production. Variable costs
normally included in the break-even cut-off grade calculation are those incurred during
drilling, sampling, blasting, loading, crushing, grinding, flotation, concentrate drying, filtering,
and shipping, smelting and refining. Fixed costs are defined in the calculation to include costs

350
 for general administration, initial capital expenditures, equipment depreciation, property taxes
and marketing.
•
m is mining costs expressed in terms of $ per ton of material moved. The unit mining costs
include drilling, blasting, loading, hauling, etc.
•
c is processing costs expressed in $ per ton of material milled. The unit costs include
crushing, grinding, floating, leaching, etc.
•
r includes all costs incurred at the product and selling stages such as smelting, refining,
packaging, freight, insurance, etc. These are expressed in terms of $ per unit of final product.
•
s is the selling price per unit of product.
•
y is the recovery, which is an overall figure for the concentrator and refinery. It is that
proportion of the mineral contained in the original ore feed that is retained in the final
product.
•
f represents the annual fixed costs.
(2)
Capacity
•
M is the maximum amount of material (ore and waste) that the mine can produce in a given
time period. It is therefore a restriction on the maximum rate of production throughout the
orebody.
•
C is the maximum amount of ore that can be put through the concentrator (mill) in a given
time period, assuming unrestricted availability of input ore from the mining stage.
•
R is the maximum amount of final product produced in the time period, assuming
unrestricted availability of concentrate from the concentrator.

As mentioned earlier, geological input included is usually obtained from a grade-tonnage

curve of the deposit. The grade-tonnage distribution shown in Table II is for a gold mine (McLaughlin
gold deposit, Northern California, USA) that was used as a case study in this paper to compare the six
cut-off grade models that were selected for comparison. The ore grade ranges up to 0.358 oz/t.

Table II. Grade-tonnage distribution for the McLaughlin gold deposit (Dagdelen and Kawahata, 2007; Myburgh,
Deb, and Craig, 2014)

Interval From (oz/t) Mid-point (oz/t) To (oz/t) kt

1 0.000 0.010 0.020 70 000

2 0.020 0.023 0.025 7 257
3 0.025 0.028 0.030 6 319
4 0.030 0.033 0.035 5 591
5 0.035 0.038 0.040 4 598
6 0.040 0.043 0.045 4 277
7 0.045 0.048 0.050 3465
8 0.050 0.053 0.055 2 438
9 0.055 0.058 0.060 2 307
10 0.060 0.063 0.065 1 747
11 0.065 0.068 0.070 1 640
12 0.070 0.073 0.075 1 485
13 0.075 0.078 0.080 1 227
14 0.080 0.090 0.100 3 598
15 0.100 0.229 0.358 9 576
Total 125 525

351
The case study data presented in Tables I and II was used in determining the optimal cut-off grade using
each of the six cut-off grade optimization models. The following sections present the framework for
each of the models and the results obtained from applying each of the six models.

Application of Break-even Cut-off Grade Approach

The following steps are used in calculating cash flows generated using a break-even cut-off grade model
(Hall, 2014).

1.
Determine the break-even cut-off grade using Equation [1] as follows:
(c + mo − mw) 19 + 1.2
Break − even cut − off grade = = = 0.038
(s )) 0.9(600 − 5)
2.
Determine the quantity of ore (qo) and quantity of waste (qw), stripping ratio (SR), and average
grade () of ore.
Using this breakeven cut-off grade of 0.038 oz/ton, all the material above this cut-off grade is sent
to the processing plant while the rest is sent to the waste dump. Ore tonnage (qo) in this deposit is
the total tons of materials between grade intervals 5 and 15 (36 346 kt). All the material below the
break-even cut-off grade is considered as waste material (qw) (89 167 kt).
The average grade of the ore (gavg) is calculated by taking a weighted average of ore tonnage and
average grades of these materials (=0.102 oz/t).
The strip ratio is calculated as follows: (qw/qo) = 89,167/36,346 = 2.45.
3.
Determine the quantity of material to be mined (Qm), quantity of ore sent to the concentrator (Qc),
and amount of product actually produced over the production period (Qr) as indicated in
Equations [2] to [4].
With a yearly ore production (Qc) of 1.05 Mt, quantity of mined material (Qm) and quantity of
refined product (Qr) are calculated as follows:
Qc = Qm (1 + SR) = 1.05Mt [2]

⎡ qw ⎤
Qm = Qc ⎢1 + ⎥ = Qc[1 + SR ] = 1.05*( 1 + 2.45 ) = 3.62 [3]
⎣ qo ⎦
()
Qr(koz) = ( Qc ) g ( y ) = ( 1.05* 0.102* 0.9 )* 1000 = 96.3koz [4]
4.
Determine cash flow for year t, CFt as indicated in Equation [5]
CFt = (s − r )Qrt − cQct − mQmt − ft [5]
where s is selling price, y is recovery, m is unit mining costs, c is unit processing cost,; r is unit
refining cost, f is fixed costs, Qm is material mined, Qc is ore processed, Qr is concentrate
refined, and t is time.
96.3
CFt = (600 − 5) − − 1.05*19 − 1.2* 3.62 = 33.0
1000
When abreak-even cut-off grade of 0.038 oz/t is applied to the deposit throughout the mine life, as NPV
of $218.5 million is generated, as shown in Table III. Break-even cut-off grade models are not focused
on maximizing cash returns, hence they tend to produce sub-optimal mine plans under the reality of
fluctuating mineral prices (Hall, 2014). In addition, the cut-off grades are constant throughout the life
of mine.

352
 Table III. Cut-off grade policy using the break-even cut-off grade model (Dagdelen and Kawahata, 2007).

Period Cut- Av. Quantity Quantity of Quantity of Cash flow ($

(year) off grade of material ore sent to gold million)
grade (oz/t) mined concentrator produced
(oz/t) (Qm) (Qc) (Mt) (Qr) (koz)
(Mt)
1 0.038 0.102 3.6 1.05 96.3 33.0
2 0.038 0.102 3.6 1.05 96.3 33.0
3 0.038 0.102 3.6 1.05 96.3 33.0
4 0.038 0.102 3.6 1.05 96.3 33.0
5 to 34 0.038 0.102 3.6 1.05 96.3 33.0
35 0.038 0.102 3.4 1.00 91.7 31.4
Total 125.8 36.7 3365.9 1154.2
NPV@15% 218.5

Application of Heuristic Cut-off Grade Approach

With the heuristic approaches, cut-off grade calculation changes at intervals along the mine’s
productive life. Equations [6] to [8] show how the calculations are done in one of the heuristic
approaches (Dagdelen, 1993; Asad, 1997). Traditional cut-off grade calculation is modified so as to
include fixed costs, depreciation, and minimum profit per ton required for a period of time to obtain a
much higher cut-off grade during the early years. Assuming that a minimum profit of $3.0 per ton
would be imposed to increase the cash flows further during the first five years and that the plant’s
capital cost of $105 million would be depreciated during the first ten years by the straight-line method,
then (Asad, 1997):
•
Depreciation cost per year = $105 million/10 years = $10.5 million per annum
•
Depreciation cost per ton = $105 million/1.05 Mt = $10 per ton of ore

If fixed costs are also included in the equations the following results can be achieved:
•
Fixed cost per ton= $8.35 million per annum/1.05 Mt = $7.95 per ton.

Year 1-5: Milling cut-off grade

Milling cost + minimum profit + fixed cost + depreciation
= [6]
(Price − (refining cost + marketing cost)*recovery
19 + 10 + 3 + 7.95
= = 0.075oz/t
($600 − $5 )* 0.90

Year 6-10: Milling cut-off grade

Milling cost + depreciation + fixed cost
= [7]
(Price − (refining cost + marketing cost)*recovery
19 + 10 + 7.95
= = 0.069oz/t
($600 − $5 )* 0.90

Year 11-18: Milling cut-off grade

353
 Milling cost + fixed cost
= [8]
(Price − (refining cost + marketing cost)*recovery
19 + 7.95
= = 0.050oz/t
($600 − $5 )* 0.90

The case study results of applying a heuristic cut-off grade model are illustrated in Table IV. The table
shows an improvement in NPV ($347.08–$218.5) by 59% compared to the break-even cut-off grade
model. However, the mine project has a shorter LoM, from 35 years to only 18 years, in order to achieve
a faster recovery of the capital investment.

Table IV. Cut-off grade policy using a heuristic model (fixed costs included) (Asad, 1997).

Period Cut- Av. Quantity of Quantity of Quantity of Cash flow

(year) off grade material ore sent to gold produced ($ million)
grade (oz/t) mined concentrator (Qr) (koz)
(oz/t) (Qm) (Mt) (Qc) (Mt)
1 0.075 0.182 9.2 1.05 171.6 62.8

2 0.075 0.182 9.2 1.05 171.6 62.8

3 0.075 0.182 9.2 1.05 171.6 62.8
4 0.075 0.182 9.2 1.05 171.6 62.8

5 0.075 0.182 9.2 1.05 171.6 62.8

6 0.069 0.169 8.2 1.05 160.0 57.1

7 0.069 0.169 8.2 1.05 160.0 57.1

8 0.069 0.169 8.2 1.05 160.0 57.1

9 0.069 0.169 8.2 1.05 160.0 57.1

10 0.069 0.169 8.2 1.05 160.0 57.1

11 to 17 0.050 0.132 5.4 1.05 124.8 39.5

18 0.050 0.132 1.3 0.26 30.5 9.6

Total 125.8 18.11 2562.5 885.6

NPV@15% 347.08

Application of a Heuristic Cut-off Grade Approach in Maptek Evolution®

Myburgh, Deb, and Craig (2014) applied modern heuristics to develop a mine planning software
package, Maptek Evolution®, which maximizes NPV through cut-off grade optimization. The approach
employed used an evolutionary algorithm in developing a cut-off grade model that caters for the
dynamism and complexity of mining parameters. This hybrid algorithm employs three levels of
optimization consisting of an evolutionary algorithm which manages two other lower level
optimization algorithms. The evolutionary algorithm manages variation of cut-off grades and the
extraction sequence, while a linear programming algorithm determines the optimal flow of material
through multiple processing streams as well as management of the stockpile policy. Lastly, a local
search technique is applied to provide the best-fit schedule. The self-adaptiveness of such genetic
algorithms contributes greatly to the package’s ability to successfully address complex real-world
problems. This is due to its flexibility, which allows it to be easily hybridized with other optimization
methods.

354
The model performs simultaneous optimization of extraction sequence and cut-off grade optimization
for a single element that goes through multiple processing streams. The evolution algorithm used in
this model stochastically produces high-quality results quickly through several iterations. However, the
iterations performed do not guarantee convergence and the time taken to complete an optimization
increases with the complexity of the problem, in the range of 3–20 minutes (Myburgh, Deb, and Craig,
2014).

Again, data in Tables I and II was used in Maptek Evolution® software to generate the cut-off grade
policy depicted in Table V. The modified heuristic approach produces a 19% higher NPV, but a shorter
LoM of 10 years compared to the basic heuristic approach.

Table V. Cut-off grade policy as reported from Maptek Evolution® per period (Myburgh, Deb, and Craig, 2014).

Period Cut- Av. Quantity of Quantity of ore Quantity of Cash

(year) off grade material sent to gold produced flow ($
grade (oz/t) mined concentrator (Qr) (koz) million)
(oz/t) (Qm) (Mt) (Qc) (Mt)
1 0.156 0.257 17.55 1.05 242.7 95.0

2 0.145 0.251 16.66 1.05 237.6 93.1

3 0.137 0.247 16.03 1.05 233.7 91.5

4 0.123 0.240 15.11 1.05 227.2 88.8

5 0.111 0.234 14.37 1.05 221.6 86.3

6 0.105 0.232 14.06 1.05 219.0 85.1

7 0.086 0.200 10.83 1.05 189.0 71.2

8 0.072 0.174 8.55 1.05 164.7 59.4

9 0.061 0.153 6.87 1.05 144.6 49.5

10 0.050 0.134 5.49 1.05 126.2 40.2

Total 125.3 10.5 2002.5 760.1

NPV@15% 413.84

Application of Lane’s Cut-off Grade Approach in OptiPit®

Dagdelen and Kawahata (2007) modified Lane’s cut-off grade theory using mixed-integer linear
programming to optimize cut-off grades. Their mathematical solution framework was developed into
OptiPit® software. The software aims to optimize mining sequence, cut-off grades, and process flows
simultaneously for mining operations. The software generates a multi-period production schedule
based on an optimized cut-off grade. It can handle large-scale open pit and underground mining
operations involving many waste dumps, stockpiles, complex processing options, and blending
requirements. Optimization in OptiPit® for a simple deposit like the one used in this case study takes
only several seconds. The run time increases with increasing deposit size. Most complex models are
solved to optimality or near optimality using OptiPit® within 3 to 5 hours (Dagdelen and Kawahata,
2007).

A solution example using OptiPit® software is illustrated in Table VI based on input parameters from
Tables I and II. The cut-off grade policy generated from OptiPit® indicates an improvement in NPV of
19% over traditional methods (basic heuristic approach), but with a shorter LoM of 10 years.

355
 Table VI. Cut-off grade policy from OptiPit® per period (Dagdelen and Kawahata, 2007).

Period Cut- Av. Quantity of Quantity of ore Quantity of Cash flow ($

(year) off grade material sent to gold million)
grade (oz/t) mined (Qm) concentrator (Qc) produced
(oz/t) (Mt) (Mt) (Qr)
(koz)
1 0.160 0.261 18.4 1.05 246.6 96.5

2 0.150 0.253 16.9 1.05 239.1 93.9

3 0.140 0.248 16.1 1.05 234.4 92.0

4 0.120 0.238 14.7 1.05 224.9 87.9

5 0.110 0.233 14.1 1.05 220.2 85.8

6 0.100 0.228 13.6 1.05 215.5 83.6

7 0.094 0.202 11.0 1.05 190.9 72.1

8 0.070 0.171 8.2 1.05 161.6 58.0

9 0.060 0.152 6.8 1.05 143.6 49.3

10 0.050 0.133 5.5 1.05 125.7 39.7

Total 125.3 10.5 2002.5 758.8

NPV@15% 414.36

Application of Lane’s Cut-off Grade Approach in Geovia Whittle 4X®

Whittle and Wharton (1995) developed an approach for determining an optimum cut-off grade for a
mining operation while simultaneously evaluating some or all of the complications of a real mining
complex such as stockpiling of mined material, blending, and multiple mineral streams. This approach
was incorporated into the Geovia Whittle 4X® open pit mining software.

The software has a comprehensive spreadsheet reporting option that opens in Microsoft Excel® for easy
analysis of results. It has the capability of handling up to 30 processing methods. Additionally, it may
be used for blending optimization under an unlimited number of constraints and variables for several
blending scenarios. However, the processing or computing time increases with an increasing number
of options to be evaluated.

Once a set of optimal pit shapes has been generated applying the Lerchs-Grossman (L-G) algorithm, the
production schedule is optimized subject to defined operational constraints. The schedule optimizer
then controls key factors that include:
•
Rate and location of mining within the pit shells defined in the previous stage of the planning
process
•
Cut-off grade(s) between waste, stockpile, and material to be processed
•
Selection of a processing method that an ore parcel will report to, if more than one alternative
exists
•
Blending specifications, observing any minimum or maximum limits while considering the
attributes of the material available from mining and stockpiles and the sensitivities of the plant’s
characteristics related to cost, recovery, and throughput

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 •
Production capacities, mix, and product specifications (where applicable).

The optimization process results in a LoM plan that maximizes the NPV of a project for a specified set
of conditions (geological, geotechnical, metallurgical, market, environmental, etc.). It applies the theory
to distinguish the material taken to the waste dump, stockpile, and processing plant. Using the data
from Tables I and II, a cut-off grade policy was generated from Geovia Whittle 4X® as shown in Table
VII. The cut-off grade changes along the mine life such that the higher-grade ore is mined in the early
years while the lower-grade ore is mined later. The NPV and LoM generated are almost the same as
those generated from OptiPit®.

Table VII. Cut-off grade policy as reported from Geovia Whittle 4X® per period.

Period Cut-off Av. Quantity of Quantity of Quantity Cash

(year) grade grade material ore sent to of gold flow ($
(oz/t) (oz/t) mined (Qm) concentrator produced million)
(Mt) (Qc) (Mt) (Qr) (koz)
1
0.161 0.259 18.0 1.05 245.2 95.9
2
0.152 0.255 17.2 1.05 241.0 94.4
3
0.142 0.250 16.5 1.05 236.4 92.6
4
0.131 0.245 15.7 1.05 231.3 90.5
5
0.120 0.239 14.9 1.05 225.7 88.1
6
0.107 0.232 14.1 1.05 219.6 85.4
7
0.092 0.213 12.1 1.05 200.9 76.7
8
0.079 0.188 9.8 1.05 177.9 65.9
9
0.065 0.163 7.6 1.05 153.6 53.9
Total 743.4
NPV@15 413.82
%

Application of Lane’s Cut-off Grade Approach in Cut-Off Grade Optimiser

Githiria, Muriuki, and Musingwini (2016) developed the Cut-off Grade Optimiser, an executable
computer application that applies Lane’s cut-off grade theory without any modifications. Cut-off Grade
Optimiser was developed in the C++ programming language in Microsoft Visual Studio 2008 Integrated
Development Environment. The cut-off grade policy generated from Cut-off Grade Optimiser is
illustrated in Table VIII. The cut-off grades are dynamic since Lane’s model accounts for the change in
the grade-tonnage curve.

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 Table VIII. Results of cut-off grade policy from Cut-off Grade Optimiser
(Githiria, Muriuki, and Musingwini 2016).

Period Cut-off Av. Quantity of Quantity of ore Quantity Cash flow

(year) grade grade material mined sent to of gold ($ million)
(oz/t) (oz/t) (Qm) (Mt) concentrator produced
(Qc) (Mt) (Qr) (koz)
1 0.16 0.259 17.93 1.05 244.76 95.81

2 0.15 0.254 17.07 1.05 240.03 94.03

3 0.14 0.249 16.29 1.05 235.31 92.16

4 0.13 0.244 15.57 1.05 230.58 90.21

5 0.12 0.239 14.92 1.05 225.86 88.18

6 0.10 0.229 13.77 1.05 216.41 83.94

7 0.09 0.224 11.58 1.05 211.68 83.75

8 0.07 0.204 8.30 1.05 192.78 76.44

9 0.06 0.181 6.83 1.05 171.05 65.28

10 0.05 0.161 5.49 1.05 152.15 55.64

Total 127.75 10.5 2120.61 825.44

NPV@15% 435.52

RESULTS AND DISCUSSION

There are two major insights that can be drawn from the three categories of cut-off grade approaches
that were compared in this study. Firstly, all factors (economic, technical, legal, environmental, social,
and political) must be taken into account when calculating cut-off grade. Secondly, when evaluation
time horizons are longer, cut-off grade values are lower, leading to lower NPVs. A summary
comparison of cut-off grade approaches is illustrated in Figure 1 and Table IX.

From Figure 1, cut-off grades are lower and constant with the break-even cut-off grade but higher with
approaches that have dynamic cut-off grades that are higher during the early years and lower during
the later years of operation. Due to higher cut-off grades in the early years, higher NPVs are generated.
The change in cut-off grade is relative to the decline in NPV with the depleting reserves. The mine life
is also shorter in dynamic cut-off grade approaches that ensure quicker recovery of the capital
investment. The variance in results from the four dynamic cut-off grade approaches is minimal and is
about 0.14%.

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 Figure 1. A comparison of the different cut-off grade models.

Table IX. Comparison of the mine life, cash flow, and NPV from the cut-off grade models.

Break- Geovia Cut-off

Heuristic Maptek
even OptiPit ® Whittle Grade
model Evolution®
model 4X® Optimiser
LoM (years) 35 18 10 10 9 10
Profits/cash
flow 1154.20 885.60 760.10 758.80 743.40 825.44
($ million)
NPV
218.50 347.08 413.84 414.36 413.82 435.52
($ million)

CONCLUSIONS AND RECOMMENDATION

The cut-off grade models presented in this paper are useful to mine planners when developing a cut-
off grade policy. Six cut-off grade models, both classical and modern, were compared in order to
illustrate the significance of optimizing cut-off grades based on NPV and life-of-mine (LoM) impacts
identified during the mine planning process. The two classical models produced sub-optimal results
compared to the four modern models, which had better value creation through improved NPVs. In
addition, the variance of results generated from the four modern models was small at about 0.14%,
indicating that modern models are appropriate for optimising cut-off grades.

Lane’s cut-off grade optimization model has been applied with success in most mining projects because
it recognizes that in order to create more value, cut-off grades should be dynamic to account for
changing technical and economic conditions over the LoM. However, it has some shortcomings which
have necessitated heuristic modifications or extensions to the model. With these modifications, it
accounts for complex mining scenarios associated in mining, concentrating, and refinery stages.

Lane’s algorithm is limited to a single process and a single commodity and cannot be applied in
operations with multiple processes. The algorithm does not take into account the economic impact of
stockpiling and blending requirements in ore processing. It also does not take in to account the variance
in the operation costs, commodity price, and grade-tonnage distribution. Therefore, future cut-off grade

359
optimization models should focus on strategies under dynamic economic situations by considering
alternative economic approaches while, considering the grade-tonnage distribution of the orebody. This
can be done by incorporating multiple realizations of economic and geological parameters in Lane’s
model.

The output from such cut-off grade optimization models would be dynamic, changing with the
variability experienced in the mining industry. Such stochastic models will consider and account for
uncertainty in all economic and geological parameters of a mining complex. In conclusion, the most
appropriate cut-off grade model is a model that generates the highest NPV in the shortest period
possible. Examples of such suitable models applied in the mining industry are generated using mining
software such as Whittle 4X and Maptek Evolution. The model should take an orebody model as an
input and endeavour to generate an optimal mining sequence and cut-off grade policy simultaneously.

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Joseph Muchiri Githiria

PhD student
University of the Witwatersrand

J. Githiria is currently doing his PhD in Mining Engineering at the University of Witwatersrand. He
holds a Master of Engineering Science-Mining in Curtin University (Western Australia School of Mines)
and a Bachelor of Science in Mining and Mineral Processing Engineering. His research interests include
mine planning and optimisation in surface and underground mining and mine design with the aid of
computer and operations research applications. He is a Member of the Australian Institute of Mining
and Metallurgy (AusIMM) and the Southern African Institute of Mining and Metallurgy (SAIMM).

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