Who Plans Mines?

D Whittle1 and J Cahill2

ABSTRACT involvement of the CEO, the market analysts, sales people and
finance specialists. Some specific examples of why this is so are:
This papers examines questions relating to the processes and structures
associated with strategic mine planning: • Whittle (1997a) presents the calculation of costs for the
• who is involved in, or influential in the design of mines? (who plans purposes of accrual accounting, and compares that with the
mines?); and requirements for discounted cash flow (DCF) analysis and
• are formal systems and processes in use? cost models for pit optimisation. It is a complex operation
The results of a small survey are presented and discussed. The authors with a critical impact on the manner in which the mine
argue for a high level of interaction and involvement of a broad range of design proceeds. It requires a detailed understanding of how
skill sets in the strategic mine planning process. There is evidence of the the financial accounts of the company are constructed, and a
industry responding to this need with a team-based approach. The detailed understanding of the pit optimisation and DCF
authors also argue for the use of formal processes in strategic mine models for which the transformed costs are used. The
planning, and found mixed evidence of the use of it in the domain. financial accounting knowledge will probably come from an
accountant. The understanding of the optimisation and DCF
INTRODUCTION models will probably come from a talented engineer, with
some accounting skills and between them they must
Hustrulid and Kuchta (1995) list seven high-level milestones in determine the correct mapping. The CEO will use a range of
the development of a mine, the first three of which are: concept financial indicators to measure the performance of the
study; preliminary study and feasibility study. These high level company and it is important that there is consistency between
milestones would be recognised by most mine planning the way in which the CEO reads the indicators, and the
professionals, who would use these precise terms, or some manner in which the indicators drive the optimisation
variation on them. The achievement of each of these milestones process.
is a major piece of work and the organisational structures and
processes that are used to achieved these milestones are the • Discount rates are an estimate of the risk that is associated
subject of this paper: with a project under consideration as well as the opportunity
cost of the capital required. The finance department must
• the first question discussed in this paper relates to the play a significant role in determining what the discount rate
organisational structures and mix of skills sets that are used should be, but so should the engineers, geologists and
in the strategic mine planning function; and metallurgists. Different mine and processing plant designs
• the second question relates to the organisation of the bodies have different risks associated with them and that should be
of work that occurs to achieve each of these major milestone reflected in the discount rate. So for example, when
and most particularly, how wide spread the use of formal comparing a configuration that includes a very conventional
procedures and process improvement are in the domain. proven-technology plant, one should consider using a lower
discount rate to the one used for a new unproven design.
STRATEGIC MINE PLANNING • Big picture strategic considerations can have a significant
impact on the design of the mine. For example, Whittle
Strategic mine planning is the art and science of the management
(1997b) shows how the risk aversion and other decision
of businesses involved in resource exploitation. It is the
making behaviours and strategies can have a significant
convergence of business strategy on the one hand and mining
impact on the design of a mine and the reserve. Net present
optimisation on the other. It therefore embraces the general
value (NPV) is not the only driver. Mine design can not
nature of mining as a business, as well as the special nature of
proceed in ignorance of the big picture strategic
mining as an application of economic geology and engineering.
considerations of the company.
The driving force behind this convergence has been information
technology, in particular full value chain modelling systems such The need to involve a broad range of professionals calls for
as those that have been developed around pit optimisation and organisational structures that can deliver high degrees of
cut-off optimisation. interaction, communication and involvement for a range of
Strategic mine planning is the domain of CEOs, directors, complex operations, most particularly the design of the mine.
market analysts, sales people, finance specialists, operational The operations need to be managed in detail (procedures) and
managers, geologists and planning engineers. It is multi- more broadly, as a business process, to ensure satisfactory
disciplinary pursuit which draws on all the skills of the results.
contributors both in their own domains, and in understanding the
links between their domain and the rest of the organisation. At THE SURVEY
the heart of the strategic planning process for mines, is the
technical plan to exploit the mineral resources, and to bring the A pilot exercise to gather empirical information about structure,
inputs to the process and control of the process was conducted by
product to market. Whilst the production of the technical plan
the authors in January and February 2001. It involved interviews
relies heavily on engineering expertise, it also requires the
with eight mine-planning professionals for different
organisations; six in Australia and two in the United States. The
sample pool was chosen from the Whittle software user base and
1. Executive Director, Whittle Technology Ltd, 4th Floor, 1013
Whitehorse Road, Box Hill Vic 3128.
the final eight that were interviewed self-selected as those who
E-mail: [email protected] were willing and able to participate in the survey. The results of
the survey are not meant to be representative of practices in the
2. PO Box 163, Riddells Creek Vic 3431. industry as a whole, they are rather a collection of mini case
studies.

Strategic Mine Planning Conference Perth, WA, 26 - 28 March 2001 15

D WHITTLE and J CAHILL

The respondents were asked to answer questions on processes • Roles and responsibilities are defined in detail for those
and structures relating to the feasibility stage of new mine, or the involved in the planning process. The board signs off on all
expansion of a pre-existing mine. plans.
The respondents have not been identified as most declined • Plan developed by an appointed leader and his team. The
permission to do so. The reason given for declining permission board must sign off on the plan.
mainly related for the need to seek permission from managers,
and/or a reluctance to show their employer in a negative light. • Plan developed by a combination of both corporate and local
level, with corporate level signing off on it.
STRUCTURE (WHO PLANS MINES?) • Engineers develop the detail, but major decisions are made
and signed off by the corporate office.
Questions:
• who decides what the basic scope of the project should be?; Where does the financial information (projected costs
• who develops the plans and who signs off on them?; and prices) come from?
• where does the financial information (projected costs and Responses included:
prices) come from?; and • Financial information is obtained by the planning engineer
• who decides what discount rates should be used? from looking at monthly reports and determining trends. No
input from the finance department is received at this stage.
The purpose of asking these questions, was to build up a The respondent develops optimised designs and then hands
picture of the responsibilities within the organisation and an them to his/her superior.
understanding as to what level certain decisions were made.
• Financial information comes from the finance department.
The information-source questions were posed in order to
Interaction is ongoing, with contact before and after pit
determine the degree to which specialists from other parts of the design.
organisation were consulted in relation to the strategic mine
planning function. The focus of the questions was on information • Projected prices come from the business evaluation team at
that people with strong financial analysis skills could assist with, head office. Contact with this department is ongoing
to determine to what extent their skills were used in the process. throughout the design process. Costs are worked out by the
mining engineers and process engineers.
Who decides what the basic scope of the project should • Financial information comes from a wide range of sources,
be? working with the whole team. The finance department
generally provided prices, whereas cost models were
Responses included: developed by the mining and process engineers.
• The scope of the project is decided by the resident manager • Projected costs come from trends in historical costs managed
and their direct superior. by a software program within the company. The sales
• The mining engineer decides the basic scope of the project, department provides projected prices.
after having been given prices and costs from the relevant • Financial information comes from the corporate office, with
people. projected costs being developed by the engineers on site.
• The respondent emphasised the use of team-work in all • Financial information is obtained from projecting current
aspects of decision making related to the planning process. budgets, with the prices coming from the commodity trading
• The site operations manager decides the basic scope of the division.
project. • Financial information is obtained in house by projecting
• The basic scope of the project is decided at local level with current figures.
corporate feedback.
• The blocked ore reserve is given to the engineer/planner. Who decides what discount rates should be used?
This person generally decides on the scope of the project. Responses included:
• Respondent was vague on the question relating to the basic • Discount rates are sent to the respondent by memo from the
scope of the project. Generally they are provided with a resident manager. The respondent had no knowledge of how
model from the geologists and are expected to develop pit they were worked out.
designs. Corporate office decides on the investment and sign
off on the plan. • Discount rates were provided by head office (generally
between ten and 15 per cent).
Who develops the plans and who signs off on them? • Discount rates ultimately come from head office. These rates
change, project to project, with all people involved in the
Most respondents appeared to use a team approach to the project putting in ideas to determine that rate.
development of plans and in most cases, board approval was
required for the plans. Responses to this question included: • The discount rate ranges from between five to 15 per cent
and is worked out by the finance department, in conjunction
• The respondent employed a step-by-step process involving with the general manager.
the general manager, mine manager, superintendent and
team. • Discount rates come directly from head office, with no input
by the site. Head office also provide the projected exchange
• The respondent used a team to develop plans under the rate.
leadership of a project manager.
• Discount rates are provided by the head office, which is
• Major work is signs off by the board. Small expansions can usually a percentage below the prime overdraft rate
be approved by the planning engineer and the resident (somewhere between ten and 15 per cent).
manager.
• Discount rates not used.

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 WHO PLANS MINES?

Discussion – Structure • No formal process is in place. The respondent noted however

The use of teams was reported by many, and this approach was a high level of communication between the corporate office
generally presented by respondents in a positive manner. Spatz and the local office in relation to planning.
(2000) provides evidence of the wide-spread use of team-based • No formal process, but a commonly understood practice is
approaches in mining, citing the successes of self-managed followed.
teams in coal mines, refinery and rod mills and in minerals
exploration. Spatz (2000) argues that the advantages of a What defined methods are used?
team-based approach includes improvements in information
flow; organisational learning; product quality; project completion One respondent could not identify any methods of analysis.
times; efficiencies and costs and employee satisfaction. Of the remaining respondents:
There was a mixed response in relation to the determination of • DCF analysis is widely used;
costs, prices and discount rates. The authors’ view is that a mix
of skill sets is required to properly determine the costs, prices • sensitivity analysis is performed by many respondents;
and discount rates for mine planning purposes. The • one company uses SWOT analysis;
determination of costs requires an understanding of systems of
financial accounting where most cost data is derived from, and • one company uses Monte Carlo Analysis occasionally; and
the transformations that are required for the purposes of pit • one company performs ASSET sensitivity analysis.
optimisation and DCF analysis. These issues are discussed in
detail in Whittle (1997a) and Hoerger (2000). The complexity of
this particular issue certainly lends itself to a team-based What are the main drivers of the mine design?
approach, which hopefully involves financial accounting experts. Most respondents sought to maximise NPV. Other objectives
The survey uncovered a number of instances where discount included minimisation of cost, and maximisation of reserves and
rates appeared to be set, outside of the mine planning process. In revenue. Responses included:
DCF analysis, the discount rate is supposed to represent risk (as • maximise NPV on a yearly basis (not by month);
well as opportunity cost), and this can change depending on the
configuration of the mine, the use or avoidance of leading edge • maximise NPV, but who was making the decision, affected
technology, and many other factors. A team approach to the the design;
determination of discount rates, where a variety of skill sets and • metal price is the main driver, with maximisation of NPV
knowledge bases are shared is regarded as a good approach by preferred;
the authors.
• until recently the objective was to minimise cost, but more
recently to maximise NPV;
FORMAL SYSTEMS AND PROCESSES
• the main drivers are NPV, reserves and revenue;
The interviews sought the answers to several questions that relate
to formal systems and processes. The purpose of asking this set • cost per ounce; and
of question was to build up a picture of the degree of formality in • NPV.
processes and techniques and the use of tools, which might
suggest processes and procedures. It was not the interviewer’s What tools are used in strategic mine planning?
intention to obtain a detailed map of what each respondent did,
but rather to try to determine whether the respondent had such a Respondents identified a number of software packages as being
map and a set of formal processes and procedures. relevant to the their strategic mine planning activities. They are
listed in order from most frequently mentioned to least
Is there a defined process in place for strategic mine frequently mentioned:
planning? 1. Whittle†,
Most respondents could not identify a formal process in use by 2. Excel,
their organisation but did not particularly indicate that they
3. Vulcan,
considered this to be a shortcoming. One respondent did identify
problems associated with a lack of process and clearly defined 4. Minesight,
responsibilities.
5. Gemcom,
One respondent considered that a formal process was in place
and regarded it as being very effective. 6. Datamine,
All responses are shown below in summary: 7. Surpac,
• No formal process is in place. Roles and responsibilities are 8. Talpac,
generally hazy. Confusion arises from not having directions
from one specific person. 9. in-house optimising software,
• Formal processes are clearly defined and practiced. The 10. in-house financial software, and
respondent believed that the introduction of these processes 11. in-house mine planning software.
had dramatically improved performance on the site.
• No formal process is in place, but a check list is used. Discussion – formal systems and processes
• No formal process is in place, but the general practices The authors were surprised at what appeared to be a relatively
required are understood. low key approach to process on the part of many of the
• No formal process is in place. Practices changed dramatically respondents. Half the respondents seemed to operate on the basis
depending on the needs of the project.
• No formal process is in place. Practices change depending on
† The sample was chosen from Whittle software users, so Whittle was
the project. The respondent was hoping to develop formal common to all.
procedures in the near future.

Strategic Mine Planning Conference Perth, WA, 26 - 28 March 2001 17

D WHITTLE and J CAHILL

of having a common understanding of what needed to be One respondent had implemented formal processes and was
achieved. It was not possible to determine in these interviews in very pleased with the results. Another had identified a need for
most cases whether this approach was negative, positive or formal processes and intended to pursue the matter. The use of a
neutral in relation to the outcomes achieved by the strategic check list, as mentioned by one respondent.
planning functions. The two notable outliers were the one that The question for strategic mine planning professionals is
had introduced formal process recently, and was very pleased whether or not they believe their operations could be improved
with the result, and the one which seemed to be lacking in any by introducing a formal process?
sort of process, even being unsure as to who to take directions
from.
CONCLUSIONS
None of the respondents mentioned a systems such as
ISO 9000‡. The degree of sophistication and apparent The authors have argued that a high degree of cooperation
effectiveness of communication was mixed. This doesn’t mean between specialist individuals and departments is required in
that they don’t have any processes, just that those processes they order to produce a strategic plan for a mine. Spatz (2000) argues
utilise are informal. for the use of cross-functional teams to approach problems such
If a company was to introduce either check lists or formal as these, and points to evidence of the widespread use of such
processes, what things specific to the domain might be included? structures in the mining industry. The pilot study uncovered
The authors suggest the following components as a starting evidence of the use of team-based approaches to strategic mine
point: planning in many cases, but with highly variable degrees of
involvement from specialist individuals and departments such as
• Use of an iterative approach in which the first designs are finance.
produced very simply and quickly, with detail and
The authors have argued that consideration be given to the use
sophistication being increased with each successive iteration.
of formal processes in strategic mine planning, due to the
Bosworth and Dincer (1999) provide a very useful case study
complex nature of the domain and the large number of complex
where an iterative approach is used to good effect.
procedures involved. Most of the respondents to the survey did
• Verification of metallurgical recovery and cost functions by not apply formal processes to the strategic mine planning
the use of simple approximations in the first instance. function and none mentioned formal quality management
• Examination of the changes that occur between iterations to programs such as ISO 9000. There were two outliers, one who
ensure that gross errors are not introduced. had introduced formal procedures and the respondent reported
positive results and another where process appeared to be
• Reconciliation of data models between major sets of seriously lacking and the respondent reported negative results.
transformations and documentation of those reconciliations.
• For particularly complex or involved elements of the process REFERENCES
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18 Perth, WA, 26 - 28 March 2001 Strategic Mine Planning Conference