Case Study 3
Process Plant Expansion
Summary
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Process Plant Expansion
Processing plant expansions can be a source of substantial value to a long life project. A 60-year project has many years that have a very low impact on the project value. The impact of ten per cent annual cash flow discounting means that revenue delayed by two years only receives 81 per cent of its value today. After ten years, this drops to 35 per cent, and after 44 years it is less than one per cent. This provides a significant incentive to delay large costs and a strong motivation to bring forward revenue. Many analysts therefore only consider the first 20–30 annual cash flows to value mining companies. This discounting of cash flows encourages processing plant expansions to be considered since they may move revenues from years 40–60, where they contribute little to project value, into the first 20–30 years.
We start with the objective of maximising shareholder value where NPV as the best proxy for this. This is an important first step since it is easy to become distracted with the additional metal that is produced and lose sight of the costs required to produce it.
We then have a range of processing expansion options to consider. Doubling and tripling the processing capability has advantages in terms of simplicity of design, implementation and maintenance, but does not necessarily provide the highest value for shareholders. There may also be good reasons to use different equipment or only expand part of the process.
When evaluating each scenario, we want to make sure that we make the most of each capital step. For example, the mining policies such as pushback sequencing, stockpiling and cut-off grades should be optimised for each processing scenario. Modern optimisation algorithms allow processing policies such as throughput/recovery relationships to be simultaneously optimised with the mining policies for each case. As a further example, a copper flotation circuit may have its throughput and recovery changed by optimising the semi-autogenous grind size and flotation residence time simultaneously with the mining policies. Projects using leaching pads may optimise the leach times, irrigation and oxidation rates simultaneously with the mining policies.
The rigour of systematic optimisation should also be applied to the base case where no significant capital is required. For example, the integration of throughput/recovery relationships with mining policies (cut-off grades, phase sequencing and stockpiles) normally provides a substantial improvement (5 to 15 per cent NPV) in the value of a project. Rather than paying large amounts of capital for new processing facilities, similar improvements in metal production and revenue can be gained by using higher throughput rates with only slightly lower recoveries. Some additional mining equipment may be required to realise this value, which may be very cheap compared to the expanded processing plant capital option.
The capability to undertake this analysis is now available commercially, although much of the industry is unaware how substantial the value is, how low the capital costs are to implement it and how easily the analysis is to undertake with new optimisation software. These techniques have been already been applied to coal, copper, diamond, gold and poly-metallic mines, there is every indication that there is application in other commodities.
Simultaneous optimisation of mining and processing policies is an old concept that has wide application for determining which processing plant expansion should be selected. If mining and processing policies are not optimised simultaneously, then lower value schedules result and decisions can be made that significantly destroy shareholder value.
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