Valuing a Multi-Zone Mine as a Real Asset Portfolio - a Modern Asset Pricing (Real Options) Approach
39 Pages Posted: 21 Aug 2001
Date Written: October 8, 2001
Modern asset pricing (MAP; commonly known as real options valuation) has been used as an alternative to discounted cash flow (DCF) methods in the mining industry to improve the representation of project structure within project valuation models. Previous mining applications of MAP have tended to treat the ore deposit as a homogenous entity as opposed to a heterogenous one in which the deposit can be subdivided into zones differentiated by size, quality and location. This is an inadequate approach for some mining applications because management may implement operating strategies that capitalize on geological structure such as selective zone closure in response to low mineral prices.
This paper introduces a project structure model that reflects the heterogenous nature of mineral deposits by representing the project as a real asset portfolio in which each zone represents a portfolio asset. The project is operated in discrete intervals by choosing, at the start of each interval, an operating mode from a set of competing operating modes. Each mode specifies the combinations of zones that will be active and the amount of project capacity that is built, abandoned or temporarily closed. A two-zone mining example is used to demonstrate the proposed model and show how operating strategies that capitalize on geological structure can add value.
JEL Classification: G3, G31
Suggested Citation: Suggested Citation