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Financial evaluation of mining innovation pilot projects and the value of information

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  • Samis, Michael
  • Steen, John

Abstract

The mining industry has traditionally used pilot programs to test new technologies and innovative business processes. The recent introduction of lean innovation methods further emphasizes the importance of pilot programs to improve innovation performance. Using Bayesian modelling, we demonstrate that a pilot program can create value regardless of whether there is a high or low level of technical risk associated with introducing new technology. Indeed, for new technologies with high failure probabilities, pilot programs are the only path for creating value. This study presents equations needed to calculate the value created by a pilot program and its risk-management benefits when the pilot provides perfect information or unreliable guidance on the future outcomes of the full-scale project. To demonstrate the use of these models, we use the hypothetical case of a mining company implementing a cost-saving technology. The results show that pilot projects can add value over a wide range of technical success probabilities and reduce the capital risk of innovation projects by fifty percent under some conditions.

Suggested Citation

  • Samis, Michael & Steen, John, 2020. "Financial evaluation of mining innovation pilot projects and the value of information," Resources Policy, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:jrpoli:v:69:y:2020:i:c:s0301420720308795
    DOI: 10.1016/j.resourpol.2020.101848
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    References listed on IDEAS

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