56 Pages Posted: 26 Feb 2005

See all articles by Bruce D. Grundy

Bruce D. Grundy

University of Melbourne

Johannes Raaballe

Aarhus University - Department of Management

Date Written: February 2005


Based on standard option pricing arguments and assumptions (including no convenience yield and sustainable property rights), we will not observe operating gold mines. We find that asymmetric information on the reserves in the gold mine is a necessary and sufficient condition for the existence of operating gold mines. Asymmetric information on the reserves in the mine implies that, at a high enough price of gold, the manager of high type finds the extraction value of the company to be higher than the current market value of the non-operating gold mine. Due to this under valuation the maxim of market value maximization forces the manager of high type to extract the gold.

The implications are three-fold. First, all managers (except the lowest type) extract the gold too soon compared to the first-best policy of leaving the gold in the mine forever. Second, a manager of high type extracts the gold sooner than a manager of lower type. Third, a non-operating gold mine is valued as being of the lowest type in the pool and all else equal, high-asymmetry mines are valued lower than low-asymmetry mines. In a qualitative sense these results are robust with respect to different assumptions (re cost structure, objectives of the manager, and convenience yield).

Keywords: Asymmetric Information, Signaling, Real Options, Options

JEL Classification: D82, G30, G13

Suggested Citation

Grundy, Bruce D. and Raaballe, Johannes, Gold-Mining (February 2005). Available at SSRN: or

Bruce D. Grundy

University of Melbourne ( email )

Faculty of Economics & Commerce
Department of Finance
Victoria, 3010
+61 3 8344 9083 (Phone)
+61 3 8344 6914 (Fax)

Johannes Raaballe (Contact Author)

Aarhus University - Department of Management ( email )

Bartholins Alle, Bygning 350
DK-8000 Aarhus C
+45 89421564 (Phone)
+45 86135132 (Fax)

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