Determination of the effect of economic uncertainties on mining project evaluation using Real Option Valuation

Abstract

Value of a mine project is typically influenced by several kinds of uncertainties. Therefore, it is necessary that the mining uncertainties be recognised at the initial stage and then the evaluation process be carried out. Obviously, the economic uncertainties are the most important parameters, which can affect the evaluation process. Selecting the most reliable method for evaluating a mining project is another knot. The results of conventional mining project evaluation methods such as Discounted Cash Flow (DCF) are conservative and these methods cannot represent the real value of mining projects. To solve this problem, it is necessary to use more accurate techniques such as Real Option Valuation (ROV). This research uses the DCF and ROV methods to compute the Net Present Value (NPV) of the Cayeli copper mine under uncertainties of operating costs and metal price. It is concluded that the NPV, which is calculated by ROV, is 40% greater than DCF.