Abstract

There is a long list of input parameters that go into pit optimization and mine design models. Examples are commodity prices, mining and processing operating costs, processing recoveries, selling costs, slope designs, etc. To have an optimum and reliable design, the sensitivity of the project for each of these parameters needs to be well understood. While some of the parameters such as the commodity prices are well discussed and understood, there is uncertainty in how sustaining capital costs and royalty payments should be considered in the process of the mine design.

It may seem self-evident that royalties (and metal streams) are a cost to a mine owner and should therefore be considered in mine development and processing decisions as a cost alongside other operating costs. However, from the perspective of other stakeholders such as the royalty holder, employees, contractors, suppliers, and the government, it is not so straightforward. A reduction in mineable inventory as a consequence of including royalties as costs is likely to negatively affect their position. Royalties can validly and usefully be considered as a function of resource ownership, rather than as a cost. A mine planning approach that excludes consideration of royalties as costs in cut-off grade determination is entirely valid.

The dividing line between operating costs and sustaining capital is not a universally agreed concept and is further blurred by legislated accounting principles that may vary by jurisdiction. In general, for mine cut-off grade decisions and strategic planning, the test should be whether or not the cost in question is impacted by the decision at hand. Equipment is generally “worn out” by using it to mine and process tonnes, rather than over time alone, so equipment overhaul and replacement costs should generally be considered in cut-off grade decisions. It becomes more complicated when the spending is “lumpy” as may be the case with strategic raises of a tailings dam (for example) or major equipment replacement. Cut-off grade decisions may span or “trigger” specific investments and must be considered in the context of the overall strategy. The complexity of these issues is often ignored in simplistic cut-off grade policy decisions. Analysis of alternate cut-off grade strategies may, in some cases be the only realistic way of understanding the impacts on the cash-flow and value proposition. Developing stockpiling policies that use the minimum cut-off grade by excluding royalties and sustaining capital costs boosts the cash flow while preserving the resource value by future value recovery.

The author(s) have found that there is no consensus about how to deal with royalties and sustaining capital costs in the process of the open pit mine design. This presentation is an attempt to layout a common path for dealing with these two important items and to open a forum to discuss it in detail. A modified real case study will be used to demonstrate the impacts of how these parameters are considered.