A structured key cost analysis methodology to identify value-contributing activities in mining projects: a case study of the Chuquicamata Underground Project

Abstract

Traditional project evaluation methods for estimating operating costs of
mining projects mostly produce static and over-conservative evaluations. In
this study, a systematic model for managing the economic risk of the
operating costs for an ongoing ‘supercave’ project, the Chuquicamata
Underground Project, is presented. Key cost generators are identified, and
their inherent variability is characterized based on a similar underground
operation and expert judgment. Using Monte Carlo simulations, variability is
factored into the evaluation, and the economic risk associated with each
variable is quantified, after which the simulated data is used to identify the
underlying risk, as well as mitigating actions and opportunities. The
methodology can serve to identify how variability may impact the value of
the project and how mitigation actions could decrease the present value of
the estimated operating cost of the project by more than 10%. As a result of
the analysis, the project managers became aware that labour and energy
costs are the major contributors from a risk-value perspective, and
mitigating actions such as construction of a power plant and
implementation of a well-designed labour productivity incentive plan could
be justified with a reduction of the overall risk value of the project.