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How rational are investment decisions in the copper industry?

  • Auger, Felipe
  • Ignacio Guzmán, Juan
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    This paper examines ex-post 51 investment decisions made in regard to copper mines coming on stream from 1957 through 1999. It discusses two critical variables: investment timing and mine capacity choice. Using a 15% discount rate, results suggest that fewer than half of decisions were made at the right time - i.e., low price periods - confirming countercyclical investment as the optimal policy. In terms of capacity choice, the distortion is even higher, as 36 projects should have entered at least 40% larger or smaller. Realized investment decisions for timing and capacity choice would have caused a 49.1% loss over the NPV potentially achievable under optimal resolutions. Although the difference could be specifically attributed to copper price uncertainty, this paper discusses how investment evaluation methodologies could be contributing to firms not being fully rational (in the neoclassical sense) when investing.

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    Article provided by Elsevier in its journal Resources Policy.

    Volume (Year): 35 (2010)
    Issue (Month): 4 (December)
    Pages: 292-300

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    Handle: RePEc:eee:jrpoli:v:35:y:2010:i:4:p:292-300
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    1. Felipe L. Aguerrevere, 2003. "Equilibrium Investment Strategies and Output Price Behavior: A Real-Options Approach," Review of Financial Studies, Society for Financial Studies, vol. 16(4), pages 1239-1272.
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    5. Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
    6. Roberts, Mark C., 2009. "Duration and characteristics of metal price cycles," Resources Policy, Elsevier, vol. 34(3), pages 87-102, September.
    7. Saman Majd & Robert S. Pindyck, 1985. "Time to Build, Option Value, and Investment Decisions," NBER Working Papers 1654, National Bureau of Economic Research, Inc.
    8. McDonald, Robert & Siegel, Daniel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, MIT Press, vol. 101(4), pages 707-27, November.
    9. Robert S. Pindyck, 1986. "Irreversible Investment, Capacity Choice, and the Value of the Firm," NBER Working Papers 1980, National Bureau of Economic Research, Inc.
    10. Moyen, Nathalie & Slade, Margaret & Uppal, Raman, 1996. "Valuing risk and flexibility : A comparison of methods," Resources Policy, Elsevier, vol. 22(1-2), pages 63-74.
    11. Dimitrakopoulos, Roussos G. & Abdel Sabour, Sabry A., 2007. "Evaluating mine plans under uncertainty: Can the real options make a difference?," Resources Policy, Elsevier, vol. 32(3), pages 116-125, September.
    12. Abdel Sabour, S. A., 2002. "Mine size optimization using marginal analysis," Resources Policy, Elsevier, vol. 28(3-4), pages 145-151.
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