Mine Valuation in the Presence of a Stochastic Ore-Grade Uncertainty

Mining companies world-wide are faced with the problem of how to accurately value and plan extraction projects subject to uncertainty in both future price and ore grade. Whilst the methodology of modelling price uncertainty is reasonably well understood, modelling ore-grade uncertainty is a much harder problem to formulate, and when attempts have been made the solutions take unfeasibly long times to compute. By treating the grade uncertainty as a stochastic variable in the amount extracted from the resource, this paper provides a new approach to the problem. We show that this method is well-posed, since it can realistically reflect the geology of the situation, and in addition it enables solutions to be derived in the order of a few seconds. A comparison is made between a real mine valuation where the prior estimate of ore grade variation is taken as fact, and our approach, where we treat it as an uncertain estimate.