IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this article

Real option in action: An example of flexible decision making at a mine operational level

Listed author(s):
  • Ajak, Ajak Duany
  • Topal, Erkan
Registered author(s):

    Flexibility and operational adaptability are essential for long term corporate success and real option (RO) appears suitable for analysing risky projects. Nevertheless, its application in engineering design has been slow-moving compared to financial uses. Therefore, there is a compelling argument for using visual, intuitive and transparent models, such as the binomial decision tree, which has the potential to eliminate decision maker apprehension and improve RO use in engineering design and decision making. This paper reviews RO applications in mining projects and proposes a new methodology to explore technical applications of RO in mine design and decision making at the mine operational level. The research will investigate the suitability of using the RO method at the mine operational level where production decisions are made frequently, rather than organisational strategies that are reviewed after several years. The proposed approach is applied to a case study. This will demonstrate how RO can be used in designing multiple pits in multi-zone ore deposits to create a switching option between pits regarding changing ore grades and fluctuating commodity prices. The main rationale of this option involves deferring waste materials by switching mining activities from a high to low strip ratio pit. This creates a choice between using new RO thinking and the traditional methodology. The option is analysed using the binomial decision tree. The results summarised in this paper׳s conclusion reveal that the project׳s value increased considerably when flexibility was included in the mine design. These increases in project value were between eight to 15 per cent, depending on the number of flexible options incorporated into the design.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Resources Policy.

    Volume (Year): 45 (2015)
    Issue (Month): C ()
    Pages: 109-120

    in new window

    Handle: RePEc:eee:jrpoli:v:45:y:2015:i:c:p:109-120
    DOI: 10.1016/j.resourpol.2015.04.001
    Contact details of provider: Web page:

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    in new window

    1. 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.
    2. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:jrpoli:v:45:y:2015:i:c:p:109-120. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.