Open-Pit Mining with Uncertainty: A Conditional Value-at-Risk Approach

The selection of a mine design is based on estimating net present values of all possible, technically feasible mine plans so as to select the one with the maximum value. It is a hard task to know with certainty the quantity and quality of ore in the ground. This geological uncertainty and also the future market behavior of metal prices and foreign exchange rates, which are always uncertain, make mining a high risk business. Value-at-Risk (VaR) is a measure that is used in financial decisions to minimize the loss caused by inadequate monitoring of risk. This measure does, however, have certain drawbacks such as lack of consistency, nonconvexity, and nondifferentiability. Rockafellar and Uryasev [J. Risk 2, 21–41 (2000)] introduce the Conditional Value-at-Risk (CVaR) measure as an alternative to the VaR measure. The CVaR measure gives rise to a convex optimization problem. An optimization model that maximizes expected return while minimizing risk is important for the mining sector as this will help make better decisions on the blocks of ore to mine at a particular point in time. We present a CVaR approach to the uncertainty involved in open-pit mining. We formulate investment and design models for the open-pit mine and also give a nested pit scheduling model based on CVaR. Several numerical results based on our models are presented by using scenarios from simulated geological and market uncertainties.