Optimization of open-pit cutoff grade based on option pricing theory

Considering the high volatility of mineral prices, this paper has proposed a new method for the optimization of open-pit cutoff grade by applying option pricing theory. The advantage of the new method is that the decision-making of current cutoff grade takes into account the possible changes of future price and the corresponding cutoff grade decisions at that time. The optimization results of such method shows that when the current price goes up, it is likely that we should raise the cutoff grade, or lower the cutoff grade, or even keep it unchanged. All these decisions are depending on the behavior of price changes and the residual mine life. This kind of results is very different from the optimization by existing models, and undoubtedly it reflects deeper economic characteristics of cutoff grade and is beneficial to improving a operating mine's economic efficiency.