Mining companies have historically used deterministic discounted cash flow models to determine the net present value (NPV) and internal rate of return (IRR) of a proposed project. Typically, these values are used as the primary metrics to determine whether to advance a project. Unfortunately, these models do not tell the whole story: they inherently assume that the development decision must be made now and that revenues and costs will remain unchanged over the life of the project. This presentation shows a more robust model that addresses these shortcomings. This presentation will show a real options approach that can be used to model management flexibility to delay construction into the future, and Monte Carlo simulation of commodity prices to determine a suite of project outcomes. The method increases the NPV of a project by incorporating the value of management flexibility. In addition, the method can be combined with a company’s risk tolerance to optimize the project hurdle rate, and the likelihood that the project will get built in the future. This presentation will demonstrate the method using a generic project where future metal prices are uncertain.
Presented by: Benjamin Teschner
Wednesday, September 13th
4 pm - 5 pm
Brown Building 125