Analyzing the profitability of metal mining investments with system dynamic modeling and real option analysis

摘要

The importance of ex-ante analysis of metal mining investments has grown in recentyears. The decreasing profitability of new projects and unpredictable metal markets posea challenge to the currently applied models of profitability analysis. The purpose of thisresearch is to investigate simulation and system dynamic (SD) models applicable to realoption analysis of metal mining investments. Real options in general refer to flexibilityof projects which can both decrease the negative effects of uncertainty and, on the otherhand, enhance the positive future realizations of the projects. This thesis is a collection ofarticles with common theme of enhancing the simulation- and SD-models used for realoption valuation of metal mining investments.Within the framework of real option analysis it is claimed that metal mining investmentsare a distinct object of study, which have specific characteristics that should be taken intoaccount in their real option analysis. The research methods of this thesis include literaturereview and modeling. Two distinct simulation models are created: a system dynamicsimulation model and a static simulation model. The models are used to run analyses withillustrative case examples that have their background in the metal mining industry.The results suggest that metal mining investments can be treated as techno-economicsystems by using the SD-methodology and that the use of system dynamic simulationbased analysis allows a more detailed and realistic ex-ante modeling of metal mininginvestments and of the connected uncertainties. It is shown that system dynamic modelsare able to model compound and interacting real options that exist on a single asset. Basedon the results of this work it seems that under non-ideal conditions the profitability ofmetal mining investments is linked to the financing of these projects. High leverage witha fixed debt servicing schedule may inhibit the use of managerial flexibility that maycause a loss of project value. It is suggested that an optimal debt-equity ratio exists thatmaximizes the project value per percentage point of equity invested.