A1 Journal article (refereed), original research

Analyzing operational real options in metal mining investments with a system dynamic model


Publication Details
Authors: Savolainen Jyrki, Collan Mikael, Luukka Pasi
Publisher: Taylor & Francis: STM, Behavioural Science and Public Health Titles
Publication year: 2016
Language: English
Related Journal or Series Information: Engineering Economist
Start page: 1
End page: 19
Number of pages: 19
ISSN: 0013-791X
JUFO-Level of this publication: 1
Open Access: Not an Open Access publication

Abstract
This article presents a detailed system dynamic (SD) model of a metal mining investment that is usable in ex-ante profitability and operations management analysis. We show how the SD model can be used to analyze the profitability effect of three operational real options: the option to temporarily close production, the option to abandon production, and the option to increase production through cutoff grade change. The SD model allows for intuitive modeling of the multiple interactive real options and arriving at results that are difficult, or impossible, to reach with commonly used spreadsheet software. We also analyze the effect of mining project debt ratio to the project value and show that correctly choosing the debt ratio affects project profitability. The effect on the project value of using three different future metal price scenarios with two different stochastic processes is illustrated to highlight the importance of correct process selection in modeling future metal price paths. A realistic case of a high-cost nickel (Ni) metal mine is used as a basis for the presented numerical illustration of the model.

Last updated on 2019-20-03 at 10:32