Mining Example #1

Valuing a Mining Switch Option with Decision Trees

  • Real option valuation
  • Price modeling
  • Downstream decisions
  • Moment matching
  • Conditioning

Guj, Pietro. "A practical methodology to optimise marginal mineral deposits using switching real options." Ore Geology Reviews. Web. 25 Apr. 2016

DPL Influence Diagram for Valuing a Mining Switch Option

Under current depressed commodity price conditions many mining projects are financially marginal. This calls for a shift from a focus on economies of scale, which can involve significant capital investments and inflexible modes of operation, to making up front investments for operational flexibility -- resulting in easier and less costly means to temporarily close and re-open poor performing mines in response to price volatility. DPL is employed to estimate the real option value of this switching option in order to provide an indication of the amount that should justifiably be invested up-front to create the necessary switching flexibility.