Quantifying the value of flexibility when conducting stochastic mine investment analysis

CIM Bulletin, Vol. 85, No. 964, 1992

Lyle Kajner, HBT AGRA Limited, and Gordon Sparks, University of Saskatchewan, Saskatoon, Saskatchewan

An often over-looked component in the assessed value of a mining property is the value derived from the ability of the operator to limit financial losses during adverse economic times (i.e. low market price, high energy prices, etc.) by suspending operations. Overlooking the value of this type of operating flexibility when conducting mine investment analysis may negatively bias the risk profile for the investment by over estimating the investment's downside potential, thereby effectively undervaluing the investment. This paper illustrates the nature of the value of operating flexibility and discusses how it may be explicitly quantified within the context of conducting stochastic mine investment analysis.

Mots Clés: Mineral economics, Investment Analysis, Operating flexibility.