Valuing a Multi-Zone Mine as a Real Asset Portfolio - a Modern Asset Pricing (Real Options) Approach

39 Pages Posted: 21 Aug 2001

See all articles by Michael R. Samis

Michael R. Samis

AMEC Americas Limited; Kuiseb Minerals Consulting

David Laughton

David Laughton Consulting Ltd/School of Business, University of Alberta

Richard Poulin

Université Laval - Faculté des Sciences et Génie

Date Written: October 8, 2001

Abstract

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

Samis, Michael R. and Laughton, David and Poulin, Richard, Valuing a Multi-Zone Mine as a Real Asset Portfolio - a Modern Asset Pricing (Real Options) Approach (October 8, 2001). Available at SSRN: https://ssrn.com/abstract=280801 or http://dx.doi.org/10.2139/ssrn.280801

Michael R. Samis (Contact Author)

AMEC Americas Limited ( email )

2020 Winston Park Drice - Suite 700
Oakville, Ontario L6H 6X7
Canada
(1-905) 829-5400 (Phone)
(1-905) 829-3633 (Fax)

HOME PAGE: www.amec.com

Kuiseb Minerals Consulting ( email )

#2701 - 88 Erskine Avenue
Toronto, Ontario M4P 1Y3
Canada
(1-416) 485-3053 (Phone)
(1-416) 485-9831 (Fax)

David Laughton

David Laughton Consulting Ltd/School of Business, University of Alberta ( email )

11006-125 St
Edmonton, Alberta T5M 0M1
Canada
+1-780-454-8846 (Phone)

HOME PAGE: http://www.davidlaughtonconsulting.ca

Richard Poulin

Université Laval - Faculté des Sciences et Génie ( email )

1033, Pavillon Alexandre-Vachon
Cite Universitaire, Quebec G1K 7P4
Canada
(1 418) 656 2303 (Phone)
(1 418) 656 5902 (Fax)

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