Evaluation of Mineral Ventures Using Modern Financial Methods
The choice of superior projects or ventures, as well as excellent management of their evolution, are critical to the success of mining organisations. A particularly important part of venture selection and management is connected with the evaluation process. Managers and investors must clearly understand and manage the effect of risk, uncertainty, and various options on venture's value appropriately. Current economic evaluation tools in the mineral industry are inadequate in helping managers and investors to handle these strategic issues. Advances in the theory of asset pricing have provided solutions to these inadequacies. This thesis project was designed to extend these advances to develop and illustrate a new economic evaluation tool, the derivative asset valuation (DAV) method, to help investors and managers to better select and manage ventures. The DAV method is implemented to examine and quantify various options and their effects on venture's present value, as well as project risks resulting from uncertainties associated with metal price, metal reserve, and expected ore grade. Graphic illustrations of results show the importance of feasibility study, timing and operating options, and metal price and expected ore grade uncertainties in venture analysis. The effects of multiple-stage feasibility study, feasibility study duration, and metal price volatility on venture's value have been quantified and analysed. Also presented are phase diagrams which delineate metal price boundaries for various expected ore grades and metal reserves at which waiting or abandoning, closing, opening, feasibility study and investment decisions are appropriate. By using the DAV method, investors and managers can examine and quantify various options available to them in the selection and management of mineral ventures. Also, the effects of risk and uncertainty in the value and viability of a venture can be better understood and controlled using the DAV method. Differences between the present values obtained from the DAV and discounted cash flow (DCF) methods indicate that the latter understates the venture's value when the option to wait to undertake feasibility studies and investment, and operating options have value.
S. Frimpong, "Evaluation of Mineral Ventures Using Modern Financial Methods," University of Alberta, Jan 1992.
Keywords and Phrases
Applied Sciences; Finance; Mining; Social Sciences
© 1992 University of Alberta, All rights reserved.
01 Jan 1992