UBC Theses and Dissertations
Multi-zone mine valuation using modern asset pricing (real options) techniques Samis, Michael R.
The project structure models used within the modern asset pricing (MAP; also called real options) valuation framework often rely on a few fixed production plans to represent the many production strategies that management may choose from. These models may be extended to include global forms of project flexibility, such as temporary closure of the full project, or choices between competing production plans, such as those made within a project decision-tree. However, many project structures allow more production strategies than currently published MAP models would suggest. Mine valuation exercises are particularly vulnerable to restrictions on the number of production plans since they often consist of multiple zones that differ by quality (mineral concentration), size and spatial orientation. These zones increase the number of possible production strategies because they allow management to consider strategies that reflect the multi-zoned nature of mineral deposits such as the temporary closure, or the delayed development, of less attractive zones. This dissertation proposes a model of project structure, called the Flexible Discrete Mine Production (FDMP) model, for use within the MAP valuation framework. The different zones within a mineral resource project are explicitly recognized and assigned a fixed development and production profile. Management operates the project for discrete intervals by choosing, at the start of each interval, an operating mode from a set of competing operating modes. Each mode specifies the combination of zones that will be active and the amount of mineral processing capacity that is built, abandoned or temporarily closed during the next period. Constraints may be placed on the choice of operating mode because of geological structure, reserve depletion or capacity restrictions. The FDMP model is demonstrated with a MAP valuation of a stylized two-zone mine in which management must decide between competing development strategies for a satellite low-grade zone, given that current operations are focused on a developed high-grade zone. One strategy, production expansion (parallel development), combines the early development of the low-grade zone with the expansion of project mineral processing facilities. The other strategy, production replacement (sequential development), delays development of the low-grade zone until the high-grade zone reserves are exhausted. The model is run in both reverting and non-reverting mineral price environments and the results are compared to three high-grade and low-grade zone Set Production Plans (SPP; high-grade zone operations only, immediate low-grade zone development, and delayed low-grade zone development) valued within the DCF and the MAP pricing frameworks. A comparison between valuation method results show that, when a 10% discount rate is used, the DCF technique returns a much higher value than the FDMP and SPP MAP models. The project has less value when the MAP approach is used because, in the given price environment, it is more risky than is reflected by the 10% discount rate used in the DCF valuation method. Comparing MAP model results, the project values determined with the SPP project model and about 10% less than those determined with the FDMP model. The FDMP model also provides more detailed operating policy insights to the SPP MAP methods because the FDMP model outlines management action boundaries over extended project periods for each zone. Finally, a discrete geological (grade) uncertainty model is created for the low-grade zone to determine its influence on low-grade zone development policy. Geological uncertainty is found to have a small impact on development decisions when these decisions are associated with large expenditures but a more substantial effect when development expenditures are smaller. The low quality outcomes from the geological uncertainty model are also used to investigate selective temporary zone closure strategies. Temporary closure of the low-grade zone is shown to be preferred to abandonment in some low mineral price environments.
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