Mineral Reserve Risk in Continuous-Time Stochastic Mine Valuation

Abstract

In this paper, the authors develop a valuation model (2DPM) to overcome the limitation of constant reserve (CRM) assumption in derivative mine valuation. It develops and solves equilibrium equations that characterise the value of mineral project under price uncertainty and reserve variability due to cutoff grade flexibility. Results show that the determination of cutoff grade independent of optimal operating policies may not always add to asset value. At copper price of $1.5/lb, a 127.8mt reserve is valued at $1,134 and $996 million dollars by CRM and 2DPM respectively. Using 2DPM delays the investment decision and early abandonment of projects.

Department(s)

Mining Engineering

Keywords and Phrases

Cutoff Grade Flexibility; Investment Decisions; Mineral Asset Valuation; Mineral Reserve Risk; Minerals Industry; Price Uncertainty; Real Options Valuation; Reserve Variability; Stochastic Mine Valuation; Risk assessment

International Standard Serial Number (ISSN)

1466-8297

Document Type

Article - Journal

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 2007 Inderscience, All rights reserved.

Publication Date

01 Jan 2007

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