Antamina Mine Case Answers to Question 1

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Date Submitted: 11/17/2013 08:48 AM

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“In what way is the development of a copper mine like Antamina a real option?”

* The Antamina mine case can be modeled as a real option. In real term an option is defined as the flexibility a manager has to take decisions. For example if he can choose between taking the decision to invest or not in a product, developing or not a product, expanding or not the variety of services offered. The Net Present Value analysis does not consider these flexibilities and assumes that it is not possible to take decisions but that they are predetermined. Instead, the Real Option analysis takes in account of these flexibilities and evaluates their effect on the value of the project. The characteristics of a real option are mainly three: i) timing, ii) uncertainty, iii) irreversibility. In the Antamina case the characteristic of timing is two years, in fact it is not necessary to take decision to develop or not the mine immediately. The uncertainty concerns the value of the mine, the costs of the opening and the price of the metal that will extract. The irreversibility is about the option premium that is a cost not recoverable, which means that either you exercise the option or not, the premium has to be paid. The option used is a call-like option (right to buy something to a predetermined price). In the case we try to examine, before the start of operation, a feasibility study is needed for additional geological exploration. This process will take two years and cost around $24 Million. Once the study done, based on the result, the developer can choose to continue the construct and develop work if the geological exploration suggest the mine is economically exploitable, or just walk away if the geological exploration suggests otherwise. In this way, the development of a copper mine like Antamina is like a real option with operating flexibility (like option to delay, growth option, option to expand, contract, or extend the life o a facility, option...