Title: Mineral reserve risk in continuous-time stochastic mine valuation

Authors: George Dogbe, Samuel Frimpong, Jozef Szymanski

Addresses: Department of Civil and Environmental Engineering, School of Mining and Petroleum Engineering, 3-133 Markin/CNRL Natural Resources Engineering Facility, University of Alberta, Edmonton, Alberta T6G 2W2, Canada. ' Department of Mining and Nuclear Engineering, University of Missouri-Rolla, Rolla, MO 65409, USA. ' Department of Civil and Environmental Engineering, School of Mining and Petroleum Engineering, 3-133 Markin/CNRL Natural Resources Engineering Facility, University of Alberta, Edmonton, Alberta T6G 2W2, Canada

Abstract: In this paper, the authors develop a valuation model (2DPM) to overcome the limitation of constant reserve (CRM) assumption in derivative mine valuation. It develops and solves equilibrium equations that characterise the value of mineral project under price uncertainty and reserve variability due to cutoff grade flexibility. Results show that the determination of cutoff grade independent of optimal operating policies may not always add to asset value. At copper price of $1.5/lb, a 127.8mt reserve is valued at $1,134 and $996 million dollars by CRM and 2DPM respectively. Using 2DPM delays the investment decision and early abandonment of projects.

Keywords: real options valuation; mineral reserve risk; mineral asset valuation; stochastic mine valuation; minerals industry; price uncertainty; reserve variability; cutoff grade flexibility; risk assessment; investment decisions.

DOI: 10.1504/IJRAM.2007.014093

International Journal of Risk Assessment and Management, 2007 Vol.7 No.5, pp.675 - 694

Published online: 18 Jun 2007 *

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