Use of Selected Derivatives For Valuation of Mining Investment Projects

Abstract

The article is devoted to the issue of valuation of mining investment projects (with the use of the Monte Carlo method) via selected derivatives. The purpose of using such instruments in the process of valuation is to secure the revenue of a mining company by guaranteeing raw material prices. According to the authors of the publication, the use of such instruments will help reduce the variability of obtained results and increase their reliability. The article consists of four parts. The introduction to the article specifies the purpose of the work. The second part of the article presents the foundations for the analysis, the purpose of which is to compare the obtained results ofthe investment value for three variants. The first one assumes the use of financial options to secure raw material prices, the second assumes the use of futures, and the last one stipulates that the company does not take action with respect to securing raw material prices. The third part presents the results of the study. Due to the availability of data, sample calculations were carried out on the basis of the financial information published by a copper manufacturer. The obtained results show that from the point of view of the value of the investment and the risk of negative investment value, the most advantageous method is to secure the prices of raw materials in the process of valuation of mining investment projects with the use of options. The last part of the work is a summary presenting the conclusions of the analysis. The article is accompanied by a list of literature used to prepare this study.