STRATEGIC COAL MINE PLANNING PROJECT USING AN INTEGRATED REAL OPTIONS MODEL APPROACH
Strategic planning and mine design is a complex process. This complexity arises from the large range of variables that need to be considered in order to maximise the value of a mining operation with any confidence. Despite extensive data gathering exercises primarily focussed on the deposit, many of the inputs into an evaluation process are either unknown or limited (e.g., ash content, washability, coal prices and operating costs, among others) even when the project is at an advanced stage. This typically results in a sequential evaluation process and averaged or factored inputs being applied to the mining operation, with little or no consideration given to the inherent uncertainty associated with such an approach. Unfortunately, current coal open pit evaluation procedures do not account for all these technical, operational and financial aspects appropriately. One of the main reasons for this is that current mine evaluation techniques are based on the (static) discounted cash flow (“DCF”) and the associated Net Present Value (“NPV”) techniques. However, these techniques are somewhat limited in that they provide a static view of the project based on averages or expected values and, from a valuation perspective, largely disregard cash flows beyond a certain period (as little as five or six years). This is formally referred as the “Flaw of Averages in Mine Project Evaluation”. Another reason is the complexity of the mine evaluation process, i.e., dealing with uncertainty and risk in coal mine project evaluation is not an easy task due to the different sources of uncertainty that a mine project faces during its production life. In the light of the above, the objective of this paper is twofold. Firstly, it discusses the concept of “flaw of averages in coal mine projects” (Martinez, 2009, 2010). Secondly, it introduces and extends recent investigations using real options theory to the evaluation of a coal mining project. Here the need for building generic frameworks that can facilitate the evaluation process of a coal mine project, in the face of uncertainty and risk, is discussed. The paper introduces a generic framework for coal mine project evaluation, named an integrated model real options approach, which is then applied to a small coal mine operation where coal quality and coal prices are seen as the main sources of uncertainty.