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Real option valuation of open pit mines with two processing methods

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  • Siña, Matías
  • Guzmán, Juan Ignacio

Abstract

This paper proposes a real option model for valuing open pit mines with two processing methods under commodity price uncertainty. The model considers the flexibility that open pit mines have in order to decide if the ore being mined will be processed or sent to the waste dump. In addition, it enables to maximize the net present value of the mine through the use of the mining sequence and the extraction rate as decision variables. A numerical example is used to illustrate the model and the effect that price uncertainty has in the design of a mining project. The main result obtained is that an open pit mine can significantly enhance its value under a design that considers two processing methods instead of one.

Suggested Citation

  • Siña, Matías & Guzmán, Juan Ignacio, 2019. "Real option valuation of open pit mines with two processing methods," Journal of Commodity Markets, Elsevier, vol. 13(C), pages 30-39.
    • Handle: RePEc:eee:jocoma:v:13:y:2019:i:c:p:30-39
    DOI: 10.1016/j.jcomm.2018.05.003
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