Proceedings of 4th European Business Research Conference
9 - 10 April 2015, Imperial College, London, UK, ISBN: 978-1-922069-72-6
Management Flexibility and Its Real Option Pricing in
Expansion Project of a Metal Mine: Actual Case Study in
Selibe Phikwe Mine, Botswana, Africa
Dineo Florence SEFEMO1 and Tsuyoshi ADACHI2
The
application of real options to mining investments is being widely discussed
and acknowledged that the real strategic value of a project should be realized
when uncertainties
and
all flexibilities that can be embedded into a project
are being analyzed. In this regard, the optimal decision strategies in the
expansion option of the current operating Cu-Ni project in Selibe Phikwe mine,
Botswana, has been evaluated with Real Options Analysis (ROA). The projects
value that can vary in the future due to commodity market or any unresolved
technical uncertainty is being evaluated in the binomial option pricing
methodology. The optimal investment timing, decisions making under
uncertainty at different times of the current operating project and expansion
option value of the project are calculated under the context of ROA. The project
has been evaluated on three different scenarios that can be visualized by
management in decision making. a) Expansion of the current operating project
to increase life of mine.
b) Stand-alone evaluation of the expansion project in a
delay option case. c) Expansion option of concurrently bringing the two projects
into production shortening life of mine evaluated with real options. The results
for life of mine extension presented 12% increase from the current operating
projects net present value with 28% internal rate of return. The delay option
case yielded $9 million option value, requiring a 6% Cu-Ni price increase from
the 2014 average London metal exchange. The expansion option valuation
increasing production capacity resulted in a high option value of $286 million.
This indicate a longer waiting period for expansion thus making the life of mine
extension case the ideal scenario for expansion under real option evaluation.
Keywords; Real options, Flexibility, Optimal investment timing, Binomial option
pricing
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1 MSc Student, Graduate School of Engineering and Resources Sciences, Akita University, 1-1 Tegata-Gakuenmachi
Akita City, 010-0825, Japan.
Email: dineo.sefemo@yahoo.com.Tel:(+8180-6010-1998 ) Fax: (+81-18-889-2468)
Mineral Economics
2Proffessor, Faculty of International Resource Sciences, Akita University, Akita, 0101-0825, Japan