Continuous-time stochastic process characterization and valuation of mineral investments and software interface

The economic evaluation of mineral projects forms the basis for project acquisition, investment and financing in the mineral sector. High capital intensity and irreversibility in the industry require the use of valuation methods that are rigorous and respond to market, industry and project risks. Conventional methods fail to properly account for these risks, their resolution through time and their effects on project value.; This study uses real options valuation method to develop two valuation models that consider both price and reserve uncertainty as opposed to models that treat reserve as known and constant. It also develops an interactive module (based on the developed models) that could be used as a tool by industry practitioners. This will allow option pricing theory to be used in valuing mineral projects without the need for thorough theoretical modeling.; The first model (2DPM) assumes that uncertainty in economic reserve is directly a result of flexible operational cut-off grade in response to price swings. The second model (2DPR) uses a more general model of reserves by assuming that the net relative change in reserve between evaluations follows a geometric Brownian motion. Results show that in general reserve uncertainty decreases the value of a mine compared with results from constant reserve model (CRM). Results from 2DPM show that the determination of cut-off grade independent of optimal operating policies may not always add value and delays the decision to invest. At a copper price of {dollar}1.5/lb, 2DPM (CRM) values a 127.8mt mine at {dollar}996 million ({dollar}1134 million) and suggests that, a critical price of {dollar}1.46/lb ({dollar}1.29/lb) of copper is high enough to justify the capital investment of {dollar}150million. The results from 2DPR show that although generally the value of the mine decreases ({dollar}952million), the decision to invest is made early (threshold price of {dollar}1.07/lb) when reserve uncertainty exists. This is attributed to the fact that the resolution of reserve uncertainty is achieved through investment and exploitation of the resource whereas under the assumption of constant reserve, uncertainty in price is resolved just by waiting.