Using real options to value and anage a mine expansion decision at a multi-zone deposit

The file is a zipped PDF document.Real options valuation is an alternative net present value framework that is able to incorporate both management flexibility and dynamic project risks. In this paper, management is considering the development of a satellite low-grade zone while operations in a developed high-grade zone continue. If the low-grade zone is developed prior to high-grade zone exhaustion, mine capacity must be expanded before additional production from the low-grade zone can be processed. This expansion can be avoided only if low-grade zone development is delayed until the high-grade zone is exhausted. The real option model presented here allows the development and capacity expansion decisions to be reconsidered on a discrete half-year basis. It delineates price regions, for given levels of high-grade zone reserves, in which it is optimal to develop the low-grade zone, defer low-grade zone development, and abandon the mine irrevocably.Applications of real options to mining project valuation have previously used fixed production plans (FPP) to describe project structure. FPPs aggregate geological structure, such as deposit zones, into pre-determined production profiles summarizing development and production operations over a project time horizon. These real options applications extend their project structure models with global forms of project flexibility, such as irrevocable abandonment and temporary closure, and decision trees in which each branch of the tree represents a FPP. In some situations, these models may be inappropriate because they may overlook operating strategies that arise from managing the production from individual deposit zones. Such shortcomings can reduce the understanding of project operating policy.This paper analyzes an expansion decision at an operation exploiting a two-zone deposit using the real options valuation framework and a project structure model called the fleXible Discrete Mine Production (XDMP) model. The XDMP model extends previous real options mining applications by identifying development and production activities associated with specific deposit zones, in addition to global project operations. It also recognizes that capital expenditures can be used for either inflexible, zone-specific (e.g. access development to a zone) or flexible, multi-zone purposes (e.g. truck purchase that can work in any zone). Finally, it incorporates operating strategies that take advantage of geological structure such as closing a high-cost zone in response to a fall in mineral price.The XDMP results are compared to three low-grade zone development fixed production plans (no development, immediate development, and delayed development) that are valued with the discounted cash flow (DCF) and real options valuation methods. The results show that a DCF valuation model with no operating flexibility (i.e. a static spreadsheet cash flow model) may at times produce project values that are significantly higher than those produced with a flexible real options valuation model, contrary to the results often presented in other real options papers. They also show that combining fixed production plans with the real options method can underestimate the value of the project, due to an incomplete description of management flexibility, and provides misleading recommendations for the low-grade zone development decision. The results also demonstrate that complex mine planning considerations can be combined with advanced financial methods to provide project net present values and operating policy recommendations that reflect inherent project risks.In a broader context, this paper shows that corporate risk management principles are also important at the project level. These ideas and insights can assist management with capital allocation decisions and provide a better understanding of the risks and opportunities associated with a particular project. However, these principles cannot be applied from a purely financial background; detailed knowledge of the project’s technical and physical structure is equally important to ensure that non-financial project considerations are also incorporated into the valuation model. Real options valuation methods and advanced risk management principles are sufficiently flexible to integrate detailed market risk information with a detailed project description into a valuation model, with which sound capital allocation decisions can be made and capital productivity improved.
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Summary: The file is a zipped PDF document.Temporal and other factors contributing to the occurrence of occupational accidents at an underground coal mine in Turkey between the years 1992 to 2000 have been analyzed. Occupational accidents in mines result in both loss of time and money, and can cause debilitating injury or death and intense hardship imposed on family, friends, and dependents, for which no amount of compensation is sufficient. Thus, occupational accidents should be analyzed carefully in...
Publication: CIM Bulletin
Author(s): M.K. Ozfirat, P.M. Ozfirat, C.O. Aksoy, C. Pamukcu, C. Tatar
Issue: 1091
Volume: 1
Year: 2006
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Summary: The file is a zipped PDF document.Destress blasting or preconditioning, a rockburst control measure, has been tried to control strainbursts since the beginning of the 20th century. The concept of destress blasting evolved from the observation that the zone of highly fractured rock immediately surrounding some deep underground openings seems to offer some shielding to both the occurrence of and damage from rockbursts. It was argued that extending and maintaining this zone of the fractured rock...
Publication: CIM Bulletin
Author(s): H.S. Mitri, M.R. Saharan
Issue: 1091
Volume: 1
Year: 2006
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Summary: The file is a zipped PDF document.The environmental management of mining operations has evolved considerably over the last two decades. Factors such as changing values of modern societies, globalization of trade, climate change, and regulations oriented towards sustainability have led to the introduction of environmental management systems (EMSs).Cambior is a medium-size gold mining company, incorporated in 1986. A rapid growth in its northwestern Quebec-based operations and its geographical...
Publication: CIM Bulletin
Author(s): S. Vézina
Issue: 1091
Volume: 1
Year: 2006
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Summary: The file is a zipped PDF document.The importance of blasting to mill operations has been discussed in a series of publications, especially in the last decade. Literature suggests that there are two types of benefits from finer blast fragmentation: productivity increases and decreased energy requirements at the mill. Productivity increases have been linked to fragmentation improvements while energy requirements in the mill can be expected if the work index changes with blasting.In the present...
Publication: CIM Bulletin
Author(s): P.D. Katsabanis, S. Gregersen, G. Kunzel, M. Pollanen, C. Pelley, S. Kelebek
Issue: 1091
Volume: 1
Year: 2006
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Summary: The file is a zipped PDF document.IntroductionThis paper describes a novel software application that has the capability to autonomously capture images of blasted rock material and analyze them to generate the particle size distribution. The system can also process a batch of rock images captured during a fixed duration of time and produce the overall particle size distribution. The new method has different layers of segmentation modules, which allows the system to respond to a wide range of...
Publication: CIM Bulletin
Author(s): G.K. Mann
Issue: 1091
Volume: 1
Year: 2006
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Summary: The file is a zipped PDF document.Extremely fine free gold was originally discovered on the surface of carbon fines within the carbon fines settling hopper at Omai Gold Mine Ltd. (OGML). This discovery prompted an intensive metallurgical investigation to determine the genesis of this gold and how to control it so as to prevent fine gold losses to carbon fines and tailings. The initial scope of work involved an extensive carbon handling circuit sampling campaign for the purpose of defining the...
Publication: CIM Bulletin
Author(s): G.A. Vickell, C. Taschereau, A.R. Laplante
Issue: 1091
Volume: 1
Year: 2006
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