IDEAS home Printed from https://ideas.repec.org/a/eee/jrpoli/v55y2018icp123-132.html
   My bibliography  Save this article

The optimisation rule for investment in mining projects

Author

Listed:
  • Foo, Nam
  • Bloch, Harry
  • Salim, Ruhul

Abstract

Investment in mining projects involves significant uncertainty. Project investment is usually high risk, irreversible and challenged by major economic factors. Mining commodity prices in particular always show greater volatility than any other primary products. The variation of these prices is critical in the investment decision of whether the project should go ahead, be abandoned or be delayed. This paper examines the impact of mineral price uncertainty on mining investment decisions using examples of projects in the Asia-Pacific region. Applying the mean reversion (MR) model, the commodity trigger value for investment decisions in each project is determined in the context of operational flexibilities. The findings indicate it is sometimes better to wait for a more suitable time to invest.

Suggested Citation

  • Foo, Nam & Bloch, Harry & Salim, Ruhul, 2018. "The optimisation rule for investment in mining projects," Resources Policy, Elsevier, vol. 55(C), pages 123-132.
  • Handle: RePEc:eee:jrpoli:v:55:y:2018:i:c:p:123-132
    DOI: 10.1016/j.resourpol.2017.11.005
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0301420717302829
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.resourpol.2017.11.005?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. 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.
    2. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    3. René Caldentey & Susana Mondschein, 2003. "Policy Model for Pollution Control in the Copper Industry, Including a Model for the Sulfuric Acid Market," Operations Research, INFORMS, vol. 51(1), pages 1-16, February.
    4. David G. Laughton & Henry D. Jacoby, 1993. "Reversion, Timing Options, and Long-Term Decision-Making," Financial Management, Financial Management Association, vol. 22(3), Fall.
    5. Rafael Epstein & Ramiro Morales & Jorge Serón & Andres Weintraub, 1999. "Use of OR Systems in the Chilean Forest Industries," Interfaces, INFORMS, vol. 29(1), pages 7-29, February.
    6. David I. Harvey & Neil M. Kellard & Jakob B. Madsen & Mark E. Wohar, 2010. "The Prebisch-Singer Hypothesis: Four Centuries of Evidence," The Review of Economics and Statistics, MIT Press, vol. 92(2), pages 367-377, May.
    7. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    8. Ozorio, Luiz de Magalhães & Bastian-Pinto, Carlos de Lamare & Baidya, Tara Keshar Nanda & Brandão, Luiz Eduardo Teixeira, 2013. "Investment decision in integrated steel plants under uncertainty," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 55-64.
    9. Gibson, Rajna & Schwartz, Eduardo S, 1990. "Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-976, July.
    10. James L. Paddock & Daniel R. Siegel & James L. Smith, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, Oxford University Press, vol. 103(3), pages 479-508.
    11. Auger, Felipe & Ignacio Guzmán, Juan, 2010. "How rational are investment decisions in the copper industry?," Resources Policy, Elsevier, vol. 35(4), pages 292-300, December.
    12. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    13. Brennan, Michael J & Schwartz, Eduardo S, 1985. "Evaluating Natural Resource Investments," The Journal of Business, University of Chicago Press, vol. 58(2), pages 135-157, April.
    14. Hahn, Warren J. & Dyer, James S., 2008. "Discrete time modeling of mean-reverting stochastic processes for real option valuation," European Journal of Operational Research, Elsevier, vol. 184(2), pages 534-548, January.
    15. Thomas E. Baker & Leon S. Lasdon, 1985. "Successive Linear Programming at Exxon," Management Science, INFORMS, vol. 31(3), pages 264-274, March.
    16. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, Oxford University Press, vol. 101(4), pages 707-727.
    17. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
    18. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    19. James S. Dyer & Richard N. Lund & John B. Larsen & V. Kumar & Robert P. Leone, 1990. "A Decision Support System for Prioritizing Oil and Gas Exploration Activities," Operations Research, INFORMS, vol. 38(3), pages 386-396, June.
    20. Guthrie, Graeme, 2009. "Real Options in Theory and Practice," OUP Catalogue, Oxford University Press, number 9780195380637.
    21. James E. Smith & Kevin F. McCardle, 1999. "Options in the Real World: Lessons Learned in Evaluating Oil and Gas Investments," Operations Research, INFORMS, vol. 47(1), pages 1-15, February.
    22. Shafiee, Shahriar & Topal, Erkan, 2010. "An overview of global gold market and gold price forecasting," Resources Policy, Elsevier, vol. 35(3), pages 178-189, September.
    23. Susana V. Mondschein & Ariel Schilkrut, 1997. "Optimal Investment Policies for Pollution Control in the Copper Industry," Interfaces, INFORMS, vol. 27(6), pages 69-87, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Izabela Jonek-Kowalska, 2018. "Method for Assessing the Development of Underground Hard Coal Mines on a Regional Basis: The Concept of Measurement and Research Results," Energies, MDPI, vol. 11(6), pages 1-23, May.
    2. Tomáš Slacík, 2022. "The e-motion of car manufacturing in CESEE: the road ahead," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q3/22, pages 31-46.
    3. Ardian, Aldin & Kumral, Mustafa, 2020. "Incorporating stochastic correlations into mining project evaluation using the Jacobi process," Resources Policy, Elsevier, vol. 65(C).
    4. Maryke C. Rademeyer, 2021. "Investigating the outcome for South African coal supply to the domestic market when faced with declining demand for exported coal," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 34(3), pages 441-453, October.
    5. Hammad Tariq Janjuhah & Muhammad Ishfaque & Muhammad Ifzal Mehmood & George Kontakiotis & Syed Muzyan Shahzad & Stergios D. Zarkogiannis, 2021. "Integrated Underground Mining Hazard Assessment, Management, Environmental Monitoring, and Policy Control in Pakistan," Sustainability, MDPI, vol. 13(24), pages 1-18, December.
    6. Jin-Biao Lu & Zhi-Jiang Liu & Dmitry Tulenty & Liudmila Tsvetkova & Sebastian Kot, 2021. "Implementation of Stochastic Analysis in Corporate Decision-Making Models," Mathematics, MDPI, vol. 9(9), pages 1-16, May.
    7. Francisco J. Díaz-Borrego & María del Mar Miras-Rodríguez & Bernabé Escobar-Pérez, 2019. "Looking for Accurate Forecasting of Copper TC/RC Benchmark Levels," Complexity, Hindawi, vol. 2019, pages 1-16, April.
    8. Nam Foo & Ruhul Salim, 2022. "The evolution of mining employment during the resource boom and bust cycle in Australia," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 35(2), pages 309-324, June.
    9. Maryke C. Rademeyer & Richard C. A. Minnitt & Rosemary M. S. Falcon, 2020. "A characterisation of the mechanisms transforming capital investment into productive capacity in mining projects with long lead-times," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 33(3), pages 349-357, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Savolainen, Jyrki, 2016. "Real options in metal mining project valuation: Review of literature," Resources Policy, Elsevier, vol. 50(C), pages 49-65.
    2. Insley, M.C. & Wirjanto, T.S., 2010. "Contrasting two approaches in real options valuation: Contingent claims versus dynamic programming," Journal of Forest Economics, Elsevier, vol. 16(2), pages 157-176, April.
    3. Miranda, Oscar & Brandão, Luiz E. & Lazo Lazo, Juan, 2017. "A dynamic model for valuing flexible mining exploration projects under uncertainty," Resources Policy, Elsevier, vol. 52(C), pages 393-404.
    4. Secomandi, Nicola & Seppi, Duane J., 2014. "Real Options and Merchant Operations of Energy and Other Commodities," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 6(3-4), pages 161-331, July.
    5. Bulan, Laarni & Mayer, Christopher & Somerville, C. Tsuriel, 2009. "Irreversible investment, real options, and competition: Evidence from real estate development," Journal of Urban Economics, Elsevier, vol. 65(3), pages 237-251, May.
    6. Siña, Matías & Guzmán, Juan Ignacio, 2019. "Real option valuation of open pit mines with two processing methods," Journal of Commodity Markets, Elsevier, vol. 13(C), pages 30-39.
    7. Kuangyuan Zhang & Richard Olawoyin & Antonio Nieto & Andrew N. Kleit, 2018. "Risk of commodity price, production cost and time to build in resource economics," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 20(6), pages 2521-2544, December.
    8. Alejandro Mac Cawley & Maximiliano Cubillos & Rodrigo Pascual, 2020. "A real options approach for joint overhaul and replacement strategies with mean reverting prices," Annals of Operations Research, Springer, vol. 286(1), pages 303-324, March.
    9. Luis M. Abadie & José M. Chamorro, 2009. "Monte Carlo valuation of natural gas investments," Review of Financial Economics, John Wiley & Sons, vol. 18(1), pages 10-22, January.
    10. Richter, Martin & Sørensen, Carsten, 2002. "Stochastic Volatility and Seasonality in Commodity Futures and Options: The Case of Soybeans," Working Papers 2002-4, Copenhagen Business School, Department of Finance.
    11. Marcel Philipp Müller & Sebastian Stöckl & Steffen Zimmermann & Bernd Heinrich, 2016. "Decision Support for IT Investment Projects," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 58(6), pages 381-396, December.
    12. Bastian-Pinto, Carlos & Brando, Luiz & Hahn, Warren J., 2009. "Flexibility as a source of value in the production of alternative fuels: The ethanol case," Energy Economics, Elsevier, vol. 31(3), pages 411-422, May.
    13. Bouasker, O. & Letifi, N. & Prigent, J.-L., 2016. "Optimal funding and hiring/firing policies with mean reverting demand," Economic Modelling, Elsevier, vol. 58(C), pages 569-579.
    14. Cortazar, Gonzalo & Casassus, Jaime, 1998. "Optimal Timing of a Mine Expansion: Implementing a Real Options Model," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 755-769.
    15. Jaime Casassus & Pierre Collin-Dufresne & Bryan R. Routledge, 2005. "Equilibrium Commodity Prices with Irreversible Investment and Non-Linear Technology," NBER Working Papers 11864, National Bureau of Economic Research, Inc.
    16. Jostein Tvedt, 2022. "Optimal Entry and Exit Decisions Under Uncertainty and the Impact of Mean Reversion," SN Operations Research Forum, Springer, vol. 3(4), pages 1-21, December.
    17. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
    18. Knaut, Andreas & Madlener, Reinhard & Rosen, Christiane & Vogt, Christian, 2012. "Effects of Temperature Uncertainty on the Valuation of Geothermal Projects: A Real Options Approach," FCN Working Papers 11/2012, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).
    19. Warren J. Hahn & James S. Dyer, 2011. "A Discrete Time Approach for Modeling Two-Factor Mean-Reverting Stochastic Processes," Decision Analysis, INFORMS, vol. 8(3), pages 220-232, September.
    20. Cortazar, Gonzalo & Schwartz, Eduardo S., 2003. "Implementing a stochastic model for oil futures prices," Energy Economics, Elsevier, vol. 25(3), pages 215-238, May.

    More about this item

    Keywords

    Real options; Asia-Pacific; Investment decisions; Uncertainty; Critical value;
    All these keywords.

    JEL classification:

    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • Q32 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Exhaustible Resources and Economic Development
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jrpoli:v:55:y:2018:i:c:p:123-132. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30467 .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.