Keywords: real options valuation, mineral reserve risk, mineral asset valuation, stochastic mine valuation, minerals industry, price uncertainty, reserve variability, cutoff grade flexibility, risk assessment, investment decisions
Mineral reserve risk in continuous-time stochastic mine valuation
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.