| Abstract: | Most mining projects are multi-phase investments and possess options for expanding mine life beyond the initially estimated one. Such strategic expansion options can have a significant influence on the economic viability of the mining project. However, the decision to go ahead with a mine expansion proposal can represent a challenge to decision-makers who must fully take into account uncertainty and risk. In this respect, the expand/not-to-expand recommendation based on a static conventional financial analysis can be misleading as it ignores real life complexities imposed by uncertain future outcomes. The now-or-never principle of the popular static merit measures might be not well suited to support such strategic expansion decisions given the dynamic nature of their value drivers. This article investigates how to deal with uncertainty when analysing mine expansion decisions. The proposed procedure is based on a simulation-based real options valuation model that can handle the complexities of mine production profiles and mining costs without oversimplification. A case study of a hypothetical copper project is provided to demonstrate the suggested procedures for analysing the mine expansion options under uncertainty. The results indicate that the decision rules for exercising the mine expansion option are highly dependent on the associated uncertainty level. The results also show how ignoring uncertainty in the conventional financial analysis can affect the expansion decision. |
