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MINING ORE VALUATION BY REAL OPTION UNDER UNCERTAINTY AND RISK

MINING ORE VALUATION BY REAL OPTION UNDER UNCERTAINTY AND RISK. Ph.D Manuel Viera Ceo& Managing Partner Metaproject S.A www.metaproject.cl. Are exposed to a high level of uncertainty Big amounts of money on the table Complex capital structures.

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MINING ORE VALUATION BY REAL OPTION UNDER UNCERTAINTY AND RISK

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  1. MINING ORE VALUATION BY REAL OPTION UNDER UNCERTAINTY AND RISK Ph.D Manuel Viera Ceo& Managing Partner Metaproject S.A www.metaproject.cl

  2. Are exposed to a high level of uncertainty Big amounts of money on the table Complex capital structures. Political risk and all kinds of financial risk. Flexibility is really important Strategic Mining Investments

  3. Open Pit at Codelco´s Andina Division

  4. Zaldivar Open Pit (Placer Dome) and Escondida Open Pit (BHP Billiton)

  5. Blast at Codelco´s Chuquicamata Mine

  6. When ore deposit is economically attractive, arise a series of questions such as: How big are the known reserves? What is the level of confidence? What is the level of risk associated with? Which is the expected return?

  7. + Income - Costs Value Quality and Risk How increase NPV? EVA Asegura Added La Gestión de Calidad y Riesgo se justifica si el beneficio es mayor a su costo Quality Risk NPV Expected value

  8. HEURÍSTICA DE DECISIÓN - RISKMANAGEMENT Fig. D.6 a) Costo Incertidumbre = 0 (p) 0 NPV (+) E(NPV) b) Hay Costo Incertidumbre (Mayoría de los Proyectos Mineros) (p) Costo Incertidumbre P(Sucessfull) P(reject) (-) 0 E(NPV) VAN (+) c) Costo Incertidumbre = Flujos de Caja Futuros (p) P(fracaso) Costo Incertidumbre (-) - E(NPV) 0 NPV (+) DECISION MAKING

  9. DCF analysis was introduced in the 1950’s and first applied to petrochemical projects. Prior to that the Payback method prevailed. Sensitivity and Scenario analysis were developed at the US Air Force and the first corporate use occurred at Shell later in that decade. The advent of computers brought simulation methods in the 1960’s and decision trees. Option theory was developed in 1973, and applications to real assets occurred a few yearslater. Evolution of Valuation Methods

  10. Evolution of Valuation Methods Option Pricing Simulation Decision Trees Real Option Valuation Sensitivity Analysis DCF Source:Brandao

  11. Analitic (closed formula) models like Black-Scholes:Big biases because their assumptions are unrealistic Traditional decision trees. Binomial models (lattices).-Good alternative but we need to know the binomial process parameters for the underlying project. Montecarlo simulation.- Maybe a black box Alternative methods to price real options

  12. Step 1: Review and Define the Mining Business Strategy Step 2: Determine Geological Uncertainty Level . Step 3: Perfect Information Level and Information Quality Step 4: Mining Resources Cubication and Valuation. Step 5: Determination of Engineering Level (Information Quality). Step 6: Calculation of Optimal Production Rate. Step 7: Metals and main Supplies Price Projection. Step 8: Determination of the Project’s Risks and Dangers. Step 9: The Normal Portfolio of Projects , to determine which candidates will be evaluated by Real Options Step 10: Scenarios and variables taken into account to Evaluate Projects. Step 11: Definition of the Decision Trees with Flexibilities. Step12: Selection of the Strategic Flexibilities and Options Mining Projects Integral Evaluation Methodology through Real Options

  13. ROV VALUE FOR PROJECT CHARACTERISTICS

  14. Option to Postpone the Decision Option of Expansion Option of Closure Option of Knowledge Option of Technological Package Selection Option of Optimal Production Rate Selection Option of Product Quality Improvement Option to anticipate with the Mining Infrastructure Preparation and Development Option of Selection of the Exploitation Method Strategic Flexibilities and Options in a Mining Project

  15. METAL PRICE SIMULATION MODEL

  16. Brownian Motion with Jumps Model(Discrete Time Version) .

  17. Jumps in Copper Price Movements

  18. 120 1982 Tendencia prevista 1981 100 80 1984 Dolares por Barril 1985 60 1986 1987 40 Actual 1991 20 1995 0 2005 1975 1980 1985 1990 1995 2000 Año Fuente: U.S. Department of Energy, 1998 Forecast Oil Price ???

  19. CASE STUDY

  20. Mining Modeling

  21. Optimum rate production

  22. Alway there are Risk anyplaces Please give me the dry device

  23. RESULTS Other Case

  24. RESULTS

  25. Mina Cinabrio- C.M. Punitaqui Metaproject S.A

  26. Mining Plan 2011 Nv-370 Nv-350 Nv-330 C-13 Nv-305 C-18 C-17 C-16 C-15 C-14 Nv-275 C-21 C-20 C-19 Nv-245 C-22 Nv-220 C-24 C-23 Nv-190 C-25 C-27 C-26 Nv-160 C-30 C-29 C-28 Nv-135 C-31 Nv-115 C-32 Nv-80 C-34 C-33 Nv-50 C-35 Nv-25

  27. Main conclusions

  28. The Latin Hypercube or Montecarlo Simulation with reversion to the mean has resulted to be a good copper and molybdenum price forecast model, allowing a better valuation of the mining property project. The NPV criterion is rigid and doesn’t allow visualizing the strategic value of mining flexibilities. The Option to expand has resulted as the best decision. The DELPHI/HAZOP experts panel is a good method to determine the uncertainty level of the ore deposit, in order to apply the Options theory. MAIN CONCLUSIONS

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