Optimization of Economic Indicators in Open-Pit Mining

Abstract

We investigate the application of the Real Options approach to the optimization of open-pit mining. The Real Options approach introduces investment as an additional control parameter for profit maximization. In the context of applying the Real Options approach to open-pit mining optimization, we consider a model with two-stage investments. Open-pit mining requires both extracting and processing capacities. These capacities in turn require investments, which are divided into two parts: investments to create the initial capacities and investments to increase existing capacities in the process of mining. The initial and augmented capacities as well as the capacity augmentation time are control parameters that can be chosen with the objective of increasing the mining profits. In this article, we assume that the market price of the mineral is a random process described by a stochastic differential equation. A control strategy is a rule that at every time instant, making use of the available information, determines the mining rate, establishes if additional investments are required at the given time, and if yes, calculates the investment amount. The problem involves the construction of an optimal mining control strategy that maximizes the mean discounted profit from the open-pit mine.