Essays on Mining Economics and System Modeling

Open Access
Author:
Zhang, Kuangyuan
Graduate Program:
Energy and Mineral Engineering
Degree:
Doctor of Philosophy
Document Type:
Dissertation
Date of Defense:
September 05, 2014
Committee Members:
  • Andrew Nathan Kleit, Dissertation Advisor
  • Antonio Nieto, Dissertation Advisor
  • Andrew Nathan Kleit, Committee Chair
  • Antonio Nieto, Committee Chair
  • George Young, Committee Member
  • Shimin Liu, Committee Member
Keywords:
  • Mining Economics
  • Real Option Evaluation
  • Mean-reverting of Commodity Price
  • Material Criticality
  • Yttrium
  • China’s Rare Earth P
Abstract:
Investigating and promoting the understanding of economic, policy, management and supply chain issues associated with mines, mining economics is an important discipline that has been emphasized by the industry, relevant consulting firms, government agencies and research institutions. This dissertation is composed of four essential topics on mining economics, including evaluation of a gold mine with uncertainty in price and operational flexibility, the assessment of how critical the rare earth element-Yttrium is to the US’ economy, the determination of economic cutoff grade for a two-mineral metal mine, and a theoretical model for stockpiling and processing the intermediate grade ore. Traditional evaluation technics, such as discounted cash flow approach, fails to address the uncertainties in commodity’s price and mining cost, as well as operational flexibility. In the first chapter, a real option model is set up to evaluate a gold mine incorporating the uncertainties, and determine the optimal price threshold to trigger the mining investment. By extension of the model, the research examines the effects of postponing the delivery of commodity to market. The results show that the real option value by virtue of operational flexibility can be significant and should not be ignored when valuing a mine. The vulnerability of the US’ economy to restrictions in the supply of various rare earth elements have been of great concern in recent years. The second chapter examines how critical Yttrium is to US’ national economy, by considering its supply sources, China’s export quota and tax, relevant uses, possible substitution in use, and recycling. Its production, however, causes a variety of environmental harms, making the supply stream vulnerable to more stringent environmental regulation. Yttrium is difficult to replace in compact fluorescent lights (CFL), its largest use. The high short-run demand for CFLs increases the criticality of Yttrium. In the longer run, however, the demand for CFLs is expected to decline gradually. Normally, there is variability in ore’s quality for metal mines. The third chapter introduces a net present value maximization algorithm for a by-product mining project. The algorithm accounts the time value of money effect for the cash flows. A rare earth case study is illustrated contingent on the algorithm. It is found the optimal economic cutoff grade of the primary product can be significantly impacted by the changes in economic variables related to the by-product. The fourth chapter follows the problem of varied quality in ore, by establishing a theoretical two-stage model for a mining system with production from the stockpiled material. In a metal mine, the intermediate grade material between economic and breakeven cutoff grades is typically stockpiled for future processing after depletion. By deriving the first order condition for objective profit function and parameterized analysis, this research finds the profit from processing the stockpiled material contributes to a mine’s profit significantly; processing the stockpiled also shifts the optimal mining strategy; in addition, the research measures how responsive the optimal mining rate is to input variables’ change, and finds the impact of some of the variables is diminishing. The intrinsic advantages of the theoretical model compared to numerical approaches in interpreting the economic intuitive of stockpiling management and optimal mining strategy are discussed.