Impact of price uncertainty on nickelextraction with environmental effects –when to close a mine?

Anni Huhtala and Olli Ropponen

KT-päivät, 10.2.2017, Jyväskylä

Focus of this paper

Exploration Project development Production Closure Cleanup completed

Motivation – why study closing of a mine?

Troubled Finnish nickel mine says could still avoid closure, Reuters 7.11.2016

YLE News 8.4.2013 11:42 | updated 8.4.2013 19:05

New waste leak at Talvivaara

Literature in economics on the extraction of non-renewable resources under uncertainty

• Textbook: Dixit and Pindyck (1994)

• Stochastic dynamic optimization models byBrennan and Schwarz (1985), Mason (2001), Muehlenbachs (2015), Insley (2015) etc.

Approach chosen here

Simulations, i.e., no optimization, but first attemptto illustrate the impacts of

1) price uncertainty and

2) learning period before full-scale production

on the profitability of a mine

Note: environmental impacts not modeled explicitly here, butmaterialized as lost output due to problems in production(caused by leakage and water management)

Simulations carried out for net present value of mining activities vs. closure

expected price and quantity developments important

Annual prices (real 2010 USD)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

US

D/

me

tric

to

n

COPPER

NICKEL

ZINC

Quarterly nickel extraction in Talvivaara

Simulated price changes – as random draws from pricedevelopment in 1960-2015

Simulated ”learning-by-doing” in production(dashed line)

Results

• given our parameter values loosely based on nickelmarkets and experiences with heap leachingtechnology, nickel extraction turns out unprofitable

• only when operating costs are rather low or nickelprice constantly higher than the current price itpays off to continue mining activities

Conclusions

• Adopting new technology to bring unconventional nickel resources into production is challenging and may turn out unprofitable

policy implications - gov’t supportCaveat: we do not have the same information on costs etc. that the Ministry of Economic Affairs and Employment has

• Extensions:- co-production (zinc, copper etc.)- stochastic environmental damage- investment in abatement technology possible