Quantifying Risk

Quantifying Risk

Quite often risk is applied to planning through the use of discount rate. Ideally, the discount rate should only account for the time value of money though it could be argued that some limited other risks, such as sovereign risk, could also be included in the discount rate.

Measurable risk should be dealt with in each technical area of the planning process. For example, geologists frequently review grade risk through conditional simulation, with this information rarely used beyond resource geology. In mine planning workflows more deterministic approaches are generally used which ignore the impact of geological variability on business risk.

With the right processes and analysis, all measurable risks can be included in the planning workflow. Integration of geological risk, for example has proven extremely useful in understanding business exposure and identifying improvement opportunities in future plans.

Understanding the interaction of grade variability as opposed to geological confidence categorisation in the planning context gives another dimension to consider when looking to address business risk. Grade variability risk can generally be addressed through additional data or development sequence, and the associated cost measured against the value at risk.

The chart below shows annual resulting cashflow by year for the results of 100 geological conditional simulation grade models. The orange dot is the annual cashflow value for the deterministic base case.

Simulated Free Cashflow by Year

There are a number of noteworthy observations we can gain from this chart.

Firstly, as would be generally expected, cashflow variance as a result of grade variability increases in later years. It could be concluded that this is a function of geological data support.

Secondly, year 5 presents a significant downside risk to the business as compared to the base case due to geological grade variability. Additional analysis showed that majority of this risk is due to the relevant grades being confined to a single ore source close to the cut-off grade, not due to geological confidence as such.

Thirdly, additional drilling targeting specific areas to be mined in year 5 where grades are close to the cut-off grade should reduce the spread of possible outcomes (i.e., the value at risk) but won't necessarily improve the overall value.

By quantifying the geological grade risk, the operation is now able to develop programs to reduce risk and address these periods of potential underperformance well in advance of them being encountered.