Accounting for tailings dam failures in the valuation of mining projects

Abstract

The number of major tailings dam failures has doubled over the past 20 years, culminating in the tragic accident at Brumadinho in Brazil where about 300 people lost their lives. In this context, there is a growing demand from mining companies, institutional investors and policymakers alike for updated mining project assessment tools taking account of such risks. As part of this research, this paper develops a real option framework for evaluating mining projects involving tailings dams and their associated risk. Two options are considered beyond standard business-as-usual safety measures: reinforced dam maintenance, and retrofitting a treatment process that reduces the volume of unconsolidated tailings. A closed-form expression was obtained for the expected value of the business-as-usual case; semi-analytic formulas were obtained for the two options for evaluation by dynamic programming with quantization of the price factor. When applied to an iron ore deposit with characteristics similar to the Samarco deposit, the method shows that both options are financially superior to business-as-usual for the mining company, with the dry processing retrofitting option being the most attractive. The sensitivity of the expected values was evaluated over a range of values of the key parameters. This research provides senior decision-makers with tools to evaluate different options regarding tailings dam safety from a financial point of view, and provides financial evidence in favour of safer treatment processes for mining waste.