Financial and economic analysis of environmental controls in the Peruvian mining industry

Like other mining countries, Peru faces the challenge of improving environmental quality by setting new environmental controls in the mining sector. It is inevitable that these controls set by the government will affect the output rate and the investment behavior in the mining industry. The focus of this research is to answer the question of how the imposition of new environmental controls would affect the investment behavior of existing producers in the Peruvian mining industry. The need for such research stems from the Peruvian government's ongoing initiatives to set emission standards to reduce the damage done by contaminants from the mining sector.;Using deterministic and probabilistic DCF techniques the study performs an analysis of alternative environmental expenditure scenarios to appraise their impacts on investment in nine existing mines of the Peruvian mineral industry. Furthermore, the study also employs option pricing theory by using a binomial lattice approach to obtain alternative estimates of the impact and to determine the magnitude of the change in investment of individual mines.;The results obtained in the simulation analysis suggest that the lower range standards will not severely affect the investment rate of existing operators under both the deterministic and probabilistic DCF techniques and the option approach. However, if international standards are applied only two mines will be able to survive the new controls under the worst case scenario. On the other hand, under the best case scenario, four mines can remain open after international standards are applied (meaning that investment will decline by less than 100 percent in these mines).