Mineral Economics

Issues and challenges

Pekan Workshop PERHAPI
10 Agustus 2016
Trisakti Jakarta

Key valuation drivers for mineral economics

1. Reserves
Classification between resources and reserve
Joint Ore Research Committee (JORC)
For purposes of valuation use proven and probable reserves

2. Price
Copper/Gold/Silver Price
Contract and spot prices
Copper/Gold/Silver reference price

3. Production
License term
Life of mine depend on production rate
Production process

4. Costs
Mining costs
Operating costs
Capital costs

ORE RESERVES

1. Reserves
IDENTIFIED MINERAL RESOURCES
(IN SITU)

Increasing level of
geological data,
knowledge and
confidence

INFERRED

INDICATED

MEASURED

ORE RESERVES
(MINEABLE)

Consideration of
economic, mining,
metallurgical,
marketing, legal,
environmental,
social and
governmental
factors

PROBABLE

PROVEN

For purposes of valuation use proven and probable reserves

Check resource & reserves reports carefully

Company reports should clearly show and detail the different categories of
resources to prevent any confusion

Ensure that you fully understand the way in which a company reports its
resources and more importantly reserves

2. Price
Factors that influence copper/gold price:
1

Ore type / grade

Global financial market behaviour

Historical prices and trends

Current market conditions

Balance between demand & supply

Gold price tend to move randomly

(non-reverting price model)

Price

Copper price tend to follow long term

equilibrium price (reverting price model)

3. Production

License term
Obtain IUP Operasi Produksi Mining Production Permit

Kontrak Karya is usually 30 years, extendable @ 20 years

Life of mine depend on production rate
The higher the production higher return
Production method and marketing
Production process

From gold extraction to customer delivery

4. Costs
Production

Amortization, deferred stripping cost,

depreciation
Extraction Cost
Mining and overburden
removal costs

Capex for Infrastructure

and processing plant

Fuel, electricity,
repair, maintenance, etc

Equipment rental

Royalty Expenses

Commission expenses/
Agency fees

Valuation Approach

Market
Approach

Comparable Transaction
Prices

Cost
Approach

Cost Spending

Income
Approach

Estimated Future
Cash Flows & Net
Present Value (NPV)

Income Approach
Based on the principle of anticipation of benefits in the future

Modern
Real Option (RO)
not widely used but

Modern

gaining in acceptance.

Conventional

Discounted Cash Flow

(DCF)
Very widely used

Net Present Value (NPV)

Basic Formula

Number of
time
periods

Net cash
flow in
period t

C
t
n
NPV
t
t 0 (1 r )
Discount
rate. Its a
critical
number!
Similar term of Discount Rate:
Company Cost of Capital or hurdle rate

TRAINING SERIES

Issues in Conventional Valuation

http;//ExploreRealOptions.com

How we traditionally value the projects?

Estimate Future
Cash Flow

Deal with Risk?

Sensitivity and scenario

Estimate Discount Rate

No
prospective
projects

Problem with
our current
approach in
investment
decision

Traditional Valuation
approach using single
deterministic approach

Bias in DCF Assumption

Assumption
1 Expected cash flow

Problem
Ignores project uncertainty

to be happened
2

Uncertainty grows

3 Now or Never

opportunity

Not affected by future

4 decision

Penalized long lived asset

Ignores option to delay
investment
Ignores managerial flexibility

Bias 1. Expected Cash Flow to be happened

Operating Cash Flow
Project
Net Cash Flow

Investment Cash Flow

same
uncertainty or
Risk?

Adding the present value of operating and investment cash flow

together seems so simple

However, dynamic risk variation in each cash flow stream is not

often appreciated

Bias 2. Uncertainty grows

1
(1 15%)1

1
0.75
(1 15%) 2
1
0.43
(1 15%)6

1.0000

Discount rate
(k) = 15%

0.9000

Net Cash Flow discount factor

0.86

0.8000
0.7000
0.6000
0.5000
0.4000
0.3000
0.2000
0.1000
0

Time Years

Year 10

1
0.25
(1 15%)10

--- 0.25

Year 20

1
0.06
(1 15%) 20

--- 0.06

Year 30

?????

Cash flow uncertainty is growing over the

project life the longer the more risky

Some frauds to manipulate the NPV result

Price Assumption is escalated

Lowering discount rate

Increase terminal Value

Some marked-ups in cost

Lets run the number

to serve what we want!

Bias 3. Now or Never Opportunity

Simple NPV calculation for oil reserve (V) at t = 0 :
NPV = q V P - D = 0.2 x 500 million barrel x 60 6,050 = $ - 50 million
There is an offering from buyer around $ 3 million. Do you accept?
Assumed there are two scenarios of oil price in year 1 (t=1)
t=1

P+ = 62 NPV = + 150 million $

50%

t=0
E[P] = 60 $/bbl
NPV(t=0) = - 50 million $

50%

P- = 58 NPV = - 250 million $

Rational manager will not execute this project
Project ini Max (NPV-, 0) = zero

At t = 1, project NPV is positive = (50% x 150) + (50% x 0) = $ + 75 million

Bias 4. Not affected by future Decision

Without option

Economics

Exploration

50%
Not economics
50%

Build infrastructure

sales
$100

($40)
Build infrastructure

sales

($40)

$0

ENPV = 50% * (-$40 + $100) + 50% * (-$40 + $0) = $10

With Option
Economics
Exploration

50%
Not economics
50%

Build infrastructure

Sales
$100

($40)
Do not build
infrastructure
$0

Sales

ENPV = 50% * (-$40 + $100) + 50% * ($0 + $0) = $30

$0

Characteristic of Investment Decision

Decision is irreversible
Future cash flow is uncertain
managerial flexibility

creates strategic options to

anticipate and respond to the
dynamic, complex and uncertain
business environment.

Real Options

SOLUSI

The development of valuation method

Traditional

Pay
Back
Period

Modern

1930-1950

1950s

Discounted
DCF
Cash Flow

Sensitivity
and
Sensitivity
Scenario
& Scenario
Analysis

(DCF)

NPV
IRR

Analysis

Impact of
variable

1960s

1970s

Simulation

Option
Option
Pricing

Simulation
Decision Tree
Decision
Tree

Risk Analysis

Pricing

Risk
Management

1980s

Real
Options
Real
Option
Valuation
Valuation

(RO)

Strategic
Value

Log
o

TRAINING SERIES

Fundamental difference between

DCF vs Real Options

http;//ExploreRealOptions.com

Valuation in the Natural Resource Industries

Valuing uncertainty (Risk Adjustment)

Modeling uncertainty

Net cash-flow (DCF)

Dynamic
quantitative

At source (Real Options)

Integrated RO
Monte Carlo and
Decision trees

Integrated DCF
Monte Carlo and
Decision Trees
Financial option
analogy
(Black-Scholes)

Static
quantitative

Simple
scenarios

Qualitative

Monte Carlo with

Risk-adjusted
state pricing

Monte Carlo with

true distribution

Static Cash Flows

with true prices

Special
Project
discount
rates

Adjusted
present value
Static Cash Flows
with risk-adjusted
prices (forwards)

Source : Michael Samis, David Laughton (2007) Using Stochastic DCF and Real Options Monte Carlo Simulation..AUSIMM

Evolution of Valuation in Financial Markets

Valuing uncertainty

Modeling uncertainty

Net cash-flow (DCF)

At source (Real Options)

1990
Traded derivatives
of many types

Dynamic
quantitative

Static
quantitative

Qualitative

1970
Old style DCF
analysis

Source : David Laughton (2004) Determining petroleum and mineral Asset values, CIM

Evolution of valuation in natural resource

Valuing uncertainty

Modeling uncertainty

Net cash-flow (DCF)

Dynamic
quantitative

Static
quantitative

At source (Real Options)

Integrated DCF
Monte Carlo and
Decision Trees

Monte Carlo with

true distribution

Simple
scenarios

Qualitative
Static Cash Flows
with true prices

Source : Michael Samis, David Laughton (2007) Using Stochastic DCF and Real Options Monte Carlo Simulation..AUSIMM

Cash Flow Risk

1 Year Price

s = +20%
Upside outcome

Exp. Coal Price * (1+ s )=

Price at t = 0
: $50/ton

High Cost Field

200 ton; UC = $30/ton

Low Cost Field

100 ton; UC = $10/ton

CF up = 200*(60-30)
= $6000

CF up = 100*(60-10)
= $5000

E ( CF) = 200*(50-30)
= $4000

E ( CF) = 100*(50-10)
= $4000

$60/ton

Expected Outcome =
$ 50/ton

CF down = 200*(40-30)
= $2000
Exp. Coal Price * (1- s )=

Downside outcome =

CF down = 100*(40-10)
= $3000

$40/ton
Time = 0

CF(s) = +50%

CF(s) = +20%

High cost field is riskier than low cost field

Discount Rate (Company Required of Return)

Market Risk adjustment

Discount Rate
Time adjustment

Capital Asset Pricing Model (CAPM):

ri = rf + b (rm - rf)
Time Adjustment

Market Risk
Adjustment

Economics Model

Time adjustment
asset value
29

DCF NPV

RO NPV

(net cash flow)

(source of uncertainty)

Price x Production = Revenue

- Opex
Operating Profit

- Capex
Net Cash Flow
* Time and Risk Adjustment
Net Present Value
aggregate risk and time
adjustment to net cash flows

Price x Risk adj. x Production =

Risk adj. Revenue

- Opex
Risk Adj. Operating Profit
- Capex
Risk Adj. Net Cash Flow
* Time Adjustment
Net Present Value

Undiscounted Cash Flow

High Cost Project

Low Cost Project

100

100

Revenue @$50/ton

5,000

5,000

Cost

4,000

3,000

Net Cash Flow

1,000

2,000

Production

Analysis of Cash flow

discounting

Modern NPV@ Price Risk of 10%

and Time Adjustment of 5%
High Cost

Low Cost

50/(1+10%)=
45.45

50/(1+10%)= 45.45

Revenue @$45.5/ton

4,545

4,545

Cost

4,000

3,000

545

1,545

545/(1+5%) =

1,545/(1+5%) = 1,471

Conventional NPV@15%
Price Risk adjusted

High Cost

Low Cost

1000/(1+15%) = 861

2000/(1+15%) = 1,721

-ln(861/1000) =
15%

-ln(1,721/2,000) =
15%

Net Cash Flow Risk

PV Cash Flow
Effective Discount Rate

519
-ln(519/1000) =
66%

-ln(1,471/2,000) =
31%

Forward Market Price

Commodity
Price Risk

Forward Price
agrees to deliver
the commodity in
the future

Spot Price
Future Price

Formula:
Price Risk Discount factor =
- ln(forward price/ current price)

Indonesia Coal Price

Indonesia Coal Price are not perfectly correlated movements and

influenced by Newcastle Prices (ref: IHS)

Forward Coal Price as of May 2014

Coal Futures Price (Oct 12 - Sep 14)

Source: Bloomberg

Case Study
Coal Project Valuation
DCF vs Real Options (RO)
See. 1. Coal Project Valuation DCF - RO.xls

Case Study : Multiple period Coal Project

Dimisalkan Informasi dari Pasar Futures (12 Oktober 2007)
Spot price pada saat itu adalah $ 84.00/ton
Long term Forward Price adalah $ 75.00/ton
Futures Price Settlement
86
84
82
80
78
76
74
72
70

Ju
l-0
8
O
ct
-0
8
Ja
n09
Ap
r-0
9
Ju
l-0
9
O
ct
-0
9
Ja
n10
Ap
r-1
0
Ju
l-1
0
O
ct
-1
0
Ja
n11
Ap
r-1
1
Ju
l-1
1
O
ct
-1
1
Ja
n12
Ap
r-1
2
Ju
l-1
2

-0
8

Ap
r

Ja

n0

68

Price Risk Discount Rate = - Ln(Forward Price/Spot Price) = 11.3%

Price Risk Discount Factor = exp(-11.3%) = 0.898

Net Cash Flow Discount Factor (NCFDF)

Years
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017

DCF
1.00000
0.86957
0.75614
0.65752
0.57175
0.49718
0.43233
0.37594
0.32690
0.28426
0.24718

Real Options
1.00000
0.70762
0.67423
0.64158
0.60958
0.57813
0.54714
0.51648
0.48602
0.45560
0.42502

Net Present Value

DCF
168,345

Real Options
185,530

NCFDFt = Net Cash Flow adjusted for risk and time at time t
Unadjusted project net cash flow at a project time t

TRAINING SERIES

Estimating Assessing the effect of metal

price and estimating the value of flexibility
in a project investment

http;//ExploreRealOptions.com

Intuition (1): Timing Option and Mine Value

Perhitungan sederhana untuk NPV suatu cadangan batubara (V) :
NPV = q V P - D = 0.2 x 500 juta ton x 60 6,050 = - 50 million $
Apakah layak dijual US$ 3 juta?
Misal ada dua skenario harga batubara pada tahun pertama (t=1)

t=1

P+ = 62 NPV = + 150 million $

50%

t=0
E[P] = $ 60 /ton
NPV(t=0) = - 50 million $

50%

P- = 58 NPV = - 250 million $

Secara rasional kita tidak akan mengeksekusi
Proyek ini Max (NPV-, 0) = zero

Pada t = 1, project NPV adalah positive = (50% x 150) + (50% x 0) = + 75 million $

Intuition (2): Timing Option and Waiting Value

Misal pada kasus yang sama namun dengan NPV positif yang kecil.
Mana yang lebih baik: develop now or wait and see ?
NPV =q V P - D= 0.2 x 500 juta ton x 60 5,900=+100 million $
Discount rate = 10%

t = 1 P+ = 62 NPV+ = + 300 million $

50%

t=0
E[P] = $60 /ton
NPV(t=0) = + 100 million $

50%

P- = 58 NPV - = - 100 million $

Rational manager will not exercise
this option Max (NPV-, 0) = zero

Pada t = 1, project NPV = (50% x 300) + (50% x 0) = +150 million $, Option to wait adalah
NPVwait(t=0) = 150/1.1 = 136.36 > 100. Pada kasus ini, lebih baik kita wait and see

Intuition (3): Deep-in-the-Money Real Option

Misal kasus yang sama namun dengan NPV yang lebih besar.
Mana yang lebih baik: develop now atau wait and see?
NPV =q V P - D= 0.2x500 juta ton x 60 5,800=+200 million $
Discount rate = 10%

t = 1 P+ = 62 NPV = 400 million $

50%

t=0
E[P] = $ 60 /ton
NPV(t=0) = 200 million $

50%

P- = 58 NPV = 0 million $

Pada t = 1, project NPV = (50% x 400) + (50% x 0) = 200 million $, Option to wait adalah
NPVwait(t=0) = 200/1.1 = 181.18 < 200 . Pada kasus ini, kita lebih baik melakukan investasi
segera karena project ini deep-in-the-money (high NPV)

Real Options Mind Set

Based on these examples, you think

this is something new and different??
No, but
By asking the question What choices do I have? at each step
into the future more value may be discovered.

We often do this when a project is not economic, but do we put

the effort into finding added value if the project base case flies?
Thinking in terms of real options creates a Real Options
Mindset that in turn searches for and creates value

Real Options Mind Set

Real Options: Change the perception of value
Inherent
Value

Perceived
Value

Real Options Mindset

Total Value

Inherent
Value

Perceived
Value

Real Options Mind Set

Real Options: Change the perception of value
Inherent
Value

Perceived
Value

Appropriate Execution of the Options

Inherent
Value

Action converts
perception to
reality

Perceived
Value

Metrics vs. Decision Criteria

Value

Option
Value

There is option
value in Project A

NPV
NPV

NPV

Conventional A < B

Modern A > B

Real Options Methodology

Financial Options Analogy Black Scholes Formula
Partial Differential Paddock Siegel Smith model
Binomial Lattice Decision Tree Mechanism
Fuzzy Pay Off Possibilistic Approach on Scenarios
Stochastic Pricing Least Square Monte Carlo (LSM)

Real Options Techniques

European American
Options
Options

Multi
1
2
N
Options Variable Variable Variable

Financial Option Analogy

Partial Differential

Binomial Lattice

Fuzzy Pay Off

Stochastic Pricing

X = not applied

O = applied in some cases

V = applied

See http://explorerealoptions.com/article/ for detail of each method

Real option valuation using binominal approach

Modelling a range of asset values with the binominal ROV
At time zero the value of an asset has a certain value,
when moving from period zero to period one this value
can increase or decrease with an equal likelihood
The change occurs as a discrete jump
The jump process is repeated when moving from period
one to period two, and continues going forward into the
future. Over time a range of possible outcomes are
generated

Binominal Real Option Valuation:

Building a lattice
t0

t1

t2

t3
Value

Binominal Real Option Valuation:

Building a lattice
t0

t1

t2

t3
Value

110

100
90.9

Binominal Real Option Valuation:

Building a lattice
t0

t1

t2

t3
Value

Cost

131

100

110

100

90.9

100

75.1

100

123
110

100

100
90.9
82.6

Binominal Real Option Valuation:

Optimisation
t0

t1

t2

t3
Value

Max(131-100,0)

Max(110-100,0)

Max(90.9-100,0)

Max(75.1-100,0)

Binominal Real Option Valuation:

Optimisation
t0

t1

t2

t3
Value

Max(131-100,0)

Max(110-100,0)

Max(90.9-100,0)

Max(75.1-100,0)

Binominal Real Option Valuation:

Discounting
t0

t1

t2
Value

31/(1+0.015)

p
1-p

10 /(1+0.015)

1-p
0 /(1+0.015)

p
1-p

0 /(1+0.015)
P = Risk neutral probability

Binominal Real Option Valuation:

Rolling back the tree
t0

t1

t2
Value

30.5
0.55*30.5 + 0.45*9.85
9.85

0.55*9.85 + 0.45*0
0
0.55*0 + 0.45*0
0

Binominal Real Option Valuation:

Discounting and roll back
t0

t1

t2

21.2
(0.55*21.2+0.45*5.4)/(1.015)

5.4
(0.55*5.4+0.45*0)/(1.015)
0

Binominal Real Option Valuation:

Discounting and roll back to period 1
t0

t1

t2

21.2
13.9

5.4
2.94
0

Binominal Real Option Valuation:

Discounting and roll back to period 0
t0

t1

13.9

(0.55*13.9+0.45*2.94)/(1.015)
2.94

Binominal Real Option Valuation:

Determine the option value
t0
The option value is finally obtained when the tree
is discounted and rolled back to period 0.
The real option value is 8.85

8.85

Comparison of results:
Optimisation versus no optimisation
Optimisation
t0

t1

No optimisation
t3

t4

t0

t1

t3

31

31

21.2
13.9
8.8

21.2
10

5.4
2.9

t4

12.1
3.8

0
0

10
1.4

-6.2

-9.1
-15.6

-24.1

Note of warning!
Several Real Option Valuation techniques have been proposed
The binominal method is easy to explain but has some
important limitations and its use is therefore not
recommended
Technique like the Least Square Mean Option Valuation are
much more suited.

The value of flexibility is

project specific
Value of flexibility
Value metrics typically increase when risk optimisation is
introduced in an economic model.
The value added to the asset, the value of flexibility, is
project specific and is determined by
the flexibility associated with the project
and the structure of the cash flow.

Silver Mine Project - a case study

Objective :
to decide whether to invest now or later on silver mine project
Initial Project Conditions:
Initial investment : $ 48 million
Production cost
: $ 7.5 /oz
Annual silver Production in Million Oz
1

0.051

0.842

2.001

3.337

3.416

Annual risk adjusted discount rate : 10%

Management has option to defer project investment for 1
year at a cost of $ 1 million

Management Question
1. Given the size of investment outlay, the current silver price, and
the dynamics (volatility) of silver price over time, is this project a
good investment?
2. Should management invest now, or should it wait and see how
silver prices will develop next year?
3. What is the cut-off investment that management should
consider to decide to either invest today or next year?
4. What is the maximum cost management should negotiate to
have the option to defer project investment for 1 year?

5. How would the project value and decision making vary with
different initial silver prices?

Project Uncertainty
Uncertainty over the value of the project is closely related to the
dynamics in silver prices
Current silver price = $16.00/oz
The volatility of silver price = 28% , following a Geometric Brownian
Motion
Year 0

6
83.4

63.3
48.1
36.5
27.7
U
16.0

21.1

27.7

16.0

27.7
21.1

16.0
12.2

9.2

Upwards move (U) = e28% = 1.32

Downwards move (D) = e-28% = 0.76

36.5

21.1

12.2

48.1

16.0
12.2

9.2
7.0

9.2
7.0

5.3

5.3
4.0
3.1

Cash Flow - deterministic

NPV - No Options
1

0.05
0.82
(0.38)

0.84
13.47
(6.32)

2.00
32.02
(15.01)

3.34
53.39
(25.03)

3.42
54.66
(25.62)

0.43

7.16

17.01

28.36

29.04

0.43

7.16

17.01

28.36

29.04

Production million oz

0.05

0.84

2.00

3.34

3.42

Revenue

0.82

13.47

32.02

53.39

54.66

(0.38)

(6.32)

(15.01)

(25.03)

(25.62)

0.43

7.16

17.01

28.36

29.04

0.43

7.16

17.01

28.36

29.04

Silver Price : $16/oz flat

Year 0

Production million oz
Revenue
$ million
Cost
$ million
EBITDA
Investment
Cash Flow

NPV@10%

(48.00)
(48.00)

$8.49

NPV - Close if not economics more and defer 1 year

Year 0
1
Silver Price : $16/oz flat

Cost
EBITDA
Investment
Cash Flow
NPV@10%

(1.00)
(1.00)
$6.72

(48.00)
(48.00)

Cash Flow
Probabilistic due to price volatility
Silver Price Evolution over 6 years
Year 0

6
83.4

63.3
48.1

48.1

36.5
27.7

21.1

16.0

27.7

27.7

21.1
16.0

36.5

12.2

21.1
16.0

16.0

12.2
9.2

12.2
9.2

9.2

7.0

7.0
5.3

5.3
4.0
3.1

DCF considering changes in Silver price over time

UR
261.4
228.0
161.6

99.2
Revenue - opex
Investment
Same as previous slide

56.5
(48.00)
8.49

130.4
106.6

67.9
34.0

54.8
36.6

13.8

DR

190.64

99.13
$(48.1-7.5)*3.34 +
46.34 ((43%*190.64)+(57%*99.13)
/(1+10%)

15.89
11.1

(3.8)
Upwards Risk probability (UR)
= (1-D)/(U-D) = (1-0.76)/(1.32-0.76) = 43%
Downwards Risk probability (DR) = 1 DR = 1 43% = 57%

$(63.3-7.5)*3.42

(1.67)
(14.0)
(11.81)

DCF vs Real Options

(to close mines if not economics)

DCF without option
Year 0

5
190.64

261.4
228.0
161.6
99.2
Revenue - opex
Investment

56.5
(48.00)
8.49

99.13
130.4

106.6
67.9

34.0

46.34
54.8

36.6
13.8

15.89
11.1

(3.8)

(1.67)
(14.0)

(11.81)
RO with options to close at any time
190.64
261.4
228.0
161.6
99.3

Revenue - opex
Investment

57.68
(48.00)
9.68

99.13
130.4

106.6

68.1
36.2

46.34

54.8
37.0

17.9

15.89
11.1

3.7

Real Options

(to close mines if not economics and defer 1 year)

year 1

if price goes up
259.11
359.5
318.9
231.7
147.9
Revenue - opex
Investment
defering cost

In year 0
(43%x41.4) + (57%x0.0))
(1+10%)
= 16.26

90.4
(48.00)
(1.00)
41.4

138.63
187.0

159.0
108.3

62.7

69.13
87.4

66.8
38.2

29.04
30.0

15.6

5.91
0.7
0.0

if price goes down

138.63
187.0
159.0
108.3
62.7

Investment
defering cost
min zero value

33.9
(48.00)
(1.00)
0.00

69.13
87.4

66.8

38.2
18.0

29.04

30.0
15.6

5.7

5.91
0.7

0.0

0.0
0.0
0.0

Project Value depending on

1. Initial
capex

2. Initial silver price

Project Value IRR

IRR = 30%

IRR =
15%

indicates that the inclusion of

flexibility in the evaluation
process not only adds value to
the project by unlocking hidden
value, but also makes it less risky
providing the confidence to the
investor to make the decision to
go ahead since the Expanded IRR
is significantly greater than the
traditional IRR

Answering Management Question

1. Is this a good investment? Yes, the North Silver project is a good investment as it is
expected to generate an NPV of US$16.26 million (based on the ROA).
2. Should management invest now, or should it wait? The best strategy is to wait
and see how silver prices develop; if it goes up then invest otherwise do not invest
(losing only the cost of having the right of waiting).

3. What is the cut-off investment to decide to either invest today or next year? Our
results indicate that if initial CAPEX is less than US$35.20 million then it is better to
invest now, otherwise the best strategy is to invest next year (note that if CAPEX is
equal to US$35.20 million then it does not matter investing now or next year).
4. What is the maximum cost management should negotiate to have the option to
defer investment for 1 year?
The option for deferring project investment is US$6.58 million, i.e., management
can negotiate a deferment cost up to this value.

5. How would the project value and decision making react to different initial silver
prices?
the analysis indicates that for values below US$11.15/Oz the best strategy is not to
invest, for values between US$11.15/Oz and US$18.41/Oz the best strategy is to
wait for one year and invest if the silver price goes up, and for values greater than
US$18.41/Oz the best strategy is to invest now

Comprehensive guide

overage of all valuation

techniques

Step by step
all the necessary
concepts of project
valuation and investment
decision analysis

http://explorerealoptions.com

Practical
application
straightforward
approach with solved
real-life examples and
solutions

0815-889-1014
nuzulul.haq@explorerealoptions.com