Monte Carlo simulation in platinum mine project evaluation
Date
2016
Authors
Sahu, Sailesh Kumar
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Abstract
ABSTRACT
The purpose of this research is to explore and understand whether adopting a
Monte Carlo simulation approach in evaluation of Platinum mine projects provides
for better investment decision making in selection and approval of the projects.
Mining projects are complex business opportunities and tend to be capital intensive.
They are relatively risky and the business case attractiveness is influenced by many
underlying natural, economic and physical uncertainties. While Discounted
Cashflow (DCF) method with Net Present Value (NPV) and Internal Rate of Return
(IRR) measures is one of the most commonly used evaluation methods in mining,
adopting a Monte Carlo simulation to model uncertainties in calculating NPV and
IRR can provide for a more realistic financial evaluation of the project.
For the research, a sample of three Platinum mining project business case were
analysed and the key parameters influencing the projects’ attractiveness were
identified. A business case model for one of the project was developed in Excel.
Monte Carlo simulation was done using @ Risk software with the respective
distribution associated with those input parameters. The results were then analysed
and presented to a mix of industry professionals from different disciplines.
Qualitative input was collected to determine whether the simulated NPV and IRR
results provide for better decision making than the NPV and IRR provided from the
static DCF results.
The survey results concluded that despite certain concerns regarding complexity in
Monte Carlo model and lack of sufficient transparency in selecting the input
parameter distributions, it still caters for better decision making in evaluation and
selection of a business case. It provides decision makers with insight into the
relevant uncertainties and their impacts on the business case. It helps managers
appreciate the range of the impact of the input factors and allows them to identify
mitigating levers to boost the value of the project’s return. It confirmed that,
probabilistic simulation, if done correctly, can significantly improve the project
evaluation process add to competitive advantage of the organisation.
Note: The real name the projects has not been included in this research report. The
Excel model developed for simulation used price sensitive information and hence
has not been shared with the research report. But the variability and probability
distributions used has been depicted for analysis and conclusion.
Description
MBA Thesis
Keywords
Mine valuation -- Statistical methods, Mines and mineral resources -- Economic aspects, Risk assessment, Platinum mines and mining.