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Accounting for tailings dam failures in the valuation of mining projects

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  • Armstrong, Margaret
  • Langrené, Nicolas
  • Petter, Renato
  • Chen, Wen
  • Petter, Carlos

Abstract

The number of major tailings dam failures has doubled over the past 20 years, culminating in the tragic accident at Brumadinho in Brazil where about 300 people lost their lives. In this context, there is a growing demand from mining companies, institutional investors and policymakers alike for updated mining project assessment tools taking account of such risks. As part of this research, this paper develops a real option framework for evaluating mining projects involving tailings dams and their associated risk. Two options are considered beyond standard business-as-usual safety measures: reinforced dam maintenance, and retrofitting a treatment process that reduces the volume of unconsolidated tailings. A closed-form expression was obtained for the expected value of the business-as-usual case; semi-analytic formulas were obtained for the two options for evaluation by dynamic programming with quantization of the price factor. When applied to an iron ore deposit with characteristics similar to the Samarco deposit, the method shows that both options are financially superior to business-as-usual for the mining company, with the dry processing retrofitting option being the most attractive. The sensitivity of the expected values was evaluated over a range of values of the key parameters. This research provides senior decision-makers with tools to evaluate different options regarding tailings dam safety from a financial point of view, and provides financial evidence in favour of safer treatment processes for mining waste.

Suggested Citation

  • Armstrong, Margaret & Langrené, Nicolas & Petter, Renato & Chen, Wen & Petter, Carlos, 2019. "Accounting for tailings dam failures in the valuation of mining projects," Resources Policy, Elsevier, vol. 63(C), pages 1-1.
    • Handle: RePEc:eee:jrpoli:v:63:y:2019:i:c:14
    DOI: 10.1016/j.resourpol.2019.101461
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    References listed on IDEAS

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    Cited by:

    1. Carlos Cacciuttolo & Deyvis Cano, 2023. "Spatial and Temporal Study of Supernatant Process Water Pond in Tailings Storage Facilities: Use of Remote Sensing Techniques for Preventing Mine Tailings Dam Failures," Sustainability, MDPI, vol. 15(6), pages 1-32, March.
    2. Cox, Benjamin & Innis, Sally & Mortaza, Adnan & Kunz, Nadja C. & Steen, John, 2022. "A unified metric for costing tailings dams and the consequences for tailings management," Resources Policy, Elsevier, vol. 78(C).

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    More about this item

    Keywords

    Dry processing; Preventive maintenance; Real options; Quantization;
    All these keywords.

    JEL classification:

    • L72 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Other Nonrenewable Resources
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions

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