Valuing Mine 2 at Raglan Using Real Options: a Least-Squares Monte Carlo Approach

摘要

Valuation of a mining project is always challenging. For complex projects, such as the case of Raglan, when the mine consists of numerous mineralized zones and produces many payable metals, the valuation process becomes very complicated. In this case, while performing typical discounted cash flow analysis (DCF) may give a gross outlook of the project value, it is well understood that such conventional methods cannot capture the value of management flexibility to change decisions over time in response to the new market conditions. In contrast to the conventional DCF methods, the real options approach (ROA) is more efficient for dealing with the management responses to the uncertain future outcomes and consequently can determine the more precise and accurate value of a project through its production stages. For a project with only one source of uncertainty, real options valuation can be carried out using either finite difference or binomial trees methods. In the case of Raglan, where there are eight payable metals, neither of the methods can be applied since they suffer the curse of dimensionality as the number of state variables is greater than one. In such cases, where there are two or more uncertain state variables, the newly developed Least-Squares Monte Carlo (LSM) approach is the most practical tool for valuing real options. Mine 2 is the next underground mine to come into production at Raglan. This paper presents the real options approach and its application for valuing Mine 2. The LSM approach is applied for valuing the mineralized zones of Mine 2 taking into account the uncertainty associated with the prices of the all payable metals simultaneously as well as the management flexibility to switch among the different operating alternatives. The paper also demonstrates the flexibility options the manager gets with ROA by analyzing multiple production scenarios.