Strategic Mine Planning Through Risk-Return Portfolio Optimization Enrique Rubio, Ph. D. Executive Director, REDCO Mi

1. Strategic Mine Planning Through Risk-Return Portfolio OptimizationEnrique Rubio, Ph. D. Executive Director, REDCO MiningConsultants

2. Strategic Mine Planning • How, When and what is going to be produced in the future from an ore body that maximizes shareholders value • It is about a vision of the future in terms of how to bit the odds • It is not related to material handling. It is about having a position in the production or the cost curve • IT IS NOT JUST ABOUT NVP OPTIMIZATION

3. NPV Driven Approach • Ore body continuity • Resource aggregation does not fulfill operational selectivity • High expectations • It does not integrate Geological/Operational/Market variability NPV t* Tpd (cog) Cut off grade (cog) Wrong fundamental assumptions!!!

4. Business Uncertainty • Geology, geotechnical distribution across the ore body • Variability in the extraction process • Variability in the material handling system • Large market variability that induces tactical decision uncertainty

5. Plan versus Operation. Draw Point Reconciliation Phase-Bench Reconciliation

6. Large operational deviation. • Deviation • Life of mine • Mining Reserves • OperatingCost Actual Production SMU (t) Planned Production SMU (t) Detailed Mine reconciliation facilitates further optimization of operational hedgging

7. Operational Deviation=>High Operating Cost. • Unplanned longer tramming distance • Low active mine utilization, • Low productivity equipment to mine more selectively as unplanned situation • Across the mining system there are mining reserves that are more costly than others 80% Cash Cost ($/mu) 20% Production Volatility (%)

8. Proposed Approach • The mine planning process must integrate operational hedging in sequence, production schedule, mine design and equipment selection to assure a certain level of reliability • This is not just about a valuation technique is about comprehending the uncertainty space and its effect in planning decisions NPV dNPV Tpd (cog) Cut off grade (cog) R

9. The role of MiningSystems in thisApproach Thevariability and theoperationalhedgingshouldbean integral part of thedesign of theminingsystem • Operatingunits-cycle times • Equipmentproductivity • Equipmentoperationalfactors Interactionamongunits ProductionUnit w

10. Operational Discrete Events Simulation • Enables to see production opportunities throughout the whole mining system • Supports the capacities and their variabiblity of different segments or components of the mining system • Foresee botleneck and congestion • Analyze different productive scenarios Teniente Chuquicamata Antamina

11. Probabilistic Production Capacity • Itis a tooltoassesstherobustness of theminingsystem • Ithelpstoanalysedifferentproductionscenarios and alternativeminingsystems

12. Examples

13. TheModel Fixedcost ($) Profitfunction Sellingcost ($/lb) Unitoperatingcost ($/t) Returnojective function Productionrate per productiveunit ((tpd) Returnojective function <= r Uncertainty of the miningsystem as a whole MiningSystemDesign OperationalHedging

14. Operational Hedging f f p p t t t i i • Itisaninsurancethatallowstomitigatetheuncertainty of a givenproduction target • In general ittranslatesintolargerfootprint, alternativedesigns, new technologies, and some times a biggerequipmentfleet.

15. Risk – Return Topology Space. Increase Production Capacity Unfeasible Scenarios • EconomicEnvelop • Miningsystem • Sequence • Production Schedule • Equipmentallocation • ProductionSimulation Return ($) Feasible Scenarios Volatility (%)

16. REDCO´s Approach Systemic Approach to Mine Planning. Dynamic simulations To Balance the Risk and the Return of Mining Systems efficiently designing operational Hedging Reliability Modeling Optimization

17. ToolKit • Integrated holistic optimization engines: BOS2, UDESS, T_Test, … • Dynamic simulation models in Arena • Portfolio Efficient frontier

18. The Process- Scenario Generation. Dynamic Simulation SequenceOptimizer VMM-PPV

19. The Platform. VirtualMiningMachine (VMM)

20. Escondida Fleet Congestion Analysis.

21. El Teniente Train Cycle Scheduling.

22. MH Sequence Optimization.

23. The Process- Scenario Generation (display). Acceso F3 Acceso F5 Acceso F3 Acceso F5 Acceso F1 Acceso F1 Banco 1670 Banco 1655

24. Portfolio Optimization. Strategic Mine Planning Portfolio Production Efficient Frontier Return ($) Activate Hedging Inefficient Scenario Re allocate Hedging Volatility (%)

25. Examples of Portfolio Optimization Integrating Geological Uncertainty

26. 1. Muzo Strategic Mine Design2. Chuquicamata UndergroundReview Case Studies

27. Case Study 1- Strategic Planning Muzo Emerald Mine • 3 Miningmethods • Price and grade uncertainty

28. Case Study 1. Price and Grade Uncertainty • Everyproductiveareaischaracterizedbyitsowndistribution • Everyproduct and subproductischaracterizedbyitsownpricedistribution

29. Case Suty 1 Eficient Frontier for Muzo Emerald Operation • Thequestioniswhichmethod and whatproductionshouldbeused at eachminingareato balance the portfolio

30. Case Study 1. Results Every single point represents a different production strategy that is taken as whole portfolio

31. Case Suty 2- Tactical Planning Chuquicamata Underground Mine Planning Cross Sectionby 2018 TheEnd of Mine Life • By 2018 Chuquicamata open pitreachestheend of itsoperatinglife • A replacementundergroundprojectwasengineeredtoprolongthelife of the mine until 2058 • Block cave miningmethod of 2710 drawpoints of 4 designedlifts • 340,000 t of fine copperover 2018 and 2058 periodwith a pre mininginvestment of 3,000 MUS$ Block Cave MiningSystem

32. MiningSystemDesign Variability of Geotechnical Context Proposed Sequence EconomicFootprint

33. ProposedProduction Schedule 1. Reviewagreementproduction versus open area 2. Reviewnumber of active blocks per panel 3. Reviewthedesign of every panel accordinglywithdifferentfragmentation

34. Review Production Targets and Mine Design ProductionUnitCharacterization Plan Volatility EficientFrontierOptimization …

35. Stages of a Single Macro Block

36. Volatility of theCurrentProduction Schedule Strategy: 5 propagating blocks 6 active blocks 1 exhausting block

37. ProposedStrategyFor Chuquicamata Underground Project 3 propagating blocks and 4 active blocks ProductionEfficientFrontier 3 propagating blocks and 4 active blocks with ad hoc designfordifferentfragmentation Return ($) Activate Hedging Inefficient Scenario Volatility (%)

38. Current Applications • Justify investment on research new technologies • Integration of mining feasibility and pre feasibility project in a global production portfolio • Value different development and exploration ventures within a district or company • Value alternative sequencing and mine design in a strategic context

39. Final Remarks. • Uncertainty in the mining business forces mine planners to introduce flexibility and operational hedges • Traditional NPV does not value flexibility • Adding operational hedging in mine design implies a conception of a flexible holistic mining system • Mining systems adding operational hedging could transform drastically geometrical, sequence and the whole production schedule either of a single mine or a district when optimizing the return and the risk of the strategic portfolio.