Dynamic discount rate through Ornstein-Uhlenbeck process for mining project valuation

[摘要] Discounted cash flow (DCF) is a conventional and widely used method for the mine valuation. The reason behind its wide use does not require complex mathematical computations. However, the technique is static; it does not allow the practitioner to react to the market changes. In DCF analysis, one of the important input is the discount rate, which, to some extent, represents the financial risk that the mining company may face in the future. The discount rate is sensitive to market and political uncertainties. Therefore, in fact, it is a dynamic parameter varying over the years. The application of DCF method is quite simple. As the life of mine prolongs, since the effect of discounting grows, DCF may not reflect the actual value of the project. This research proposes a way to find the discount rate for each year. The discount rate is calculated by a weighted average cost of capital formula by incorporating into the interest rate. The interest rate is treated by a stochastic process called Ornstein-Uhlenbeck (OU) process. This approach generates multiple realizations for the discount rate. Therefore, the proposed approach can quantify risks associated with the discount rate. Thus, the management of a mining project can make meaningful decisions. In doing so, a case study is conducted on a mining project to demonstrate the proposed approach.

[发布机构] McGill University, Department of Mining and Materials Engineering, 3450 rue University, Montreal; QUE 0E8, Canada^1

[效力级别] 矿业工程

[关键词] Discounted cash flow;Dynamic parameters;Financial risks;Mathematical computation;Mining companies;Mining projects;Ornstein-Uhlenbeck process;Weighted average cost of capitals