Valuing the unknown

could the real options have redeemed the ailing Western Australian junior iron ore operations in 2013–2016 iron price crash

Ajak Duany Ajak, Eric Lilford, Erkan Topal

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

The inability of existing analytical models to accurately predict future events has, at times, led to the economic failure of mining operations whose financial viabilities were determined based on static assumptions, leaving operational managers with little room to make future decisions. Therefore, the application of a robust decision-making tool, such as Real Options (RO) can minimise losses and more accurately express uncertainty. This paper has considered a stochastic simulation to analyse ROs for a real case iron ore mine, which closed in April 2016. In comparing the net present value from the traditional discounted cash flow (DCF) method to delay, to abandon the operations and to stage the investment options, the ROs method increased the project value by between 56% and 195% depending on the volatility. As a new contribution, a managerial flexibility domain map is proposed in this paper. Thus, flexibility in mining operations creates agility, increases value and mitigates financial losses.

Original languageEnglish
JournalInternational Journal of Mining, Reclamation and Environment
DOIs
Publication statusAccepted/In press - Jan 1 2018

Fingerprint

Iron ores
iron ore
Iron
iron
Analytical models
viability
Managers
Decision making
decision making
Economics
economics
simulation
loss
price
method
Real options
Iron ore
Crash
volatility
decision

Keywords

  • managerial flexibility
  • optimal decision
  • real option
  • stochastic simulation
  • Uncertainty

ASJC Scopus subject areas

  • Geotechnical Engineering and Engineering Geology
  • Geology
  • Earth-Surface Processes
  • Management of Technology and Innovation

Cite this

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