Optimal Timing of a Mine Expansion: Implementing a Real Options Model

Posted: 5 Nov 1998

See all articles by Gonzalo Cortazar

Gonzalo Cortazar

Pontificia Universidad Catolica de Chile

Jaime Casassus

Pontificia Universidad Catolica de Chile

Abstract

We present the results of implementing a real options model for valuing an investment project that expands production capacity and/or modifies unit costs of a copper mine. The model and its implementation addresses the three requirements we find necessary to increase the use of the real option methodology by the practitioner community: a user-acceptable stochastic model for commodity prices with mean reversion, a customized real asset model which includes the main managerial flexibilities of opening-closing production or delaying investments, and a user-friendly computer implementation. A case study shows that a significant fraction of investment value may be due to the flexibility of delaying investment, value that decreases as copper prices increase. Critical investment prices are analyzed.

JEL Classification: L11, L72

Suggested Citation

Cortazar, Gonzalo and Casassus, Jaime, Optimal Timing of a Mine Expansion: Implementing a Real Options Model. Available at SSRN: https://ssrn.com/abstract=129330

Gonzalo Cortazar

Pontificia Universidad Catolica de Chile ( email )

Departamento Ingenieria Industrial y de Sistemas
Av. Vicuna Mackenna 4860
Santiago
Chile

Jaime Casassus (Contact Author)

Pontificia Universidad Catolica de Chile ( email )

Av. Vicuna Mackenna 4860
Instituto de Economia
Santiago
Chile
(56-2) 2354 4319 (Phone)

HOME PAGE: http://economia.uc.cl/profesor/jaime-casassus/

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