Mining Projects Management: Think Second Order!

CIM Montreal 2003
Denis Marcotte,
Abstract Few industries are more challenged by technical, political and market uncertainty than the mineral industry. Technical uncertainty in mining projects concerns the volume and quality of the resource, the processing and metallurgical parameters, the production efficiency, etc. Political uncertainty can take diverse forms. It is highly country or even continent dependent. It includes risks of change in the taxation system, risk of expropriation and risk of social instability or war. Market uncertainty depends on the market structure of the commodity. For mineral commodities exchanged on a free market, the price volatility is the main issue whereas for commodities sold directly to the consumers, like iron and uranium, the demand is also a relevant uncertain parameter. Intensive feasibility studies incorporating these uncertainties and risks are needed before investing up to billions of dollars in the development of a new mine. Current feasibility studies are often based on a single (or very few) mean geological scenario and simplified price profiles along the life of the project. Yet, strategic decisions are made at an early stage: e.g. level of investment in exploration and metallurgical studies; adoption of a flexible, but more costly, mine design; risk-sharing strategies. Over the last twenty years, Real Option theory has emerged as a unifying framework enabling strategic planning under uncertainty (technical, political and market). Geological and market variances (second order!) are pivotal for proper uncertainty quantification and project management. Geostatistical and financial tools exist to assess variances in resource quantity and quality (commonly represented by variograms) and price (commonly represented by the volatility). The present study explores the possible benefits of using modern geostatistical tools and financial techniques for project management. More precisely, the following questions are examined: Is geological uncertainty really an issue? How does the geological uncertainty affect an optimal mine design ? Can we combine geological and price uncertainties in a unifying Real Option framework? Simple examples aimed at illustrating the concepts involved are presented.
Keywords: Mining, Management, Uncertainty, Real options, Evaluation, Geostatistics
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