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UNDERSTANDING REAL OPTIONS
IN MINE PROJECT VALUATION:
A SIMPLE PERSPECTIVE

The recent downturn has shown that operating flexibility and strategic adaptability are critical to the long-term success of many resource companies. The early planning stage of a mining project (i.e., before completion of the feasibility study) typically provides the greatest scope to explore alternatives, assess risk and implement changes in order to minimise overall project costs while maximising the project upside potential. Once ground has been broken, the alternatives available to engineers and operators diminish exponentially.
The objective of this paper is to provide an alternative technique for project evaluation, which takes into account uncertainty and risk, as well as managerial flexibility to respond to these uncertainties. To achieve this outcome, this paper introduces real options in a general context, and, demonstrates the viability of the method as an alternative technique for strategic mine project evaluation. A small disseminated gold deposit is used as case study and evaluated under gold price uncertainty. The results indicate that although a bit more complex to implement, real options gives a better overview of the mine project performance giving the mine analyst the flexibility of making decisions to minimise the downside risk while maximising the upside potential.

Mining 2010 Paper

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