Proceedings of 5th European Business Research Conference
10 - 11 September 2015, St. Regis Hotel, Rome, Italy, ISBN: 978-1-922069-83-2
Evaluation of Cu-Ni Mine Expansion Project in the Stratified
State Aggregation Method: Real Option Analysis
Dineo Florence Sefemo* and Tsuyoshi Adachi**
Mining projects are multistaged investments that require management decision making to invest
either now or in future when some parameters of the projects are being resolved. Most
commonly the binomial tree option pricing is used to price American type options under Real
Option Valuation (ROV). The difficulties of this method is the inability to handle the projects
multiple sources of uncertainties and accurate simulations. We therefore present the developed
numerical Monte Carlo simulation, the stratified state aggregation method to value the expansion
option of Selebi Central Cu-Ni project in BCL mine, Botswana under ROV. The metal price
market and geological uncertainty are modelled together to estimate the net present and
expansion option values which includes the value of management flexibility. This method treats
the project from current operating to expanded state within the set development period with
decision making to continue from one state to the other. The results show significantly improved
expected net present value and expansion option value with in cooperation of multiple key
principal uncertainties for this project. The expansion option payoff values and optimal
investment timing under real options analysis are determined with recommendation for future
execution of Selebi Central at the calculated expansion option value.
Management
Keywords: Stratified State Aggregation, Real Options, Optimal Investment Timing,
Binomial Option Pricing
* Miss Dineo Florence Sefemo, Graduate School of Engineering and Resources Sciences, Akita University.11 Tegata - Gakuenmachi Akita City, 010-0825, Japan. Email : dineo.sefemo@yahoo.com
** Prof. Tsuyoshi Adachi, Faculty of International Resource Sciences, Akita University, Akita, 0101-0825,
Japan. Email : adachi.tgipc.akita-u.ac.jp