Valuation of Mining Operation with Uncertainty and the Power of Waiting - A Real Option Method

摘要

Traditional Discounted Cash Flow (DCF) method has been adopted as a standard tool in the mining industry to conduct economic pre-feasibility and feasibility studies. However, DCF can be problematic in that it fails to regard the uncertainties embedded in economic parameters such as commodity price or operational cost, as well as the operational flexibilities such as postponing capital investment when the commodity price is low and expected to rise. Mining companies may choose to wait to start mining for a future higher commodity price. However, waiting too long may cause a suboptimal investment decision because of the timing effect of money, or even losing the investment opportunity. Therefore, there is an optimal timing of mining activation. Starting from gold spot price on Jan 1st, 2013 which is $1687.32/Oz., 10,000 simulations of price paths for future 35 years are generated to determine the optimal option-exercising threshold for gold price. The real option method provides a tractable and realistic scheme to evaluate the in-situ value of a mining project and a strategy to manage the timing of mining activities. This research implies that the ROV due to operational flexibility can be significant and should not be overlooked when triggering the mining investment decisions.