Journal of Mining and Geology Vol. 57(1) 2021. pp.

99 - 111 0022-2763

Mining Geometrical Modelling Approach for the Estimation of Cut-Off Grade

of Open-Pit Mines, Through Maximization of the Net Present Value

Nwosu, J.I. and Williams, W.N.

Department of Geology, University of Port Harcourt, Port Harcourt, Nigeria.
Corresponding E-mail: joseph.nwosu@uniport.edu.ng

Abstract
The theory of cut-off grade estimation has taken a new dimension since Lane's proposal of maximum net present
value criterion for cut-off grade estimation. However, whereas this criterion is widely accepted by mine planners,
Lane's analytical method of its realisation has been subjected to several criticisms. In this paper a geometrical
modelling approach has been proposed for realisation of the maximum net present criterion which overcomes the
shortfalls of Lane's analytical approach. This geometrical modelling approach was applied to a hypothetical deposit
with five ore bodies of varying grades. The approach is applicable to situations of varying production rates, costs of
production and prices and can be utilised when multiple processing streams are available.
Keywords: Cut-Off Grade, Geometrical Modelling, Mining, Net Present Value, Open Pit Mines.

Introduction deposit, North central Nigeria and emphasized on the

need to adjust the cut-off grade of Itakpe deposit with
The Concept of Cut-Off Grade changing price-cost ratio.

The issue of discriminating between what should be Nwosu and Nwankwoala (2015) considered the
mined and what should not be mined is as old as mining influence of construction materials on the cut-off grade
itself. In primitive mining, ancient miners always of Itakpe iron ore deposits. Furthermore, Nwosu and
discriminated between pure gems and impure gems. Bernard (2020) also considered the influence of
Metallurgical slags found in Itakpe iron ore deposit subgrade ores on the cut-off grade of Itakpe iron ore
Nigeria, where ancient miners and metallurgists smelted deposit.
iron ore in-situ and forged primitive weapons are always
found in rich iron ore zones. Another factor that requires very serious consideration
in cut-off grade estimation is the geology of the deposit
In modern mining, mine planners have always and mine design.
attempted to establish what level of mineral content
should be found in an ore in order to justify its Consider the hypothetical deposit shown in fig. 1a & 1b
exploitation and processing. The simplest but perhaps below.
most accurate definition of cut-off grade is the one by
Lane. Lane (1988) defined cut-off grade as the smallest
amount of concentration in the mineralised material that
determines what is considered as ore versus what is
considered as waste.

Several factors affect cut-off grade of a mineral deposit

and these include: presence of other materials
(secondary ores) in the deposit; presence of processing
facility for low grade ores, price of mineral commodities Fig. 1a: Illustration of effect of geological factor and mine design on
cut-off grade of a deposit
in the market, cost of mining and processing etc.

Some Factors Affecting Cut-Off Grade of a Mineral

Deposit

The problem of establishing the effect of various factors

on cut-off grade has been treated by several researchers.
Nwosu and Nwankwoala (2012) studied the influence
of changes in cost of production and price of iron ore Fig. 1b: Illustration of effect of geological factor and mine design on
concentrates on the cut-off grade of Itakpe iron ore cut-off grade of a deposit

99
100 Journal of Mining and Geology Vol. 57(1) 2021.

Design A considers mining the three ore bodies using a project as the new policy for cut-off grade estimation.
single pit. Rationally, mine sequencing requires that pit One inadequacy of the break-even approach is its
bottom be sited where ore bodies 1 & 2 are located. This inability to show how the cut-of grade affects the value
will involve removal of all the waste material between of the project as a whole. But with maximum net present
ore bodies 2 and 3 in order to mine ore body 3. The cost value approach, the impact of the chosen cut-off grade
of removal of the waste material between ore bodies 2 on the overall value of the project can be known. As
and 3 will drastically increase the total production cost laudable as this policy may be, the methods of realising
and therefore increase the cut-off grade. However, it have been many and varied and are fraught with
design B considers mining the deposit with two inadequacies. Even the models proposed by Kenneth
concentric pits. The first pit being for ore bodies 1 and 2 Lane himself, have been subjected to several criticisms.
while a second pit is for the 3rd ore body. A pillar of waste Thus Pentigel (2017) noted that one inadequacy of
material is left in-between the two pits. With this mine Lane's method is its assumption that there was one
design approach, the total production cost is lowered source of material feeding one treatment plant. He
and thus cut-off grade lowers. Consequently, the further noted that Lane's model also assumes that pit
disposition of ore bodies (geology) and the mine design limit and mine schedule were already known. From the
applied will affect the cut-off grade of the deposit. point of view of practical mine planning, such
assumptions are capable of invalidating any model since
The above mentioned situation can only be considered pit limit and mine schedule are themselves dependent on
in cut-off grade estimation through mine geometrical the cut-off grade being sought for. Gholamnegad (2009)
modelling. Analytical method cannot be applied to also noted that Lane's model does not consider the cost
consider the influence of geology and mine design in the of waste removal and dumping as well as pit
above situation. rehabilitation. He therefore amended Lane's model to
accommodate them. It can also be observed that Lane's
The effect of other factors such as multiple processing model is based on three constraints, the production rate
steams on cut-off grade has been noted in the works of of the mine, the maximum processing capacity of the
Pettingel (2017), Asad and Dimitrakopoulos (2013). processing plant and the existing market. In our own
Michelson and Buckley (1973) noted the effects of opinion, the above parameters should not stand as
minor metals on the cut-off grade of a mineral deposit. constraint since the production rate of the pit itself is
dependent on the cut-off grade. Breed and Heerden
Cut-Off Grade Policy (2015) stated that to ensure cut-off grade optimization is
done correctly, the capacity constraints must be
Cut-off grade policy refers to the principle on which the independent of cut-off grade. When the cut-off grade is
estimation of cut-off grade must be based. In the history high, the reserve becomes low and the production rate is
of mine planning, two main principles can be therefore low. When the cut-off grade is low, the reserve
distinguished; (i) the break-even principle (ii) the is high and production rate is therefore high (Nwosu and
maximum net present value principle. Nwankwoala 2009). The capacity of the processing
plant is also variable and is usually chosen to match with
The method of realizing these principles may vary. One the production rate of the mine. Market can always be
approach to establishing the break-even cut-off grade is expanded and therefore should not stand as constraint.
to regard the cut-off grade as the grade in which the cost This fact is buttressed by Asad and Topal (2011).
of production and the value per ton of the ore are equal. Pettingel (2017) noted that variable cost estimate and
Consequently, any material above the cut-off grade is increasing prices of mineral products cannot be
mined. This approach is not a sound approach because it incorporated in Lane's model for estimating cut-off
is not all materials above such a cut-off grade can grade of the project through the net present value (NPV)
provide a minimum acceptable rate of return on maximization. Because of the above inadequacies, it
investment. As noted by Nwosu and Okengwu (2009) becomes obvious that analytical approach alone does
any material above the cut-off grade must provide at not offer flexibility in the estimation of cut-off grade of a
least a minimum corporate acceptable rate of return on deposit through maximization of net present value. The
investment in order to be mined. above flexibility is offered by the Mining Geometrical
Modelling approach.
The break-even policy of cut-off grade estimation
remained the traditional method of cut-off grade Methodology
estimation until 1964 when Kenneth Lane presented his
seminar in which he proposed maximum NPV from the In general, the mining geometrical modelling approach
Journal of Mining and Geology Vol. 57(1) 2021. 101

of establishing the cut-off grade of a mining project is an analysed. Then geometrical modelling is done based on
iterative method and starts by choosing an arbitrary pit the three ore bodies to generate annual production of ore
limit and using annual deepening rates to form the and annual removal of waste at each bench (each push-
various bench heights of the pit. Hence, any ore or waste back). Consequently, cash flow analysis is done to
produced from each pushback will represent annual establish the NPV of the pit. At the second stage, the 4th
production of ore and annual waste removal. Mine ore body is added to the 3 ore bodies in this pit limit and a
sequencing and locus of box-cut movement are drawn. second NPV is obtained. If the NPV obtained with the
From the box-cuts push-backs are drawn to imitate the inclusion of the 4th ore body is greater than NPV
mine extraction process. Pit limit is varied (raised or obtained from the first 3 ore bodies, then the process is
lowered) as maximum NPV is being sought. The ore continued to include the 5 ore body. If less, then
th

bodies to be mined are included in each pit limit in analysis for the first pit limit is stopped and a new and
descending order of their grades until maximum NPV is deeper pit limit is chosen. The entire process is repeated
obtained. For example consider a pit with ore bodies A, from 3 ore bodies to the last ore body until the overall
B, C, D, E with corresponding grades of XA%, XB%, maximum NPV of the pit is obtained in the new pit limit.
XC%, XD% and XE% respectively. The lowest grade of the ore body in the pit when the
maximum NPV was obtained becomes the cut-off grade
As a starting point, the first three ore bodies (with higher of the mineral deposit under consideration. The
grades) will be included in the first pit limit to be algorithm below simplifies the methodology.

Fig. 2: Algorithm for the realisation of the geometrical modelling approach

102 Journal of Mining and Geology Vol. 57(1) 2021.

Results and Discussion

In order to establish the cut-off grade of the mineral

deposit based on the maximum net present value
criterion using geometrical modelling, use is made of a
cross-section of a hypothetical iron ore deposit
consisting of five ore bodies A, B, C, D, E with
respective grades as 45% Fe, 38% Fe, 32% Fe, 40% Fe
and 23% Fe (fig. 3). Table 2 shows the techno-economic
data for this deposit.

Fig. 4: First trial pit limit of 120m with 3 ore bodies A, B, D.

were used for the development of the cash flow. The

result of the economic analysis are also presented in
table 2 and for clarity are shown graphically in fig. 5 & 6.

NPV Estimation

NPV of any project can be estimated with the following

Fig. 3: Cross-section of the hypothetical iron ore deposit showing formula (Pandey 2006)
the five ore bodies A, B, C, D, E.
Table 2: Techno-economic data for the hypothetical deposit

Where;
NPV = net present value of the project

= sum of discounted annual net profits

n = Lifespan of the project (1, 2, 3……… n)

TC = capital outlay on the development of the pit limit
TC = 0.25T
Where ;
a) Selection of first trial limit and investment analysis T = the present value of both capital and operating
(Steps 1-3) expenditures on the project.

Following the methodology as stated above, the first T = (Nwosu and Onwualu 2019)
trial pit limit of 120m consisting of 3 ore bodies A, B, D Where;
was established (fig. 4). TO = present value of sum of annual cash outflow
throughout the life of the project.
In fig. 4, the geometrical modelling was done using
bench heights of 10m which is also equal to the annual Consequently,
deepening rate of the pit. A bench working room of 40m
was used for the imitation of the extraction process. The T = = US$101.68million
process of extraction was imitated in several push-backs
representing years of operation of the pit. The ore, waste TC = 0.25 x 101.68 = US$25.42million
and concentrate generated for each year of operation are
presented in column 2, 3 and 4 respectively (table 2). NPV = 26.18 – 25.42 = US$0.76million

Techno economic data of the pit as presented in table 1

Journal of Mining and Geology Vol. 57(1) 2021. 103

Table 2: Production scheduling and cash flow table of mining-geometrical analysis of 120m pit depth with 3 ore bodies.

Fig. 5: Tonnage of ore and waste for the entire life of the project Fig. 6: Cash flow for the entire life of the project (120m pit depth
(120m pit depth with 3 ore bodies) with 3 ore bodies)

b) Addition of one more ore body to the 120m pit limit flow table was developed as in the previous case. The
(Step 4) techno-economic parameters are presented in table 3
below and for clarity, graphical representation of the
We now move to step 4 by adding one more ore body of production scheduling and major economic indicators
lower grade to the deposit (fig. 7). (cash outflow and annual net profit) have been
presented in fig. 8 & 9.
Mine-geometrical modelling was carried out and cash
104 Journal of Mining and Geology Vol. 57(1) 2021.

Fig. 8: Tonnage of ore and waste for the entire life of the project
(120m pit depth with 4 ore bodies).
NPV Estimation
Fig. 7: Trial pit limit of 120m with 4 ore bodies A, B, C, D.
T = = US$127.28million

Table 3: Production scheduling and cash flow table of mining-geometrical analysis of 120m pit depth with 4 ore bodies.

TC = 0.25 x 127.28 = US$31.82million Since the NPV in step4 is greater than NPV in step3, we
NPV = 35.84 – 31.82 = US$4.02million now add the fifth ore body (fig. 10) to the 120m pit and
repeat geometrical analysis and cash flow development.
c) Addition of the 5th ore body to the pit limit (Step 5, The result of this is presented in table 4. Also the major
right side of the loop) techno-economic indicators are presented graphically
in fig. 11 & 12.
Journal of Mining and Geology Vol. 57(1) 2021. 105

Fig. 9: Cash flow for the entire life of the project (120m pit depth
with 4 ore bodies).

Fig. 10: Trial pit limit of 120m with 5 ore bodies A, B, C, D, E.

NPV Estimation

T = = US$130.76million The NPV with five ore bodies has decreased in

comparison with the NPV of the pit with 4 ore bodies.
TC = 0.25 x 130.76 = US$32.69million Consequently, analysis for the 120m pit depth is
NPV = 31.08 – 32.69 = US$-1.61million stopped.
Table 4: Production scheduling and cash flow table of mining-geometrical analysis of 120m pit depth with 5 ore bodies.
106 Journal of Mining and Geology Vol. 57(1) 2021.

Fig. 11: Tonnage of ore and waste for the entire life of the project Fig. 12: Cash flow for the entire life of the project (120m pit depth
(120m pit depth with 5 ore bodies). with 5 ore bodies)

d) Increment of pit limit to 160m and selection of As in steps 2-3 the geometrical analysis has been done
first 3 ore bodies (Step 6) for the 160m depth and techno-economic analysis
shown in table 5. They are subsequently represented
We now increase the pit depth to 160m and steps 2-3 in graphically in fig. 14 &15.
the algorithm are repeated.
NPV Estimation
Fig. 13 below shows the 160m pit depth with 3 ore
bodies. Capital outlay for the pit with 160m

Fig. 13: First trial pit limit of 160m with 3 ore bodies A, B, D.
Journal of Mining and Geology Vol. 57(1) 2021. 107

Table 5: Production scheduling and cash flow table of mining-geometrical analysis of 160m pit depth with 3 ore bodies.

Fig. 14: Tonnage of ore and waste for the entire life of the project Fig. 15: Cash flow for the entire life of the project (160m pit depth
(160m pit depth with 3 ore bodies). with 3 ore bodies).
Tc = 0.25T Tc = 0.25 x 115.05 = US$28.76million
NPV = 27.64 – 28.76 = US$-1.12million
T = = US$115.05million
108 Journal of Mining and Geology Vol. 57(1) 2021.

The negative NPV shows the non-viability of the pit

with 3 ore bodies at a depth of 160m.

e) Addition of one more ore body to the 160m pit limit

(Step 7)

We now add the fourth ore body to the 160m pit limit.
The geometrical modelling of this pit and techno-
economic indicators are shown below in fig. 16 and
table 6 respectively. The techno-economic indicators
are further displayed graphically in fig. 17 & 18.

Fig. 16: Trial pit limit of 160m with 4 ore bodies A, B, C, D.

Table 6: Production scheduling and cash flow table of mining-geometrical analysis of 160m pit depth with 4 ore bodies.
Journal of Mining and Geology Vol. 57(1) 2021. 109

Fig. 17: Tonnage of ore and waste for the entire life of the project Fig. 18: Cash flow for the entire life of the project (160m pit depth
(160m pit depth with 4 ore bodies). with 4 ore bodies).

NPV Estimation f) Addition of the 5th ore body to the 160m pit limit
(Step 8, right side of the loop)
T = = US$135.41million
The NPV estimated in step 7 is greater than the NPV
Tc = 0.25 x 135.41 = US$33.85million estimated in step 6 (160m with 3 ore bodies) so we add
NPV = 39.47 – 33.85 = US$5.62million the 5th ore body to the pit and repeat the geometrical
modelling (fig. 19). The techno-economic data are
presented in table 7 and further represented graphically
in fig. 20 & 21.

Fig. 19: Trial pit limit of 160m with 5 ore bodies A, B, C, D.E.
110 Journal of Mining and Geology Vol. 57(1) 2021.

Table 7: Production scheduling and cash flow table of mining-geometrical analysis of 160m pit depth with 5 ore bodies.

Fig. 20: Tonnage of ore and waste for the entire life of the project Fig. 21: Cash flow for the entire life of the project (160m pit depth
(160m pit depth with 5 ore bodies). with 5 ore bodies).

NPV Estimation The pit with the 5th ore body gives a negative NPV
showing that the deposit now becomes unprofitable to
T = = US$139.17million exploit. This can be explained due to high cost of mining
the 5th ore body when compared to cost of removal of the
TC = 0.25 x 139.17 = US$34.79million ore as waste. It can also be explained in terms of lower
NPV = 32.38 - 34.79 = US$-2.41million concentrate yield per ton of ore due to the low grade of
Journal of Mining and Geology Vol. 57(1) 2021. 111

the 5 ore body. Also capital cost is higher due to higher bodies. The 4th ore body in this pit is ore body C with a
th

production rate caused by the addition of the 5th ore grade of 32% Fe. The grade of 32% Fe therefore
body. becomes the cut-off grade of the deposit and the pit limit
of 160m becomes the optimum pit limit of the mine.
Summary and Conclusion
1. The above method proposed for the realization
The results of the above analysis have been summarised of net present value criterion for cut-off grade
in the table below. estimation is flexible and can be used when the
production rate, cost and prices vary. This is an
Table 8: Summary of geometrical analysis for cut-off grade estimation advantage over Lane's analytical method which
allows only a single value for production rate,
cost and price.
2. It also allows for a simultaneous estimation of
pit limit, production rate and cut-off grade
Table 8 above shows that the highest net present value which is another major advantage over Lane's
(NPV) was obtained from the 160m pit depth with 4 ore method.

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