A method used to account for uncertainty in financial analysis could deliver huge profits to mining and mineral processing.
Uncertainty in decision making
It's easy to look back and see where value in a mining project was lost because of decisions relating to ore treatment, processing or unexpected market conditions.
If those variables could be modelled early, companies would be in a better position to make profit-creating decisions.
Real options analysis
We investigated the application of real options analysis (ROA) to optimising the value in mining and mineral processing.
ROA is a mathematical tool that helps with business decision-making by analysing the effect of decisions such as whether to expand or defer an investment, or whether to process high or low-grade ore at certain times of the price cycle.
Putting ROA into practice is not easy given the number of variables that influence a mining project – from commodity prices and exchange rates to ore grades and energy costs.
A primary aim of the ROA team is to construct a mechanism that will assist with making optimal decisions at any point in time, given the large range of uncertainty over future market and operating conditions.
We found that ROA is a tool that can be used to help maximise a mine's profitability during the different stages of its life.
In one case study we looked at three different strategies in mining and treating nickel laterite ore: constant feed and grade, optimised blending to maximise profit in a given year, and optimised blending to maximise long-term profit. Long-term optimisation delivered the highest profits – an 11 per cent increase over 10 years in one study. A study over a five-year period revealed a gain of 12 per cent.
If similar results could be found across the Australian mining industry they represent up to $5 billion annually of untapped profits.
We're currently working on visualisation of optimal decision boundaries, in order to assist industry with optimal decision-making under uncertainty.
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