Financially Efficient Ore Selections Incorporating Grade Uncertainty

Author: Richmond, A.

Source: Mathematical Geology, Volume 35, Number 2, February 2003 , pp. 195-215(21)

Publisher: Springer

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Traditional mining selection methods focus on local estimates or loss functions that do not take into account the potential diversification benefits of financial risk that is unique to each location. A constrained efficient set model with a downside risk function is formulated as a solution. Estimates of this nonlinear mixed-integer combinatorial optimization problem are provided by a simulated annealing heuristic. A utility framework that is congruent with the proposed efficiency model is then used to choose the optimal set of local mining selections for a decision-maker with specific risk-averse characteristics. The methodology is demonstrated in a grade control environment. The results show that downside financial risk can be reduced by around 33% while the expected payoff is only reduced by 1% when compared to ore selections generated by traditional cut-off grade techniques.

Keywords: downside risk; mixed-integer optimization; portfolio theory

Document Type: Research Article

Affiliations: Earth Science and Engineering Department, Imperial College, London SW7 2BP, United Kingdom;

Publication date: February 1, 2003

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