Strategic project evaluation for open pit mining ventures using real options and allied econometric techniques

Tipe, Luis Alberto Martinez (2010) Strategic project evaluation for open pit mining ventures using real options and allied econometric techniques. PhD thesis, Queensland University of Technology.


Open pit mine operations are complex businesses that demand a constant assessment of risk. This is because the value of a mine project is typically influenced by many underlying economic and physical uncertainties, such as metal prices, metal grades, costs, schedules, quantities, and environmental issues, among others, which are not known with much certainty at the beginning of the project. Hence, mining projects present a considerable challenge to those involved in associated investment decisions, such as the owners of the mine and other stakeholders.

In general terms, when an option exists to acquire a new or operating mining project, , the owners and stock holders of the mine project need to know the value of the mining project, which is the fundamental criterion for making final decisions about going ahead with the venture capital. However, obtaining the mine project’s value is not an easy task. The reason for this is that sophisticated valuation and mine optimisation techniques, which combine advanced theories in geostatistics, statistics, engineering, economics and finance, among others, need to be used by the mine analyst or mine planner in order to assess and quantify the existing uncertainty and, consequently, the risk involved in the project investment.

Furthermore, current valuation and mine optimisation techniques do not complement each other. That is valuation techniques based on real options (RO) analysis assume an expected (constant) metal grade and ore tonnage during a specified period, while mine optimisation (MO) techniques assume expected (constant) metal prices and mining costs. These assumptions are not totally correct since both sources of uncertainty—that of the orebody (metal grade and reserves of mineral), and that about the future behaviour of metal prices and mining costs—are the ones that have great impact on the value of any mining project.

Consequently, the key objective of this thesis is twofold. The first objective consists of analysing and understanding the main sources of uncertainty in an open pit mining project, such as the orebody (in situ metal grade), mining costs and metal price uncertainties, and their effect on the final project value. The second objective consists of breaking down the wall of isolation between economic valuation and mine optimisation techniques in order to generate a novel open pit mine evaluation framework called the ―Integrated Valuation / Optimisation Framework (IVOF)‖. One important characteristic of this new framework is that it incorporates the RO and MO valuation techniques into a single integrated process that quantifies and describes uncertainty and risk in a mine project evaluation process, giving a more realistic estimate of the project’s value. To achieve this, novel and advanced engineering and econometric methods are used to integrate financial and geological uncertainty into dynamic risk forecasting measures.

The proposed mine valuation/optimisation technique is then applied to a real gold disseminated open pit mine deposit to estimate its value in the face of orebody, mining costs and metal price uncertainties.

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ID Code: 48334
Item Type: QUT Thesis (PhD)
Supervisor: Wolff, Rodney
Additional Information: Embargoed until 10th November 2013.
Keywords: decision making criteria, dynamic cash flow, flexibility value, metal price forecasting, multi-parametric orebody modelling, net present value, open pit mine design and planning, orebody modelling, project value, risk analysis, and real options
Divisions: Past > QUT Faculties & Divisions > Faculty of Science and Technology
Past > Schools > Mathematical Sciences
Institution: Queensland University of Technology
Deposited On: 30 Jan 2012 04:17
Last Modified: 11 Feb 2014 03:05

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