Expanded Net Present Value for Various Mining Valuation

Abstract

The purpose of this paper to provide a valuation incorporating management flexibility in an uncertain operating environment for valuing various mining in Indonesia. This research raises the question on what strategies in developing valuations models of various mining and how uncertainty such as prices, grades/quality, costs, schedules, quantities, environmental issues and among others which are not known at the beginning of the project, have contributed to the value resulted. The study is based on an Expanded Net Present Value (eNPV) valuation in which uncertainty and management flexibility are incorporated into the valuation. The focus of the research is on the strategy in determining value using Expanded Net Present Value (eNPV) and on how to mitigate the risks of uncertainties. The paper emphasizes the specific characteristics of the actual mining valuation in Indonesia, generated by conventional NPV method commonly used. This was also confirmed in a study carried out by Graham and Campbell (2002), of 392 completed CFO surveys, 74.9% of respondents always or mostly use the Net Present Value (NPV) method of project valuation. However, conventional valuation tools have penalized projects with a high degree of uncertainty and lead to myopic decisions. The research is correlated to diagnose the flexibility of strategic mine planning and to analyze the process of change within the uncertainties. The study allows emphasis on some characteristics of the mining valuation process developed in Indonesia.