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Statistical considerations of progressive value and risk in mineral exploration

  • Guj, Pietro
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    Financial markets recognise maximisation of expected value (E), in an essentially risk-neutral context, as the main corporate financial objective of private enterprise. This may be valid for large, integrated mining companies. Yet, most junior and middle-size exploration companies behave in a risk-averse fashion when making decisions about progressively more expensive exploration programs. From their perspective, a potential increase in expected value from either an increase in target value or related probability of discovery, or both, may not be a sufficient incentive to embark in an exploration programme if the resultant increase in expected value is accompanied by a significant increase in possible maximum loss. Risk-averse explorers may be unwilling to bear larger, albeit less probable losses, when the cost of successive exploration programmes is taken into account. The paper provides a practical methodology for such explorers to optimise the decision whether to progress to the next stage of exploration or to farm out a risky project. It uses a decision-tree model incorporating the effectiveness of the proposed exploration programme, the explorer's risk tolerance and related utility values and the probability distribution of the possible value of the exploration target.

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    Article provided by Elsevier in its journal Resources Policy.

    Volume (Year): 33 (2008)
    Issue (Month): 3 (September)
    Pages: 150-159

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    Handle: RePEc:eee:jrpoli:v:33:y:2008:i:3:p:150-159
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30467

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