Probabilistic Asset Valuation Applied to Natural Resource Projects

This paper develops three probabilistic asset valuation models for mining projects. Firstly, an overview of available asset valuation techniques is presented. The probabilistic asset valuation technique is described in greater detail in advance of developing the probabilistic financial models. The probabilistic models incorporate a stochastic behaviour model for the price of copper and a Chilean peso exchange rate correlated to the copper price. The stochastic model parameters are defined based on the deterministic sensitivity analysis and on academic research. A sensitivity analysis tests the influence of one parameter for which guidance from the deterministic valuation process is not available. Three potential copper projects are evaluated deterministically and probabilistically and outputs from each approach are compared. Applications of the probabilistic approach are discussed along with implications on the decision making process. Finally, a high level implementation strategy is presented aimed at overcoming barriers for adopting probabilistic asset valuation.