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    Evaluation of a mining project under the joint effect of commodity price and exchange rate uncertainties using real options valuation

    Access Status
    Fulltext not available
    Authors
    Haque, Md Aminul
    Topal, Erkan
    Lilford, E.
    Date
    2016
    Type
    Journal Article
    
    Metadata
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    Citation
    Haque, M.A. and Topal, E. and Lilford, E. 2016. Evaluation of a mining project under the joint effect of commodity price and exchange rate uncertainties using real options valuation. Engineering Economist. 62 (3): pp. 231-253.
    Source Title
    Engineering Economist
    DOI
    10.1080/0013791X.2016.1217366
    ISSN
    0013-791X
    School
    Dept of Mining Eng & Metallurgical Eng
    URI
    http://hdl.handle.net/20.500.11937/29952
    Collection
    • Curtin Research Publications
    Abstract

    Cash flows generated by mining projects tend to be volatile and are extensively influenced by exogenous variables, notably commodity prices and exchange rates. The traditional discounted cash flow (DCF) method, which is normally used for economic feasibility studies and mining project evaluations, presents inconsistencies because the method fails to adequately address uncertainties and operational flexibilities and often ignores certain specific market conditions. Numerous studies have been carried out for mining project evaluations using the real options valuation (ROV) technique for assessing commodity price uncertainty, but there is no research on the combined effects of price and exchange rate uncertainties. Therefore, in order to assess the economic viability of a mining project more accurately, the commodity price and its inherent volatility, the exchange rate and its inherent volatility, and the correlation parameters between them have been incorporated into the model and used in the evaluation process. One of the interesting findings revealed in the study is that project values are overestimated if only commodity price uncertainty is considered in evaluating the project value instead of the joint effect of commodity price and exchange rate uncertainties. This new ROV technique will explore the opportunity to utilize an alternative methodology for approximating project values and to identify valuation opportunities to enhance economic gains or to mitigate economic losses, where the DCF valuation method does not.

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