Mining rate optimization considering the stockpiling: A theoretical economics and real option model

•This research establishes a theoretical economic model to examine the stockpiling option for mines, its impacts on optimal mining rate, and cutoff grade.•Option of processing the stockpiled material cannot be ignored, as it may account as high as 15% of a mine’s total profit.•The sensitivities of optimal mining rate have been measured;.•The advantages of a theoretical method have been discussed compared to the generally used Lane’s Model (1988).

In the extraction of metal from a mine, the intermediate ore between the economic and the breakeven cutoff grade is usually stockpiled for future processing once the mine is depleted. This research establishes a theoretical two-stage economic model to derive the value of this stockpile and how it affects optimal mining rate. By deriving the optimal condition for objective profit function and parameterized analysis, this research finds the stockpiling option can significantly boost a mine's profit. Processing the stockpiled material affects the optimal mining rate and cutoff grade strategy significantly compared to the case that it is not processed. The research also investigates the optimal mining rate's sensitivity to input variables such as commodity price, discounting rate, capital cost, and processing capacity, etc. In addition, the intrinsic advantages of this approach compared to the broadly used Lane's model (1988) are discussed.