Using dynamic DCF and real options to assess the value and risk of mining investments

Investment decision-making and risk management in the mining industry are becoming increasingly complex because of:

• Increased technical uncertainty due to the difficulty of finding new deposits and the decline in deposit quality
• Greater financial uncertainty linked to metal and energy prices
• The flexibility to actively manage project investment, and
• Financing and taxation structures that distribute value and risk in a complex manner

This complexity increases the difficulty of analyzing many mining investments in a manner that considers each investments unique structure and risk characteristics. Unfortunately, the static cash flow models often used to support investment decisions have difficulty recognizing the contrasting characteristics of many mining investments. Advances in finance theory and risk management allow mining professionals to improve their financial and risk analysis with dynamic cash flow models. These models improve investment analysis by dynamically describing uncertainty, recognizing unusual project features and flexibility, and assessing the value and risk-transfer effects of complex financing and taxation structures.

Well illustrate key concepts with a series of case studies involving:

• How exploration creates value
• The hidden value benefit of long-life copper projects over multiple price cycles
• The possible value and risk benefits of staged development in comparison to frontloading capital investment
• How alternative finance may distribute value and risk in a surprising manner
• The impact of jurisdiction and development stage of each asset on the risk profile of an M&A transaction

This short course is an opportunity to learn how financial and technical uncertainty, project structure, and financing structures influence the value and risk of mining investments.

Top takeaways:

• How exploration and technical pilot programs create value and manage risk
• The hidden value influence of long-life copper projects
  
• How management flexibility increases value
  
• The value and risk transfer effects of conventional and alternative project finance
  
• The impact of technical and country risk on mining corporate portfolios