UNDERSTANDING REAL OPTIONS: DOES REAL OPTIONS ANALYSIS ALWAYS INCREASE MINE PROJECT VALUE?
This is a note about Real Option Analysis (“ROA”) always improving project value. The result from a ROA is the Expanded Net Present Value (“ENPV”) which is equal to the traditional NPV, named the Base case NPV, plus the additional value of all identified operational and managerial strategies or options that can be implemented over the Life of Mine (“LOM”). That is, by definition ROA will in general either provide a better value than the Base case NPV or the same value – in case no options are seen to increase project value over time.Sometimes, however, experience has shown that after running a ROA “IN” a mine project (which implies repeating the entire mine evaluation process considering both the uncertainties at their sources and the nonlinearities of the process) the resulting ENPV is either similar or less than the Base case NPV. These results, of course, would suggest that the ROA either did not have a significant effect on the value of the project or that it reduces the value of the mine project. Then, the mandatory questions are why these outcomes happen and how to interpret them. This white paper will analyse and answer these questions from a realistic viewpoint.