Wycena górniczego projektu inwestycyjnego z elastycznością - podejście ‘MAD’ vs. model konsekutywnego drzewa stochastycznego / Valuation of Mineral Project with Flexibility – ‘Mad’ Approach vs. Consecutive Stochastic Tree

For many years, real options analysis (ROA) has been perceived as an attractive project valuation alternative to the traditional discounted cash flow analysis (DCF). Right now, one can see evidence of a growing dispersion in the applicability of the method among various industries (particularly minerals, coal, gas and petroleum) and the banking sector. This is because of its potential to value managerial flexibility including possibilities for delaying investments or reformulating the operating strategies of the company. The real option approach enables one to calculate a project’s fundamental value in approximating the market one. The basis of option theory is stochastic modeling of underlying assets - the preferred, commonly used ROA methodology, introduced by Copeland and Antikarov (2001), is called the MAD (marketed asset disclaimer) approach. It assumes that an underlying asset, which is the (gross) present value of the project (PV), changes with time according to themultiplicative stochastic process derived as discrete binomial approximation of geometric Brownian motion (GBM). In addition, theMAD assumes, that a twin asset of the underlying instrument is calculated in a common way net present value (NPV). The twin-asset assumption fulfills the theoretical criteria required for fair option valuation in no-arbitrage conditions. The paper delivers empirical arguments arguing that indirect modeling of PVs, according to the standard stochastic process, do not properly reflect reality. The calculations were based on the valuation of a hard coal project with flexibility - the methodology has included multiplicative price modeling (that parameter has served as so called ‘referential asset’) and, consequently, built a consecutive PVs tree, where respective present values have been adjusted by referential price levels. Moreover, the paper has emphasized that the option-to-wait changes the structure of project’s cash flow and PV trees, depending on the waiting period. In conclusion, the arguments have been derived from the consecutive modeling of a PV asset is more accurate than indirect constructing of it in the MAD’s multiplicative mode.