Valuing a Mining Switch Option with Decision Trees
Real option valuation
Guj, Pietro. "A practical methodology to optimise marginal mineral deposits using switching real options." Ore Geology Reviews. Web. 25 Apr. 2016
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.