Real Options Valuation of Australian Gold Mines and Mining Companies

32 Pages Posted: 19 Dec 2002

See all articles by David B. Colwell

David B. Colwell

UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)

Thomas Henker

Bond University

John Ho

UNSW Australia Business School, School of Banking and Finance

Date Written: September 20, 2002

Abstract

Conventional discounted cash flow valuation techniques are inappropriate for mining companies because operational flexibilities are deemed an essential component of mine values. In this article we review the real options literature on the valuation of mines and their embedded option to close the mine. We use a model based on Brennan and Schwartz (1985) to empirically value Australian gold mines and mining companies. One difficulty with doing empirical research in this area is in obtaining relevant and complete data, given the nature of real assets and the fact that investments are typically private in nature. The mine data for this study is supplied by Brook Hunt mining and metal industry consultants, UK and covers the period from 1992 to 1995. The primary advantage of this data set is its consistency across different mines that cannot be matched by data sets derived from annual reports data. We find that the real options model is a useful tool for the description and valuation of operational flexibilities. However, the values of the embedded options are very sensitive to estimation errors in the input parameters of the model. While average and median closure option values are economically significant, the option values vary over a large range.

Keywords: real options, mining companies, closure option, Brennan and Schwartz

JEL Classification: G13

Suggested Citation

Colwell, David B. and Henker, Thomas and Ho, John, Real Options Valuation of Australian Gold Mines and Mining Companies (September 20, 2002). Available at SSRN: https://ssrn.com/abstract=332402 or http://dx.doi.org/10.2139/ssrn.332402

David B. Colwell (Contact Author)

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia
+61 (2) 9385 5851 (Phone)
+61 (2) 9385 6347 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Thomas Henker

Bond University ( email )

Gold Coast, QLD 4229
Australia
+61 7 5595-1561 (Phone)

John Ho

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

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