A real options application to manage risk related to intrinsic variables of a mine plan: A case study on Chuquicamata underground mine project

Abstract

Traditional risk quantification methods provide little information onthe sources of risk, and tend to produce static over-conservativeevaluations, which do not account for changes in the performance ofthe project. Capital investment decisions for large mining projectsrequire more complex risk evaluation models that include the value of flexibility and the different risk levels associated with uncertainty on project variables (price, grade, dilution, and production rates, among many other). In this context, real option valuation (ROV) methods have proven potential to quantify the risk associated with such variables and integrate alternative scenarios and managementstrategies into the evaluation process. In this paper, a risk quantification model is developed that successfully quantifies the riskassociated with dilution, as a function of production rate. This modelis then validated in a case study on the Chuquicamata UndergroundMine project.