A Practical Methodology for Optimizing Capital Investment Decisions Across a Portfolio of Mining Assets

Mining companies face strategic decisions regarding capital investment in assets that provide long-term streams of cash flow under conditions of significant uncertainty. The more remote and complex an ore body and the further in the future development will occur the greater the impact of all sources of uncertainty become whereas uncertainty reduces as work is carried out and production becomes more imminent. This pattern of diminished uncertainty with time results in enormous complexity if one company is looking at a number of different potential mine developments with differing commodity outputs under conditions of constrained capital availability. The ability to vary the scale and pace of development along with the flexibility to accelerate or delay the initiation of capital investment adds significant real option value that may be difficult to estimate in isolation.

A methodology will be illustrated to treat future investment opportunities as a portfolio and optimize investment decisions under constraints while assessing the impact of uncertainty. The goal is not to determine an optimum path but to provide important information to illustrate the trade offs and implications of strategic decisions and to do so in real time so companies can continuously re-assess those decisions as circumstances change.
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