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T E C H N I C A L P A P E R S

IntroductionIn a world of widening competi-

tion and uncertainty, operating flex-ibility and strategic adaptability arebeing increasingly recognized ascritical to long-term corporate suc-cess. It has been realized in operat-ing underground mines that thegreatest scope for savings is avail-able during the early planning stage,within and somewhat beyond thefeasibility study. Here, the planningteam has greater freedom to explorealternatives and assess risk using various technical andeconomic criteria. Once ground has been broken, the al-ternatives available to the operator diminish exponen-tially as the mine matures. Although optimization,focusing on production level and cost, are the consistentobjectives of the mine operator, many key design andplanning commitments have been made at the initialplanning stage.

The planning stage considered here is that periodbetween the initiation of the feasibility study and thestart of mine production. Subsequent planning tends tofollow the developed production plans. Modificationsare made only as made necessary by changes in financial,technical or social factors. Flexibility in any plan is theability to cope with such change. The overall objective ofunderground mine planning is to develop an extraction(depletion) strategy that maximizesthe economic benefits from the orereserve.

In addition to traditional engi-neering, other constraints need to betaken into account, such as safety,environmental and social impact.The traditional engineering effortrequired to produce the optimumplan is governed by technical con-straints such as ground stability orventilation. The ability to plan withconfidence is often limited by a lackof geological, economic and geo-technical information on the depositat depth (Pelley, 1994). A plans ef-fectiveness depends on the abilityto foresee and provide solutions topossible production-related prob-

lems that can occur once the mine isoperational.

Production-related problemscan arise from peculiarities of theunderground mine as well as thecomplexity of the production pro-cess. To optimize the mine plan, thefollowing individual objectives needto be met (Pelley, 1994):

• maximize the overall percentage extraction of the mineralresource,

• develop an optimum sustain able rate of extraction,• minimize the cost per unit extracted,• minimize the initial development time and cost,• provide a grade-control strategy and• minimize ground-control cost and problems.

These objectives are usually not complementaryand, to some degree, may be in conflict. A techno-eco-nomic feasibility study of a mining project focuses on theoptimization of a complex set of variables through thelong-range plan. The entire process can be summarizedin a simple statement, that is, the determination of theoptimum technical and economic system to extract theore.

Strategic and tactical mine planning are complexand involved processes (Kazakidis et al., 1999). They alsodepend on the mine location, management’s experience,

economic conditions and local regu-lations. Also, mine planning has be-come further diversified in recentyears as environmental and socialfactors have emerged that need tobe considered in planning forsustainability (Anderson et al.,2001).

Sources of uncertaintyfor mining projects

Internal sources of uncertaintyare those that are dictated by thedeposit itself. External sources aredetermined by outside consider-ations, such as business or marketrequirements (Krantz and Scott,1992). The internal sources in a min-

Planning for flexibility in undergroundmine production systems

V.N. KAZAKIDIS AND M. SCOBLE

V.N. Kazakidis, member SME, is associate professor with theSchool of Engineering, Laurentian University, Sudbury, Ontario,

Canada; M. Scoble is professor and head with the Department ofMining and Mineral Process Engineering, University of British

Columbia, Vancouver, B.C., Canada. Nonmeeting paper number 02-310. Original manuscript submitted for review March 2002 and

accepted for publication November 2002. Discussion of this peer-reviewed and approved paper is invited and must be submitted to

SME Publications Dept. prior to Nov. 30, 2003.

AbstractUnderground mines often face

uncertainty in production planningassociated with diverse sources suchas grade distribution, ground con-ditions, equipment reliability, in-frastructure needs and extractionmethod performance. Despite thebest planning efforts, such operat-ing uncertainty needs to be counter-balanced by the integration of somecontingency to enhance the flexibil-ity in mine plans. This paper con-siders how flexibility can be eval-uated and integrated into proactivemine planning using the concept ofa flexibility index.

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ing project relate, for example, to grade distribution,ground conditions, workforce, management/operatingteam, equipment and infrastructure. The externalsources include market prices, environmental conditions,political/country risk, community relations, industrial re-lations, stakeholder issues, legislation and governmentpolicy (Smith, 1995; Dunbar et al., 1998). Depending onthe type of analysis conducted and on the particularcharacteristics of a mining project, certain conditionsmay be perceived as internal rather than external, or viceversa.

Common sources of risk in mining projects are sum-marized in Fig. 1. According to Worth and Haystead(1990), the risk factors evaluated in a feasibility study bya financial institution include operational risk, technicalrisk, completion and cost overrun risk, market and pricerisk, country risk, legal risk and environmental risk. En-vironmental and safety-related aspects of mining projectrisk assessment have been evaluated by Summers (2000).

The efficacy of the production schedule and cost es-timates in a mine plan will depend on its ability to ac-count for the variability in the geological characteristicsof the orebody and on the experience of the operatingteam. One of the objectives of a mine-planning team is tominimize the risk that is associated with the forecastedschedule of production and costs. Obtaining additionalinformation about a particular parameter (such as fur-ther drilling to improve the confidence in the grade esti-mation) can possibly reduce this risk, or buildingcontingency into the plan through greater flexibility canmitigate this risk.

The flexibility needs of mineral resource invest-ments as related to market risk have been examined byseveral authors (Singh and Skibniewski, 1991; Kajnerand Sparks, 1992; Sagi et al., 1995; Samis and Poulin,1997; Dunbar et al., 1998; Trigeorgis, 1998). Several typesof flexibility have been identified for natural-resourceinvestments by Trigeorgis (1990, 1998) that relate to theability to defer investment, expand, contract, temporarilyshut down, abandon and switch use. In that sense, flex-ibility needs to be built into a project to not only act as“insurance” against adverse production performance butalso to enable the management team to take advantage

FIGURE 1

Sources of uncertainty in mining projects.

of opportunities that may developduring the life cycle of the opera-tion. The risk imposed by internalproject factors that are nonmarketrelated, such as associated with op-erational uncertainty, is often notexamined in such analyses.

Types of flexibility inunderground mining systems

Flexibility is an integral part ofmine planning and design. Here,flexible alternatives are evaluatedand contingency plans are builtwhere this is judged to be necessary.Examples of specific factors govern-ing flexibility identified in planningand design of underground hardrock mines (Kazakidis, 2001) in-clude:

• maintaining developmentopenings well ahead of stope production,

• prediction of dilution and oversize and the measuresto contain the problem,

• stope sequencing that includes “back pocket” stopes,• bin capacity to accommodate production delays and

the stockpiling of ore,• scheduling mine production to accommodate quality

and throughput requirements,• extra support of openings in anticipation of rehabili-

tation needs,• retaining the ability to blast out of sequence,• ensuring the availability of spare equipment to

maintain production levels,• creation and use of alternative mine openings (ore

passes, drifts),• access to external resources (contractors, consult-

ants),• adequacy of inventory available in a warehouse,• budgetary contingencies,• ability of personnel to recognize a problem and• breadth of training of mine personnel.

An evaluation of mine-planning practices in under-ground mines indicates that there is no systematicmethod for introducing flexibility in mine planning anddesign. This procedure is not documented or formalized.Instead, it is subjective and depends on the experience ofthe senior planner. Currently, there appears to be no for-malized process to quantify the value of flexible alterna-tives in a mine plan. The process of decision making inmine planning, including the links to operating risk andflexibility assessment, is shown in Fig. 2.

In a study of mining method selection, Krantz andScott (1992) emphasize that the ultimate level of profit-ability of a mining project is enhanced by flexibility inthe mine plan and by the choice of mining methods. Amine plan must have sufficient flexibility to allow themining method to be changed and still meet the othergoals of the project as defined by production scheduling,economic analysis and manpower and equipment avail-ability.

In selecting a mining method, Singh and Rajala(1981) indicate that the method must be flexible enough

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to accommodate limitations im-posed by existing mine facilities,such as the existing development,ore handling, compatibility withproduction schedule, fill and drain-age systems, as well as to cope withdifferent geological conditions.Bharti et al. (1983) emphasize thatalternative mining approachesshould be sufficiently flexible todeal with difficult and unanticipatedground conditions. Despite such rec-ognition of its importance, there arefew means available to evaluate thelevel of flexibility inherent within amine production plan.

Valuation of productionplan flexibility

Valuation of operational flex-ibility in mines can be conducted bycomparing alternative scenarios.Here, the impact can be valued of aparticular scenario on the mine pro-duction and the operating cost. Al-though traditional discounted cashflow (DCF) analysis and productionsimulation can be used to evaluatealternatives, the true value of flex-ibility cannot be determined.

Operating flexibility often con-siders the risk associated withnonmarket-related factors such asthose operating problems that resultin deviation from prespecified pro-duction and cost performance. Suchflexibility is often constrained bygeological complexity and excava-tion geometry, layout, access, se-quence and mining method. Realoptions, in the form of multiple Eu-ropean put or call barrier optionshave been shown (Kazakidis, 2001)to provide an effective means tovalue flexible operating alternativesassociated with ground-relatedproblems in a mining system.

The applicability of options theory to make manage-ment decisions established several real options ap-proaches for the evaluation of new technologiescontaining uncertainty in technical and financial perfor-mance (Armstrong and Galli, 1997; Dunbar et al., 1998;Samis and Poulin 1998; Trigeorgis, 1998). It was indicatedthat, using an option-based approach, an expanded netpresent value (NPV) can be calculated that includes the“static” NPV determined from a conventional DCFanalysis plus an option premium that reflects the valueof strategic options.

Expanded NPV = Static NPV +Option premium (1)

The application of real options to assess the flexibil-ity of a mining system that contains operating risk/vola-tility due to production delays associated withground-related problems was evaluated using Monte

FIGURE 2

Process for mine planning and design for assessment ofalternatives and risk (Kazakidis, 2001).

Carlo simulation (Kazakidis, 2001). Operating flexibilitywith respect to ground-related problems can include:

• The ability to introduce in the future an optionalchange in a mine design parameter (alternativeplan) that will provide to the operator the ability tocounterbalance the impact of a ground-related prob-lem on the mine-production system.

• The ability to expand mine production if favorableground conditions (better than anticipated) is foundin a mine sector.

• The up-front modification of a design parameter (se-quence, stoping method and support system) to en-able the operator to maintain the prescheduledproduction levels under low operating risk condi-tions.

In the example shown in Fig. 3, two alternative min-ing sequences were considered during the planning of

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FIGURE 3

Consideration of two miningsequences.

the mining extension of a nickel orebody. A productionschedule for each of the two sequences indicates that thepillarless sequence has a slower start up than that withpillars.

Once the potential production delays and additionaloperating cost due to ground-related problems are con-

sidered and quantified, then it becomes evident that thisalone can change the decision over which sequencewould be preferable. As an example of the introductionof flexibility into a mine plan, the availability of an extrarehabilitation crew is evaluated for the sequence withpillars. The cumulative cash flows are shown in Fig. 4. Itis found that this option improves the overall NPV of theproject and, therefore, that it is desirable to introducethis form of flexibility.

The results of such an analysis depend on the pre-sumed frequency of ground-related problems and thecosts to accommodate the needs for rehabilitation andrework. Should the intensity of these problems, or thecost to adopt measures to minimize their impact on pro-duction increase, then the analysis may result in a differ-ent conclusion. A sensitivity analysis for the sequencewith pillars, with respect to the intensity of ground-re-lated problems, is shown in Fig. 5. It can be seen that,once the annual impact of ground-related problems onlost production exceeds 17 kt (18,740 st), then the optionobtains a positive value, and it becomes worthwhile toinclude it in the project.

Flexibility indexThe decision making in a mining project often has

budgetary constraints that can influence a decision tointroduce a flexible option. For the mine planning teamto assess which of the flexible alternatives are most valu-able in an operation, a flexibility index is proposed here.Such an index is defined as

(2)

A flexibility index value of 10 percent would indi-cate that the introduced flexible alternative would im-prove the NPV of the base case of a project (passive)NPV by 10 percent.

A flexible alternative is often associated with capitaland/or operating costs that have to occur for the particu-lar alternative to be active throughout the project. Thesecosts are additional capital outlays and will occurwhether or not the operator exercises the flexible option.This “premium” includes the up-front capital outlays, as

well as the additional outlays thatmay have to occur during the oper-ating stage of a mine to maintain(not necessarily to exercise) the op-tion, discounted at time zero.

A comparison of the size of thiscapital cost outlay with the flexibil-ity index can provide a means to ex-amine which of the alternatives aremost attractive and would be valu-able to introduce as part of the mineplan optimization. Four flexible al-ternatives are examined in Fig. 6.

Alternative A1 (a secondcrusher in addition to an existinghigh-performance crusher) is char-acterized by a relatively low flexibil-ity index value and a relatively highcost to implement it. The implemen-tation of Alternative A2 (an in-crease in hoisting capacity at a laterstage of a mine’s life) will have a

Flexibility index FOption value OV

NPV passiveOV , %

,

, ( ) = × >100 0

FIGURE 4

Cumulative cash flows for the two alternative sequences with ground-re-lated problems using Monte Carlo simulation.

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MINING ENGINEERING ■ AUGUST 2003 37

high impact on the value of theproject, but will also have a highimplementation cost. Alternative A3(an additional vent raise) has a lowcost and a low impact on the valueof the project. Finally, AlternativeA4 (a second unlined orepass sys-tem in a mine) has the higher impactof the four, while its implementationcost is the lowest, and it should bethe most preferable one.

The impact that a particularflexible alternative will have on theoverall NPV of a project will be afunction of the particular character-istics of the mining system and theanticipated operating risk, for ex-ample, due to ground-related prob-lems. Costly alternatives, such as thelining of an orepass or the increaseof the capacity of a hoisting system,may prove to be valuable (have ahigh impact) when significant pro-duction delays are anticipated re-lated to the performance of particular mining subsys-tems. In cases of low operating risk, the same alternativesmay be found to have only a significantly smaller impact.

The placement of a second unlined orepass is a typi-cal example of a low-cost flexible alternative that canhave a high impact on the maintenance of the produc-tion schedule of a mine, because the impact of hang-upscan be minimized. Design alternatives, such as the place-ment of grizzlies or the minimization of finger raises inthe same orepass, are also low-cost design solutions thatcan be found to control hang-ups and damage to passwalls. Therefore, they can significantly improve the over-all performance of the particular subsystem.

Overall, the impact of each design alternative in aflexible mining system would needto be evaluated separately to deter-mine its overall impact throughoutthe life cycle of the production sys-tem. This will enable the classifica-tion of the various alternatives inthe manner shown in Fig. 6, whichshould provide a key input to thedecision maker for budget alloca-tion and prioritization of flexible al-ternatives.

ConclusionReal options can provide a

means for assessing flexibility in amining system. Quantifying theprobability of operating problems interms of economic impact is neededto consider the optimization of amine plan. Once an internal-riskmodel is established, then annualcash flows may be extended to in-clude uncertainty due to various pa-rameters.

The authors used ground-re-lated problems and the evaluationof stoping schedule alternatives as

an example of the approach. Risk can be minimized byplanning to avoid causative situations and by building inflexibility to contend with the occurrence of such prob-lems. The next-generation flexible mining systems for thecompetitive world of metal markets will be those able toadapt to downturns due to operating problems, whilealso taking advantage of opportunities from upturns.Evaluation of flexible alternatives will need to be con-ducted with reference to criteria such as the flexibilityindex demonstrated here. ■

ReferencesAnderson, R., Scoble, M., and Dunbar, S., 2001, “Integrating so-

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FIGURE 5

Sensitivity analysis for the sequence with pillars withrespect to the intensity of ground-related problems.

FIGURE 6

Classification of flexible options in a mining project us-ing the flexibility index.

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