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Manual Decision on Opening Gold Mine Using NPV Analysis

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A case description of each of the three companies will also be presented in the paper. The descriptions will show how the companies view flexibility today and how this can be looked at from an option-theoretic point of view. Also, the different kinds of external and internal uncertainties that the companies are, or could be, affected by will be described as well as the means to achieve the desired flexibility.

The companies are producing totally different products; electrical motors, casting reels and industrial robots, to industry and consumer customers. For the two latter products it might thereby be an alternative to separate standardised product and customer-specific and produce these in different line where the line producing the customer-specific products has a flexible process. Different production set-ups can be eva luated using option pricing to find an optimal set-up, which maximise NPV.

The paper will focus on flexibility in the assembly part of production. Assembly is a central operation to the companies that are studied and flexibility of the whole production line is often constrained by the flexibility in the assembly stations. All three companies strive to achieve the same types of flexibility, volume and product-mix, to cope with uncertainties in demand.

However, the ways to achieve these types of flexibility differ between the companies due to differences in products and ways to produce these. For example, one company is solely carrying out manual assembly while another uses automatic machines. Thus different kinds of options have to be identified and different kinds of exercise patterns may be shown.

We will highlight some practical problems associated with the different steps from identifying options, finding sources of uncertainty, gathering appropriate data from the financial markets, etc. This paper aims to lay a theoretical foundation on how individuals value durable products. In this paper we emphasize ownership and analyze why customers want to own products and the value they give to ownership.

Specifically, we argue that the ownership of a product represents a bundle of options. At any given point in time, the owner of a product has the option to choose whether she wants to use the product or not. In addition, this paper extends the current literature on product value by taking explicitly into account several important characteristics of modern products, namely modularity, and systemic as well as network effects.

This approach has the significant benefit that it allows consideration of uncertainty about the future use of the product. The model shows that the value of a product is sensitive to the changes in uncertainty, especially when the variable costs are high compared to the utility. This uncertainty about future utility depends on the uncertainty about future needs and wants, about the quality of the product, and about the availability and quality of future upgrades. However, the value is also dependent on the uncertainty about the future variable costs.

Paul D. Riddiough, Massachusetts Institute of Technology. Unlike the assets that underlie exchange-traded claims, many real assets are infrequently traded so that asset values cannot be continuously and precisely observed. If the exact value of the asset that underlies the contingent claim is not known with certainty, both the valuation and any exercise decision must be made with an imperfect estimate of real asset value. In this setting, the claimholder has an incentive to more precisely determine asset value by acquiring additional information about the underlying asset value.

The framework for this paper is that the value of underlying assets for some contingent claims is partially obscured by noise. We determine distributional parameters for the conditional expected asset value where the noise and the underlying asset value dynamics follow normal, lognormal and mean-reverting processes. We also examine the effects of two types of noise: an initial level of noise present when the underlying asset value is originally observed or estimated, and a dynamic process that accumulates noise after the initial observation.

Recent Journal of Sustainable Mining Articles

When a costly information acquisition technology does not exist, the initial level of noise volatility does not affect option value or exercise policy, while noise that accumulates always results in lower option values. To study information acquisition policy, we examine the case of a borrower who holds the default put option inherent in a risky discount debt contract.

Costly information acquisition technology will be used to reduce potential errors in exercise policy at the debt payoff date if the technology is sufficiently inexpensive and the conditional expected asset value is sufficiently close to the face value of the debt. Comparative static results reveal that when asset volatility is greater than the accumulating noise volatility, the optimal level of information acquisition is most sensitive to noise volatility.

Initial noise volatility has the greatest impact for short-lived claims while accumulating noise volatility has the greatest impact for longer-lived claims. We provide solutions for the value of the debt given that market participants anticipate acquisition of information. Under the more general setting where there are multiple opportunities to gather information, it is optimal to acquire information in smaller increments to reduce the potential of ex-post overinvestment and underinvestment in information acquisition.

Nevertheless, the cumulative level of information acquisition is often higher relative to the case when information can only be gathered once. Spiros Martzoukos, U. In this paper we propose a conceptual framework for valuation of real options in the presence of controls with random outcome learning in continuous time. The controls affect the value of the underlying asset, and are incurred at some cost. They represent optional efforts by management to add value to the underlying real investment over which it has monopoly power, albeit with uncertain results. A solution methodology is demonstrated and the impact of such uncertain actions is seen to be relatively more significant in the case of less profitable investment options.

Morten W. The Norwegian offshore activity has evolved rapidly and Norway is today the 7th largest oil producer in the world. As a consequence the oil and gas industry has become a very important element of the Norwegian economy, and the focus on improved development strategies has strengthened over the last years, putting emphasis on the need for so-called flexible development strategies. A number of contributions have addressed the subject of investment under uncertainty in the oil industry. Especially the development of contingent claims analysis and its applications to real investments have provided increased insight into this topic.

However, most of the published examples greatly simplify the project description, both regarding the number of stochastic variables and the operator's decision making freedom. Due to the simplifications it is hard to discern the benefit of real options in a realistic oil field development project from contributions reported in the literature. The model described in this paper seeks to provide a more complete and realistic description of an oil field development project by capturing the main types of options present in the projects.

Compared to related models the presented framework represents a significantly extended approach. Both the degree of decision making freedom and the number of stochastic variables are increased, implying a much more computationally demanding model. The model is a finite horizon Markov decision process and includes three stochastic variables; the oil price, the well rate, and the reservoir volume.

These variables are of major importance to the production profile and the cash flow of the field. The size of the model, measured by its state space, the number of alternative decisions and the number of stages, depends on the field development project being addressed as well as e. Nevertheless, reported solution times for runs made on a PC and on a Unix machine are considered acceptable for practical decision making situations. To illustrate the qualities of the developed framework the model has been implemented for a small oil field about to be developed on the Norwegian continental shelf.

Project data are, however, somewhat modified in order not to reveal any restricted information. The case study reveal several interesting consequences of going from a deterministic to a stochastic eva luation of the oil field development project, and clearly illustrate the importance of giving due attention to flexibility in future oil field development projects.

The value of flexibility for the addressed project is substantial, both in relative and absolute terms. The model outlined in this paper represents a first approach to provide a comprehensive decision support model for oil field development projects. It should be conceived of as a prototype, and the possibilities for refinement and expansion are thus abundant.

Such improvements are not considered in this context. In some countries, the exploration concession has features such as the possibility of extension of the exploratory period. The holder of a petroleum exploration concession has an investment option until the expiration date fixed by the governmental agency, and these rights can be extended by additional cost.

The value of these rights and the optimal investment timing thresholds are calculated by solving a stochastic optimal control problem of an American call option with extendible maturities, using the dynamic programming framework. The thresholds for both the optimal extension of the option and the immediate development investment are presented and discussed.

The uncertainty of the oil prices is modeled as a mix jump-diffusion process. Normal information generates continuous mean-reverting process for oil prices, whereas random abnormal information generates discrete jumps of random size. We adapt the Merton jump-diffusion idea to the oil prices case. Abnormal information means very important news, causing in a short time interval, a large variation jumps in the prices. These jumps, which has been observed sometimes in oil prices history, are modelled with a Poisson process.

The paper's new contributions are two: the framework of options with extendible maturities for real assets and the utilization of a mixed stochastic process mean-reversion with jumps to model the petroleum prices which, despite of its economic logic, has not been used before in petroleum economic literature.

Comparisons are performed with the popular geometric Brownian process for both the concession option value and the optimal investment timing policy. The role of the convenience yield is also discussed for both stochastic process, which has an important impact in the optimal development investment threshold.

Analysis of alternative timing policies for the petroleum sector is presented, and also the comparative statics for the main parameters of the model. Gonzalo Cortazar , P. We present a real options model for valuing natural resource exploration investments when there is joint price and geological uncertainty. Price uncertainty is modeled by a brownian motion, while geological risk is on reserves, development investments and cost structure, with uncertainty declining as exploration investments are undertaken.

The model considers that in case of finding an economically feasible mine, there may be a development investment, to be followed by an extraction phase. All phases are optimized contingent on price and geological uncertainty. Several real options are considered in the model. The model allows for several exploration phases, each one with its own investment schedule and probabilities of success. In the event of an exploration success the model considers a timing option for the development investment, and closure, opening and abandonment options for the extraction phase.

The model has the virtue of maintaining a relatively simple structure by collapsing price and geological uncertainty into a one-factor model for expected value. The model was applied to value some real exploration prospects for a major copper company. Results for a case are presented. Alberto Micalizzi, Bocconi University. This case is taken from Schering Plough in the pharmaceutical sector, a sector in which the concept of value creation is currently under significant reconsideration.

It follows that more and more attention is being devoted to:. The fact that the fixed cost investments are focused increasingly on the late stage of clinical trials gives more importance to the product launch as an irreversible investment decision. In particular, the costs of the last phase of clinical trials necessary to bring new products to market are typically undertaken three to five years before product launch.

These resource-intensive trials can significantly impact the total value of the project. The firm is faced with an irreversible decision of whether or not and when to invest in the third stage of clinical trials of a new anti-asthma product, Newprox. The potential worldwide market for Newprox is approximately one billion dollars. The case is enriched by the fact that the firm plans the launch of a product, Minprox, designed to treat nasal congestion caused by allergies. This product uses the same molecule in Newprox but the market for Minprox could be significantly small, which would result in a negative NPV.

There are two important aspects worth considering about the Minprox project and its link to Newprox. First, the launch of Minprox would underline the continuity of investments in company image and would represent a bridge between the anti-allergy segment where Schering Plough has been present for over ten years and the anti-asthma segment where Schering Plough is a newcomer.

Second, Minprox represents an important source of information that allows SP to postpone and condition the launch of Newprox. As a matter of fact, SP bases the decision to invest in the last stage of clinical trials of Newprox on the potential success of Minprox. Real options may arise naturally in the course of business, such as the option to wait to invest. Alternatively, they may be granted or purchased in the form of contractual options. This paper presents the authors' experience with the valuation and use of contractual aircraft delivery options in the aircraft manufacturing and airline industries.

The relative value of a contractual option compared to an airline's natural option to wait to invest is captured using a contingent claims model. Some of the interesting issues that arise in the analysis include mean reversion, the estimation of underlying present values and volatilities, and the appropriate specification of stochastic exercise prices and queue lengths for delivery. In addition to a standard delivery option, we also examine conversion rights - options to take delivery when there is a choice of aircraft type i.

The use of contractual delivery options raises many interesting strategic issues from the perspective of both the aircraft manufacturers as well as the airlines. We explore implications for risk management, value creation through flexibility, competitive strategy, and optimal contract design. Soussan Faiz, Texaco Inc. The Real Options methodology is emerging as the state-of-the-art technique for asset valuation among practitioners. The increased collection of comprehensible literature on real-life applications is paving the way for using "option-pricing" methods, customary on Wall Street, in situations within firms of all sizes on Main Street.

Separately, the concept of "efficient frontier" is also making headway for applications in strategic diversification. Various products within the marketplace now enable a portfolio manager to optimize an asset or business mix under different risk and return trade-offs, short- and long-term objectives, and key operational and fiscal constraints. There is, however, a large gap in the literature and in practice on combining Real Options with Portfolio Optimization. Often a portfolio contains opportunities that are dependent on common macroeconomics e.

The ability to dynamically optimize asset combinations and determine the percentage stake and staging of each opportunity is of critical interest to senior executives. This presentation conveys some insights from a Real Options application and, separately, from a Portfolio Optimization case study.

In the absence of established guidelines to link the two techniques, however, it invites the Real Options community to focus its attention on closing this important gap and providing a seamless solution to a portfolio manager. Peter H. Monkhouse, Rio Tinto plc, UK. This presentation outlines the experiences of Rio Tinto plc in applying the real options framework to the valuation of mining properties.

It sets out our successes, the difficulties we have encountered, and one major problem that is currently halting the quantitative implementation of the real options approach within Rio Tinto. As a company we have been using the real options approach for about 10 years. We began by treating the project value as the stochastic variable. This approach has two major deficiencies. It is difficult to parameterise the stochastic process and it is poorly suited to valuing multiple real options, which is a characteristic of almost all mining projects. In an effort to overcome these difficulties we moved to treating the commodity price as the stochastic variable.

This allows us to use futures data to parameterise the stochastic process, and coupled with the concept of switching between modes, allows the valuation of multiple American real options. Using this approach we have constructed a lattice-type model within Excel. The model uses a two-factor price process and can value three American real options simultaneously.

The growth option was added because the development of an initial new molecular entity NME is similar to purchasing a call option on the value of a subsequent NME. Intermediate results from the decision tree method were used to calculate the beginning asset values and volatilities for valuing both the initial NME and the growth option with the binomial lattice method. We show how a real options approach can be used to value a biotechnology firm.

Usage of average assumptions and binomial lattices seems to work better when projects are in earlier stages of development and less is known about the drug. Understanding how managers make decisions and react to external stimuli is an important topic that academics in many disciplines study. Economists tend to build normative models of rational behavior, such as real options models, that represent how value-maximizing agents should optimally choose to exercise the options that business presents. Sociologists tend to build positive models of behavior, characterizing how individuals and organizations are likely to respond to the world around them.

Far too often, these single-disciplinary research efforts are unconnected. In our project, we seek to use insights from both economics and sociology to study one particular managerial reaction to the environment: the decision by gold mining firms whether to open or shut mines in response to changes in gold prices.

In previous research Moel and Tufano , we analyzed this decision using the real option framework of Brennan and Schwartz Using a hand-collected database, we tracked the annual opening and closing decisions of developed North American gold mines in the period Our analysis provided strong support for the real options approach as a useful model to describe and predict a mine's opening and shutting decisions. In particular ,we found that the decision to open and close demonstrated hysteresis, and was sensitive to both the level and volatility of gold prices as well as to mines' operating costs.

The prior paper took the mine as the unit of observation, and tested if mine and market characteristics affected the decision to close. We used a narrow economic perspective, and tested whether managers behaved "rationally" in response to market and firm conditions. There are, however, entirely different ways of looking at these decisions, where the unit of analysis is not the rational decision manager, but the context within which the manager operates.

In particular, the fields of sociology and organizational behavior have developed models of managerial decision-making where the organizational structure and context dictate the boundaries of the manager's decision-making capabilities. Sociologists and organizational theorists have, over the past twenty years, argued that economic transactions are embedded in social relations Granovetter These social relations often account for what economists observe to be "non-rational" behavior.

In this new paper we propose to explore this line of research and examine the social and organizational factors that influence a firm's decision to close or reopen a mine. In this current project, we recognize that important decisions such as whether to close a mine are made by managers, who often work in larger organizations firms , and whose decision-making may reflect more than narrow economic criteria. Drawing upon the literature in sociology which deals with factors that might affect how firms respond to external stimuli, as well as the related behavior finance field, we will seek to understand how the following factors could influence the decision whether or not to close a gold mine.

This is work-in progress, and we are unsure how much of this data we can collect:. Tomi Laamanen, H elsi nki University of Technology. Previous work shows that strategic synergy advantages in company acquisitions are often not immediately realized, but rather affect the combined growth options of acquiring and target firms. It is hypothesized that with a small number of growth options, the growth opportunities are constrained setting a limit to the expected value of the firm. With a large number of growth options, the value-increasing effect of variability gradually levels off and option interactions start to dominate decreasing the expected value of the growth option portfolio.

More specifically: 1 The higher the growth expectations, i. Furthermore, 3 the higher the market-to-book ratio, the more positive the stock market reaction to focus decisions such as divestments and 4 the lower the market-to-book ratio, the less positive the market reaction to divestment decisions. The hypotheses are tested empirically by studying the abnormal returns from acquisitions and divestments of three major Finnish companies possessing different growth option characteristics.

Altogether acquisition and divestment events during a period from to are studied. The data would seem to provide support for the hypotheses concerning the relationship between the cumulative abnormal returns in acquisitions and the market-to-book ratio. In connection with divestments, the results are opposite to the hypotheses. Divestments would seem to reduce the book value more than the market value resulting into increasing market-to-book ratios when the initial market-to-book ratios are low. The results also corroborate partly the earlier results concerning the cumulative abnormal returns to shareholders of the acquiring and target firms.

As expected, the stock market reactions to divestments and acquisitions differ. The differences are not, however, identical to what has already been documented in the literature. In addition to being dependent on the nature of acquisition or divestment, the stock market reactions to acquisitions and divestments seem to be company specific and time period specific. A signaling explanation is put forward to explain the stock market reactions to divestments.

This paper introduces incomplete information and strategic behaviour into an equilibrium model of firms holding real options. The main contributions of our study are, first, to provide a practically useful and yet consistent way of combining real option values and threats of preemption with incomplete information in a capital budgeting framework. Incorporating incomplete information is important as it is otherwise hard to see what prevents firms from colluding and splitting the surplus efficiently.

Given some basic data about a firm's investment costs, revenue potential after investment, and conjectures about the distribution of costs faced by competitors, our techniques permit one to derive an optimal investment strategy in a simple fashion. Second, we explore the implications of our analysis for equity returns. Our model allows one to decompose equity volatility into price changes reflecting changes in publicly observable profit variables and price changes caused by the resolution of uncertainty about competitors.

Parametrizing our model so that in simulations it yields second and higher moments that resemble those of US biotech stocks, we show that 'competitor risk' may comprise a substantial fraction of these firms' total volatility especially close to the firms' initial listing dates. As we show, the degree to which the threat of preemption may accelerate investment according to our estimates is comparable to the firm facing an expected time to ruin on its individual real options of approximately half a year.

Third, we show that incomplete information and competitive pressure interact in a way that crucially affects real option values. For firms of a similar type, if information is complete, preemption will lead to the total destruction of option value. Under incomplete information, these firms will be better off. On average, if one integrates across firms of all different types, incomplete information leads to a reduction in firm value, however. Bengtsson, LIT, Sweden. Managers in the manufacturing industry of today ask the question how to justify the higher costs often associated with a flexible manufacturing system.

Even though they are aware of all the advantages of a flexible manufacturing system they face a problem since the traditional capital budgeting approaches undervalue the potential of a flexible system. Using the traditional approach might in the worst case result in rejection of a profitable project, wherefore other methods should be used to eva luate projects with embedded flexibility.

This paper considers applications of real option thinking and valuation of manufacturing flexibility using option-pricing theory and will present results and experiences from research carried out with industry. Three Swedish midsize companies constitute the empirical base. A case description of each of the three companies will also be presented in the paper.

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The descriptions will show how the companies view flexibility today and how this can be looked at from an option-theoretic point of view. Also, the different kinds of external and internal uncertainties that the companies are, or could be, affected by will be described as well as the means to achieve the desired flexibility. The companies are producing totally different products; electrical motors, casting reels and industrial robots, to industry and consumer customers.

For the two latter products it might thereby be an alternative to separate standardised product and customer-specific and produce these in different line where the line producing the customer-specific products has a flexible process. Different production set-ups can be eva luated using option pricing to find an optimal set-up, which maximise NPV. The paper will focus on flexibility in the assembly part of production.

Assembly is a central operation to the companies that are studied and flexibility of the whole production line is often constrained by the flexibility in the assembly stations. All three companies strive to achieve the same types of flexibility, volume and product-mix, to cope with uncertainties in demand.

However, the ways to achieve these types of flexibility differ between the companies due to differences in products and ways to produce these. For example, one company is solely carrying out manual assembly while another uses automatic machines. Thus different kinds of options have to be identified and different kinds of exercise patterns may be shown. We will highlight some practical problems associated with the different steps from identifying options, finding sources of uncertainty, gathering appropriate data from the financial markets, etc. This paper aims to lay a theoretical foundation on how individuals value durable products.

In this paper we emphasize ownership and analyze why customers want to own products and the value they give to ownership. Specifically, we argue that the ownership of a product represents a bundle of options. At any given point in time, the owner of a product has the option to choose whether she wants to use the product or not. In addition, this paper extends the current literature on product value by taking explicitly into account several important characteristics of modern products, namely modularity, and systemic as well as network effects.

This approach has the significant benefit that it allows consideration of uncertainty about the future use of the product. The model shows that the value of a product is sensitive to the changes in uncertainty, especially when the variable costs are high compared to the utility. This uncertainty about future utility depends on the uncertainty about future needs and wants, about the quality of the product, and about the availability and quality of future upgrades.

However, the value is also dependent on the uncertainty about the future variable costs. Paul D. Riddiough, Massachusetts Institute of Technology. Unlike the assets that underlie exchange-traded claims, many real assets are infrequently traded so that asset values cannot be continuously and precisely observed. If the exact value of the asset that underlies the contingent claim is not known with certainty, both the valuation and any exercise decision must be made with an imperfect estimate of real asset value.

In this setting, the claimholder has an incentive to more precisely determine asset value by acquiring additional information about the underlying asset value. The framework for this paper is that the value of underlying assets for some contingent claims is partially obscured by noise. We determine distributional parameters for the conditional expected asset value where the noise and the underlying asset value dynamics follow normal, lognormal and mean-reverting processes. We also examine the effects of two types of noise: an initial level of noise present when the underlying asset value is originally observed or estimated, and a dynamic process that accumulates noise after the initial observation.

When a costly information acquisition technology does not exist, the initial level of noise volatility does not affect option value or exercise policy, while noise that accumulates always results in lower option values.

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To study information acquisition policy, we examine the case of a borrower who holds the default put option inherent in a risky discount debt contract. Costly information acquisition technology will be used to reduce potential errors in exercise policy at the debt payoff date if the technology is sufficiently inexpensive and the conditional expected asset value is sufficiently close to the face value of the debt.

Comparative static results reveal that when asset volatility is greater than the accumulating noise volatility, the optimal level of information acquisition is most sensitive to noise volatility. Initial noise volatility has the greatest impact for short-lived claims while accumulating noise volatility has the greatest impact for longer-lived claims. We provide solutions for the value of the debt given that market participants anticipate acquisition of information. Under the more general setting where there are multiple opportunities to gather information, it is optimal to acquire information in smaller increments to reduce the potential of ex-post overinvestment and underinvestment in information acquisition.

Nevertheless, the cumulative level of information acquisition is often higher relative to the case when information can only be gathered once. Spiros Martzoukos, U. In this paper we propose a conceptual framework for valuation of real options in the presence of controls with random outcome learning in continuous time. The controls affect the value of the underlying asset, and are incurred at some cost.

They represent optional efforts by management to add value to the underlying real investment over which it has monopoly power, albeit with uncertain results. A solution methodology is demonstrated and the impact of such uncertain actions is seen to be relatively more significant in the case of less profitable investment options. Morten W.

The Norwegian offshore activity has evolved rapidly and Norway is today the 7th largest oil producer in the world.

Gold Ore Processing: Project Development and Operations - Google Libros

As a consequence the oil and gas industry has become a very important element of the Norwegian economy, and the focus on improved development strategies has strengthened over the last years, putting emphasis on the need for so-called flexible development strategies. A number of contributions have addressed the subject of investment under uncertainty in the oil industry.

Especially the development of contingent claims analysis and its applications to real investments have provided increased insight into this topic. However, most of the published examples greatly simplify the project description, both regarding the number of stochastic variables and the operator's decision making freedom.

Due to the simplifications it is hard to discern the benefit of real options in a realistic oil field development project from contributions reported in the literature. The model described in this paper seeks to provide a more complete and realistic description of an oil field development project by capturing the main types of options present in the projects. Compared to related models the presented framework represents a significantly extended approach. Both the degree of decision making freedom and the number of stochastic variables are increased, implying a much more computationally demanding model.

The model is a finite horizon Markov decision process and includes three stochastic variables; the oil price, the well rate, and the reservoir volume. These variables are of major importance to the production profile and the cash flow of the field. The size of the model, measured by its state space, the number of alternative decisions and the number of stages, depends on the field development project being addressed as well as e. Nevertheless, reported solution times for runs made on a PC and on a Unix machine are considered acceptable for practical decision making situations.

To illustrate the qualities of the developed framework the model has been implemented for a small oil field about to be developed on the Norwegian continental shelf. Project data are, however, somewhat modified in order not to reveal any restricted information. The case study reveal several interesting consequences of going from a deterministic to a stochastic eva luation of the oil field development project, and clearly illustrate the importance of giving due attention to flexibility in future oil field development projects.

The value of flexibility for the addressed project is substantial, both in relative and absolute terms. The model outlined in this paper represents a first approach to provide a comprehensive decision support model for oil field development projects. It should be conceived of as a prototype, and the possibilities for refinement and expansion are thus abundant.


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Such improvements are not considered in this context. In some countries, the exploration concession has features such as the possibility of extension of the exploratory period. The holder of a petroleum exploration concession has an investment option until the expiration date fixed by the governmental agency, and these rights can be extended by additional cost.

The value of these rights and the optimal investment timing thresholds are calculated by solving a stochastic optimal control problem of an American call option with extendible maturities, using the dynamic programming framework. The thresholds for both the optimal extension of the option and the immediate development investment are presented and discussed. The uncertainty of the oil prices is modeled as a mix jump-diffusion process.

Normal information generates continuous mean-reverting process for oil prices, whereas random abnormal information generates discrete jumps of random size. We adapt the Merton jump-diffusion idea to the oil prices case. Abnormal information means very important news, causing in a short time interval, a large variation jumps in the prices. These jumps, which has been observed sometimes in oil prices history, are modelled with a Poisson process. The paper's new contributions are two: the framework of options with extendible maturities for real assets and the utilization of a mixed stochastic process mean-reversion with jumps to model the petroleum prices which, despite of its economic logic, has not been used before in petroleum economic literature.

Comparisons are performed with the popular geometric Brownian process for both the concession option value and the optimal investment timing policy. With many of the required approvals in place or well advanced, the Los Filos Expansion can start shortly after Leagold makes its final investment decision. Summary results of the Expansion Feasibility Study were previously announced on January 16, January Summary Results and, during the completion of the Expansion Feasibility Study report, several more opportunities to enhance the plan were identified.

While total gold production is minimally reduced, the optimized open pit designs reduce mining costs and improve cash flow generation. Processing costs were also reduced with lower volumes of low-grade material being processed and from unit cost reductions due to a refined costing approach that recognizes the current heap leach costs at Los Filos will normalize to lower levels over time.

Figure 2 illustrates the key updates that contribute to this increase in net cash flow and a summary description of the key updates is included below. With the refined designs, the average gold grades of the open pit Mineral Reserves have increased to 0. In addition, the total open pit material mined has been reduced by 50 million tonnes. Table 1 states the Los Filos Proven and Probable mineral reserves as of October 31, , and for the avoidance of doubt, the majority of discussion of the Expansion Feasibility Study in this news release relates to the period of January 1, to the end of the mine life.

Journal of Sustainable Mining

Cut-off grade for the Los Filos underground is 2. Mineral reserves for Los Filos, Bermejal and Guadalupe open pits are based on variable break-even cut-offs for ore revenue as generated by process destination and recoveries. Variables for revenue calculation include process cost, recovery, and estimated gold, copper and sulphur grades. Contained gold are reported as troy ounces. The reduction in mining costs is directly related to the This unit cost improvement is primarily due to a refined costing approach that recognizes the current costs at Los Filos will normalize to lower costs levels once the practice of applying additional lime to raise the pH level of previously leached ore within the heap leach pads and the need to apply additional cyanide leaching solution is reduced.

Cyanide consumption and lime addition are the major contributors to the processing cost. Lime addition is currently added at double the required quantity to address the low pH and subsequent cyanide losses through volatilization. Cyanide losses are also attributed to solution application to leached areas of the heap. Operational measures are being implemented to reduce the cyanide consumption by eliminating solution application to leached areas of the heap and the creation of an inter-lift liner through compaction of the previously leached heap surface.