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COST ESTIMATION FOR OPEN PIT MINES: TACKLING COST UNCERTAINTIES

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 214

COST ESTIMATION FOR OPEN PIT MINES: TACKLING

COST UNCERTAINTIES
I.INTHANONGSONE1,*., C.DREBENSTEDT2., J.C. BONGAERTS3.
1
Department of Mining Engineering, National University of Laos, 3166 Vientiane, Laos.
2
Institute of Mining and Special Construction Engineering, Freiberg University of Mining and
Technology, Gustav Zeuner Strasse 1a, 09599 Freiberg, Germany
3
Institute of International Management of Resources and Environment, Freiberg University of Mining
and Technology, Lessing Strasse 45, 09599 Freiberg, Germany
*Corresponding author: i.inthanongsone@gmail.com

Abstract
This article presents cost models for open pit mines, which takes into account cost
uncertainty. In this paper, cost uncertainty is considered as cost of under production, and cost
of over production. The cost uncertainty model is developed using the real option techniques.
The proposed cost model is applied through an example case study of the hypothetical copper
mines. The results show that cost uncertainties likely have a critical impact on the profitability
for when the mine operates the stable extraction rate with the presence of over mining and
processing costs. Therefore, the mine is suggested to handle cost uncertainties by increasing
the production rate and extract quicker while the operating cost is reasonably low. The
proposed cost model in this paper can be further extended to estimate the costs of the projects,
which influence by cost uncertainty resulting from the production processes.
Keywords
Cost uncertainty, real options technique, profitability, production rate

1. Introduction
The objective of mine investors is to maximize the returns on an investment. There are two
possible ways to achieve their objectives: (i) reducing the cost of production while sustaining
the production rate, and (ii) increasing production rate while sustaining cost structures.
However, those two techniques are conflicted in real practices because there are many
independent variables related to it. Cost-savings can be optimized in the early planning stage,
as part of the feasibility study. The ability to manage costs of the project diminishes further as
more decisions are made during the design stage and at the end of the construction period;
there is essentially no opportunity to influence costs (Lee, 1994 cited in [2], p.7). It is
arguable that if one uses traditional cost estimation method to support a decision making for
an investment. However, using real option logics and techniques would thereafter enable
mining planning engineers to readjust the plans and alter the costs, respectively.

Stebbins and Leinart [5] stated “there is no universal standard in estimating costs for surface
mines, and developing a standardized method that suits every situation would be extremely
difficult, since each proposed mine is unique and conditions can be so variable”. This is true
since mineral deposit is located in different geological and geographical settings. Sontamino
and Drebenstedt [7] presented cost estimation models using system dynamics. The model was
specifically designed for coal mining, it therefore restricted to certain costs components.
Nevertheless, the model of [7] can be further extended to estimate costs of other types of open
pit mines. Khousavand et al [3] developed models, which included costs uncertainty in
stockpile of open pit mines. Pehrsson et al [4] presented cost modeling technique using
simulation-based multi-objective optimization, and post-optimality analysis. So far, there are
limited numbers of research that carried out cost optimization for open pit mining. In fact, it is
lacks of studies conducting the uncertainty in cost variations might influence the value of a
Please cite this article as: Inthavongsa et al. (2015). Cost estimation for open pit mines: Tackling cost uncertainties. In: IUR, Vol 1,
Medienzentrum der TU Bergakademie Freiberg, ISBN: 2190555x. pp.214-222.
 215

project. Thus, this article focuses on cost estimation including cost uncertainty associated with
the production processes. It is worthwhile to note that this paper does not attempt to optimize
the cost per unit of production, but rather addressing the impact of cost uncertainties to the
profitability of a given operation. The rests of this paper is organized as follows: the
“Methodology” section describes types of cost, and proposes cost estimations models
included uncertainty. The “Example” section gives an example of hypothetical case study to
demonstrate application of the proposed models. In “Results and Discussions” section,
explain results obtained from simulations and discuss on the key findings, and the
“Conclusion” section summarizes the insight results and highlights on why cost uncertainty
should be taken into consideration.

2. Methodology
It is of paramount important to understand that what costs pay for what?, how much does it
cost?, and when to pay?. The following sections give descriptions of the methods used in this
paper. The method is started by defining types of cost and categorizes them into group of
specific types. Then, cost model is developed by taking into account cost uncertainty of the
production.The cost model is developed using Vensim®DSS6b, and the discrete-event
simulation is used to study the effect of cost uncertainties to the profitability of a project.
2.1 Cost Categorization
In this paper, costs in open pit mines are categorized into four groups: (1) capital costs, (2)
operating costs, (3) general and administrative (G&A) costs, and (4) fixed costs. Capital costs
are investments required to start a mine. Typically, it is the costs of acquiring equipment.
Operating costs are the daily unit cost per ton of production basis, generally is drilling,
blasting, loading, and hauling costs, etc. These costs are further categorized into four main
groups: (i) mining costs, (ii) processing costs, (iii) mine reclamation costs, and (iv) power and
energy costs. G&A cost is regarded as management cost per year, which consists of
workforce costs, supervision costs, maintenance costs, and general mine services costs. Fixed
costs include overheads, opportunity costs, and social and environmental protection costs.
Cost varies from where the mine is located, the scale of a mine, the size and number of
equipment needed, and the transportation of product to clients. The optimization techniques
have been developed to reduce the costs, for example, the model proposed by [3] and [4].
There are many possibilities to reduce the costs such as purchasing less equipment or making
bid proposals for selecting the economical equipment suppliers, deferring waste extraction,
operating less-machines, and cutting unnecessary workforce. Theoretically, the cost of a given
mining operation is calculated using the following power curve formula; however, it is vital to
note that the costs obtain from this equation need to be readjusted since it is an estimate cost.

= (1)
Where are constant parameters, is the production rate per day.

2.2 Cost Models included Uncertainty

Modeling enables cost estimators to represent the cost structure via mathematical models or
graphical structured models. One can therefore explore the behavior of the developed cost
structures through simulation, which is efficient and powerful method to get results. Detailed
mining cost estimations are a time-consuming and long process; it requires detailed data of
each component to perform estimating process. The assumption enables the cost estimators to
replicate the cost structure for which it cannot obtain in real practices. In this paper, it is
crucial to note that the cost of reclamation is excluded from cost estimation for simplicity
reasons. The model is built based on the types of cost described above:

Please cite this article as: Inthavongsa et al. (2015). Cost estimation for open pit mines: Tackling cost uncertainties. In: IUR, Vol 1,
Medienzentrum der TU Bergakademie Freiberg, ISBN: 2190555x. pp.214-222.
 216

Capital Cost (CC) = (Total equipment costs) + (Mills associated capital costs) +
(Mines associated capital costs) + (*G&A costs) + (Fixed
costs*)
Operating costs (COP) = (Mining costs) + (Processing costs) + (Mine reclamation costs)
+ (Power and Energy costs)
G&A costs (CG&A) = (Workforce costs) + (Supervision costs) + (Maintenance costs) +
(General mine services)
Fixed costs (CF) = (Overheads) + (Opportunity costs) + (Social and Environment
protection costs) + (Taxes)
Where, *G&A cost and *Fixed cost are the initial expenses for starting the mine. According
to the method presented by [2], capital costs can be classified into material, expenses and
power (MEP) ownership costs. The MEP ownership cost consists two parts: depreciation and
average annual investment costs (AAIC) of equipment. The AAIC is written as:

+1
= × (2)
2

!"$
= (3)
$ $

Where, % is the percentage included interest rate, tax rate, and insurance rate (%); & is
expected life of equipment (years); and '' is the total capital costs (US$). The MEP
ownership costs in included in calculating the labour cost per ton and can be obtained by:

() * ℎ = + (4)

In real practices, cost uncertainty is most likely occurred with operating sections; particularly,
in the mining unit and processing unit. The mine might sometimes produces under targeted
production rate, or the other way around, it may produces over the targeted production rate.
However, cost uncertainty can be triggered by the external factor, for instance, the
instantaneous disease outbreaks in the regions that highly prone to this kind of risk, such as
the Ebola viruses spread in South Africa and the vicinity. In this case, costs of shortage of
skilled-workforce and the cost of transportation might be increased and escalated rapidly. In
this unusual situation, real options technique would suggest the mines to temporary shutdown
the operations until the disease outbreak has completely stopped. However, such viruses-
triggered cost uncertainty is beyond the scope of this paper. Therefore, it is important to take
into account the cost uncertainties, which might influence value of a project. Cost uncertainty
will be included in the mining and processing cost; if there is over or under production event
occurred. Such circumstances might trigger additional operating costs, which should be
incorporated in to the cost model. Thus, this paper incorporates real options logic into the
formula, that is, if and only if, the cost of under or over production incurred, then these costs
must be added into the total costs of production per ton, otherwise, the cost uncertainty is
zero. The proposed cost models included cost uncertainty is shown below.

,
= -( . + () * ℎ $ , (5)
$ 0 |
+/ , 045
$ 0 |

The proposed cost model for processing cost is as follows:

Please cite this article as: Inthavongsa et al. (2015). Cost estimation for open pit mines: Tackling cost uncertainties. In: IUR, Vol 1,
Medienzentrum der TU Bergakademie Freiberg, ISBN: 2190555x. pp.214-222.
 217

,
= -( . + () * ℎ $ ,
(6)
$ 0 | $
+/ , 045
$ 0 | $

The cost of under production at time can be calculated using Eq.(7):

67 8 9 :; !<= > (7)

* ? , @! * ? ,
!<=
< ? , + @ * ? ,

The cost of over-production at time can be calculated using Eq.(8):

A7 8 9 B; C<= >
(8)
C0 * ? , @ * ? ,
C<=
< ? , + @ * ? ,

Where: 67 is the cost of under-production; 8 is the total materials (waste + ore)

mined in time t; :; is the penalty charge per under-produced tons of ore; !<= is under
working scheduling factor at time t; A7 is the cost of over-production; B; is the
penalty charge per over-produced tons of ore; and C<= is the over working schedule factor at
time t.

Revenue per ton of a given metal can be computed using Eq. (9) below
0
0 , , 0 (9)
?

Eq.(10) denotes the profitability per ton, which can be calculated by subtracting cost of
mining and processing, included uncertainties costs of productions. Thus, the profitability per
ton is given by:
$ .
(10)
D 0 @ Total mining cost per ton Total processing cost per ton

3. An Example: A hypothetical case study
The hypothetical copper mine case study is assumed to demonstrate the proposed cost
estimation models. In this example, the copper mine has total resource of 84Mt. The mine
schedule is determined to operate 2 shifts/day, 6 days/week, 52 weeks/year, with 12 holidays.
The type of ore is copper sulphide (Cu2S), and found to be low-grade with the average grade
of 2.7%, where copper price is 2.90US$/lb, and the recovery rate is 90%. Table 1 provides the
information of mine scheduling and relevant parameters for cost estimations. For simplicity
reason, this paper assumed that cost of under and over production are not incurred in the same
production period. Therefore, the discrete-event simulation is performed to carry out the cost
uncertainty of each cost components.

Please cite this article as: Inthavongsa et al. (2015). Cost estimation for open pit mines: Tackling cost uncertainties. In: IUR, Vol 1,
Medienzentrum der TU Bergakademie Freiberg, ISBN: 2190555x. pp.214-222.
 218

Table 1 mine scheduling for hypothetical copper mines

Description Unit Amount

Extraction planning Mtpa 5; 6.5; 8
Stripping ratio 0.6:1
Tons of material mined per day
Ore Tpd 16,026; 20,833; 25,641

Waste Tpd 26,710; 34,723; 42,726

Milling rate per day Tpd 15,224; 19,792; 24,359

Mill efficiency % 95
Number of mill personals Persons 120
Number of mine personals Persons 125
Penalty charge per under mined tons of ore US$/ton 1.12
Penalty charge per over mined tons of ore US$/ton 0.85
Penalty charge per under milled tons of ore US$/ton 0.78
Penalty charge per over milled tons of ore US$/ton 1.14
Expected life of equipments years 8

4. Results and Discussions

The base case mine schedule was designed to replicate the cost structure of the hypothetical
copper mine operations. The extraction rate was set up to be stable for the base case mine
scheduling, then it is increased by the certain rate to observe the effect of cost uncertainty.
Two key findings can be drawn from the simulation results: first, when the extraction is
increased, the mining and processing costs are decreased even with the presence of cost
uncertainty. Second, when the extraction rate is stable, the mining and processing costs are
increased with the inclusions of cost uncertainty. Figure 1(a) shows the mining and processing
cost per ton of material mined. As observed, the mining and processing costs of the stable
extraction rate rises up when cost uncertainty occurred. The slope curves in the graphs are
caused by the MEP ownership cost of the equipments. Figure 1(b) depicts the profitability
per ton of the operation. It indicates that the profit is lower with the presence of cost
uncertainty. The effect of cost uncertainty will be further explained in the following sections.

5 US$/ton 3 2 US$/ton
3 1 1
4 2 3 3 3
7
5
US$/ton
US$/ton
1
2
4 2
1
4 2 1
4 2 4 1 2 (a) 2 US$/ton
(b)
1 1 1 1 1
7 US$/ton
1.5 US$/ton
1.5 US$/ton 2 2 2 2 2
2.5 US$/ton
3.5 US$/ton 1 1 1
2.5 US$/ton 1 US$/ton
3.5 US$/ton 1 US$/ton
2 2

0.5 US$/ton
0 US$/ton
0.5 US$/ton
0 US$/ton
0 US$/ton
0 US$/ton
3
4 1 2 3
4 1 2 3
4 1 2
3 0 US$/ton
2015 2020 2025 2030 2035 2040 0 US$/ton
Year 2 1 2 1 2 2
1 2
1
2015 2020 2025 2030 2035 2040
"Total Mining cost per ton ($/t)" : Base case extraction rate 5Mtpa 1 1 1 1 US$/ton
"Total processing cost per ton ($/t)" : Base case extraction rate 5Mtpa 2 2 2 2 US$/ton Year
"Total Mining cost per ton ($/t)" : Base case extraction rate 5Mtpa with cost uncertainty 3 3 3 US$/ton "Profitability per ton ($/t)" : Base case extraction rate 5Mtpa 1 1 1 1 1 1 1 US$/ton
"Total processing cost per ton ($/t)" : Base case extraction rate 5Mtpa with cost uncertainty 4 4 4 US$/ton "Profitability per ton ($/t)" : Base case extraction rate 5Mtpa with cost uncertainty 2 2 2 2 US$/ton

Figure 1 (a) Base case mining and processing cost with (b) Base case profitability per ton with cost uncertainty
cost uncertainty

Mining and processing cost will swing up or down depending upon the production rate. In this
example, the production rate is set to 5Mtpa (for the base case), then increased to 6.5Mtpa,
and 8Mtpa, respectively. Figure 2(a) depicts the cumulative costs of mining and processing
for the under-production rate cases. By assuming the penalty charge per under mined tons of
ore equals 1.12US$/t; the cost of under mined tons of ore suggests that the amount of cost
uncertainty will be higher if the extraction rate is stable, while it drastically reduces when the
Please cite this article as: Inthavongsa et al. (2015). Cost estimation for open pit mines: Tackling cost uncertainties. In: IUR, Vol 1,
Medienzentrum der TU Bergakademie Freiberg, ISBN: 2190555x. pp.214-222.
 219
3 US$/ton 10 US$/ton 1 1
6 3 4 6 3 4 6 3
2 4
4
2
US$/ton
US$/ton
(a) 3 3 3
8
8
US$/ton
US$/ton
(b) 5 5 2 5 5
4 2 4 2 4 3 1
3 US$/ton 6 US$/ton 6 4
1 2
2 US$/ton 3 5 5 5 1 5 7 US$/ton
4 6 6 6
2 5
3 US$/ton 5 US$/ton
1
5
6 4 1 2
2
4 3
0 US$/ton 3 1 0 US$/ton 6 2
0 US$/ton 2 0 US$/ton 1
0 US$/ton 6 0 US$/ton 5
5 1 4
0 US$/ton 4 0 US$/ton
3 3
0 US$/ton 0 US$/ton
2
1 1
2
0 US$/ton 0 US$/ton
2015 2020 2025 2030 2035 2040 2015 2020 2025 2030 2035 2040
Year Year
"Cost of under milled tons of ore ($/t)" : Base case extraction rate 5Mtpa 1 1 US$/ton "Cost of over milled tons of ore ($/t)" : Base case extraction rate 5Mtpa 1 1 1 US$/ton
"Cost of under mined tons of material ($/t)" : Base case extraction rate 5Mtpa 2 2 US$/ton "Cost of over mined tons of materils ($/t)" : Base case extraction rate 5Mtpa 2 2 US$/ton
"Cost of under milled tons of ore ($/t)" : Base case extraction rate 6.5Mtpa 3 3 3 US$/ton "Cost of over milled tons of ore ($/t)" : Base case extraction rate 6.5Mtpa 3 3 3 US$/ton
"Cost of under mined tons of material ($/t)" : Base case extraction rate 6.5Mtpa 4 4 4 US$/ton "Cost of over mined tons of materils ($/t)" : Base case extraction rate 6.5Mtpa 4 4 4 US$/ton
"Cost of under milled tons of ore ($/t)" : Base case extraction rate 8Mtpa 5 5 US$/ton "Cost of over milled tons of ore ($/t)" : Base case extraction rate 8Mtpa 5 5 US$/ton
"Cost of under mined tons of material ($/t)" : Base case extraction rate 8Mtpa 6 6 US$/ton "Cost of over mined tons of materils ($/t)" : Base case extraction rate 8Mtpa 6 6 US$/ton

Figure 2 (a) Accumulative mining and processing cost (b) Accumulative mining and processing cost of over
of under production production

mine increases its production rate. This is rational because if the unit cost per ton is estimated
by dividing total operating costs to the quantity of material mined, therefore the more amount
of material mined, the less unit cost. Similarly, the curve of the cost of under milled tons of
ore shows akin patterns as the cost of under mined tons of ore (see Fig.2a). The reason behind
is due to the fact that cost of under-processed tons of ore is lower because it operates less time
and consumes less power and energy comparing to the base case. In this context, the curve of
over mined and milled tons of ore as showed in Figure 2(b) show a contrast pattern with the
under-production. In this case, by assuming the mill operates over time as a result consumes
more power and energy to produce the over tons of ore feeding in the throughputs. Thus, the
penalty charge per over milled tons of ore assumed to be 1.14US$/t. The cost of over milled
tons of ore is increased because the mills operate exceed the base case mine scheduling.
Whereas the cost of over mined tons of ore is reduced for when the extraction rate is
increased, this is regardless of over operated mine equipment. For simplicity reasons, this
paper assumed that the cost of over operates the mining fleets is excluded in the cost
estimation models.
4
Base case extraction rate 8Mtpa with
over mining and processing costs
3.5

3 Base case extraction rate 6.5Mtpa with

over mining and processing costs
2.5
Base case extraction rate 5Mtpa with
US$/t

2 over mining and processing costs

1.5 Base case extraction rate 8Mtpa with

under mining and processing costs
1
Base case extraction rate 6.5Mtpa with
0.5 under mining and processing costs

0 Base case extraction rate 5Mtpa with

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 under mining and processing costs

Year

Figure 3 Profitability per ton with over and under mining and processing costs

Figure 3 shows the profitability per ton of the hypothetical copper mine. It is obvious that the
highest profitability per ton is when the mine increased the extraction rate to 8Mtpa with the
costs of under of mining and processing while the lowest profitability is the stable extraction
rate of 5Mtpa with the costs of over mining and processing. The insight is that cost
uncertainties seemingly have a critical impact on profitability for when the mine operates with

Please cite this article as: Inthavongsa et al. (2015). Cost estimation for open pit mines: Tackling cost uncertainties. In: IUR, Vol 1,
Medienzentrum der TU Bergakademie Freiberg, ISBN: 2190555x. pp.214-222.
 220

the stable extraction rate, and there is the presence of over mining and processing costs.
However, the cost uncertainty seemed to have less negative impact for when the mine
increases its production rate. As shown in Fig.3 that the extraction rate is increased to 8Mtpa,
the profitability is 3.36US$/t (with the presence of the over and under production); yet it is
higher than the base case extraction rate, which is 1.37US$/t. This implies that the mine might
be able to handle cost uncertainty by increasing mining capacity and extract quicker (if the
mining cost is reasonably low) or otherwise, the mine have to sustain the operating costs.

5. Conclusions
The paper has presented the cost models for open pit mines, which included cost uncertainty.
The example of cost estimation using the proposed cost model was given through a
hypothetical case study. Cost uncertainty was explicitly included in the proposed model by
considering cost of under production and cost of over production. The findings were that cost
of uncertainty is significantly influenced the profitability of a project for when the mine
operates with stable mining capacity. In this case, the mine is suggested to increase its
production capacity while the operating cost is reasonably low. The insight is that increasing
production rate and mine quicker might help the mine to reduce the impact of cost
uncertainties.
Acknowledgement
This work is supported by the German Academic Exchange Service (DAAD), granted code
A/12/96777 (Ref.no.91541199). The author would like to express a gratitude to the Institute
of Mining and Special Construction Engineering, TU Bergakademie Freiberg for supporting a
sound working environment to carry out this research.
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Please cite this article as: Inthavongsa et al. (2015). Cost estimation for open pit mines: Tackling cost uncertainties. In: IUR, Vol 1,
Medienzentrum der TU Bergakademie Freiberg, ISBN: 2190555x. pp.214-222.

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