Risk analysis mining operations

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  • Publicado : 30 de diciembre de 2010
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Juan Esteban Fuentes1, Tom George2 and James Whittaker3

CRU Strategies
Augusto Leguía Norte 100, Of. 505-506, Las Condes, Santiago, Chile
Phone: (56-2) 231 3900
Fax: (56-2) 231 4314

1 Consultant, juan.esteban.fuentes@crugroup.com
2 Consultant, tom.george@crugroup.com
3 Principal Consultant, james.whittaker@crugroup.com

ABSTRACTCRU Strategies has developed an approach to identify and measure the risks that cause business variability. The objective of this approach is to offer a proven methodology to companies in order for their shareholders or boards of directors to be able to decide with more and more transparent information at hand, therefore making more informed decisions.

The promises of mining companies’administration to their shareholders are not often realized due to the inherent variability embedded in their strategic plans, business plans and budgets. The concept is not to search for zero variability without concern for shareholder value, but to understand the variability, measure it, manage and mitigate it when possible. Most mining companies assign deterministic values to the key inputs orvariables of their business plans, defining therefore a deterministic value of their production and of the value of their plan. On the other hand, by assigning probability distributions to certain variables, a histogram, for example of NPV can be achieved, therefore the promise to the board would shift from a certain production level or revenue to a value with a certain level of confidence.

There aredifferent categories of risks, for example: location risks, project risks, market risks and resource risks. There are also different categories of appetites for risk, from the most conservative approach with typically a lower return, to speculative activities with higher expected returns. CRU’s approach consist in identifying the most important risks of the operation in order to measure itsimpact and to identify and measure possible mitigation actions that could reduce the value at risk (VAR) at a certain confidence level that should be determined by the company’s shareholders. Today, the incorporation of risk in mine business planning is in a development phase, and will continue to be improved as companies understand its importance, application and usefulness.

The risk approachconsists in identifying the risks of the operation and, through a qualitative scoring methodology, in ranking them in order to model the most important. The model is custom made for each operation and basically it incorporates the risks identified, therefore variability, through probability distributions. By using the simulation process of Monte Carlo, the output obtained is a histogram of the desiredvariable. The next step consists in quantitatively measuring the value at risk (VAR) of each risk in an independent way in order to build a ranking. This ranking is very important because it provides the value focus in which the mine administration and shareholders should concentrate their resources in building mitigation plans. This process is iterative, in which the new mitigation plans arere-entered back into the model in order to obtain the new VAR, therefore the value that the mitigation plan was able to protect.

After the early 1990’s financial crisis, the financial sector saw an increased need to assess risk when managing portfolios. Commonly used models, such as the net present value (NPV) summarized risk only through the selection of a discount rate. This isbecause NPV assumes input quantities to be constant and renders a single numerical output. Hence, NPV summarizes both value and risk in a single result.

To better manipulate and adapt predictions to diverse risk scenarios and observed input variability, the financial sector developed a tool that enables the use of input ranges, rather than single values. This model, known as the Value at Risk...
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